e10vq

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


þ		QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTER ENDED JUNE 30, 2007


o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

Commission File Number 0-19032

ATMEL CORPORATION

(Registrant)


Delaware		77-0051991
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)

2325 Orchard Parkway
San Jose, California 95131
(Address of principal executive offices, including zip code)

(408) 441-0311
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes þ No o

Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act):

Large accelerated filer þ Accelerated filer o Non-accelerated filer o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

On July 31, 2007, the Registrant had 491,191,936 outstanding shares of Common Stock.

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Atmel Corporation

Condensed Consolidated Balance Sheets

(Unaudited)


	June 30,			December 31,
*(in thousands, except par value)*	2007			2006
ASSETS

Current assets
Cash and cash equivalents	$	417,809		$	410,480
Short-term investments		58,279			56,264
Accounts receivable, net of allowance for doubtful accounts of $3,417 and $3,605, respectively		224,656			227,031
Inventories		361,646			339,799
Other current assets		80,788			118,965

Total current assets		1,143,178			1,152,539
Fixed assets, net		495,408			514,349
Non-current assets held for sale		90,774			123,797
Intangible and other assets, net		23,691			27,854

Total assets	$	1,753,051		$	1,818,539


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Current portion of long-term debt	$	68,258		$	108,651
Trade accounts payable		131,641			145,079
Accrued and other liabilities		186,188			231,237
Liabilities related to assets held for sale		60,659			63,553
Deferred income on shipments to distributors		17,601			18,856

Total current liabilities		464,347			567,376
Long-term debt less current portion		57,451			60,333
Other long-term liabilities		223,475			236,936

Total liabilities		745,273			864,645


Commitments and contingencies (Note 15)

Stockholders’ equity
Common stock; par value $0.001; Authorized: 1,600,000 shares; Shares issued and outstanding: 489,064 at June 30, 2007 and 488,844 at December 31, 2006		489			489
Additional paid-in capital		1,425,173			1,418,004
Accumulated other comprehensive income		124,334			107,237
Accumulated deficit		(542,218	)		(571,836	)

Total stockholders’ equity		1,007,778			953,894

Total liabilities and stockholders’ equity	$	1,753,051		$	1,818,539

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Atmel Corporation

Condensed Consolidated Statements of Operations

(Unaudited)


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
*(in thousands, except per share data)*	2007			2006			2007			2006
Net revenues	$	404,247		$	429,488		$	795,560		$	830,272

Operating expenses
Cost of revenues		262,605			290,459			513,981			564,861
Research and development		69,266			74,560			136,565			142,711
Selling, general and administrative		67,881			54,266			125,940			99,677
Restructuring and other charges (credits)		(2,640	)		—			(858	)		151

Total operating expenses		397,112			419,285			775,628			807,400

Income from operations		7,135			10,203			19,932			22,872
Interest and other income (expenses), net		610			(644	)		1,589			(7,263	)

Income from continuing operations before income taxes		7,745			9,559			21,521			15,609
Benefit from (provision for) income taxes		(7,067	)		(6,708	)		8,097			(13,912	)

Income from continuing operations		678			2,851			29,618			1,697
Income from discontinued operations, net of income taxes		—			5,428			—			11,290

Net income	$	678		$	8,279		$	29,618		$	12,987


Basic income per share:
Income from continuing operations	$	0.00		$	0.01		$	0.06		$	0.00
Income from discontinued operations, net of income taxes		—			0.01			—			0.03

Net income	$	0.00		$	0.02		$	0.06		$	0.03

Weighted-average shares used in basic income per share calculations		488,916			486,928			488,879			486,252

Diluted income per share:
Income from continuing operations	$	0.00		$	0.01		$	0.06		$	0.00
Income from discontinued operations, net of income taxes		—			0.01			—			0.03

Net income	$	0.00		$	0.02		$	0.06		$	0.03

Weighted-average shares used in diluted income per share calculations		494,244			493,045			494,285			491,981

The accompanying notes are an integral part of these Condensed Consolidated Financial Statements.

Atmel Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)


	Six Months Ended
	June 30,			June 30,
*(in thousands)*	2007			2006
Cash flows from operating activities
Net income	$	29,618		$	12,987
Adjustments to reconcile net income to net cash provided by operating activities
Depreciation and amortization		63,568			118,984
Gain on sale of fixed assets		(1,343	)		(2,571	)
Other non-cash losses		2,288			2,684
Provision for doubtful accounts receivable		182			93
Accrued interest on zero coupon convertible debt		—			2,819
Accrued interest on other long-term debt		416			974
Stock-based compensation		6,613			5,060
Changes in operating assets and liabilities Accounts receivable		2,225			(30,494	)
Inventories		(20,919	)		197
Current and other assets		37,739			25,272
Trade accounts payable		1,899			20,643
Accrued and other liabilities		(60,296	)		10,111
Deferred income on shipments to distributors		(1,255	)		3,876

Net cash provided by operating activities		60,735			170,635


Cash flows from investing activities
Acquisitions of fixed assets		(44,694	)		(35,512	)
Proceeds from the sale of fixed assets		70			3,795
Proceeds from sale of manufacturing facilities, net of selling costs		34,714			—
Proceeds from the sale of interest in privately-held companies		—			1,799
Acquisitions of intangible assets		—			(209	)
Purchases of short-term investments		(7,350	)		(8,553	)
Sales or maturities of short-term investments		5,484			2,954

Net cash used in investing activities		(11,776	)		(35,726	)


Cash flows from financing activities
Principal payments on capital leases and other debt		(47,220	)		(73,020	)
Proceeds from equipment financing and other debt		—			25,000
Repurchase of convertible notes		—			(145,515	)
Proceeds from issuance of common stock		—			7,389

Net cash used in financing activities		(47,220	)		(186,146	)

Effect of exchange rate changes on cash and cash equivalents		5,590			6,209

Net increase (decrease) in cash and cash equivalents		7,329			(45,028	)


Cash and cash equivalents at beginning of period		410,480			300,323

Cash and cash equivalents at end of period	$	417,809		$	255,295


Supplemental cash flow disclosures:
Interest paid	$	4,309		$	7,340
Income taxes paid, net		7,698			3,521
Decreases in accounts payable related to fixed asset purchases		(13,242	)		(953	)
Fixed assets acquired under capital leases		—			3,243
Proceeds from the sale of fixed assets included in other current assets		1,430			—

The accompanying notes are an integral part of these Condensed Consolidated Financial statements.

Notes to Condensed Consolidated Financial Statements

(In thousands, except per share data and percentages)
(Unaudited)

Note 1 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

These unaudited interim condensed consolidated financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to state fairly, in all material respects, the financial position of Atmel Corporation (“the Company” or “Atmel”) and its subsidiaries as of June 30, 2007 and the results of operations for the three and six months ended June 30, 2007 and 2006 and cash flows for the six months ended June 30, 2007 and 2006. All intercompany balances have been eliminated. Because all of the disclosures required by U.S. generally accepted accounting principles are not included, these interim condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and accompanying notes included in the Company’s Annual Report on Form 10-K/A for the year ended December 31, 2006. The December 31, 2006 year-end condensed balance sheet data was derived from the audited consolidated financial statements and does not include all of the disclosures required by U.S. generally accepted accounting principles. The condensed consolidated statements of operations for the periods presented are not necessarily indicative of results to be expected for any future period, nor for the entire year.

In the third quarter of 2006, the Company completed the divestiture of its Grenoble, France, subsidiary. Results from the Grenoble subsidiary are excluded from the amounts from continuing operations for the three and six months ended June 30, 2006 disclosed herein, and have been classified as Results from Discontinued Operations. See Note 7 for further discussion.

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Significant estimates in these financial statements include reserves for inventory, sales return reserves, restructuring charges, stock-based compensation expense, allowances for doubtful accounts receivable, warranty reserves, estimates for useful lives associated with long-lived assets, asset impairments, certain accrued liabilities and income taxes and tax valuation allowances. Actual results could differ from those estimates.

Reclassifications

Certain prior-year amounts in the condensed consolidated financial statements and the notes thereto have been reclassified where necessary to conform to the current presentation. The Company reclassified debt and capital lease obligations totaling $70,340 from “liabilities related assets held for sale” to “current portion of long-term debt” and $313 from “non-current liabilities related to assets held for sale” to “long-term debt less current portion” at December 31, 2006. This reclassification did not have an effect on the prior period’s current liabilities, long-term liabilities, stockholders’ equity, net loss or cash flow from operations. See Note 8 for further discussion of assets held for sale.

Inventories

Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis for raw materials and purchased parts; and an average-cost basis for work in progress and finished goods) or market. Market is based on estimated net realizable value. The Company establishes lower of cost or market reserves, aged inventory reserves and obsolescence reserves. Inventory reserves are generally recorded when the inventory product exceeds nine months of demand or twelve months of backlog for that product. Inventory reserves are not relieved until the related inventory has been sold or scrapped. Inventories are comprised of the following:


	June 30,		December 31,
*(in thousands)*	2007		2006
Raw materials and purchased parts	$	19,232	$	13,434
Work-in-process		258,804		245,760
Finished goods		83,610		80,605

	$	361,646	$	339,799

Grant Recognition

Subsidy grants from government organizations are amortized as a reduction of expenses over the period the related obligations are fulfilled. In fiscal 2006, Atmel entered into new grant agreements and modified existing agreements, with several European government agencies. Recognition of future subsidy benefits will depend on Atmel’s achievement of certain capital investment, research and development spending and employment goals. The Company recognized the following amount of subsidy grant benefits as a reduction of either cost of revenues or research and development expenses, depending on the nature of the grant:


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
*(in thousands)*	2007		2006		2007		2006
Cost of revenues	$	149	$	1,958	$	446	$	3,775
Research and development expenses		3,876		1,052		9,343		4,814

Total	$	4,025	$	3,010	$	9,789	$	8,589

Stock-Based Compensation

Upon adoption of SFAS No. 123R, the Company reassessed its equity compensation valuation method and related assumptions. The Company’s determination of the fair value of share-based payment awards on the date of grant utilizes an option-pricing model, and is impacted by its common stock price as well as a change in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to: expected common stock price volatility over the term of the option awards, as well as the projected employee option exercise behaviors (expected period between stock option vesting date and stock option exercise date).

Stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations for the three and six months ended June 30, 2007 and 2006 included a combination of awards granted prior to January 1, 2006 and awards granted subsequent to January 1, 2006. For stock-based awards granted prior to January 1, 2006, the Company attributes the value of stock-based compensation, determined under SFAS No. 123R, to expense using the accelerated multiple-option approach. Compensation expense for all stock-based payment awards granted subsequent to January 1, 2006 is recognized using the straight-line single-option method. Stock-based compensation expense included in the three and six months ended June 30, 2007 and 2006 includes the impact of estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the periods prior to 2006, the Company accounted for forfeitures as they occurred. The adoption of SFAS No. 123R requires the Company to reflect the net cumulative impact of estimating forfeitures in the determination of period expense by reversing the previously recognized cumulative compensation expense related to those forfeitures, rather than recording forfeitures when they occur as previously permitted. The Company did not record this cumulative impact upon adoption, as the amount was insignificant. Stock options granted in periods prior to 2006 were measured based on SFAS No. 123 requirements, whereas stock options granted subsequent to January 1, 2006 were measured based on SFAS No. 123R requirements. See Note 9 for further discussion.

Recent Accounting Pronouncements

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.” This statement establishes a framework for measuring fair value in generally accepted accounting principles and expands disclosures about fair value measurements. SFAS No. 157 is effective for financial statements issued for fiscal years beginning after November 15, 2007, and interim periods within those fiscal years. The provisions of SFAS No. 157 should be applied prospectively as of the beginning of the fiscal year in which SFAS No. 157 is initially applied, except in limited circumstances. The Company expects to adopt SFAS No. 157 beginning January 1, 2008. The Company is currently evaluating the impact that this pronouncement may have on its consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. The Company expects to adopt SFAS No. 159 beginning January 1, 2008. The Company is currently evaluating the impact that this pronouncement may have on its consolidated financial statements.

Note 2 SHORT-TERM INVESTMENTS

Short-term investments at June 30, 2007 and December 31, 2006 primarily comprise U.S. and foreign corporate debt securities, U.S. Government and municipal agency debt securities, commercial paper, and guaranteed variable annuities.

All marketable securities are deemed by management to be available-for-sale and are reported at fair value. Net unrealized gains or losses that are not determined to be other than temporary are reported within stockholders’ equity on the Company’s condensed consolidated balance sheets as a component of accumulated other comprehensive income. Realized gains or losses are recorded based on the specific identification method. During the three and six months ended June 30, 2007 and 2006, the Company’s realized gains or losses on short-term investments were not material. The carrying amount of the Company’s investments is shown in the table below:


	June 30, 2007					December 31, 2006
*(in thousands)*	Book Value			Market Value		Book Value			Market Value
U.S. Government debt securities	$	1,356		$	1,352	$	1,400		$	1,396
State and municipal debt securities		3,450			3,450		3,450			3,450
Corporate equity securities		87			1,031		87			892
Corporate debt securities and other obligations		51,275			52,446		49,170			50,526

	$	56,168		$	58,279	$	54,107		$	56,264
Unrealized gains		2,135			—		2,176			—
Unrealized losses		(24	)		—		(19	)		—

Net unrealized gains		2,111			—		2,157			—

Total	$	58,279		$	58,279	$	56,264		$	56,264

The Company considers the unrealized losses in the table above not to be “other than temporary” due primarily to their nature, quality and short-term holding.

Contractual maturities (at book value) of available-for-sale debt securities as of June 30, 2007, were as follows:


Due within one year	$	12,231
Due in 1-5 years		5,822
Due in 5-10 years		—
Due after 10 years		38,115

Total	$	56,168

Atmel has classified all investments with maturity dates of 90 days or more as short-term since it has the ability to redeem them within the year.

Note 3 INTANGIBLE ASSETS

Intangible assets as of June 30, 2007, consisted of the following:


	Gross		Accumulated			Net
*(in thousands)*	Assets		Amortization			Assets
Core/licensed technology	$	89,722	$	(86,199	)	$	3,523
Non-compete agreement		306		(306	)		—
Patents		1,377		(1,377	)		—

Total Intangible Assets	$	91,405	$	(87,882	)	$	3,523

Intangible assets as of December 31, 2006, consisted of the following:


	Gross		Accumulated			Net
*(in thousands)*	Assets		Amortization			Assets
Core/licensed technology	$	89,581	$	(83,557	)	$	6,024
Non-compete agreement		306		(306	)		—
Patents		1,377		(1,377	)		—

Total Intangible Assets	$	91,264	$	(85,240	)	$	6,024

Amortization expense for intangible assets for the three months ended June 30, 2007 and 2006 totaled $1,408 and $1,587, respectively, and amortization expense for the six months ended June 30, 2007 and 2006 totaled $2,601 and $3,166, respectively.

The following table presents the estimated future amortization of the intangible assets:


Years Ending December 31:
*(in thousands)*
2007 (July 1 through December 31)	$	2,168
2008		1,100
2009		175
2010		72
2011		8

Total future amortization	$	3,523

Note 4 BORROWING ARRANGEMENTS

Information with respect to Atmel’s debt and capital lease obligations as of June 30, 2007 and December 31, 2006 is shown in the following table:


	June 30,			December 31,
*(in thousands)*	2007			2006
Various interest-bearing notes	$	54,084		$	80,550
Bank lines of credit		25,000			25,000
Capital lease obligations		46,625			63,434

Total	$	125,709		$	168,984
Less: current portion of long-term debt		(68,258	)		(108,651	)

Long-term debt and capital lease obligations due after one year	$	57,451		$	60,333

Maturities of debt and capital lease obligations are as follows:


Years Ending December 31:
*(in thousands)*
2007 (July 1 through December 31)	$	55,711
2008		54,914
2009		12,235
2010		5,830
2011		4,720
Thereafter		3,222

		136,632
Less: amount representing interest		(10,923	)

Total	$	125,709

Certain of the Company’s debt facilities contain terms that subject the Company to financial and other covenants. The Company was in compliance with its covenants as of June 30, 2007. The Company was not in compliance with covenants requiring timely filing of U.S. GAAP financial statements as of December 31, 2006, and, as a result, the Company requested waivers from its lenders to avoid default under these facilities. Waivers were not received from all lenders, and as a result, the Company had previously classified $22,544 of non-current liabilities as current liabilities on the condensed consolidated balance sheet as of December 31, 2006. These liabilities are classified as non-current liabilities as of June 30, 2007.

On June 30, 2006, the Company entered into a 3-year term loan agreement for $25,000 with a European bank to finance equipment purchases. The interest rate on this loan is based on the London Interbank Offered Rate (“LIBOR”) plus 2.5%. Principal repayments are to be made in equal quarterly installments beginning September 30, 2006. The loan is collateralized by the financed assets and is subject to certain cross-default provisions. As of June 30, 2007, the outstanding balance on the term loan was $16,667 and was classified as an interest bearing note in the summary debt table above.

On March 15, 2006, the Company entered into a five-year asset-backed credit facility for up to $165,000 with certain European lenders. This facility is secured by the Company’s non-U.S. trade receivables. At June 30, 2007, the amount available under this facility was $116,849, based on eligible non-U.S. trade receivables. Borrowings under the facility bear interest at LIBOR plus 2% per annum, while the undrawn portion is subject to a commitment fee of 0.375% per annum. The terms of the facility subject the Company to certain financial and other covenants and cross-default provisions. As of June 30, 2007, there were no amounts outstanding under this facility. Commitment fees and amortization of up-front fees paid related to the Facility for the three and six months ended June 30, 2007 totaled $324 and $726, respectively, and for the three and six months ended June 30, 2006 totaled $350 and $404, respectively, and are included in interest and other expenses, net, in the condensed consolidated statements of operations.

In September 2005, the Company obtained a $15,000 term loan with a domestic bank. This term loan matures in September 2008. The interest rate on this term loan is LIBOR plus 2.25%. In December 2004, the Company had obtained a term loan with the same domestic bank in the amount of $20,000. Concurrent to this, the Company established a $25,000 revolving line of credit with this domestic bank, which has been

extended until September 2008. The term loan matures in December 2007. The interest rate on the revolving line of credit is determined by the Company and must be either the domestic bank’s prime rate or LIBOR plus 2%. The interest rate on the term loan is 90-day euro Interbank Offered Rate (“EURIBOR”) plus 2.0%. All U.S. domestic account receivable balances secure amounts borrowed. The revolving line of credit and both term loans require the Company to meet certain financial ratios and to comply with other covenants on a periodic basis. As of June 30, 2007, the full $25,000 of the revolving line of credit was outstanding and $9,672 of the term loans was outstanding and was classified as an interest bearing note in the summary debt table above.

In June 2005, the Company entered into a euro 43,156 ($52,237) term loan agreement with a domestic bank. The interest rate is fixed at 4.10%. The Company has pledged certain manufacturing equipment as collateral. The loan is required to be repaid in equal installments of euro 3,841($4,649) per calendar quarter commencing on September 30, 2005, with the final payment due on June 28, 2008. As of June 30, 2007, the outstanding balance on the loan was $20,406 and was classified as an interest-bearing note in the summary debt table above.

In February 2005, the Company entered into an equipment financing arrangement in the amount of euro 40,685 ($54,005) which is repayable in quarterly installments over three years. The stated interest rate is EURIBOR plus 2.25%. This equipment financing is collateralized by the financed assets. As of June 30, 2007, the balance outstanding under the arrangement was $14,550 and was classified as a capital lease.

In September 2004, the Company entered into a euro 32,421 ($40,274) loan agreement with a European bank. The loan is to be repaid in equal principal installments of euro 970 ($1,205) per month plus interest on the unpaid balance, with the final payment due on October 1, 2007. The interest rate is fixed at 4.85%. The Company has pledged certain manufacturing equipment as collateral. This note requires Atmel to meet certain financial ratios and to comply with other covenants on a periodic basis. As of June 30, 2007, the outstanding balance on the loan was $5,231 and was classified in current liabilities as an interest-bearing note in the summary debt table above.

The Company’s remaining $34,183 in outstanding debt obligations as of June 30, 2007 are comprised of $32,075 in capital leases and $2,108 in an interest bearing note. Included within the outstanding debt obligations are $88,163 of variable-rate debt obligations where the interest rates are based on either the LIBOR plus a spread ranging from 2.0% to 2.5% or the short-term EURIBOR plus a spread ranging from 0.9% to 2.25%. Approximately $91,525 of the Company’s total debt obligations have cross default provisions.

Note 5 PENSION PLANS

The Company sponsors defined benefit pension plans that cover substantially all French and German employees. Plan benefits are provided in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. The plans are unfunded. Pension liabilities and charges to expense are based upon various assumptions, updated quarterly, including discount rates, future salary increases, employee turnover, and mortality rates.

Pension Plans consist of two types of plans. The first plan type provides for termination benefits paid to employees only at retirement, and consists of approximately one to five months of salary. This structure covers the Company’s French employees. The second plan type provides for defined benefit payouts for the remaining employee’s post-retirement life, and covers the Company’s German employees.

The aggregate net pension expense relating to the two plan types for the three and six months ended June 30, 2007 and 2006, are as follows:


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
*(in thousands)*	2007		2006		2007		2006
Service costs-benefits earned during the period	$	504	$	795	$	1,295	$	1,521
Interest cost on projected benefit obligation		525		629		1,211		1,204
Amortization of actuarial loss		140		150		183		284

Net pension cost	$	1,169	$	1,574	$	2,689	$	3,009


Distribution of pension costs
Continuing operations	$	1,169	$	1,438	$	2,689	$	2,738
Discontinued operations		—		136		—		271

Net pension cost	$	1,169	$	1,574	$	2,689	$	3,009

Amounts for the three and six months ended June 30, 2006 have been adjusted to reflect the divestiture of the Company’s Grenoble, France, subsidiary in July 2006. Results from the Grenoble subsidiary were classified within Results from Discontinued Operations for the three and six months ended June 30, 2006. See Note 7 for further discussion.

The Company expects to make $1,130 in benefit payments in 2007. As of June 30, 2007, the Company had paid approximately $317.

The Company’s pension liability represents the present value of estimated future benefits to be paid. With respect to the Company’s unfunded plans in Europe, during 2007, an increase in the discount rate assumption and an increase in inflation rate assumptions and an adjustment for retirement age used to calculate the present value of the pension obligation resulted in a decrease in the pension liability of $4,355. This resulted in a benefit net of tax, of $2,871, which was credited to accumulated other comprehensive income in stockholders’ equity in the condensed consolidated balance sheet during the six months ended June 30, 2007, in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans.”

Note 6 RESTRUCTURING AND OTHER CHARGES (CREDITS) AND LOSS ON SALE

The following table summarizes the activity related to the accrual for restructuring and other charges and loss on sale detailed by event for the three and six months ended June 30, 2007.


	January 1,							Currency		March 31,								Currency		June 30,
	2007							Translation		2007		Charges/						Translation		2007
*(in thousands)*	Accrual		Charges		Payments			Adjustment		Accrual		(Credits)			Payments			Adjustment		Accrual
Third quarter of 2002
Termination of contract with supplier	$	8,896	$	—	$	(249	)	$	—	$	8,647	$	(3,071	)	$	(3,984	)	$	—	$	1,592
Fourth quarter of 2005
Nantes fabrication facility sale		115		—		—			—		115		(27	)		—			—		88
Fourth quarter of 2006
Employee termination costs		7,490		1,782		(1,743	)		41		7,570		458			(3,899	)		111		4,240
Grant contract termination costs		30,034		—		—			206		30,240		—			—			581		30,821

Total 2007 activity	$	46,535	$	1,782	$	(1,992	)	$	247	$	46,572	$	(2,640	)	$	(7,883	)	$	692	$	36,741


	January 1,							March 31,							June 30,
	2006							2006							2006
*(in thousands)*	Accrual		Charges		Payments			Accrual		Charges		Payments			Accrual
Third quarter of 2002
Termination of contract with supplier	$	9,833	$	—	$	(217	)	$	9,616	$	—	$	(251	)	$	9,365
Third quarter of 2005
Employee termination costs		1,246		—		(497	)		749		—		(672	)		77
Fourth quarter of 2005
Nantes fabrication facility sale		1,310		—		(873	)		437		—		(204	)		233
Employee termination costs		1,223		—		(704	)		519		—		(492	)		27
First quarter of 2006
Employee termination costs		—		151		(5	)		146		—		(65	)		81

Total 2006 activity	$	13,612	$	151	$	(2,296	)	$	11,467	$	—	$	(1,684	)	$	9,783

2007 Restructuring Charges

During the three and six months ended June 30, 2007, the Company continued to implement the restructuring initiative announced prior to 2007 and recorded a net restructuring credit of $2,640 and $858, respectively, consisting of the following:

	•		Charges of $717 and $2,002 for the three and six months ended June 30, 2007, respectively, related to one-time minimum statutory termination benefits recorded in accordance with SFAS No. 112, “Employers’ Accounting for Post Employment Benefits” (“SFAS No. 112).

	•		Charges of $639 and $1,136 for the three and six months ended June 30, 2007, respectively, related to severance costs for involuntary termination of employees. These employee severance costs were recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with exit or Disposal Activities” (“SFAS No. 146”).

	•		A credit of $898 in the three months ended June 30, 2007 related to changes in estimates of termination benefits originally recorded in accordance with SFAS No. 112, “Employers’ Accounting for Post Employment Benefits” (“SFAS No. 112”).

	•		A credit of $3,071 in the three months ended June 30, 2007 related to the settlement of a long-term gas supply contract originally recorded in the third quarter of 2002. On May 1, 2007, in connection with the sale of the Irving, Texas facility, the Company paid $5,600 to terminate this contract, of which $1,700 was reimbursed by the buyer of the facility. The Company paid $84 in monthly payment in the three months ended June 30, 2007.

2006 Restructuring Activities

In the first quarter of 2006, the Company incurred $151 in restructuring charges primarily comprised of severance and one-time termination benefits.

In the three and six months ended June 30, 2007, the Company paid $3,899 and $5,642 related to employee termination costs, respectively. In the three and six months ended June 30, 2006, the Company paid $1,229 and $2,435 related to employee termination costs, respectively.

Other Charges

In the fourth quarter of 2006, the Company announced its intention to close its design facility in Greece and its intention to sell its facility in North Tyneside, United Kingdom. The Company recorded a charge of $30,034 in the fourth quarter of 2006 associated with the expected repayment of subsidy grants previously received and recognized related to grant agreements with government agencies at these locations.

Note 7 DISCONTINUED OPERATIONS

Grenoble, France, Subsidiary Sale

The Company’s condensed consolidated financial statements and related footnote disclosures reflect the results of the Company’s Grenoble, France, subsidiary as Discontinued Operations, net of applicable income taxes, for all reporting periods presented.

In July 2006, Atmel completed the sale of its Grenoble, France, subsidiary to e2v technologies plc, a British corporation (“e2v”). On August 1, 2006, the Company received $140,000 in cash upon closing ($120,073, net of working capital adjustments and costs of disposition).

The facility was originally acquired in May 2000 from Thomson-CSF, and was used to manufacture image sensors, as well as analog, digital and radio frequency ASICs.

Technology rights and certain assets related to biometry or “Finger Chip” technology were excluded from the sale. As of July 31, 2006, the facility employed a total of 519 employees, of which 14 employees primarily involved with the Finger Chip technology were retained, and the remaining 505 employees were transferred to e2v.

In connection with the sale, Atmel agreed to provide certain technical support, foundry, distribution and other services extending up to four years following the completion of the sale, and in turn e2v has agreed to provide certain design and other services to Atmel extending up to 5 years following the completion of the sale. The financial statement impact of these agreements is not expected to be material to the Company. The ongoing cash flows between Atmel and e2v are not significant and as a result, the Company has no significant continuing involvement in the operations of the subsidiary. Therefore, the Company has met the criteria in SFAS No. 144, which were necessary to classify the Grenoble, France, subsidiary as discontinued operations.

Included in other currents assets on the condensed consolidated balance sheet as of June 30, 2007, is an outstanding receivable balance due from e2v of $1,984 related to payments advanced to e2v to be collected from customers of e2v by Atmel. The transitioning of the collection of trade receivables on behalf of e2v is expected to be completed in 2007.

The following table summarizes results from Discontinued Operations for the periods indicated included in the condensed consolidated statement of operations:


	Three Months Ended			Six Months Ended
*(in thousands)*	June 30, 2006			June 30, 2006
Net revenues	$	33,287		$	69,287
Operating costs and expenses		25,896			50,262

Income from discontinued operations, before income taxes		7,391			19,025
Less: provision for income taxes		(1,963	)		(7,735	)

Income from discontinued operations, net of income taxes	$	5,428		$	11,290

Income from discontinued operations, net of income taxes, per share:
Basic	$	0.01		$	0.03

Diluted	$	0.01		$	0.03

Weighted-average shares used in basic net income per share calculations		486,928			486,252

Weighted-average shares used in diluted net income per share calculations		493,045			491,981

Note 8 ASSETS HELD FOR SALE AND IMPAIRMENT CHARGES

Under Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) the Company assesses the recoverability of long-lived assets with finite useful lives whenever events or changes in circumstances indicate that the Company may not be able to recover the asset’s carrying amount. The Company measures the amount of impairment of such long-lived assets by the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. The Company classifies long-lived assets to be disposed of other than by sale as held and used until they are disposed. The Company reports assets and liabilities to be disposed of by sale as held for sale and recognizes those assets and liabilities on the condensed consolidated balance sheet at the lower of carrying amount or fair value, less cost to sell. These assets are not depreciated.

The Company classified the assets and liabilities of the North Tyneside, United Kingdom, facility and the assets of the Irving, Texas, facility as held for sale during the quarter ended December 31, 2006. Following the sale of the North Tyneside facility, the Company expects to incur significant continuing cash flows with the disposed entity due to a supply agreement with potential buyers and, as a result, does not expect to meet the criteria to classify the results of operations as well as assets and liabilities as discontinued operations. The Irving facility does not qualify as discontinued operations as it is an idle facility and does not constitute a component of an entity in accordance with SFAS No. 144.

The following table details the items which are reflected as assets and liabilities held for sale in the condensed consolidated balance sheets as of June 30, 2007 and December 31, 2006:

Held for Sale at June 30, 2007


	North
*(in thousands)*	Tyneside
Non-current assets
Fixed assets, net	$	90,204
Intangible and other assets		570

Total non-current assets held for sale	$	90,774


Current liabilities
Trade accounts payable	$	12,325
Accrued liabilities and other		48,334

Total current liabilities related to assets held for sale	$	60,659

Held for Sale at December 31, 2006


	North
*(in thousands)*	Tyneside		Irving		Total
Non-current assets
Fixed assets, net	$	87,941	$	35,040	$	122,981
Intangible and other assets		816		—		816

Total non-current assets held for sale	$	88,757	$	35,040	$	123,797


Current liabilities
Trade accounts payable	$	17,329	$	—	$	17,329
Accrued liabilities and other		46,224		—		46,224

Total current liabilities related to assets held for sale	$	63,553	$	—	$	63,553

Irving, Texas, Facility

The Company acquired its Irving, Texas, wafer fabrication facility in January 2000 for $60,000 plus $25,000 in additional costs to retrofit the facility after the purchase. Following significant investment and effort to reach commercial production levels, the Company decided to close the facility in 2002 and it has

been idle since then. Since 2002, the Company recorded various impairment charges, including $3,980 during the quarter ended December 31, 2005. In the quarter ended December 31, 2006, the Company performed an assessment of the market value for this facility based on management’s estimate, which considered a current offer from a willing third party to purchase the facility, among other factors, in determining fair market value. Based on this assessment, an additional impairment charge of $10,305 was recorded.

On May 1, 2007, the Company sold its Irving, Texas, wafer fabrication facility for approximately $36,500 in cash ($34,714, net of selling costs). The sale of the facility includes approximately 39 acres of land, the fabrication facility building, and related offices, and remaining equipment. An additional 17 acres was retained by the Company. No significant gain or loss was recorded upon the sale of the facility.

North Tyneside, United Kingdom, and Heilbronn, Germany, Facilities

In December 2006, the Company announced its decision to sell its wafer fabrication facilities in North Tyneside, United Kingdom, and Heilbronn, Germany. It is expected these actions will increase manufacturing efficiencies by better utilizing remaining wafer fabrication facilities, while reducing future capital expenditure requirements. The Company has classified assets of the North Tyneside site with a net book value of $90,774 and $88,757 (excluding cash and inventory which will not be included in any sale of the facility) as assets held-for-sale on the condensed consolidated balance sheet as of June 30, 2007 and December 31, 2006, respectively. Following the announcement of intention to sell the facility in the fourth quarter of 2006, the Company assessed the fair market value of the facility compared to the carrying value recorded, including use of an independent appraisal, among other factors. The fair value was determined using a market-based valuation technique and estimated future cash flows. The Company recorded a net impairment charge of $72,277 in the quarter ended December 31, 2006 related to the write-down of long lived assets to their estimated fair values, less costs to dispose of the assets. The charge included an asset write-down of $170,002 for equipment, land and buildings, offset by related currency translation adjustment associated with the assets, of $97,725, as the Company intends to sell its United Kingdom subsidiary, which contains the facility, and hence the currency translation adjustment related to the assets is included in the impairment calculation.

The Company acquired the North Tyneside, United Kingdom, facility in September 2000, including an interest in 100 acres of land and the fabrication facility of approximately 750,000 square feet, for approximately $100,000. The Company will have the right to acquire title to the land in 2016 for a nominal amount. The Company sold 40 acres in 2002 for $13,900. The Company subsequently purchased additional manufacturing equipment and then recorded an asset impairment charge of $317,927 in the second quarter of 2002 to write-down the carrying value of equipment in the fabrication facilities in North Tyneside, United Kingdom, to its estimated fair value. The estimate of fair value was made by management based on a number of factors, including an independent appraisal.

The Heilbronn, Germany, facility did not meet the criteria for classification as held-for-sale as of June 30, 2007 or December 31, 2006, due to uncertainties relating to the likelihood of completing the sale within the next twelve months. After an assessment of expected future cash flows generated by the Heilbronn, Germany facility, the Company concluded that no impairment exists.

Note 9 STOCK-BASED COMPENSATION

Option and Employee Stock Purchase Plans

Atmel has two stock option plans — the 1986 Stock Plan and the 2005 Stock Plan (an amendment and restatement of the 1996 Stock Plan). The 1986 Stock Plan expired in April 1996. The 2005 Stock Plan was approved by stockholders on May 11, 2005. As of June 30, 2007, of the 56,000 shares authorized for issuance under the 2005 Stock Plan, 12,746 shares of common stock remain available for grant. Under Atmel’s 2005 Stock Plan, Atmel may issue common stock directly or grant options to purchase common stock to employees, consultants and directors of Atmel. Options, which generally vest over four years, are granted at fair market value on the date of the grant and generally expire ten years from that date.

Activity under Atmel’s 1986 Stock Plan and 2005 Stock Plan is set forth below:


							Outstanding Options					Weighted-
							Exercise		Aggregate			Average
	Available			Number of			Price		Exercise			Exercise Price
*(in thousands, except per share data)*	for Grant			Options			per Share		Price			per Share
Balances, December 31, 2006		13,300			31,320		$	1.68-$24.44		181,480		$	5.79
Options granted		(608	)		608			5.20-6.05		3,632			5.97
Options forfeited		221			(221	)		1.98-19.81		(1,111	)		5.03
Options exercised		—			—					—

Balances, March 31, 2007		12,913			31,707		$	1.68-$24.44		184,001			5.80
Options granted		(470	)		470		$	5.17-$5.67		2,639			5.62
Options forfeited		303			(304	)	$	1.98-$18.13		(2,164	)		6.34
Options exercised		—			(224	)	$	1.68-$5.75		(616	)		2.75

Balances, June 30, 2007		12,746			31,649		$	1.68-$24.44		183,860		$	5.81

The aggregate intrinsic value of stock options exercised was $655 in the three and six months ended June 30, 2007.

In the three and six months ended June 30, 2007, 672,664 and 811,200 options granted, respectively, were modified. Stock-based compensation related to the modification was not material for both the three and six months ended June 30, 2007.

The following table summarizes the stock options outstanding at June 30, 2007:


Options Outstanding									Options Exercisable
*(in thousands, except per share data)*
			Weighted-								Weighted-
			Average		Weighted-						Average		Weighted-
Range of			Remaining		Average		Aggregate				Remaining		Average		Aggregate
Exercise	Number		Contractual		Exercise		Intrinsic		Number		Contractual		Exercise		Intrinsic
Price	Outstanding		Term (years)		Price		Value		Exercisable		Term (years)		Price		Value
$ 1.68-2.06		2,599		1.95	$	1.98	$	9,304		2,442		1.56	$	1.98	$	8,742
2.11-2.13		3,397		5.53		2.11		11,720		2,456		5.46		2.11		8,473
2.26-3.29		3,581		7.64		3.09		8,845		1,549		7.51		3.05		3,888
3.33-5.55		4,439		7.64		4.70		3,818		1,450		4.97		4.37		1,726
5.61-5.73		2,768		9.29		5.71		—		251		9.09		5.71		—
5.75-6.12		4,670		6.34		5.81		—		2,965		5.60		5.79		—
6.22-7.69		5,104		8.33		6.51		—		1,597		5.99		6.97		—
7.76-24.44		5,091		3.17		12.46		—		5,092		3.17		12.47		—

$1.68-24.44		31,649		6.29	$	5.81	$	33,687		17,802		4.53	$	6.42	$	22,829

The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions:


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
	2007			2006			2007			2006
Risk-free interest rate		5.02	%		4.98	%		4.75	%		4.95	%
Expected life (years)		5.98			6.05			5.98			6.04
Expected volatility		61	%		70	%		63	%		71	%
Expected dividend yield		—			—			—			—

The Company’s weighted-average assumptions during the three and six months ended June 30, 2007 and 2006 were determined in accordance with SFAS No. 123R and are further discussed below.

The expected life of employee stock options represents the weighted-average period the stock options are expected to remain outstanding and was derived based on an evaluation of the Company’s historical settlement trends, including an evaluation of historical exercise and expected post-vesting employment-termination behavior. The expected life of employee stock options impacts all underlying assumptions used in the Company’s Black-Scholes option-pricing model, including the period applicable for risk-free interest and expected volatility.

The risk-free interest rate assumption is based upon observed interest rates appropriate for the expected life of the Company’s employee stock options.

The Company calculates the historic volatility over the expected life of the employee stock options and believes this to be representative of the Company’s expectations about its future volatility over the expected life of the option.

The dividend yield assumption is based on the Company’s history and expectation of dividend payouts.

The weighted-average estimated fair values of options granted in the three months ended June 30, 2007 and 2006 were $3.42 and $3.28, respectively. The weighted-average estimated fair values of options granted in the six months ended June 30, 2007 and 2006 were $3.60 and $3.18, respectively.

The adoption of SFAS No. 123R did not impact the Company’s methodology to estimate the fair value of share-based payment awards under the Company’s ESPP. The fair value of each purchase under the ESPP is estimated on the date of the beginning of the offering period using the Black-Scholes option pricing model. There were no ESPP offering periods that began in the three and six months ended June 30, 2007 or 2006.

The components of the Company’s stock-based compensation expense, net of amounts capitalized in inventory, for the three and six months ended June 30, 2007 and 2006 are summarized below:


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
*(in thousands)*	2007		2006		2007		2006
Employee stock options	$	3,279	$	2,457	$	6,554	$	4,983
Employee stock purchase plan		—		—		—		302
Non-employee stock option modifications		—		92		—		120
Amounts liquidated from (capitalized in) inventory		24		93		59		(345	)

	$	3,303	$	2,642	$	6,613	$	5,060

SFAS No. 123R requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. The future realizability of tax benefits related to stock compensation is dependent upon the timing of employee exercises and future taxable income, among other factors. The Company did not realize any tax benefit from the stock-based compensation expense incurred during the three and six months ended June 30, 2007 or 2006, as the Company believes it is more likely than not that it will not realize the benefit from tax deductions related to equity compensation.

The following table summarizes the distribution of stock-based compensation expense related to employee stock options and employee stock purchases under SFAS No. 123R for the three and six months ended June 30, 2007 and 2006, which was recorded as follows:


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
*(in thousands)*	2007		2006		2007		2006
Cost of revenues	$	475	$	663	$	1,001	$	950
Research and development		709		566		1,489		1,277
Selling, general and administrative		2,119		1,413		4,123		2,833

Total stock-based compensation expense, before income taxes		3,303		2,642		6,613		5,060
Tax benefit		—		—		—		—

Total stock-based compensation expense, net of income taxes	$	3,303	$	2,642	$	6,613	$	5,060

Non-employee stock-based compensation expense (based on fair value) included in net income for the three and six months ended June 30, 2006 was $92 and $120, respectively. Non-employee stock-based compensation expense for the three and six months ended June 30, 2007 was not material.

As of June 30, 2007, total unearned compensation expense related to nonvested stock options, net of estimated forfeitures, was approximately $31,739, excluding forfeitures, and is expected to be recognized over the next 1.7 years calculated on a weighted average basis.

Employee Stock Purchase Plan

Under the 1991 Employee Stock Purchase Plan (“ESPP”), qualified employees are entitled to purchase shares of Atmel’s common stock at the lower of 85 percent of the fair market value of the common stock at the date of commencement of the six-month offering period or at the last day of the offering period. Purchases are limited to 10% of an employee’s eligible compensation. There were no purchases under the ESPP for the three and six months ended June 30, 2007 and the three months ended June 30, 2006. Purchases under the ESPP were 2,072 shares of common stock during the six months ended June 30, 2006 at a price of $1.84 per share. Of the 42,000 shares authorized for issuance under this plan, 9,320 shares were available for issuance at June 30, 2007.

Note 10 ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income (loss) is defined as a change in equity of a company during a period, from transactions and other events and circumstances excluding transactions resulting from investments by owners and distributions to owners. The primary difference between net income (loss) and comprehensive income for Atmel arises from foreign currency translation adjustments, pension liability adjustments and unrealized gains (losses) on investments.

The components of accumulated other comprehensive income at June 30, 2007 and December 31, 2006, net of tax are as follows:


	June 30,			December 31,
*(in thousands)*	2007			2006
Foreign currency translation	$	125,039		$	110,766
Acturial losses related to defined benefit pension plan		(2,816	)		(5,686	)
Net unrealized gains on investments		2,111			2,157

Total accumulated other comprehensive income	$	124,334		$	107,237

The components of comprehensive income for the three and six months ended June 30, 2007 and 2006 are as follows:


	Three Months Ended					Six Months Ended
	June 30,			June 30,		June 30,			June 30,
*(in thousands)*	2007			2006		2007			2006
Net income	$	678		$	8,279	$	29,618		$	12,987

Other comprehensive income:
Foreign currency translation adjustments		10,206			36,614		14,273			56,001
Changes in acturial losses related to defined benefit pension plan		1,281			1,977		2,870			3,381
Unrealized gains (losses) on investments		(53	)		50		(46	)		1,129

Other comprehensive income		11,434			38,641		17,097			60,511

Total comprehensive income	$	12,112		$	46,920	$	46,715		$	73,498

Note 11 NET INCOME PER SHARE

Basic net income per share is calculated by using the weighted-average number of common shares outstanding during that period. Diluted net income per share is calculated giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental common shares issuable upon exercise of stock options for all periods. No dilutive potential common shares were included in the computation of any diluted per share amount when a loss from continuing operations was reported by the Company. The Company utilizes income or loss from continuing operations as the “control number” in determining whether potential common shares are dilutive or anti-dilutive.

A reconciliation of the numerator and denominator of basic and diluted net income per share for both continuing and discontinued operations is provided as follows:


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
*(in thousands)*	2007		2006		2007		2006
Income from continuing operations	$	678	$	2,851	$	29,618	$	1,697
Income from discontinued operations, net of income taxes		—		5,428		—		11,290

Net income	$	678	$	8,279	$	29,618	$	12,987


Weighted-average common shares — basic		488,916		486,928		488,879		486,252
Incremental common shares attributable to exercise of outstanding options		5,328		6,117		5,406		5,729

Weighted-average common shares — diluted		494,244		493,045		494,285		491,981

Earnings per share:
Basic
Income from continuing operations	$	0.00	$	0.01	$	0.06	$	0.00
Discontinued operations		—		0.01		—		0.03

Net income per share — basic	$	0.00	$	0.02	$	0.06	$	0.03

Diluted
Income from continuing operations	$	0.00	$	0.01	$	0.06	$	0.00
Discontinued operations		—		0.01		—		0.03

Net income per share — diluted	$	0.00	$	0.02	$	0.06	$	0.03

The following table summarizes securities which were not included in the “Weighted-average shares — diluted” used for calculation of diluted net income per share, as their effect would have been antidilutive:


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
*(in thousands)*	2007			2006			2007			2006
Employee stock options outstanding		31,821			28,861			31,814			28,861
Incremental common shares attributable to exercise of outstanding options		(5,328	)		(6,117	)		(5,406	)		(5,729	)

Employee stock options excluded from per share calculation		26,493			22,744			26,408			23,132

Common stock equivalent shares associated with:
Convertible notes due 2018		—			17			—			17
Convertible notes due 2021		—			1,941			—			2,620

Total weighted-average potential shares excluded from per share calculation		26,493			24,702			26,408			25,769

The calculation of dilutive or potentially dilutive common shares related to the Company’s convertible securities considers the conversion features associated with these securities. Conversion features were considered, as at the option of the holders, the 2018 and 2021 convertible notes are convertible at any time, into the Company’s common stock at the rate of 55.932 shares per $1 (one thousand dollars) principal amount and 22.983 shares per $1 (one thousand dollars) principal amount, respectively. In this scenario, the “if converted” calculations are based upon the average outstanding convertible note balance for the three and six months ended June 30, 2006 and the respective conversion ratios. These convertible notes were redeemed in full in 2006.

Note 12 INTEREST AND OTHER INCOME (EXPENSES), NET

Interest and other income (expenses), net, is summarized in the following table:


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
*(in thousands)*	2007			2006			2007			2006
Interest and other income	$	5,520		$	3,065		$	10,416		$	8,247
Interest expense		(3,054	)		(5,777	)		(6,543	)		(11,975	)
Foreign exchange transaction gains (losses)		(1,856	)		2,068			(2,284	)		(3,535	)

Total	$	610		$	(644	)	$	1,589		$	(7,263	)

For the three and six months ended June 30, 2006, interest and other income (expenses), net related to the Company’s Grenoble, France, subsidiary and included in Discontinued Operations totaled $234 and $478, respectively (see Note 7 for further discussion).

Note 13 INCOME TAXES

For the three and six months ended June 30, 2007, the Company recorded an income tax expense of $7,067 and an income tax benefit of $8,097, respectively, compared to an income tax expense of $6,708 and $13,912 for the three and six months ended June 30, 2006.

The provision for (benefit from) income taxes for these periods was determined using the annual effective tax rate method for Atmel entities that are profitable. Entities that had operating losses with no tax benefit were excluded. As a result, excluding the impact of discrete tax events during the quarter, the provision for income taxes was at a higher consolidated effective rate than would have resulted if all entities were profitable or if losses produced tax benefits.

During the quarter ended March 31, 2007, the Company recognized a tax benefit of $19,549 resulting from the refund of French research tax credits for years 1999 through 2002, which was received during the quarter. In addition, in the three months ended March 31, 2007, the Hong Kong tax authorities completed a review of the Company’s tax returns for the years 2001 through 2004, which resulted in no adjustments. As

a result, during the quarter ended March 31, 2007, the Company recognized a tax benefit relating to a tax refund of $1,500 received in prior years that had been previously accrued as a tax contingency.

In 2005, the Internal Revenue Service (“IRS”) proposed adjustments to the Company’s U.S. income tax returns for the years 2000 and 2001. In January 2007, after subsequent discussions with the Company, the IRS revised the proposed adjustments for these years. The Company has protested these proposed adjustments and is currently pursuing administrative review with the IRS Appeals Division.

In May 2007, the IRS proposed adjustments to the Company’s U.S. income tax returns for the years 2002 and 2003. The Company intends to file a protest to these proposed adjustments and pursue administrative review with the IRS Appeals Division.

In addition, the Company has various tax audits in progress in certain U.S. states and foreign jurisdictions. The Company has accrued taxes, and related interest and penalties that may be due upon the ultimate resolution of these examinations and for other matters relating to open U.S. Federal, state and foreign tax years in accordance with FIN 48.

While the Company believes that the resolution of these audits will not have a material adverse impact on the Company’s results of operations, cash flows or financial position, the outcome is subject to uncertainty. Should the Company be unable to reach agreement with the IRS, U.S. state or foreign tax authorities on the various proposed adjustments, there exists the possibility of an adverse material impact on the results of operations, cash flows and financial position of the Company.

The Company files income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. The Company is no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 1999. Tax years for significant foreign jurisdictions including Germany, France, United Kingdom, and Switzerland are closed through 2002, 2001, 2004 and 2001 respectively; subsequent tax years for these jurisdictions remain subject to tax authority review. Hong Kong tax years are closed for years through 2004 and subsequent tax years remain subject to tax authority review.

On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Under FIN 48, the impact of an uncertain income tax position on income tax expense must be recognized at the largest amount that is more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Upon review of the Company’s reserves, there were no changes to its reserves for uncertain tax positions upon adoption. At the adoption date of January 1, 2007, the Company had $176,309 of unrecognized tax benefits, all of which would affect its income tax expense if recognized. Material changes in unrecognized tax benefits in the six months ended June 30, 2007 totaling $21,049 are described above.

Management believes that events that could occur in the next 12 months and cause a material change in unrecognized tax benefits include, but are not limited to, the following:

	•		completion of examination of the Company’s tax returns by the U.S. or foreign tax authorities;

	•		expiration of statute of limitations on the Company’s tax returns; and

	•		recording taxable income in certain unprofitable entities.

The calculation of unrecognized tax benefits involves dealing with uncertainties in the application of complex global tax regulations. Management regularly assesses the Company’s tax positions in light of legislative, bilateral tax treaty, regulatory and judicial developments in the countries in which the Company does business. Management determined that an estimate of the range of reasonably possible material changes in the unrecognized tax benefits within the next 12 months can not be made.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of January 1, 2007, the Company had approximately $30,866 of accrued interest and penalties related to uncertain tax positions. Interest and penalties of $3,535 have been expensed in the six months ended June 30, 2007.

Note 14 OPERATING AND GEOGRAPHICAL SEGMENTS

The Company designs, develops, manufactures and sells a wide range of semiconductor integrated circuit products. The segments represent management’s view of the Company’s businesses and how it allocates Company resources and measures performance of its major components. In addition, each segment comprises product families with similar requirements for design, development and marketing. Each segment requires different design, development and marketing resources to produce and sell semiconductor integrated circuits. Atmel’s four reportable segments are as follows:

	•		Application specific integrated circuit (“ASIC”) segment includes custom application specific integrated circuits designed to meet specialized single-customer requirements for their high performance devices in a broad variety of applications. This segment also encompasses a range of products which provide security for digital data, including smart cards for mobile phones, set top boxes, banking and national identity cards. The Company also develops customer specific ASICs, some of which have military applications. This segment also includes products with military and aerospace applications.

	•		Microcontrollers segment includes a variety of proprietary and standard microcontrollers, the majority of which contain embedded nonvolatile memory and integrated analog peripherals.

	•		Nonvolatile Memories segment consists predominantly of serial interface electrically erasable programmable read-only memory (“SEEPROM”) and serial interface Flash memory products. This segment also includes parallel interfaced Flash memories as well as mature parallel interface EEPROM and EPROM devices. This segment also includes products with military and aerospace applications.

	•		Radio Frequency (“RF”) and Automotive segment includes products designed for the automotive industry. This segment produces and sells wireless and wired devices for industrial, consumer and automotive applications and it also provides foundry services which produce radio frequency products for the mobile telecommunications market.

The accounting policies of the segments are the same as those described in the summary of significant accounting policies. The Company evaluates segment performance based on revenues and income or loss from operations excluding impairment and restructuring charges. Interest and other expenses, net, nonrecurring gains and losses, foreign exchange gains and losses and income taxes are not measured by operating segment.

The Company’s wafer manufacturing facilities fabricate integrated circuits for segments as necessary and their operating costs are reflected in the segments’ cost of revenues on the basis of product costs. Because segments are defined by the products they design and sell, they do not make sales to each other. The Company does not allocate assets by segment, as management does not use asset information to measure or evaluate a segment’s performance. Prior year amounts have been reclassified to conform to current year presentation for certain changes to product groupings. Certain product families have been reassigned within the ASIC and Microcontroller segments as part of reorganization efforts to improve organizational efficiency. As a result, prior period net revenues and income from operating segments have been reclassified to conform to the current presentation of operating segment information.

Information about Reportable Segments


				Micro-		Nonvolatile		RF and
*(in thousands)*	ASIC			Controllers		Memories		Automotive			Total
Three months ended June 30, 2007
Net revenues from external customers	$	124,518		$	110,619	$	89,112	$	79,998		$	404,247
Segment income (loss) from operations		(14,103	)		5,126		13,643		(171	)		4,495
Three months ended June 30, 2006
Net revenues from external customers	$	123,820		$	111,317	$	93,215	$	101,136		$	429,488
Segment income (loss) from operations		(21,139	)		23,652		2,442		5,248			10,203


				Micro-		Nonvolatile		RF and
*(in thousands)*	ASIC			Controllers		Memories		Automotive		Total
Six months ended June 30, 2007
Net revenues from external customers	$	235,495		$	218,641	$	175,140	$	166,284	$	795,560
Segment income (loss) from operations		(22,861	)		8,262		23,204		10,469		19,074
Six months ended June 30, 2006
Net revenues from external customers	$	247,788		$	202,403	$	188,844	$	191,237	$	830,272
Segment income (loss) from operations		(33,946	)		32,055		11,470		13,444		23,023

Amounts for the three and six months ended June 30, 2006 have been adjusted to reflect the divestiture of the Company’s Grenoble, France, subsidiary in July 2006. For the three and six months ended June 30, 2006, net revenues related to this subsidiary and included in Discontinued Operations totaled $33,287 and $69,287, respectively. These amounts were previously reported in the Company’s ASIC operating segment. See Note 7 for further discussion.

Reconciliation of Segment Information to Condensed Consolidated Statements of Operations


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
*(in thousands)*	2007		2006		2007		2006

Total segment income from operations	$	4,495	$	10,203	$	19,074	$	23,023
Unallocated amounts:
Restructuring and other credits (charges)		2,640		—		858		(151	)

Consolidated income from operations	$	7,135	$	10,203	$	19,932	$	22,872

Geographic sources of revenues were as follows:


	Three Months Ended				Six Months Ended
	June 30,		June 30,		June 30,		June 30,
*(in thousands)*	2007		2006		2007		2006

United States	$	56,212	$	65,400	$	105,998	$	129,167
Germany		54,328		49,671		111,201		92,528
France		38,518		40,113		76,441		80,885
United Kingdom		9,628		9,091		16,620		13,119
Japan		25,940		13,962		47,939		27,531
China including Hong Kong		87,386		87,854		170,268		172,399
Singapore		38,761		69,543		83,979		131,170
Rest of Asia-Pacific		49,184		51,915		93,024		101,358
Rest of Europe		39,437		38,442		80,759		75,404
Rest of the World		4,853		3,497		9,331		6,711

Total net revenues	$	404,247	$	429,488	$	795,560	$	830,272

Net revenues are attributed to countries based on delivery locations.

Locations of long-lived assets as of June 30, 2007 and December 31, 2006 were as follows:


	June 30,		December 31,
*(in thousands)*	2007		2006
United States	$	147,405	$	159,998
Germany		29,631		30,733
France		277,741		285,469
United Kingdom		16,877		19,753
Japan		177		181
China, including Hong Kong		791		716
Rest of Asia-Pacific		25,053		19,018
Rest of Europe		11,392		12,095

Total	$	509,067	$	527,963

At June 30, 2007, long-lived assets totaling $90,774 classified as held for sale, and excluded from the table above, were located in the United Kingdom. At December 31, 2006, long-lived assets totaling $88,757 and $35,040 classified as held for sale, and excluded from the table above, were located in the United Kingdom and United States, respectively.

Note 15 COMMITMENTS AND CONTINGENCIES

Commitments

Employment Agreements

The Company entered into an employment agreement with an executive, effective August 7, 2006. The agreement provides for certain payments and benefits to be provided in the event that the executive is terminated without “cause” or that he resigns for “good reason,” including a “change of control.” The agreement initially called for the Company to issue restricted stock or restricted stock units to the executive on January 2, 2007. However, due to the Company’s non-timely status regarding reporting obligations under the Securities Exchange Act of 1934 (“Exchange Act”), the Company was unable to issue these shares on January 2, 2007. On March 13, 2007, the executive’s agreement was amended to provide for issuing these shares after the Company became current with its reporting obligations under the Exchange Act, or for an amount in cash if the executive’s employment terminates prior to issuance, equal to the portion that would have vested had these shares been issued on January 2, 2007, as originally intended. On July 11, 2007, the Company granted 1 million restricted stock units to the executive pursuant to the employment agreement of August 7, 2006 mentioned above.

Indemnifications

As is customary in the Company’s industry, as provided for in local law in the United States and other jurisdictions, the Company’s standard contracts provide remedies to its customers, such as defense, settlement, or payment of judgment for intellectual property claims related to the use of the Company’s products. From time to time, the Company will indemnify customers against combinations of loss, expense, or liability arising from various trigger events related to the sale and the use of the Company’s products and services, usually up to a specified maximum amount. In addition, the Company has entered into indemnification agreements with its officers and directors, and the Company’s bylaws permit the indemnification of the Company’s agents. In the Company’s experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability is not material.

with these matters. The Company is currently paying or reimbursing legal expenses being incurred in connection with these matters by a number of its current and former directors, officers and employees. The Company believes the fair value of any required future payments under this liability is adequately provided for within the reserves it has established for currently pending legal proceedings.

Purchase Commitments

At June 30, 2007, the Company had outstanding capital purchase commitments of $6,023. The Company also has a supply agreement obligation with a subsidiary of XbyBus SAS, a French Corporation, of $19,427 for wafer purchases through 2008.

Contingencies

Litigation

Atmel currently is party to various legal proceedings. While management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the results of operations, cash flows and financial position of Atmel. The estimate of the potential impact on the Company’s financial position or overall results of operations or cash flows for the legal proceedings described below could change in the future. The Company has accrued for all losses related to litigation that the Company considers probable and for which the loss can be reasonably estimated.

On August 7, 2006, George Perlegos, Atmel’s former President and Chief Executive Officer, and Gust Perlegos, Atmel’s former Executive Vice President, Office of the President, filed three actions in Delaware Chancery Court against Atmel and some of its officers and directors under Sections 211, 220 and 225 of the Delaware General Corporation Law. In the Section 211 action, plaintiffs alleged that on August 6, 2006, the Board of Directors wrongfully cancelled or rescinded a call for a special meeting of Atmel’s stockholders, and sought an order requiring the holding of the special meeting of stockholders. In the Section 225 action, plaintiffs alleged that their termination was the product of an invalidly noticed board meeting and improperly constituted committees acting with gross negligence and in bad faith. They further alleged that there was no basis in law or fact to remove them from their positions for cause, and sought an order declaring that they continue in their positions as President and Chief Executive Officer, and Executive Vice President, Office of the President, respectively. For both actions, plaintiffs sought costs, reasonable attorneys’ fees and any other appropriate relief. The Section 220 action, which sought access to corporate records, was dismissed in 2006.

Regarding the Delaware actions, a trial was held in October 2006, the court held argument in December 2006, issued a Memorandum Opinion in February 2007, and granted a Final Order on March 15, 2007. Regarding the Section 211 action, the Court ruled in favor of the plaintiffs with regards to calling a Special Meeting of Stockholders. The Perlegoses subsequently made a motion in the Chancery Court for attorneys’ fees and expenses, based on their having prevailed in the Section 211 action. Atmel intends to oppose this motion.

Pursuant to the order of the Delaware Chancery Court, the Company held a Special Meeting of Stockholders on May 18, 2007 to consider and vote on a proposal by George Perlegos, our former Chairman, President and Chief Executive Officer, to remove five members of the Company’s Board of Directors and to replace them with five persons nominated by Mr. Perlegos. On June 1, 2007, following final tabulation of votes and certification by IVS Associates, Inc., the independent inspector of elections for the Special Meeting, the Company announced that stockholders had rejected the proposal considered at the Special Meeting.

held on July 25, 2007. On June 5, 2007, the Company received notice that Mr. Perlegos will not solicit proxies from the Company’s shareholders as to any issue, including the makeup of the Company’s Board of Directors, in connection with the Company’s annual meeting to be held in July 2007.

In the Section 225 action, the court found that the plaintiffs had not demonstrated any right to hold any office of Atmel. On April 13, 2007, George Perlegos and Gust Perlegos filed an appeal to the Supreme Court of the State of Delaware with respect to the Section 225 action. On April 27, 2007, Atmel filed a cross-appeal in the Supreme Court of the State of Delaware relating to the Section 225 claims. On May 23, 2007, George Perlegos and Gust Perlegos withdrew their appeal with respect to the Section 225 action. On May 25, 2007, Atmel withdrew its cross-appeal with respect to this action.

In January 2007, the Company received a subpoena from the Department of Justice (“DOJ”) requesting information relating to its past stock option grants and related accounting matters. Also, in August 2006, the Company received a letter from the SEC making an informal inquiry and request for information on the same subject matters. In August 2006, the Company received Information Document Requests from the IRS regarding the Company’s investigation into misuse of corporate travel funds and investigation into backdating of stock options. The Company is cooperating fully with the DOJ, SEC and IRS inquiries and intends to continue to do so. These inquiries likely will require the Company to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal actions seeking, among other things, injunctions against the Company and the payment of significant fines and penalties by the Company, which may adversely affect our results of operations and cash flows. The Company cannot predict how long it will take or how much more time and resources it will have to expend to resolve these government inquiries, nor can the Company predict the outcome of these inquiries.

On November 3, 2006, George Perlegos filed an administrative complaint against Atmel with the federal Occupational Safety & Health Administration (“OSHA”) asserting that he was wrongfully terminated by Atmel’s Board of Directors in violation of the Sarbanes-Oxley Act. More specifically, Mr. Perlegos alleged that Atmel terminated him in retaliation for his providing information to Atmel’s Audit Committee regarding suspected wire fraud and mail fraud by Atmel’s former travel manager and its third-party travel agent. Mr. Perlegos sought reinstatement, costs, attorneys’ fees, and damages in an unspecified amount. On December 11, 2006, Atmel responded to the complaint, asserting that Mr. Perlegos’ claims were without merit and that he was terminated, along with three other senior executives, for the misuse of corporate travel funds. By letter dated June 6, 2007, Atmel received notice that Mr. Perlegos had withdrawn his complaint.

From July through September 2006, six stockholder derivative lawsuits were filed (three in the U.S. District Court for the Northern District of California and three in Santa Clara County Superior Court) by persons claiming to be Company stockholders and purporting to act on Atmel’s behalf, naming Atmel as a nominal defendant and some of its current and former officers and directors as defendants. The suits contain various causes of action relating to the timing of stock option grants awarded by Atmel. The federal cases were consolidated and an amended complaint was filed on November 3, 2006. Atmel and the individual defendants have each moved to dismiss the consolidated amended complaint on various grounds. On July 16, 2007, the Court issued an order dismissing the complaint but granting the plaintiffs leave to file an amended complaint. The Court’s order did not set a deadline for the plaintiffs to file an amended complaint. The state derivative cases have also been consolidated. In April 2007, a consolidated derivative complaint was filed in the state court action, and the Company moved to stay it. The court granted Atmel’s motion to stay on June 14, 2007. Atmel believes that the filing of the derivative actions was unwarranted and intends to vigorously contest them.

On March 23, 2007, Atmel filed a complaint in the U.S. District Court for the Northern District of California against George Perlegos and Gust Perlegos. In the lawsuit, Atmel asserts that the Perlegoses used false and misleading proxy materials in violation of Section 14(a) of the federal securities laws to wage their proxy campaign to replace Atmel’s President and Chief Executive Officer and all of Atmel’s independent directors. Further, Atmel asserts that the Perlegos group, in violation of federal securities laws, failed to file a Schedule 13D as required, leaving stockholders without the information about the Perlegoses and their plans that is necessary for stockholders to make an informed assessment of the Perlegoses’

proposal. In its complaint, Atmel has asked the Court to require the Perlegoses to comply with their disclosure obligations, and to enjoin them from using false and misleading statements to improperly solicit proxies as well as from voting any Atmel shares acquired during the period the Perlegoses were violating their disclosure obligations under the federal securities laws. On April 11, 2007, George Perlegos and Gust Perlegos filed a counterclaim with respect to such matters in the U.S. District Court for the Northern District of California seeking an injunction (a) prohibiting Atmel from making false and misleading statements and (b) requiring Atmel to publish and publicize corrective statements, and requesting an award of reasonable expenses and costs of this action. Atmel disputed this counterclaim. On July 3, 2007, this action, including the counterclaim, was dismissed.

In October 2006, an action was filed in First Instance labour court, Nantes, France on behalf of 46 former employees of Atmel’s Nantes facility, claiming that the sale of the Nantes facility to MHS (XbyBus SAS) in December 2005 was not a valid sale, and that these employees should still be considered employees of Atmel, with the right to claim social benefits from Atmel. The action is for unspecified damages. Atmel believes that the filing of this action is without merit and intends to vigorously defend the terms of the sale to MHS.

In January 2007, Quantum World Corporation filed a patent infringement suit in the United States District Court, Eastern District of Texas naming Atmel as a co-defendant, along with a number of other electronics manufacturing companies. The plaintiff claims that the asserted patents allegedly cover a true random number generator and that the patents are infringed by the manufacture, use importation and offer for sale of certain Atmel products. The suit seeks damages for infringement and recovery of attorneys’ fees and costs incurred. In March 2007, Atmel filed a counterclaim for declaratory relief that the patents are neither infringed nor valid. Atmel believes that the filing of this action is without merit and intends to vigorously defend against this action.

In March 2006, Atmel filed suit against AuthenTec in the United States District Court, Northern District of California, San Jose Division, alleging infringement of U.S. Patent No. 6,289,114, and on November 1, 2006, Atmel filed a First Amended Complaint adding claims for infringement of U.S. Patent No. 6,459,804 (the “’804 Patent”). In November 2006, AuthenTec answered denying liability and counterclaimed seeking a declaratory judgment of non-infringement and invalidity, its attorneys’ fees and other relief. In April 2007, AuthenTec filed an action against Atmel for declaratory relief in the United States District Court for the Middle District of Florida that the patents asserted against it by Atmel in the action pending in the Northern District of California are neither infringed nor valid, and amended that complaint in May 2007 to add claims for declaratory relief that the ’804 Patent is unenforceable, alleged interference with business relationships, and abuse of process. Authentec seeks declaratory relief and unspecified damages. On June 25, 2007, the action pending in the Middle District of Florida was transferred to the Northern District of California. On July 3, 2007, Atmel filed an answer to the claims for declaratory relief that the patents were neither valid nor infringed, and also added counterclaims of infringement. Also on July 3, 2007, Atmel moved to dismiss the remaining claims for declaratory relief that the ’804 Patent is unenforceable, alleged interference with business relationships, and alleged abuse of process. On August 2, 2007 the parties agreed to the dismissal with prejudice of Authentec’s claims for allged interference with business relationships and alleged abuse of process. The parties also agreed to grant Authentec leave to amend its counterclaim to add the claim for alleged unenforceability of the ’804 Patent. Atmel believes that AuthenTec’s claims are without merit and intends to vigorously pursue and defend these actions.

From time to time, the Company may be notified of claims that the Company may be infringing patents issued to other parties and may subsequently engage in license negotiations regarding these claims.

Other Investigations

In addition to the investigation into stock option granting practices, the Audit Committee of the Company’s Board of Directors, with the assistance of independent legal counsel and forensic accountants, conducted independent investigations into (a) certain proposed investments in high yield securities that were being contemplated by the Company’s former Chief Executive Officer during the period from 1999 to 2002 and bank transfers related thereto, and (b) alleged payments from certain of the Company’s customers

to employees at one of the Company’s Asian subsidiaries. The Audit Committee has completed its investigations, including its review of the impact on the Company’s condensed consolidated financial statements for the six months ended June 30, 2007 and prior periods, and concluded that other than the costs of conducting the investigation, there was no impact on such condensed consolidated financial statements.

Other Contingencies

For products and technology exported from the U.S. or otherwise subject to U.S. jurisdiction, the Company is subject to U.S. laws and regulations governing international trade and exports, including, but not limited to the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and trade sanctions against embargoed countries and destinations administered by the Office of Foreign Assets Control (“OFAC”), U.S. Department of the Treasury. The Company has recently discovered shortcomings in its export compliance procedures. The Company is currently analyzing product shipments and technology transfers, working with U.S. government officials to ensure compliance with applicable U.S. export laws and regulations, and developing an enhanced export compliance system. A determination by the U.S. government that the Company has failed to comply with one or more of these export controls or trade sanctions could result in civil or criminal penalties, including the imposition of significant fines, denial of export privileges, loss of revenues from certain customers, and debarment from U.S. participation in government contracts. Any one or more of these sanctions could have a material adverse effect on the Company’s business, financial condition and results of operations.

Income Tax Contingencies

In 2005, the Internal Revenue Service (“IRS”) completed its audit of the Company’s U.S. income tax returns for the years 2000 and 2001 and has proposed various adjustments to these income tax returns, including carryback adjustments to 1996 and 1999. In January 2007, after subsequent discussions with the Company, the IRS revised its proposed adjustments for these years. The Company has protested these proposed adjustments and is currently working through the matter with the IRS Appeals Division.

In May 2007, the IRS completed its audit of the Company’s U.S. income tax returns for the years 2002 and 2003 and has proposed various adjustments to these income tax returns. The Company intends to file a protest to these proposed adjustments and to work through the matter with the IRS Appeals Division.

While the Company believes that the resolution of these audits will not have a material adverse impact on the Company’s results of operations, cash flows or financial position, the outcome is subject to uncertainties. Should the Company be unable to reach agreement with the IRS on the various proposed adjustments, there exists the possibility of an adverse material impact on the results of operations, cash flows and financial position of the Company.

The Company’s French subsidiary’s income tax return for the 2003 tax year is currently under examination by the French tax authorities. The examination has resulted in an additional income tax assessment and the Company is currently pursuing administrative appeal of the assessment. While the Company believes the resolution of this matter will not have a material adverse impact on its results of operations, cash flows or financial position, the outcome is subject to uncertainty. The Company has provided its best estimate of income taxes and related interest and penalties due for potential adjustments that may result from the resolution of this examination, as well as for examinations of other open tax years.

In addition, the Company has various tax audits in progress in certain U.S. states and foreign jurisdictions. The Company has provided its best estimate of taxes and related interest and penalties due for potential adjustments that may result from the resolution of these examinations, and examinations of open U.S. Federal, state and foreign tax years.

The Company’s income tax calculations are based on application of the respective U.S. Federal, state or foreign tax law. The Company’s tax filings, however, are subject to audit by the respective tax authorities. Accordingly, the Company recognizes tax liabilities based upon its estimate of whether, and the extent to

which, additional taxes will be due. To the extent the final tax liabilities are different from the amounts originally accrued, the increases or decreases are recorded as income tax expense.

Product Warranties

The Company accrues for warranty costs based on historical trends of product failure rates and the expected material and labor costs to provide warranty services. The majority of products are generally covered by a warranty typically ranging from 90 days to two years.

The following table summarizes the activity related to the product warranty liability during the three and six months ended June 30, 2007 and 2006:


	Three Months Ended						Six Months Ended
	June 30,			June 30,			June 30,			June 30,
*(in thousands)*	2007			2006			2007			2006
Balance at beginning of period	$	5,327		$	5,845		$	4,773		$	6,184
Accrual for warranties during the period		1,343			872			3,598			1,732
Actual costs incurred		(1,352	)		(1,331	)		(3,053	)		(2,530	)

Balance at end of period	$	5,318		$	5,386		$	5,318		$	5,386

Guarantees

During the ordinary course of business, the Company provides standby letters of credit or other guarantee instruments to certain parties as required for certain transactions initiated by either our subsidiaries or us. As of June 30, 2007, the maximum potential amount of future payments that we could be required to make under these guarantee agreements is approximately $12 million. The Company has not recorded any liability in connection with these guarantee arrangements. Based on historical experience and information currently available, the Company believes it will not be required to make any payments under these guarantee arrangements.

Note 16 SUBSEQUENT EVENTS

On July 26, the Company announced the expansion of its Board of Directors from six to eight members with the election of Papken Der Torossian and Jack L. Saltich as new Independent Directors at the Annual Meeting of Stockholders held on July 25, 2007. In connection with their election to the Board, the Company also granted each of Mr. Der Torossian and Mr. Saltich a non-qualified stock option for the purchase of 50,000 shares of Atmel’s common stock at an exercise price per share equal to the fair market value on that date, or $5.69 per share. Assuming continued service on Atmel’s Board, such options vest and become exercisable over four years, with 12.5% of the shares vesting six months after grant date and 2.0833% of the shares vesting each month thereafter until fully vested.

At the Company’s annual meeting of stockholders held on July 25, 2007, stockholders approved an amendment to the Company’s 2005 Stock Plan. The amendment to the 2005 Plan permits the Company to commence a “409A exchange offer” in connection with every option that was unvested, in whole or in part, as of December 31, 2004 and that had a per share exercise price that was less than the fair market value per share of the Company’s common stock, as determined for purposes of Internal Revenue Code Section 409A, on its grant date.

Item 2. Management’s Discussion and Analysis of Financial Condition And Results of Operations

You should read the following discussion and analysis in conjunction with the Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere in this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the

various disclosures made by us in this Report and in our other reports filed with the SEC, including our Annual Report on Form 10-K/A for the year ended December 31, 2006.

Forward Looking Statements

You should read the following discussion of our financial condition and results of operations in conjunction with our Condensed Consolidated Financial Statements and the related “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements regarding our outlook for fiscal 2007, our anticipated revenues, operating expenses and liquidity, the effect of our restructuring and other strategic efforts and our expectations regarding the effects of exchange rates. Our actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, and in Item 1A – Risk Factors, and elsewhere in this Form 10-Q and similar discussions in our other filings with the Securities and Exchange Commission, including our Annual Report on Form 10-K. Generally, the words “may,” “will,” “could,” “would,” “anticipate,” “expect,” “intend,” “believe,” “seek,” “estimate,” “plan,” “view,” “continue,” the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Form 10-Q is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. Atmel undertakes no obligation to update any forward-looking statements in this Form 10-Q.

OVERVIEW

We are a leading designer, developer and manufacturer of a wide range of semiconductor products. Our diversified product portfolio includes our proprietary AVR microcontrollers, security and smart card integrated circuits, and a diverse range of advanced logic, mixed-signal, nonvolatile memory and radio frequency devices. Leveraging our broad intellectual property portfolio, we are able to provide our customers with complete system solutions. Our solutions target a wide range of applications in the communications, computing, consumer electronics, storage, security, automotive, military and aerospace markets, and are used in products such as mobile handsets, automotive electronics, GPS systems and batteries.

We design, develop, manufacture and sell our products. We develop process technologies to ensure our products provide the maximum possible performance. During the six months ended June 30, 2007, we manufactured approximately 94% of our products in our own wafer fabrication facilities.

Our operating segments comprise: (1) application specific integrated circuits (ASICs); (2) microcontroller products (Microcontroller); (3) nonvolatile memory products (Nonvolatile Memory); and (4) radio frequency and automotive products (RF and Automotive).

Net revenues decreased by 6% to $404 million in the three months ended June 30, 2007, compared to $429 million in the three months ended June 30, 2006. Net revenues decreased by 4% to $796 million in the six months ended June 30, 2007, compared to $830 million in the six months ended June 30, 2006. These decreases were primarily a result of declines in our Nonvolatile Memory, RF and Automotive and ASIC segments, partially offset by growth in our Microcontroller segment in the six months ended June 30, 2007. Nonvolatile Memory net revenues decreased in the three and six months ended June 30, 2007 as flash memory products experienced lower revenue compared to the three and six months ended June 30, 2006 due to competitive pricing pressures. The decrease in net revenues in the RF and Automotive segment is primarily related to a decrease in shipment quantities for BiCMOS foundry products related to communication chipsets for CDMA phones partially offset by growth in other Automotive products. The decrease in net revenues in the ASIC segment is primarily due to reduced shipments of lower margin commodity telecommunication-market products.

Gross margin improved to 35% in the three and six months ended June 30, 2007, compared to 32% in the three and six months ended June 30, 2006. These improvements were primarily due to a more favorable mix of higher margin products sold, improved manufacturing yields, as well as lower depreciation expense following the December 2006 reclassification of assets at our North Tyneside, UK facility as held for sale. However, gross margin was negatively impacted by unfavorable exchange rates as well as lower factory utilization rates, primarily for our North Tyneside, UK facility.

We had income from operations of $7 million in the three months ended June 30, 2007, compared to income from operations of $10 million in the three months ended June 30, 2006. Income from operations was $20 million in the six months ended June 30, 2007, compared to $23 million in the six months ended June 30, 2006. The decrease in income from operations from the comparable prior periods resulted primarily from higher legal and accounting costs related to the special shareholder meeting and recently completed stock option and other investigations. These costs totaled approximately $15 million for the three months ended June 30, 2007 and $20 million for the six months ended June 30, 2007.

Income tax expense totaled $7 million for the three months ended June 30, 2007, compared to $7 million for the three months ended June 30, 2006. Income tax expense results primarily from taxable income in our profitable foreign subsidiaries. As a result, the effective tax rate for the current quarter is higher than expected based on standard rates in effect in each taxable jurisdiction if all entities were operating at a profit. We recognized a benefit of $20 million resulting from the receipt of French research and development tax credits related to prior tax years in the first quarter of 2007, resulting in a net tax benefit of $8 million for the six months ended June 30, 2007.

We generated positive cash flow from operations of $61 million and continued to strengthen our liquidity position at June 30, 2007. At June 30, 2007, our cash, cash equivalents and short-term investments totaled $476 million, up from approximately $467 million at December 31, 2006, while total indebtedness decreased to approximately $126 million at June 30, 2007, from $169 million at December 31, 2006. In addition, current liabilities were also reduced significantly to $464 million at June 30, 2007, compared to $567 million at December 31, 2006.

RESULTS OF OPERATIONS


	Three Months Ended
	June 30,			June 30,			June 30,		June 30,
*(in thousands, except percentage of net revenue*	2007			2007			2006		2006
Net revenues	$	404,247			100.0	%	$	429,488		100.0	%


Gross profit	$	141,642			35.0	%	$	139,029		32.4	%
Research and development expenses		69,266			17.1	%		74,560		17.4	%
Selling, general and administrative expenses		67,881			16.8	%		54,266		12.6	%
Restructuring and other credits		(2,640	)		-0.7	%		—		—

Income from continuing operations	$	7,135			1.8	%	$	10,203		2.4	%


	Six Months Ended
	June 30,			June 30,			June 30,		June 30,
*(in thousands, except percentage of net revenue*	2007			2007			2006		2006
Net revenues	$	795,560			100.0	%	$	830,272		100.0	%


Gross profit	$	281,579			35.4	%	$	265,411		32.0	%
Research and development expenses		136,565			17.2	%		142,711		17.2	%
Selling, general and administrative expenses		125,940			15.8	%		99,677		12.0	%
Restructuring and other charges (credits)		(858	)		-0.1	%		151		0.0	%

Income from continuing operations	$	19,932			2.5	%	$	22,872		2.8	%

Net Revenues

Net revenues decreased by 6% to $404 million in the three months ended June 30, 2007, compared to $429 million in the three months ended June 30, 2006. Net revenues decreased by 4% to $796 million in the six months ended June 30, 2007, compared to $830 million in the six months ended June 30, 2006. These decreases were primarily a result of declines in our Nonvolatile Memory and RF and Automotive segments. Nonvolatile Memory net revenues decreased in the three and six months ended June 30, 2007 as flash memory products experienced lower revenue compared to the three and six months ended June 30, 2006 due to competitive pricing pressures. The decrease in net revenues in the RF and Automotive segment is primarily related to a decrease in quantity shipments for BiCMOS foundry products related to communication chipsets for CDMA phones, partially offset by growth in other Automotive products.

Net Revenues — By Operating Segment

Our net revenues by segment for the three and six months ended June 30, 2007 compared to the three and six months ended June 30, 2006 are summarized as follows:


	Three Months Ended
*(in thousands)*	June 30,		June 30,
Segment	2007		2006		Change			% Change
ASIC	$	124,518	$	123,820	$	698			1	%
Microcontroller		110,619		111,317		(698	)		-1	%
Nonvolatile Memory		89,112		93,215		(4,103	)		-4	%
RF and Automobile		79,998		101,136		(21,138	)		-21	%

Total net revenues	$	404,247	$	429,488	$	(25,241	)		-6	%


	Six Months Ended
*(in thousands)*	June 30,		June 30,
Segment	2007		2006		Change			% Change
ASIC	$	235,495	$	247,788	$	(12,293	)		-5	%
Microcontroller		218,641		202,403		16,238			8	%
Nonvolatile Memory		175,140		188,844		(13,704	)		-7	%
RF and Automobile		166,284		191,237		(24,953	)		-13	%

Total net revenues	$	795,560	$	830,272	$	(34,712	)		-4	%

Prior year amounts have been reclassified to conform to current year presentation for certain changes to product groupings. Certain product families have been reassigned within the ASIC and Microcontroller segments as part of reorganization efforts to improve organizational efficiency. As a result, prior period net revenues and income from operating segments have been reclassified to conform to the current presentation of operating segment information.

Net revenue amounts have been adjusted to reflect the divestiture of our Grenoble, France, subsidiary. Net revenues from the Grenoble subsidiary of $33 million and $69 million for the three and six months ended June 30, 2006 are excluded from consolidated net revenues, and are reclassified to Results from Discontinued Operations. See Note 7 to Notes to Condensed Consolidated Financial Statements for further discussion.

ASIC

ASIC segment net revenues remained flat at $125 million in the three months ended June 30, 2007, compared to $124 million in the three months ended June 30, 2006. Sequentially, ASIC net revenues increased 12%, or $13 million, from $111 million of net revenues recorded during the three months ended March 31, 2007. ASIC segment net revenues decreased by 5% to $235 million in the six months ended June 30, 2007, compared to $248 million in the six months ended June 30, 2006, as smart card product net revenues declined $20 million, or 19%, compared to the six months ended June 30, 2006 primarily due to reduced shipments of lower margin commodity telecommunication-market products, offset by increased revenues in Crypto memory products (up 140%) and CBIC products (up 9%) during the six months ended June 30, 2007.

Microcontroller

Microcontroller segment net revenues remained flat at $111 million in the three months ended June 30, 2007, compared to $111 million in the three months ended June 30, 2006. Sequentially, microcontroller revenues increased 3%, or $3 million, from $108 million of net revenues recorded during the three months ended March 31, 2007. Microcontroller segment net revenues increased by 8% to $219 million in the six months ended June 30, 2007, compared to $202 million in the six months ended June 30, 2006. The growth in net revenues in the six months ended June 30, 2007 compared to the six months ended June 30, 2006 resulted primarily from new customer designs utilizing both our proprietary AVR microcontroller products as well as our ARM-based microcontroller products. AVR microcontroller revenue grew 9% in the six months ended June 30, 2007, compared to the six months ended June 30, 2006 while other non-proprietary microcontroller families increased revenue by 7% in the six months ended June 30, 2007, compared to the six months ended June 30, 2006. Increased test capacity installed during 2006 allowed us to increase shipment rates in 2007 compared to the level of test capacity available in the first half of 2006 for AVR microcontrollers. In addition, market share gains in the 8-bit microcontroller market and ARM-based microcontrollers contributed to higher shipment levels in 2007. Demand for microcontrollers is largely driven by increased use of embedded control systems in consumer, industrial and automotive products.

Nonvolatile Memory

Nonvolatile Memory segment revenues decreased by 4% to $89 million in the three months ended June 30, 2007, compared to $93 million in the three months ended June 30, 2006. Sequentially, Non-volatile Memory revenues increased $3 million, or 4%, from $86 million of net revenues recorded during the three months ended March 31, 2007. Nonvolatile Memory segment revenues decreased by 7% to $175 million in the six months ended June 30, 2007, compared to $189 million in the six months ended June 30, 2006. These decreases in the three and six months ended June 30, 2007, compared to three and six months ended June 30, 2006 were primarily due to reduced shipments of lower margin commodity flash memory products. For the three and six months ended June 30, 2007, revenues for flash-based products declined by 16% and 19% compared to the three and six months ended June 30, 2006. Markets for our nonvolatile memory products are more competitive than other markets we sell in, and as a result, our memory products are subject to greater declines in average selling prices than products in our other segments. Competitive pressures and rapid obsolescence of products are among several factors causing continued pricing declines in 2007. During the three and six months ended June 30, 2007, serial EEPROM-based product revenues increased 5% and 2%, respectively when compared to revenue levels experienced for the three and six months ended June 30, 2006. While pricing for this product family remained steady, unit shipments increased by 6% and 2%, compared to the three and six months ended June 30, 2006. This product family benefits from significant market share resulting from competitive pricing and a broad range of offerings. Conditions in the non volatile memory segment are expected to remain challenging for the foreseeable future. In an attempt to mitigate the pricing fluctuations in this market, we have shifted our focus away from lower margin commodity parallel Flash products, which tend to experience greater than average sales price fluctuations, to other serial interface nonvolatile memory products.

RF and Automotive

RF and Automotive segment revenues decreased by 21% to $80 million in the three months ended June 30, 2007, compared to $101 million in the three months ended June 30, 2006. Sequentially, RF and Automotive revenues decreased $6 million, or 7%, from the $86 million recorded during the three months ended March 31, 2007. RF and Automotive segment revenues decreased by 13% to $166 million in the six months ended June 30, 2007, compared to $191 million in the six months ended June 30, 2006. These decreases in net revenues in the RF and Automotive segment are primarily related to reduced shipment quantities for BiCmos foundry products related to communication chipsets for CDMA phones partially offset by growth in other automotive products. For the three and six months ended June 30, 2007, net revenues decreased approximately $26 million and $36 million, respectively, for BiCmos foundry products, offset by a $5 million and $11 million increase in revenue, respectively, from other automotive products.

Net Revenues — By Geographic Area

Our net revenues by geographic areas for the three and six months ended June 30, 2007 compared to the three and six months ended June 30, 2006 are summarized as follows (revenues are attributed to countries based on delivery locations):


	Three Months Ended
*(in thousands)*	June 30,		June 30,
Region	2007		2006		Change			% Change
United States	$	56,212	$	65,400	$	(9,188	)		-14	%
Europe		141,911		137,317		4,594			3	%
Asia		201,271		223,274		(22,003	)		-10	%
Other *		4,853		3,497		1,356			39	%

Total net revenues	$	404,247	$	429,488	$	(25,241	)		-6	%


	Six Months Ended
*(in thousands)*	June 30,		June 30,
Region	2007		2006		Change			% Change
United States	$	105,998	$	129,167	$	(23,169	)		-18	%
Europe		285,021		261,936		23,085			9	%
Asia		395,210		432,458		(37,248	)		-9	%
Other *		9,331		6,711		2,620			39	%

Total net revenues	$	795,560	$	830,272	$	(34,712	)		-4	%


*		Primarily includes Philippines, South Africa, and Central and South America

Net revenue amounts have been adjusted to reflect the divestiture of our Grenoble, France, subsidiary. Net revenues from the Grenoble subsidiary of $33 million and $69 million for the three and six months ended June 30, 2006 are excluded from consolidated net revenues, and are reclassified to Results from Discontinued Operations. See Note 7 of Notes to Condensed Consolidated Financial Statements for further discussion.

Sales outside the United States accounted for 86% and 87% of our net revenues in the three and six months ended June 30, 2007, compared to 85% and 84% of our net revenues in the three and six months ended June 30, 2006.

Our sales in the United States decreased by $9 million, or 14%, in the three months ended June 30, 2007, compared to the three months ended June 30, 2006, and decreased by $23 million, or 18%, in the six months ended June 30, 2007, compared to the six months ended June 30, 2006, primarily due to United States based customers continuing to reduce deliveries to domestic operations and reduced shipments to United States based distributors.

Our sales in Europe increased by $5 million, or 3%, in the three months ended June 30, 2007, compared to the three months ended June 30, 2006, and increased by $23 million, or 9%, in the six months ended June 30, 2007, compared to the six months ended June 30, 2006, primarily due to both higher volume shipments of ARM-based microcontrollers and automotive products, as well as higher revenues related to the increase in the value of the euro relative to the U.S. dollar.

Our sales in Asia decreased by $22 million, or 10%, in the three months ended June 30, 2007, compared to the three months ended June 30, 2006, and decreased by $37 million, or 9% in the six months ended June 30, 2007, compared to the six months ended June 30, 2006, primarily due to reduced shipment quantities for BiCMOS foundry products related to communication chipsets for CDMA phones.

The trend over the last several years has been an increase in revenues in Asia, while revenues in the United States and Europe have either declined or grown at a much slower rate. We believe that part of this shift reflects changes in customer manufacturing trends, with many customers increasing production in Asia due to lower labor costs. While revenues in Asia declined in 2007 compared to 2006, we expect that Asia revenues will grow more rapidly than other regions in the future. However, in the short-term our revenues in Asia may decrease further as we optimize our distributor base in Asia. It may take time for us to identify financially viable distributors and help them develop high quality support services. This process may result in short-term revenue loss, particularly in the third and fourth quarters of fiscal 2007. There can be no assurances that we will be able to manage this optimization process in an efficient and timely manner.

Revenues and Costs – Impact from Changes to Foreign Exchange Rates

During the three months ended June 30, 2007 and 2006, 21% and 18% of net revenues were denominated in foreign currencies, primarily the euro. During the six months ended June 30, 2007 and 2006, 22% and 18% of net revenues were denominated in foreign currencies, primarily the euro. Sales in euros amounted to approximately 21% and 17% of net revenues in the three months ended June 30, 2007 and 2006, respectively, and 22% and 17% of net revenues in the six months ended June 30, 2007 and 2006, respectively. Sales in Japanese yen accounted for approximately 1% of net revenues in the six months ended June 30, 2007 and 2006, respectively, and 1% of net revenues in the six months ended June 30, 2007 and 2006, respectively.

Average exchange rates utilized to translate foreign currency revenues and expenses were approximately $1.35 and approximately $1.33 to the euro for the three and six months ended June 30, 2007, compared to approximately $1.25 and approximately $1.22 to the euro for the three and six months ended June 30, 2006.

During the three and six months ended June 30, 2007, changes in foreign exchange rates had a favorable impact on revenue and an unfavorable impact on operating costs and income from operations since a greater portion of our operating expenses are denominated in foreign currencies than net revenues. Had average exchange rates remained the same during the three and six months ended June 30, 2007 as the average exchange rates in effect for the three and six months ended June 30, 2006, our reported revenues for the three and six months ended June 30, 2007, would have been $6 million and $15 million lower. However, our foreign currency expenses exceed foreign currency revenues. For the three and six months ended June 30, 2007, 51% and 53% of our operating expenses were denominated in foreign currencies, primarily the euro. Had average exchange rates for the three and six months ended June 30, 2007 remained the same as the average exchange rates for the three and the six months ended June 30, 2006, our operating expenses would have been $14 million and $33 million lower (three and six months ended June 30, 2007 relating to cost of revenues of $9 million and $22 million, respectively; research and development expenses of $4 million and $9 million, respectively; and sales, general and administrative expenses of $1 million and $2 million, respectively). The net effect resulted in a decrease to income from operations of $8 million and $19 million in the three and six months ended June 30, 2007 as a result of unfavorable exchange rates when compared to the three and six months ended June 30, 2006.

Cost of Revenues and Gross Margin

Our cost of revenues includes the costs of wafer fabrication, assembly and test operations, changes in inventory reserves and freight costs. Our gross margin as a percentage of net revenues fluctuates, depending on product mix, manufacturing yields, utilization of manufacturing capacity, and average selling prices, among other factors.

During the three months ended June 30, 2007, gross margin improved to 35% from 32% for the three and six months ended June 30, 2006, respectively, primarily due to a more favorable mix of higher margin products sold, improved manufacturing yields, as well as lower depreciation expense following the December 2006 decision to reclassify assets at our North Tyneside, UK facility as held for sale. However, gross margin was negatively impacted by unfavorable exchange rates as well as lower factory utilization rates, primarily for our North Tyneside, UK, facility.

In recent periods, average selling prices for certain semiconductor products have been below manufacturing costs, which has adversely affected our results of operations, cash flows and financial condition. Because inventory reserves are recorded in advance of when the related inventory is sold, subsequent gross margins in the period of sale may be higher than they would be absent the effect of the previous write-downs. The impact on gross margins of the sale of previously written down inventory was not material in the three and six months ended June 31, 2007 and 2006. Our excess and obsolete inventory reserves taken in prior years relate to all of our product categories, while lower-of-cost or market reserves relate primarily to our non-volatile memory products and smart card products.

We receive economic assistance grants in some locations as an incentive to achieve certain hiring and investment goals related to manufacturing operations, the benefit for which is recognized as an offset to related costs. We recognized a reduction to cost of revenues for such grants of $0.1 million and $2 million in the three months ended June 30, 2007 and 2006, respectively, and $0.4 million and $4 million in the six months ended June 30, 2007, respectively, following the elimination of grant benefits as a result of our December 2006 decision to sell our North Tyneside, UK facility.

Research and Development

Research and development (“R&D”) expenses decreased by 7% to $69 million in the three months ended June 30, 2007, compared to $75 million in the three months ended June 30, 2006, and decreased by 4% to $137 million in the six months ended June 30, 2007, compared to $143 million in the six months ended June 30, 2006. The decrease in R&D expenses in the three months ended June 30, 2007 from the three months ended June 30, 2006 was primarily due to the lower cost of development wafers used in technology development of $4 million, lower depreciation expense of $2 million and higher research grant benefits of $3 million, offset in part by unfavorable impact of foreign exchange rate fluctuations of $4 million. The decrease in R&D expenses in the six months ended June 30, 2007 from the six months ended June 30, 2006 was primarily due the lower cost of development wafers used in technology development of $8 million, lower depreciation expense of $4 million and higher research grant benefits of $5 million, offset in part by unfavorable impact of foreign exchange rate fluctuations of $9 million. As a percentage of net revenues, R&D expenses totaled 17% for both the three months and the six months ended June 30, 2007 and 2006, respectively.

We have continued to invest in a variety of product areas and process technologies, including embedded EEPROM CMOS technology, logic and nonvolatile memory to be manufactured at 0.13 and 0.09 micron line widths, as well as investments in SiGe BiCMOS technology to be manufactured at 0.18 micron line widths. We have also continued to purchase or license technology when necessary in order to bring products to market in a timely fashion. We believe that continued strategic investments in process technology and product development are essential for us to remain competitive in the markets we serve. However, we are seeking to reduce our R&D costs by focusing on fewer, more profitable development projects.

We receive R&D grants from various European research organizations, the benefit for which is recognized as an offset to related costs. For the three months ended June 30, 2007, we recognized $4 million in research grant benefits, compared to $1 million recognized in the three months ended June 30,

2006. For the six months ended June 30, 2007, we recognized $9 million in research grant benefits, compared to $5 million recognized for the six months ended June 30, 2006.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses increased by 25% to $68 million in the three months ended June 30, 2007, compared to $54 million in the three months ended June 30, 2006, and by 26% to $126 million in the six months ended June 30, 2007, compared to $100 million in the six months ended June 30, 2006. The increase in SG&A expenses for the three months ended June 30, 2007, compared to the three months ended June 30, 2006, was primarily due to increased legal and accounting services expenses of $15 million related to our May 2007 special shareholder meeting and recently completed stock option and other independent investigations. In addition, SG&A costs increased due to higher employee salaries and benefits of $1 million, and an increase in stock option compensation charges of $1 million. The increase in SG&A expenses for the six months ended June 30, 2007, compared to the six months ended June 30, 2006, was primarily due to increased legal and accounting services expenses of $20 million, increased employee salaries and benefits of $3 million, and an increase in stock option compensation charges of $1 million. As a percentage of net revenues, SG&A expenses totaled 17% and 13% in the three months ended June 30, 2007 and 2006, respectively, and 16% and 12% in the six months ended June 30, 2007 and 2006, respectively.

SG&A expenses are expected to be lower in the third and fourth quarter of 2007 due to the completion of the audit committee investigations and the May 2007 special shareholder meeting described above.

Stock-Based Compensation

Effective January 1, 2006, we adopted the provisions of SFAS No. 123(R), “Share-Based Payment.” SFAS No. 123R establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award which is computed using a Black-Scholes option valuation model, and is recognized as expense over the employee’s requisite service period.

Stock-based compensation totaled at $3 million for both the three months ended June 30, 2007 and 2006, respectively. Stock-based compensation was $7 million in the six months ended June 30, 2007, compared to $5 million in the six months ended June 30, 2006. Compensation expense recognized in connection with the employee stock purchase plans were not significant during these periods due to suspension of stock purchase activity after February of 2006 as a result of the audit committee investigation into prior stock option practices.

Assets Held for Sale and Impairment Charges

Under SFAS No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” we assess the recoverability of long-lived assets with finite useful lives whenever events or changes in circumstances indicate that we may not be able to recover the asset’s carrying amount. We measure the amount of impairment of such long-lived assets by the amount by which the carrying value of the asset exceeds the fair market value of the asset, which is generally determined based on projected discounted future cash flows or appraised values. We present impairment charges as a separate line item within operating expenses in our condensed consolidated statements of operations. We classify long-lived assets to be disposed of other than by sale as “held-and-used” until they are disposed. We report long-lived assets to be disposed of by sale as “held-for-sale” and recognize those assets on the condensed consolidated balance sheet at the lower of carrying amount or fair value less cost to sell.

We reclassified the assets and liabilities of the North Tyneside, United Kingdom, facility and the assets of the Irving, Texas, facility as held for sale during the quarter ended December 31, 2006. Following the sale of the North Tyneside facility, we expect to incur significant continuing cash flows with the disposed entity due to a supply agreement with potential buyers and, as a result, we do not expect to meet the criteria

to classify the results of operations as well as assets and liabilities as discontinued operations. The Irving facility does not qualify as discontinued operations as it is an idle facility and does not constitute a component of an entity in accordance with SFAS No. 144.

The following table details the items which are reflected as assets and liabilities held for sale in the condensed consolidated balance sheets as of June 30, 2007 and December 31, 2006:

Held for Sale at June 30, 2007


	North
*(in thousands)*	Tyneside
Non-current assets
Fixed assets, net	$	90,204
Intangible and other assets		570

Total non-current assets held for sale	$	90,774


Current liabilities
Trade accounts payable	$	12,325
Accrued liabilities and other		48,334

Total current liabilities related to assets held for sale	$	60,659

Held for Sale at December 31, 2006


	North
*(in thousands)*	Tyneside		Irving		Total
Non-current assets
Fixed assets, net	$	87,941	$	35,040	$	122,981
Intangible and other assets		816		—		816

Total non-current assets held for sale	$	88,757	$	35,040	$	123,797


Current liabilities
Trade accounts payable	$	17,329	$	—	$	17,329
Accrued liabilities and other		46,224		—		46,224

Total current liabilities related to assets held for sale	$	63,553	$	—	$	63,553

Irving, Texas, Facility

We acquired our Irving, Texas, wafer fabrication facility in January 2000 for $60 million plus $25 million in additional costs to retrofit the facility after the purchase. Following significant investment and effort to reach commercial production levels, we decided to close the facility in 2002 and it has been idle since then. Since 2002, we recorded various impairment charges, including $4 million during the quarter ended December 31, 2005. In the quarter ended December 31, 2006, we performed an assessment of the market value for this facility based on our estimate, which considered a current offer from a willing third party to purchase the facility, among other factors, in determining fair market value. Based on this assessment, an additional impairment charge of $10 million was recorded.

On May 1, 2007, we announced the sale of our Irving, Texas, wafer fabrication facility for $37 million in cash ($35 million, net of selling costs). The sale of the facility includes 39 acres of land, the fabrication facility building, and related offices, and remaining equipment. An additional 17 acres was retained by us. No significant gain or loss was recorded upon the sale of the facility.

North Tyneside, United Kingdom, and Heilbronn, Germany, Facilities

In December 2006, we announced our decision to sell our wafer fabrication facilities in North Tyneside, United Kingdom, and Heilbronn, Germany. It is expected these actions will increase manufacturing efficiencies by better utilizing remaining wafer fabrication facilities, while reducing future capital expenditure requirements. We have classified assets of the North Tyneside site with a net book value of

$91 million and $89 million (excluding cash and inventory, which will not be included in any sale of the facility) as assets held-for-sale on the condensed consolidated balance sheets as of June 30, 2007 and December 31, 2006. Following the announcement of intention to sell the facility in the fourth quarter of 2006, we assessed the fair market value of the facility compared to the carrying value recorded, including use of an independent appraisal, among other factors. The fair value was determined using a market-based valuation technique and estimated future cash flows. We recorded a net impairment charge of $72 million in the quarter ended December 31, 2006 related to the write-down of long lived assets to their estimated fair values, less costs to dispose of the assets. The charge included an asset write-down of $170 million for equipment, land and buildings, offset by related currency translation adjustment associated with the assets, of $98 million, as we intend to sell our United Kingdom entity, which contains the facility, and hence the currency translation adjustment related to the assets is included in the impairment calculation.

We acquired the North Tyneside, United Kingdom, facility in September 2000, including an interest in 100 acres of land and the fabrication facility of approximately 750,000 square feet, for $100 million. We will have the right to acquire title to the land in 2016 for a nominal amount. We sold 40 acres in 2002 for $14 million. We recorded an asset impairment charge of $318 million in the second quarter of 2002 to write-down the carrying value of equipment in the fabrication facilities in North Tyneside, United Kingdom, to its estimated fair value. The estimate of fair value was made by management based on a number of factors, including an independent appraisal.

The Heilbronn, Germany, facility did not meet the criteria for classification as held-for-sale as of June 30, 2007 and December 31, 2006, due to uncertainties relating to the likelihood of completing the sale within the next twelve months. Long-lived assets of this facility at June 30, 2007 and at December 31, 2006, respectively, remain classified as held-and-used. After an assessment of expected future cash flows generated by the Heilbronn, Germany facility, we concluded that no impairment exists.

See Note 8 to Notes to Condensed Consolidated Financial Statements for further discussion of assets held for sale as of June 30, 2007 and December 31, 2006.

Restructuring Charges and Loss on Sale


	January 1,							Currency		March 31,								Currency		June 30,
	2007							Translation		2007		Charges/						Translation		2007
*(in thousands)*	Accrual		Charges		Payments			Adjustment		Accrual		(Credits)			Payments			Adjustment		Accrual
Third quarter of 2002
Termination of contract with supplier	$	8,896	$	—	$	(249	)	$	—	$	8,647	$	(3,071	)	$	(3,984	)	$	—	$	1,592
Fourth quarter of 2005
Nantes fabrication facility sale		115		—		—			—		115		(27	)		—			—		88
Fourth quarter of 2006
Employee termination costs		7,490		1,782		(1,743	)		41		7,570		458			(3,899	)		111		4,240
Grant contract termination costs		30,034		—		—			206		30,240		—			—			581		30,821

Total 2007 activity	$	46,535	$	1,782	$	(1,992	)	$	247	$	46,572	$	(2,640	)	$	(7,883	)	$	692	$	36,741


	January 1,							March 31,							June 30,
	2006							2006							2006
*(in thousands)*	Accrual		Charges		Payments			Accrual		Charges		Payments			Accrual
Third quarter of 2002
Termination of contract with supplier	$	9,833	$	—	$	(217	)	$	9,616	$	—	$	(251	)	$	9,365
Third quarter of 2005
Employee termination costs		1,246		—		(497	)		749		—		(672	)		77
Fourth quarter of 2005
Nantes fabrication facility sale		1,310		—		(873	)		437		—		(204	)		233
Employee termination costs		1,223		—		(704	)		519		—		(492	)		27
First quarter of 2006
Employee termination costs		—		151		(5	)		146		—		(65	)		81

Total 2006 activity	$	13,612	$	151	$	(2,296	)	$	11,467	$	—	$	(1,684	)	$	9,783

2007 Restructuring Charges

During the three and six months ended June 30, 2007, we continued to implement the restructuring initiative announced prior to 2007 and recorded a net restructuring credit of $2,640 and $858, respectively, consisting of the following:

	•		Charges of $1 million and $2 million for the three and six months ended June 30, 2007, respectively, related to one-time minimum statutory termination benefits recorded in accordance with SFAS No. 112, “Employers’ Accounting for Post Employment Benefits” (“SFAS No. 112).

	•		Charges of $1 million and $1 million for the three and six months ended June 30, 2007, respectively, related to severance costs for involuntary termination of employees. These employee severance costs were recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with exit or Disposal Activities” (“SFAS No. 146”).

	•		A credit of $1 million in the three months ended June 30, 2007 related to changes in estimates of termination benefits originally recorded in accordance with SFAS No. 112, “Employers’ Accounting for Post Employment Benefits” (“SFAS No. 112”).

	•		A credit of $3 million in the three months ended June 30, 2007 related to the settlement of a long-term gas supply contract originally recorded in the third quarter of 2002. On May 1, 2007, in connection with the sale of the Irving, Texas facility, the Company paid $6 million to terminate this contract, of which $2 million was reimbursed by the buyer of the facility. We paid $0.1 million in monthly payment in the three months ended June 30, 2007.

With respect to the restructuring initiatives, we are on track to achieve the previously stated costs savings of $70 million to $80 million this year and between $80 million to $95 million annually beginning in 2008.

2006 Restructuring Activities

In the first quarter of 2006, we incurred $0.2 million in restructuring charges primarily comprised of severance and one-time termination benefits.

In the three and six months ended June 30, 2007, we paid $4 million and $6 million related to employee termination costs, respectively. In the three and six months ended June 30, 2006, we paid $1 million and $2 million related to employee termination costs, respectively.

Other Charges

In the fourth quarter of 2006, we announced our intention to close the design facility in Greece and to sell our facility in North Tyneside, United Kingdom. We recorded a charge of $30 million in the fourth quarter of 2006 associated with the expected future repayment of subsidy grants pursuant to the grant previously received and recognized related to grant agreements with government agencies at these locations.

Interest and Other Income (Expenses), Net

Interest and other income (expenses), net, improved to $1 million of income in the three months ended June 30, 2007 from $1 million of expense in the three months ended June, 2006, and improved to $2 million of income in the six months ended June 30, 2007 from $7 million of expenses in the six months ended June 30, 2006. These changes to net income from net expense are primarily due to long-term debt reductions in fiscal 2006 and a gain from sale of land for $1 million. Interest and other income (expenses), net also improved as a result of increased interest income from higher average cash balances in the three and six months ended June 30, 2007 following the repayment of our convertible bonds in May 2006 as well as the receipt of proceeds from the sale of our Grenoble, France subsidiary in July 2006.

Interest rates on our outstanding borrowings did not change significantly in the three and six months ended June 30, 2007, compared to the three and six months ended June 30, 2006.

Income Taxes

For the three and six months ended June 30, 2007, we recorded an income tax expense of $7 million and an income tax benefit of $8 million, respectively, compared to an income tax expense of $7 million and $14 million in the three and six months ended June 30, 2006, respectively.

The provision for (benefits from) income taxes for these periods was determined using the annual effective tax rate method for Atmel entities that are profitable. Entities that had operating losses with no tax benefit were excluded. As a result, excluding the impact of discrete tax events during the quarter, the provision for income taxes was at a higher consolidated effective rate than would have resulted if all entities were profitable or if losses produced tax benefits.

In the three months ended March 31, 2007, we recognized a tax benefit of approximately $20 million resulting from the refund of French research tax credits for years 1999 through 2002, which was received during the first quarter of 2007. In addition, in the three months ended March 31, 2007, the Hong Kong tax authorities completed a review of our tax returns for the years 2001 through 2004, which resulted in no adjustments. As a result, during the three months ended March 31, 2007, we recognized a tax benefit relating to a tax refund of approximately $2 million received in prior years that had been previously accrued as a tax contingency.

In 2005, the Internal Revenue Service (“IRS”) proposed adjustments to our U.S. income tax returns for the years 2000 and 2001. In January 2007, after subsequent discussions with us, the IRS revised the proposed adjustments for these years. We have protested these proposed adjustments and are currently pursuing administrative review with the IRS Appeals Division.

In May 2007, the IRS proposed adjustments to our U.S. income tax returns for the years 2002 and 2003. We intend to file a protest to these proposed adjustments and pursue administrative review with the IRS Appeals Division.

In addition, we have various tax audits in progress in certain U.S. states and foreign jurisdictions. We have accrued taxes, and related interest and penalties that may be due upon the ultimate resolution of these examinations and for other matters relating to open U.S. Federal, state and foreign tax years in accordance with FIN 48.

While we believe that the resolution of these audits will not have a material adverse impact on our results of operations, cash flows or financial position, the outcome is subject to uncertainty. Should we be unable to reach agreement with the IRS, U.S. state or foreign tax authorities on the various proposed adjustments, there exists the possibility of an adverse material impact on our results of operations, cash flows and financial position.

We file income tax returns in the U.S. federal jurisdiction, and various states and foreign jurisdictions. We are no longer subject to U.S. federal and state income tax examinations by tax authorities for years prior to 1999. Tax years for significant foreign jurisdictions including Germany, France, United Kingdom, and Switzerland are closed through 2002, 2001, 2004 and 2001 respectively; subsequent tax years for these jurisdictions remain subject to tax authority review. Hong Kong tax years are closed for years through 2004 and subsequent tax years remain subject to tax authority review.

On January 1, 2007, we adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (FIN 48). Under FIN 48, the impact of an uncertain income tax position on income tax expense must be recognized at the largest amount that is more-likely-than-not to be sustained. An uncertain income tax position will not be recognized if it has less than a 50% likelihood of being sustained. Upon review of our reserves, there were no changes to our reserves for uncertain tax positions upon adoption. At the adoption date of January 1, 2007, we had $176 million of unrecognized tax benefits, all of which would affect our

income tax expense if recognized. Material changes in unrecognized tax benefits in the six months ended June 30, 2007 totaling $21 million are described above.

Management believes that events that could occur in the next 12 months and cause a material change in unrecognized tax benefits include, but are not limited to, the following:

	•		completion of examination of the our tax returns by the U.S. or foreign tax authorities;

	•		expiration of statute of limitations on our tax returns; and

	•		recording taxable income in certain unprofitable entities.

Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. As of January 1, 2007, we had approximately $31 million of accrued interest and penalties related to uncertain tax positions. Interest and penalties of $4 million have been expensed in the six months ended June 30, 2007.

Discontinued Operations

Grenoble, France, Subsidiary Sale

Our condensed consolidated financial statements and related footnote disclosures reflect the results of our Grenoble, France, subsidiary as Discontinued Operations, net of applicable income taxes, for all reporting periods presented.

In July 2006, we completed the sale of our Grenoble, France, subsidiary to e2v technologies plc, a British corporation (“e2v”). On August 1, 2006, we received $140 million in cash upon closing ($120 million, net of working capital adjustments and costs of disposition).

The facility was originally acquired in May 2000 from Thomson-CSF, and was used to manufacture image sensors, as well as analog, digital and radio frequency ASICs.

In connection with the sale, we agreed to provide certain technical support, foundry, distribution and other services extending up to four years following the completion of the sale, and in turn e2v has agreed to provide certain design and other services to us extending up to 5 years following the completion of the sale. The financial statement impact of these agreements is not expected to be material to us. The ongoing cash flows between us and e2v are not significant and as a result, the Company has no significant continuing involvement in the operations of the subsidiary. Therefore, we have met the criteria in SFAS No. 144, which were necessary to classify the Grenoble, France, subsidiary as discontinued operations.

Included in other currents assets on the condensed consolidated balance sheet as of June 30, 2007, is an outstanding receivable balance due from e2v of $2 million related to payments advanced to e2v to be collected from customers of e2v by Atmel. The transitioning of the collection of trade receivables on behalf of e2v is expected to be completed in 2007.

The following table summarizes results from Discontinued Operations for the periods indicated included in the condensed consolidated statement of operations (in thousands, except per share data :


	Three Months Ended			Six Months Ended
*(in thousands)*	June 30, 2006			June 30, 2006
Net revenues	$	33,287		$	69,287
Operating costs and expenses		25,896			50,262

Income from discontinued operations, before income taxes		7,391			19,025
Less: provision for income taxes		(1,963	)		(7,735	)

Income from discontinued operations, net of income taxes	$	5,428		$	11,290

Income from discontinued operations, net of income taxes, per share:
Basic	$	0.01		$	0.03

Diluted	$	0.01		$	0.03

Weighted-average shares used in basic net income per share calculations		486,928			486,252

Weighted-average shares used in diluted net income per share calculations		493,045			491,981

Liquidity and Capital Resources

At June 30, 2007, we had $476 million of cash and cash equivalents and short-term investments compared to $467 million at December 31, 2006. Our current ratio, calculated as total current assets divided by total current liabilities, was 2.46 at June 30, 2007, an increase of 0.43 from 2.03 at December 31, 2006. During 2007, we continue to generate positive cash flow from operating activities. We have reduced our net debt obligations to $126 million at June 30, 2007, from $169 million at December 31, 2006, a decrease of $43 million. Working capital (calculated as total current assets less total current liabilities) increased by $94 million to $679 million at June 30, 2007, compared to $585 million at December 31, 2006.

Operating Activities: Net cash provided by operating activities was $61 million in the six months ended June 30, 2007, resulting primarily from net income of $30 million, adjusted for depreciation and amortization expense of $64 million and working capital of $94 million. Net cash from operating activities declined from $171 million generated during the first six months of 2006, primarily due to increases to inventory of $21 million and reduction of certain accrued expense items of $60 million in the first six months of 2007. Reduction of these payable balances resulted in improvement to working capital of $94 million while maintaining consistent cash balances and higher inventory levels to facilitate improved delivery time to customers.

Accounts receivable decreased by 1% or $2 million to $225 million at June 30, 2007, from $227 million at December 31, 2006. The average days of accounts receivable outstanding (“DSO”) was 50 days at June 30, 2007, flat with the level of 50 days for the three months ended December 31, 2006. Our accounts receivable and DSO are primarily impacted by shipment linearity, payment terms offered, and collection performance. Should we need to offer longer payment terms in the future due to competitive pressures or longer customer payment patterns, our DSO and cash flows from operating activities would be negatively affected.

Increases in inventories utilized $21 million of operating cash flows in the six months ended June 30, 2007, compared to a decrease of $0.2 million in the six months ended June 30, 2006. Inventory levels increased to 125 days at June 30, 2007, compared to 116 days at December 31, 2006. This increase is primarily related to higher stock levels required to improve customer delivery times, and reduced shipment levels experienced during the first half of 2007. Inventories consist of raw wafers, purchased specialty wafers, work-in-process and finished units. We are continuing to take measures to reduce manufacturing cycle times and improve production planning efficiency. However, the strategic need to offer competitive lead times may result in an increase in inventory levels in the future.

Decreases in current and other assets generated $38 million of operating cash flows in the six months ended June 30, 2007, primarily due to payments received for trade receivables advanced to e2v technologies PLC related to the sale of the Grenoble, France, subsidiary and the receipt of $20 million in research and development income tax credits.

Decreases in accounts payable utilized $2 million of operating cash flows in the six months ended June 30, 2007, primarily related to payments to suppliers for fixed asset acquisitions and lower assembly production activity levels in 2007.

Decreases in accrued and other liabilities utilized $60 million of operating cash flows in the six months ended June 30, 2007 compared to $10 million of cash generated from the increase in accrued and other liabilities in the six months ended June 30, 2006. The decrease in accrued liabilities resulted from cash paid for litigation settlements, income and other tax payments, annual management incentive payments and payments on long-term supplier obligations. We do not expect to further reduce accrued and other liabilities significantly in future quarters.

Investing Activities: Net cash used in investing activities was $12 million in the six months ended June 30, 2007, compared to $36 million in the six months ended June 30, 2006. During the six months ended June 30, 2007, we made additional investments in wafer fabrication equipment to advance our process technologies and in test equipment to process higher unit volumes. For the six months ended June 30, 2007 and 2006, we paid $45 million and $36 million, respectively, for capital equipment acquisitions.

On May 1, 2007, we sold our Irving, TX wafer fabrication facility for approximately $36.5 million ($34.7 million, net of selling costs).

Financing Activities: Net cash used in financing activities was $47 million in the six months ended June 30, 2007, compared to $186 million in the six months ended June 30, 2006. We continued to pay down debt, with repayments of principal balances on capital leases and other debt totaling $47 million for the six months ended June 30, 2007, compared to $219 million in the six months ended June 30, 2006. No cash was received from the issuance of common stock in the six months ended June 30, 2007. Issuance of common stock totaled $7 million for the six months ended June 30, 2006.

We believe that our existing balances of cash, cash equivalents and short-term investments, together with anticipated cash flow from operations, equipment lease financing, and other short-term and medium-term bank borrowings, will be sufficient to meet our liquidity and capital requirements over the next twelve months.

The increase in cash and cash equivalents in the six months ended June 30, 2007 and 2006 due to the effect of exchange rate changes on cash balances was $6 million for both periods. These cash balances were primarily held in certain subsidiaries in euro denominated accounts and increased in value due to the strengthening of the euro compared to the U.S. dollar during these periods.

During the next twelve months, we expect our operations to generate positive cash flow; however, a significant portion of cash will be used to repay debt and make capital investments. We expect that we will have sufficient cash from operations and financing sources to meet all debt obligations. We made $45 million in cash payments for capital equipment in the six months ended June 30, 2007, and we expect our cash payments for capital expenditures in the next twelve months to be in the range of $70 million to $80 million. Debt obligations outstanding at June 30, 2007, which is expected to be repaid in the twelve months ended June 30, 2008, totaled $68 million. In 2007 and future years, our capacity to make necessary capital investments will depend on our ability to continue to generate sufficient cash flow from operations and on our ability to obtain adequate financing if necessary.

As of June 30, 2007, we did not have any material changes to our contractual obligations that were disclosed in the Liquidity section of our Form 10-K for the fiscal year ended December 31, 2006, other than the adoption of FIN 48. Under FIN 48 the total liabilities associated with uncertain tax positions was $94 million on January 1, 2007, of which $2 million was included in “Accrued and other liabilities”, as it is expected to be paid within the next twelve months. The remainder of our liabilities associated with uncertain tax positions of $92 million was included in “Other long-term liabilities”. Due to the complexity and uncertainty associated with our tax controversies, we cannot make a reasonably reliable estimate of the period in which cash settlement will be made for our liabilities associated with uncertain tax positions in “Other Long-term liabilities.” There were no material changes in liabilities associated with uncertain tax positions in the six months ended June 30, 2007.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our Condensed Consolidated Financial Statements, which we have prepared in accordance with U.S. generally accepted accounting principles. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and on various other assumptions that it believes to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

Accounting for income taxes

In calculating our income tax expense, it is necessary to make certain estimates and judgments for financial statement purposes that affect the recognition of tax assets and liabilities.

We record a valuation allowance to reduce our deferred tax assets to the amount that is more likely than not to be realized. While we consider future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance, in the event that we determine that we would be able to realize deferred tax assets in the future in excess of the net recorded amount, an adjustment to the net deferred tax asset would decrease income tax expense in the period such determination was made. Likewise, should we determine that we would not be able to realize all or part of the net deferred tax asset in the future, an adjustment to the net deferred tax asset would increase income tax expense in the period such determination is made.

Effective January 1, 2007, we adopted the provisions of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in Income Taxes – an interpretation of FASB Statement no. 109. FIN 48 prescribes a threshold for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. Only tax positions meeting the more-likely-than-not recognition threshold at the effective date may be recognized or continue to be recognized upon adoption of this Interpretation. FIN 48 also provides guidance on accounting for derecognition, interest and penalties, and classification and disclosure of matters related to uncertainty in income taxes.

Income tax positions are recorded based upon management’s evaluation of the facts, circumstances, and information available at the reporting date. For those tax positions where it is more likely than not that a tax benefit will be sustained, we have recorded the largest amount of tax benefit with a greater than 50 percent likelihood of being realized upon ultimate settlement with a taxing authority that has full knowledge of all relevant information. For those income tax positions where it is not more likely than not that a tax benefit will be sustained, no tax benefit has been recognized in the financial statements.

An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that other than the adoption of FIN 48, there have been no significant changes during the three and six months ended June 30, 2007 to the items that we had disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2006. See Note 13 to Notes to Condensed Consolidated Financial Statements for further discussion of the adoption of FIN 48.

Recent Accounting Pronouncements

SFAS No. 157 is initially applied, except in limited circumstances. We expect to adopt SFAS No. 157 beginning January 1, 2008. We are currently evaluating the impact that this pronouncement may have on our consolidated financial statements.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an amendment of FASB Statement No. 115.” This statement permits entities to choose to measure many financial instruments and certain other items at fair value that are not currently required to be measured at fair value and establishes presentation and disclosure requirements designed to facilitate comparisons between entities that choose different measurement attributes for similar types of assets and liabilities. SFAS No. 159 is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007. Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157. We expect to adopt SFAS No. 159 beginning January 1, 2008. We are currently evaluating the impact that this pronouncement may have on our consolidated financial statements.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

We maintain investment portfolio holdings of various issuers, types and maturities whose values are dependent upon short-term interest rates. We generally classify these securities as available-for-sale, and consequently record them on the condensed consolidated balance sheet at fair value with unrealized gains and losses being recorded as a separate part of stockholders’ equity. We do not currently hedge these interest rate exposures. Given our current profile of interest rate exposures and the maturities of our investment holdings, we believe that an unfavorable change in interest rates would not have a significant negative impact on our investment portfolio or statements of operations through June 30, 2008. In addition, certain of our borrowings are at floating rates, so this would act as a natural hedge.

We have short-term debt, long-term debt and capital leases totaling $126 million at June 30, 2007. Approximately $38 million of these borrowings have fixed interest rates. We have $88 million of floating interest rate debt, of which approximately $35 million is euro denominated. We do not hedge against the risk of interest rate changes for our floating rate debt and could be negatively affected should these rates increase significantly. While there can be no assurance that these rates will remain at current levels, we believe that any rate increase will not cause a significant adverse impact to our results of operations, cash flows or to our financial position.

The following table summarizes our variable-rate debt exposed to interest rate risk as of June 30, 2007. All fair market values are shown net of applicable premium or discount, if any (dollars in thousands):


													Total
													Variable-rate
													Debt
													Outstanding at
	Payments by Due Year												June 30,
*(in thousands)*	Remainder of 2007		2008		2009		2010		2011		Thereafter		2007
30 day USD LIBOR weighted-average interest rate basis (1) — Capital Leases	$	1,389	$	—	$	—	$	—	$	—	$	—	$	1,389

Total of 30 day USD LIBOR rate debt	$	1,389	$	—	$	—	$	—	$	—	$	—	$	1,389

90 day USD LIBOR weighted-average interest rate basis (1) — Revolving Line of Credit Due 2008	$	—	$	25,000	$	—	$	—	$	—	$	—	$	25,000
Senior Secured Term Loan Due 2009	$	4,167	$	8,333	$	4,167	$	—	$	—	$	—	$	16,667

Total of 90 day USD LIBOR rate debt	$	4,167	$	33,333	$	4,167	$	—	$	—	$	—	$	41,667

90 day USD LIBOR weighted-average interest rate basis (1) — Capital Leases	$	11,845	$	9,300	$	4,397	$	4,397	$	4,397	$	1,098	$	35,434

Total of 90 day USD LIBOR rate debt	$	11,845	$	9,300	$	4,397	$	4,397	$	4,397	$	1,098	$	35,434

360 day USD LIBOR weighted-average interest rate basis (1) — Senior Secured Term Loan Due 2008	$	2,500	$	3,750	$	—	$	—	$	—	$	—	$	6,250

Total of 360 day USD LIBOR rate debt	$	2,500	$	3,750	$	—	$	—	$	—	$	—	$	6,250

30/60/90 day EURIBOR interest rate basis (1) - Senior Secured Term Loan Due 2007	$	3,423	$	—	$	—	$	—	$	—	$	—	$	3,423

Total of 30/60/90 day EURIBOR debt rate	$	3,423	$	—	$	—	$	—	$	—	$	—	$	3,423

Total variable-rate debt	$	23,324	$	46,383	$	8,564	$	4,397	$	4,397	$	1,098	$	88,163


*		Represents payments due over the six months remaining for 2007.

(1)		Actual interest rates include a spread over the basis amount.

The following table presents the hypothetical changes in interest expense, for the three month period ended June 30, 2007, related to the $88 million in outstanding borrowings that are sensitive to changes in interest rates as of June 30, 2007. The modeling technique used measures the change in interest expense arising from hypothetical parallel shifts in yield, of plus or minus 50 Basis Points (“BPS”), 100 BPS and 150 BPS (in thousands).

For the three months ended June 30, 2007:


	Interest Expense Given an Interest						Interest Expense		Interest Expense Given an Interest
	Rate Decrease by X Basis Points						with No Change in		Rate Increase by X Basis Points
*(in thousands)*	150 BPS		100 BPS		50 BPS		Interest Rate		50 BPS		100 BPS		150 BPS
Interest expense	$	1,650	$	2,118	$	2,586	$	3,054	$	3,522	$	3,990	$	4,458

For the six months ended June 30, 2007:


	Interest Expense Given an Interest						Interest Expense		Interest Expense Given an Interest
	Rate Decrease by X Basis Points						with No Change in		Rate Increase by X Basis Points
*(in thousands)*	150 BPS		100 BPS		50 BPS		Interest Rate		50 BPS		100 BPS		150 BPS
Interest expense	$	5,057	$	5,553	$	6,048	$	6,543	$	7,038	$	7,533	$	8,029

Foreign Currency Risk

When we take an order denominated in a foreign currency we will receive fewer dollars than we initially anticipated if that local currency weakens against the dollar before we ship our product, which will reduce revenue. Conversely, revenues will be positively impacted if the local currency strengthens against the dollar. In Europe, where our significant operations have costs denominated in European currencies, costs will decrease if the local currency weakens. Conversely, costs will increase if the local currency strengthens against the dollar. The net effect of unfavorable exchange rates for the three and six months ended June 30, 2007, compared to the average exchange rates for the three and six months ended June 31, 2006, resulted in a decrease in income from operations of $8 million and $19 million (as discussed in this report in Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations). This impact is determined assuming that all foreign currency denominated transactions that occurred in the three and six months ended June 30, 2007 were recorded using the average foreign currency exchange rates for the same period in 2006. Sales denominated in foreign currencies were 21% and 18% in the three months ended June 30, 2007 and 2006, respectively, and 22% and 18% in the six months ended June 30, 2007 and 2006, respectively. Sales denominated in euros were 21% and 17% in the three months ended June 30, 2007 and 2006, respectively, and 22% and 17% in the six months ended June 30, 2007 and 2006, respectively. Sales denominated in yen were 1% and 1% in the three months ended June 30, 2007 and 2006, respectively, and 1% and 1% in the six months ended June 30, 2007 and 2006, respectively. Costs denominated in foreign currencies, primarily the euro, were 51% and 53% in the three months ended June 30, 2007 and 2006, respectively, and 53% and 52% in the six months ended June 30, 2007 and 2006, respectively.

We also face the risk that our accounts receivables denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. Approximately 22% and 26% of our accounts receivable are denominated in foreign currency as of June 30, 2007 and December 31, 2006, respectively.

We also face the risk that our accounts payable and debt obligations denominated in foreign currencies will increase if such foreign currencies strengthen quickly and significantly against the dollar. Approximately 37% and 48% of our accounts payable were denominated in foreign currency as of June 30, 2007 and December 31, 2006, respectively. Approximately 56% and 60% of our debt obligations were denominated in foreign currency as of June 30, 2007 and December 31, 2006, respectively.

Item 4. Controls and Procedures

Evaluation of Effectiveness of Disclosure Controls and Procedures

As of the end of the period covered by this Quarterly Report on Form 10-Q, under the supervision of our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such terms are defined in Rule 13a-15(e) and Rule 15d-15(e) under the Securities and Exchange Act of 1934 (“Disclosure Controls”). Based on this evaluation our Chief Executive Officer and our Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of the end of the period covered by this Quarterly Report on Form 10-Q to ensure that information we are required to disclose in reports that we file or submit under the Securities and Exchange Act of 1934 is accumulated and communicated to our management, including our principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure, and that such information is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Limitations on the Effectiveness of Controls

The Company’s management, including the Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s Disclosure Controls or internal control over financial reporting will prevent all errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of

controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

Changes in Internal Control Over Financial Reporting.

During the period covered by this Quarterly Report on Form 10-Q, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II OTHER INFORMATION

Item 1. Legal Proceedings

Pursuant to the order of the Delaware Chancery Court, the Company held a Special Meeting of Stockholders on May 18, 2007 to consider and vote on a proposal by George Perlegos, our former Chairman, President and Chief Executive Officer, to remove five members of our Board of Directors and to replace them with five persons nominated by Mr. Perlegos. On June 1, 2007, following final tabulation of votes and certification by IVS Associates, Inc., the independent inspector of elections for the Special Meeting, the Company announced that stockholders had rejected the proposal considered at the Special Meeting.

Prior to the Special Meeting, Atmel also received a notice from Mr. Perlegos indicating his intent to nominate eight persons for election to our Board of Directors at our Annual Meeting of Stockholders to be held on July 25, 2007. On June 5, 2007, the Company received notice that Mr. Perlegos will not solicit

proxies from the Company’s shareholders as to any issue, including the makeup of the Company’s Board of Directors, in connection with the Company’s annual meeting to be held in July 2007.

disclosure obligations, and to enjoin them from using false and misleading statements to improperly solicit proxies as well as from voting any Atmel shares acquired during the period the Perlegoses were violating their disclosure obligations under the federal securities laws. On April 11, 2007, George Perlegos and Gust Perlegos filed a counterclaim with respect to such matters in the U.S. District Court for the Northern District of California seeking an injunction (a) prohibiting Atmel from making false and misleading statements and (b) requiring Atmel to publish and publicize corrective statements, and requesting an award of reasonable expenses and costs of this action. Atmel disputed this counterclaim. On July 3, 2007, this action, including the counterclaim, was dismissed.

From time to time, the Company may be notified of claims that the Company may be infringing patents issued to other parties and may subsequently engage in license negotiations regarding these claims.

Indemnification Obligations

indemnification agreements with its officers and directors, and the Company’s bylaws permit the indemnification of the Company’s agents. In the Company’s experience, claims made under such indemnifications are rare and the associated estimated fair value of the liability is not material.

Subject to certain limitations, the Company is obligated to indemnify its current and former directors, officers and employees in connection with the investigation of the Company’s historical stock option practices and related government inquiries and litigation. These obligations arise under the terms of the Company’s certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that the Company is required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. The Company is currently paying or reimbursing legal expenses being incurred in connection with these matters by a number of its current and former directors, officers and employees. The Company believes the fair value of any required future payments under this liability is adequately provided for within the reserves it has established for currently pending legal proceedings.

Item 1A. Risk Factors

The following trends, uncertainties and risks may impact the “forward-looking” statements described elsewhere in this Form 10-Q and in the documents incorporated herein by reference. They could affect our actual results of operations, causing them to differ materially from those expressed in “forward-looking” statements.

THE RESULTS OF OUR AUDIT COMMITTEE INVESTIGATION INTO OUR HISTORICAL STOCK OPTION PRACTICES AND RESULTING RESTATEMENTS MAY CONTINUE TO HAVE ADVERSE EFFECTS ON OUR FINANCIAL RESULTS.

The Audit Committee investigation into our historical stock option practices and the resulting restatement of our historical financial statements have required us to expend significant management time and incur significant accounting, legal, and other expenses. The resulting restatements have had a material adverse effect on our results of operations. We have recorded additional non-cash, stock-based compensation expense of $116 million for the periods from 1993 to 2005 (excluding the impact of related payroll and income taxes). In addition, several lawsuits have been filed against us, our current directors and officers and certain of our former directors and officers relating to our historical stock option practices and related accounting. See Part II, Item 1 Legal Proceedings, for a more detailed description of these proceedings. We may become the subject of additional private or government actions regarding these matters in the future. These actions are in the preliminary stages, and their ultimate outcome could have a material adverse effect on our business, financial condition, results of operations, cash flows and the trading price for our securities. Litigation may be time-consuming, expensive and disruptive to normal business operations, and the outcome of litigation is difficult to predict. The defense of these lawsuits will result in significant expenditures and the continued diversion of our management’s time and attention from the operation of our business, which could impede our business. All or a portion of any amount we may be required to pay to satisfy a judgment or settlement of any or all of these claims may not be covered by insurance.

JUDGMENT AND ESTIMATES UTILIZED BY US IN DETERMINING STOCK OPTION GRANT DATES AND RELATED ADJUSTMENTS MAY BE SUBJECT TO CHANGE DUE TO SUBSEQUENT SEC GUIDANCE OR OTHER DISCLOSURE REQUIREMENTS.

In determining the restatement adjustments in connection with the stock option investigation, management used all reasonably available relevant information to form conclusions it believes are appropriate as to the most likely option granting actions that occurred, the dates when such actions occurred, and the determination of grant dates for financial accounting purposes based on when the requirements of the accounting standards were met. We considered various alternatives throughout the course of the review and restatement, and we believe the approaches used were the most appropriate, and the choices of measurement dates used in our review of stock option grant accounting and restatement of our financial statements were reasonable and appropriate in our circumstances. However, the SEC may

issue additional guidance on disclosure requirements related to the financial impact of past stock option grant measurement date errors that may require us to amend this filing or other filings with the SEC to provide additional disclosures pursuant to such additional guidance. Any such circumstance could also lead to future delays in filing our subsequent SEC reports and delisting of our common stock from the NASDAQ Global Select Market. Furthermore, if we are subject to adverse findings in any of these matters, we could be required to pay damages or penalties or have other remedies imposed upon us which could harm our business, financial condition, results of operations and cash flows.

OUR REVENUES AND OPERATING RESULTS MAY FLUCTUATE SIGNIFICANTLY DUE TO A VARIETY OF FACTORS, WHICH MAY RESULT IN VOLATILITY OR A DECLINE IN OUR STOCK PRICE.

Our future operating results will be subject to quarterly variations based upon a wide variety of factors, many of which are not within our control. These factors include:

	•		the cyclical nature of both the semiconductor industry and the markets addressed by our products;

	•		our transition to a fab-lite strategy;

	•		our increased dependence on outside foundries and their ability to meet our volume, quality, and delivery objectives, particularly during times of increasing demand;

	•		inventory excesses or shortages due to reliance on third party manufacturers;

	•		our compliance with U.S. trade and export laws and regulations;

	•		fluctuations in currency exchange rates;

	•		ability of independent assembly contractors to meet our volume, quality, and delivery objectives;

	•		success with disposal or restructuring activities, including disposition of our North Tyneside and Heilbronn facilities;

	•		fluctuations in manufacturing yields;

	•		third party intellectual property infringement claims;

	•		the highly competitive nature of our markets;

	•		the pace of technological change;

	•		political and economic risks;

	•		natural disasters or terrorist acts;

	•		assessment of internal controls over financial reporting;

	•		ability to meet our debt obligations;

	•		availability of additional financing;

	•		our ability to maintain good relationships with our customers;

	•		integration of new businesses or products;

	•		our compliance with international, federal and state export, environmental, privacy and other regulations;

	•		personnel changes;

	•		business interruptions;

	•		system integration disruptions; and

	•		changes in accounting rules, such as recording expenses for employee stock option grants.

Any unfavorable changes in any of these factors could harm our operating results.

We believe that our future sales will depend substantially on the success of our new products. Our new products are generally incorporated into our customers’ products or systems at their design stage. However, design wins may precede volume sales by a year or more. We may not be successful in achieving design wins or design wins may not result in future revenues, which depend in large part on the success of the customer’s end product or system. The average selling price of each of our products usually declines as individual products mature and competitors enter the market. To offset average selling price decreases, we rely primarily on reducing costs to manufacture those products, increasing unit sales to absorb fixed costs and introducing new, higher priced products which incorporate advanced features or integrated technologies to address new or emerging markets. Our operating results could be harmed if such cost

reductions and new product introductions do not occur in a timely manner. From time to time, our quarterly revenues and operating results can become more dependent upon orders booked and shipped within a given quarter and, accordingly, our quarterly results can become less predictable and subject to greater variability.

In addition, our future success will depend in large part on the continued economic growth generally and of growth in various electronics industries that use semiconductors, including manufacturers of computers, telecommunications equipment, automotive electronics, industrial controls, consumer electronics, data networking equipment and military equipment. The semiconductor industry has the ability to supply more products than demand requires. Our ability to return to profitability will depend heavily upon a better supply and demand balance within the semiconductor industry.

THE CYCLICAL NATURE OF THE SEMICONDUCTOR INDUSTRY CREATES FLUCTUATIONS IN OUR OPERATING RESULTS.

The semiconductor industry has historically been cyclical, characterized by wide fluctuations in product supply and demand. The industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. The semiconductor industry faced severe business conditions with global semiconductor revenues for the industry declining 32% to $139 billion in 2001, compared to revenues in 2000. The semiconductor industry began to turn around in 2002 with global semiconductor sales increasing modestly by 1% to $141 billion. Global semiconductor sales increased 18% to $166 billion in 2003, 27% to $211 billion in 2004, 8% to $228 billion in 2005, 9% to $248 billion in 2006 and are estimated to increase 2% to $252 billion in 2007.

Atmel’s operating results have been harmed by industry-wide fluctuations in the demand for semiconductors, which resulted in under-utilization of our manufacturing capacity and declining gross margins. In the past we have recorded significant charges to recognize impairment in the value of our manufacturing equipment, the cost to reduce workforce, and other restructuring costs. Our business may be harmed in the future not only by cyclical conditions in the semiconductor industry as a whole but also by slower growth in any of the markets served by our products.

WE COULD EXPERIENCE DISRUPTION OF OUR BUSINESS AS WE TRANSITION TO A FAB-LITE STRATEGY.

As part of our fab-lite strategy, we have reduced and plan to further reduce the number of our owned manufacturing facilities. In December 2005, we sold our Nantes, France fabrication facility and the related foundry activities, to XybyBus SAS. In July 2006, we sold our Grenoble, France subsidiary (including the fabrication facility in Grenoble) to e2v technologies plc. In December 2006, we announced the planned sale of our North Tyneside, United Kingdom and Heilbronn, Germany wafer fabrication facilities. On May 1, 2007, we announced the sale of our Irving, Texas, wafer fabrication facility. As a result of the sale (or planned sale) of such fabrication facilities, we will be increasingly relying on the utilization of third-party foundry manufacturing and assembly and test capacity. As part of such transition we must expand our foundry relationships by entering into new agreements with such third-party foundries. If such agreements are not completed on a timely basis, manufacturing of certain of our products could be disrupted, which would harm our business. In addition, difficulties in production yields can often occur when transitioning to a new third-party manufacturer. If such foundries fail to deliver quality products and components on a timely basis, our business could be harmed.

Implementation of our new fab-lite strategy will expose us to the following risks:

	•		reduced control over delivery schedules and product costs;

	•		manufacturing costs that are higher than anticipated;

	•		inability of our manufacturing subcontractors to develop manufacturing methods appropriate for our products and their unwillingness to devote adequate capacity to produce our products;

	•		possible abandonment of fabrication processes by our manufacturing subcontractors for products that are strategically important to us;

	•		decline in product quality and reliability;

	•		inability to maintain continuing relationships with our suppliers;

	•		restricted ability to meet customer demand when faced with product shortages; and

	•		increased opportunities for potential misappropriation of our intellectual property.

If any of the above risks are realized, we could experience an interruption in our supply chain or an increase in costs, which could delay or decrease our revenue or harm our business.

AS WE INCREASE DEPENDENCE ON OUTSIDE FOUNDRIES, SUCH FOUNDRIES MAY NOT HAVE ADEQUATE CAPACITY TO FULFILL OUR NEEDS AND MAY NOT MEET OUR QUALITY AND DELIVERY OBJECTIVES OR MAY ABANDON FABRICATION PROCESSES THAT WE REQUIRE.

We expect to increase our utilization of outside foundries to expand our capacity in the future, especially for high volume commodity type products and certain aggressive technology ASIC products. Reliance on outside foundries to fabricate wafers involves significant risks, including reduced control over quality and delivery schedules, a potential lack of capacity, and a risk the subcontractor may abandon the fabrication processes we need from a strategic standpoint, even if the process is not economically viable. We hope to mitigate these risks with a strategy of qualifying multiple subcontractors. However, there can be no guarantee that any strategy will eliminate these risks. Additionally, since most of such outside foundries are located in foreign countries, we are subject to certain risks generally associated with contracting with foreign manufacturers, including currency exchange fluctuations, political and economic instability, trade restrictions and changes in tariff and freight rates. Accordingly, we may experience problems in timelines and the adequacy or quality of product deliveries, any of which could have a material adverse effect on our results of operations.

INCREASING DEPENDENCE ON THIRD PARTY MANUFACTURERS COULD HARM OUR BUSINESS IN TIMES OF INCREASING DEMAND IN OUR INDUSTRY.

We currently manufacture our products at our facilities in Colorado Springs, Colorado; Heilbronn, Germany; Rousset, France; and North Tyneside, United Kingdom. In December 2006, we announced our plan to sell the Heilbronn and North Tyneside facilities to optimize our manufacturing operations as part of our adoption of a fab-lite strategy. In order to shift from a manufacturing-based business model to an outsourcing business model, we will need to substantially expand our foundry relationships. The terms on which we will be able to obtain wafer production for our products, and the timing and volume of such production will be substantially dependent on agreements to be negotiated with semiconductor foundries. We cannot be certain that the agreements we reach with such foundries will be on terms reasonable to us. Therefore, any agreements reached with semiconductor foundries may be short-term and possibly non-renewable, and hence provide less certainty regarding the supply and pricing of wafers for our products.

During economic upturns in the semiconductor industry we will not be able to guarantee that our third party foundries will be able to increase manufacturing capacity to a level that meets demand for our products, which would prevent us from meeting increased customer demand and harm our business. Also during times of increased demand for our products, if such foundries are able to meet such demand, it may be at higher wafer prices, which would reduce our gross margins on such products or require us to offset the increased price by increasing prices for our customers, either of which would harm our business and operating results.

AS A RESULT OF INCREASED DEPENDENCE ON THIRD PARTY MANUFACTURERS, WE MAY INCUR INVENTORY EXCESSES OR SHORTAGES

As we increase our reliance on third party manufacturers and subcontractors, we acknowledge that the lead times required by such foundries have increased in recent years and is likely to increase in the future. However, market conditions and intense competition in the semiconductor industry require that we be prepared to ship products to our customers with much shorter lead times. Consequently, to have product inventory to meet potential customer purchase orders, we may have to place purchase orders for wafers from our manufacturers in advance of having firm purchase orders from our customers, which from time-

to-time will cause us to have an excess or shortage of wafers for a particular product. If we do not have sufficient demand for our products and cannot cancel our current and future commitments without material impact, we may experience excess inventory, which will result in a write-off affecting gross margin and results of operations. If we cancel a purchase order, we may have to pay cancellation penalties based on the status of work in process or the proximity of the cancellation to the delivery date. As a result of the long lead-time for manufacturing wafers and the increase in “just in time” ordering by customers, semiconductor companies from time-to-time may need to record additional expense for the write-down of excess inventory. Significant write-downs of excess inventory could have a material adverse effect on our consolidated financial condition and results of operations.

Conversely, failure to order sufficient wafers would cause us to miss revenue opportunities and, if significant, could impact sales by our customers, which could adversely affect our customer relationships and thereby materially adversely affect our business, financial condition and results of operations.

OUR INTERNATIONAL SALES AND OPERATIONS ARE SUBJECT TO APPLICABLE LAWS RELATING TO TRADE AND EXPORT CONTROLS, THE VIOLATION OF WHICH COULD ADVERSELY AFFECT OUR OPERATIONS.

For products and technology exported from the U.S. or otherwise subject to U.S. jurisdiction, we are subject to U.S. laws and regulations governing international trade and exports, including, but not limited to the International Traffic in Arms Regulations (“ITAR”), the Export Administration Regulations (“EAR”) and trade sanctions against embargoed countries and destinations administered by the Office of Foreign Assets Control (“OFAC”), U.S. Department of the Treasury. We have recently discovered shortcomings in our export compliance procedures. We are currently analyzing product shipments and technology transfers, working with U.S. government officials to ensure compliance with applicable U.S. export laws and regulations, and developing an enhanced export compliance system. A determination by the U.S. government that we have failed to comply with one or more of these export controls or trade sanctions could result in civil or criminal penalties, including the imposition of significant fines, denial of export privileges, and debarment from U.S. participation in government contracts. Any one or more of these sanctions could have a material adverse effect on our business, financial condition and results of operations.

WE ARE EXPOSED TO FLUCTUATIONS IN CURRENCY EXCHANGE RATES THAT COULD NEGATIVELY IMPACT OUR FINANCIAL RESULTS AND CASH FLOWS.

Because a significant portion of our business is conducted outside the United States, we face exposure to adverse movements in foreign currency exchange rates. These exposures may change over time as business practices evolve and could have a material adverse impact on our financial results and cash flows. Our primary exposure relates to operating expenses in Europe, where a significant amount of our manufacturing is located.

We have in the past entered into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on certain foreign currency assets and liabilities. In addition, we have periodically hedged certain anticipated foreign currency cash flows. We do not plan to hedge against either of these risks in the foreseeable future, but if we should, our attempts to hedge against these risks may not be successful, resulting in an adverse impact on our net income. In addition, our net income may be subject to greater foreign currency gains and losses on certain foreign currency assets and liabilities during times in which we have not entered into foreign exchange forward contracts.

REVENUES AND COSTS DENOMINATED IN FOREIGN CURRENCIES COULD ADVERSELY IMPACT OUR OPERATING RESULTS WITH CHANGES IN THESE FOREIGN CURRENCIES AGAINST THE DOLLAR.

When we take an order denominated in a foreign currency we may receive fewer dollars than initially anticipated if that local currency weakens against the dollar before we collect our funds. Conversely, when we incur a cost denominated in a foreign currency we may pay more dollars than initially anticipated if that local currency strengthens against the dollar before we pay the costs. In addition to reducing revenues or

increasing our costs, this risk can negatively affect our operating results. In Europe, where our significant operations have costs denominated in European currencies, a negative impact on expenses can be partially offset by a positive impact on revenues. Sales denominated in European currencies, and yen as a percentage of net revenues were 21% and 18% in the three months ended June 30, 2007 and 2006, respectively, and 22% and 18% in the six months ended June 30, 2007 and 2006, respectively. Operating expenses denominated in foreign currencies as a percentage of total operating expenses, primarily the euro, were 51% and 53% in the three months ended June 30, 2007 and 2006, respectively, and 53% and 52% in the six months ended June 30, 2007 and 2006, respectively. We also face the risk that our accounts receivable denominated in foreign currencies could be devalued if such foreign currencies weaken quickly and significantly against the dollar. Conversely, we face the risk that our accounts payable denominated in foreign currencies could increase in value if such foreign currencies strengthen against the dollar.

WE DEPEND ON INDEPENDENT ASSEMBLY CONTRACTORS WHICH MAY NOT HAVE ADEQUATE CAPACITY TO FULFILL OUR NEEDS AND WHICH MAY NOT MEET OUR QUALITY AND DELIVERY OBJECTIVES.

We currently manufacture a majority of the wafers for our products at our fabrication facilities, and the wafers are then sorted and tested at our facilities. After wafer testing, we ship the wafers to one of our independent assembly contractors located in China, Hong Kong, Indonesia, Japan, Malaysia, the Philippines, South Korea, Taiwan or Thailand where the wafers are separated into die, packaged and, in some cases, tested. Our reliance on independent contractors to assemble, package and test our products involves significant risks, including reduced control over quality and delivery schedules, the potential lack of adequate capacity and discontinuance or phase-out of the contractors’ assembly processes. These independent contractors may not continue to assemble, package and test our products for a variety of reasons. Moreover, because our assembly contractors are located in foreign countries, we are subject to certain risks generally associated with contracting with foreign suppliers, including currency exchange fluctuations, political and economic instability, trade restrictions, including export controls, and changes in tariff and freight rates. Accordingly, we may experience problems in timelines and the adequacy or quality of product deliveries, any of which could have a material adverse effect on our results of operations.

WE FACE RISKS ASSOCIATED WITH DISPOSAL OR RESTRUCTURING ACTIVITIES.

As part of our fab-lite strategy, in December 2006, we announced plans to sell our Heilbronn, Germany, and North Tyneside, United Kingdom, manufacturing facilities. However, reducing our wafer fabrication capacity involves significant potential costs and delays, particularly in Europe, where the extensive statutory protection of employees imposes substantial costs and delays on their employers when the market requires downsizing. Such costs and delays include compensation to employees and local government agencies, requirements and approvals of governmental and judicial bodies, and losses of or requirement to repay governmental subsidies. We may experience labor union objections or other difficulties while implementing a downsizing. Any such difficulties that we experience would harm our business and operating results, either by deterring needed downsizing or by the additional costs of accomplishing it in Europe relative to America or Asia.

We continue to evaluate the existing restructuring and asset impairment reserves related to previously implemented restructuring plans. As a result, there may be additional restructuring charges or reversals of

previously established reserves. However, we may incur additional restructuring and asset impairment charges in connection with any restructuring plans adopted in the future. Any such restructuring or asset impairment charges recorded in the future could significantly harm our business and operating results. See Notes 6 and 8 to Notes to Condensed Consolidated Financial Statements for further discussion.

IF WE ARE UNABLE TO IMPLEMENT NEW MANUFACTURING TECHNOLOGIES OR FAIL TO ACHIEVE ACCEPTABLE MANUFACTURING YIELDS, OUR BUSINESS WOULD BE HARMED.

Whether demand for semiconductors is rising or falling, we are constantly required by competitive pressures in the industry to successfully implement new manufacturing technologies in order to reduce the geometries of our semiconductors and produce more integrated circuits per wafer. We are developing processes that support effective feature sizes as small as 0.13-microns, and we are studying how to implement advanced manufacturing processes with even smaller feature sizes such as 0.065-microns.

Fabrication of our integrated circuits is a highly complex and precise process, requiring production in a tightly controlled, clean environment. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. Whether through the use of our foundries or third party manufacturers, we may experience problems in achieving acceptable yields in the manufacture of wafers, particularly during a transition in the manufacturing process technology for our products.

We have previously experienced production delays and yield difficulties in connection with earlier expansions of our wafer fabrication capacity or transitions in manufacturing process technology. Production delays or difficulties in achieving acceptable yields at any of our fabrication facilities or at the fabrication facilities of our third party manufacturers could materially and adversely affect our operating results. We may not be able to obtain the

additional cash from operations or external financing necessary to fund the implementation of new manufacturing technologies.

WE MAY FACE THIRD PARTY INTELLECTUAL PROPERTY INFRINGEMENT CLAIMS THAT COULD BE COSTLY TO DEFEND AND RESULT IN LOSS OF SIGNIFICANT RIGHTS.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which on occasion have resulted in significant and often protracted and expensive litigation. We have from time to time received, and may in the future receive, communications from third parties asserting patent or other intellectual property rights covering our products or processes. In the past, we have received specific allegations from major companies alleging that certain of our products infringe patents owned by such companies. In order to avoid the significant costs associated with our defense in litigation involving such claims, we may license the use of the technologies that are the subject of these claims from such companies and be required to make corresponding royalty payments, which may harm our operating results.

We have in the past been involved in intellectual property infringement lawsuits, which harmed our operating results and are currently involved in intellectual property infringement lawsuits, which may harm our future operating results. We are currently involved in several intellectual property infringement lawsuits. Although we intend to vigorously defend against any such lawsuits, we may not prevail given the complex technical issues and inherent uncertainties in patent and intellectual property litigation. Moreover, the cost of defending against such litigation, in terms of management time and attention, legal fees and product delays, could be substantial, whatever the outcome. If any patent or other intellectual property claims against us are successful, we may be prohibited from using the technologies subject to these claims, and if we are unable to obtain a license on acceptable terms, license a substitute technology, or design new technology to avoid infringement, our business and operating results may be significantly harmed.

We have several cross-license agreements with other companies. In the future, it may be necessary or advantageous for us to obtain additional patent licenses from existing or other parties, but these license agreements may not be available to us on acceptable terms, if at all.

OUR MARKETS ARE HIGHLY COMPETITIVE, AND IF WE DO NOT COMPETE EFFECTIVELY, WE MAY SUFFER PRICE REDUCTIONS, REDUCED REVENUES, REDUCED GROSS MARGINS, AND LOSS OF MARKET SHARE.

We compete in markets that are intensely competitive and characterized by rapid technological change, product obsolescence and price decline. Throughout our product line, we compete with a number of large semiconductor manufacturers, such as AMD, Cypress, Freescale, Fujitsu, Hitachi, IBM, Infineon, Intel, LSI Logic, Microchip, Philips, Renesas, Samsung, Sharp, Spansion, STMicroelectronics, Texas Instruments and Toshiba. Some of these competitors have substantially greater financial, technical, marketing and management resources than we do. As we have introduced new products we are increasingly competing directly with these companies, and we may not be able to compete effectively. We also compete with emerging companies that are attempting to sell products in specialized markets that our products address. We compete principally on the basis of the technical innovation and performance of our products, including their speed, density, power usage, reliability and specialty packaging alternatives, as well as on price and product availability. During the last several years, we have experienced significant price competition in several business segments, especially in our nonvolatile memory segment for EPROM, Serial EEPROM, and Flash memory products, as well as in our commodity microcontrollers and smart cards. We expect continuing competitive pressures in our markets from existing competitors and new entrants, new technology and cyclical demand, which, among other factors, will likely maintain the recent trend of declining average selling prices for our products.

In addition to the factors described above, our ability to compete successfully depends on a number of factors, including the following:

	•		our success in designing and manufacturing new products that implement new technologies and processes;

	•		our ability to offer integrated solutions using our advanced nonvolatile memory process with other technologies;

	•		the rate at which customers incorporate our products into their systems;

	•		product introductions by our competitors;

	•		the number and nature of our competitors in a given market;

	•		the incumbency of our competitors at potential new customers;

	•		our ability to minimize production costs by outsourcing our manufacturing, assembly and testing functions; and

	•		general market and economic conditions.

Many of these factors are outside of our control, and we may not be able to compete successfully in the future.

WE MAY BE SUBJECT TO ADVERSE FINDINGS FROM ADDITIONAL AUDIT COMMITTEE INVESTIGATIONS INTO IMPROPER BUSINESS PRACTICES.

In addition to the investigation into stock option granting practices, the Audit Committee of Atmel’s Board of Directors, with the assistance of independent legal counsel and forensic accountants, conducted independent investigations into (a) certain proposed investments in high yield securities that were being contemplated by our former Chief Executive Officer during the period from 1999 to 2002 and bank transfers related thereto, and (b) alleged payments from certain of our customers to employees at one of our Asian subsidiaries. The Audit Committee has completed its investigations, including its review of the impact on our condensed consolidated financial statements for the three and six months ended June 30, 2007 and prior periods, and concluded that there was no impact on such consolidated financial statements. However, we can give no assurances that subsequent information will not be discovered that may cause the

Audit Committee to reopen such reviews. In addition, government agencies, including local authorities in Asia, may initiate their own review into these and related matters. At this time, we cannot predict the outcome of such reviews, if any. An adverse finding in any of these matters could lead to future delays in filing our subsequent SEC reports and delisting of our common stock from the NASDAQ Global Select Market, and result in additional management time being diverted and additional legal and other costs that could have a material adverse effect on our business, financial condition and results of operations.

WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.

The average selling prices of our products historically have decreased over the products’ lives and are expected to continue to do so. As a result, our future success depends on our ability to develop and introduce new products which compete effectively on the basis of price and performance and which address customer requirements. We are continually designing and commercializing new and improved products to maintain our competitive position. These new products typically are more technologically complex than their predecessors, and thus have increased potential for delays in their introduction.

The success of new product introductions is dependent upon several factors, including timely completion and introduction of new product designs, achievement of acceptable fabrication yields and market acceptance. Our development of new products and our customers’ decision to design them into their systems can take as long as three years, depending upon the complexity of the device and the application. Accordingly, new product development requires a long-term forecast of market trends and customer needs, and the successful introduction of our products may be adversely affected by competing products or by technologies serving the markets addressed by our products. Our qualification process involves multiple cycles of testing and improving a product’s functionality to ensure that our products operate in accordance with design specifications. If we experience delays in the introduction of new products, our future operating results could be harmed.

In addition, new product introductions frequently depend on our development and implementation of new process technologies, and our future growth will depend in part upon the successful development and market acceptance of these process technologies. Our integrated solution products require more technically sophisticated sales and marketing personnel to market these products successfully to customers. We are developing new products with smaller feature sizes, the fabrication of which will be substantially more complex than fabrication of our current products. If we are unable to design, develop, manufacture, market and sell new products successfully, our operating results will be harmed. Our new product development, process development, or marketing and sales efforts may not be successful, our new products may not achieve market acceptance, and price expectations for our new products may not be achieved, any of which could harm our business.

OUR OPERATING RESULTS ARE HIGHLY DEPENDENT ON OUR INTERNATIONAL SALES AND OPERATIONS, WHICH EXPOSES US TO VARIOUS POLITICAL AND ECONOMIC RISKS.

Sales to customers outside the U.S. accounted for 86% and 85% of net revenues in the three months ended June 30, 2007 and 2006, respectively, and 87% and 84% in the six months ended June 30, 2007 and 2006, respectively. We expect that revenues derived from international sales will continue to represent a significant portion of net revenues. International sales and operations are subject to a variety of risks, including:

	•		greater difficulty in protecting intellectual property;

	•		reduced flexibility and increased cost of staffing adjustments, particularly in France and Germany;

	•		longer collection cycles;

	•		potential unexpected changes in regulatory practices, including export license requirements, trade barriers, tariffs and tax laws, environmental and privacy regulations; and

	•		general economic and political conditions in these foreign markets.

Further, we purchase a significant portion of our raw materials and equipment from foreign suppliers, and we incur labor and other operating costs in foreign currencies, particularly at our French, German and U.K. manufacturing facilities. As a result, our costs will fluctuate along with the currencies and general economic conditions in the countries in which we do business, which could harm our operating results.

Approximately 21% and 18% of our net revenues in the three months ended June 30, 2007 and 2006, respectively, and 22% and 18% of our net revenues in the six months ended June 30, 2007 and 2006, respectively, were denominated in foreign currencies. Approximately 50% and 52% of net revenues were generated in Asia in the three months ended June 30, 2007 and 2006, respectively, and 50% and 52% of net revenues were generated in Asia in the six months ended June 30, 2007 and 2006, respectively.

OUR OPERATIONS AND FINANCIAL RESULTS COULD BE HARMED BY NATURAL DISASTERS OR TERRORIST ACTS.

Since the terrorist attacks on the World Trade Center and the Pentagon in 2001, certain insurance coverage has either been reduced or made subject to additional conditions by our insurance carriers, and we have not been able to maintain all necessary insurance coverage at reasonable cost. Instead, we have relied to a greater degree on self-insurance. For example, we now self-insure property losses up to $10 million per event. Our headquarters, some of our manufacturing facilities, the manufacturing facilities of third party foundries and some of our major vendors’ and customers’ facilities are located near major earthquake faults and in potential terrorist target areas. If a major earthquake or other disaster or a terrorist act impacts us and insurance coverage is unavailable for any reason, we may need to spend significant amounts to repair or replace our facilities and equipment, we may suffer a temporary halt in our ability to manufacture and transport product and we could suffer damages of an amount sufficient to harm our business, financial condition and results of operations.

A LACK OF EFFECTIVE INTERNAL CONTROL OVER FINANCIAL REPORTING COULD RESULT IN AN INABILITY TO ACCURATELY REPORT OUR FINANCIAL RESULTS, WHICH COULD LEAD TO A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE.

Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, deficiencies in our internal controls. Evaluations of the effectiveness of our internal controls in the future may lead our management to determine that internal control over financial reporting is no longer effective. Such conclusions may result from our failure to implement controls for changes in our business, or deterioration in the degree of compliance with our policies or procedures.

A failure to maintain effective internal control over financial reporting, including a failure to implement effective new controls to address changes in our business could result in a material misstatement of our consolidated financial statements or otherwise cause us to fail to meet our financial reporting obligations. This, in turn, could result in a loss of investor confidence in the accuracy and completeness of our financial reports, which could have an adverse effect on our stock price.

OUR DEBT LEVELS COULD HARM OUR ABILITY TO OBTAIN ADDITIONAL FINANCING, AND OUR ABILITY TO MEET OUR DEBT OBLIGATIONS WILL BE DEPENDENT UPON OUR FUTURE PERFORMANCE.

As of June 30, 2007, our total debt was $126 million, compared to $169 million at December 31, 2006. Our long-term debt less current portion to equity ratio was 0.05 and 0.06 at June 30, 2007 and December 31, 2006, respectively. Increases in our debt-to-equity ratio could adversely affect our ability to obtain additional financing for working capital, acquisitions or other purposes and make us more vulnerable to industry downturns and competitive pressures.

Certain of our debt facilities contain terms that subject us to financial and other covenants. We were in compliance with our covenants as of June 30, 2007. We were previously not in compliance with covenants requiring timely filing of U.S. GAAP financial statements as of June 30, 2007, and, as a result, requested waivers from our lenders to avoid default under these facilities. Waivers were not received from all lenders, and as a result, we had previously classified $23 million of non-current liabilities to current liabilities on our condensed consolidated balance sheet as of December 31, 2006.

From time to time our ability to meet our debt obligations will depend upon our ability to raise additional financing and on our future performance and ability to generate substantial cash flow from operations, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to meet debt obligations or otherwise are obliged to repay any debt prior to its due date, our available cash would be depleted, perhaps seriously, and our ability to fund operations harmed. In addition, our ability to service long-term debt in the U.S. or to obtain cash for other needs from our foreign subsidiaries may be structurally impeded, as a substantial portion of our operations are conducted through our foreign subsidiaries. Our cash flow and ability to service debt are partially dependent upon the liquidity and earnings of our subsidiaries as well as the distribution of those earnings, or repayment of loans or other payments of funds by those subsidiaries, to the U.S. parent corporation. These foreign subsidiaries are separate and distinct legal entities and may have limited or no obligation, contingent or otherwise, to pay any amounts to us, whether by dividends, distributions, loans or any other form.

WE MAY NEED TO RAISE ADDITIONAL CAPITAL THAT MAY NOT BE AVAILABLE.

Although in July 2006 we sold our Grenoble, France, subsidiary and in December 2006 we announced our plan to sell the Heilbronn and North Tyneside fabrication facilities, we intend to continue to make capital investments to support new products and manufacturing processes that achieve manufacturing cost reductions and improved yields. Currently, we expect our total capital expenditures for 2007 total approximately $75 million. We may seek additional equity or debt financing to fund operations or to fund other projects. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for products, product mix, changes in semiconductor industry conditions and competitive factors. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms.

PROBLEMS THAT WE EXPERIENCE WITH KEY CUSTOMERS OR DISTRIBUTORS MAY HARM OUR BUSINESS.

Our ability to maintain close, satisfactory relationships with large customers is important to our business. A reduction, delay, or cancellation of orders from our large customers would harm our business. The loss of one or more of our key customers, or reduced orders by any of our key customers, could harm our business and results of operations. Moreover, our customers may vary order levels significantly from period to period, and customers may not continue to place orders with us in the future at the same levels as in prior periods.

We sell many of our products through distributors. Our distributors could experience financial difficulties or otherwise reduce or discontinue sales of our products. Our distributors could commence or increase sales of our competitors’ products. In any of these cases, our business could be harmed. In addition, in the short-term our revenues in Asia may decrease as we optimize our distributor base in Asia. It may take time for us to identify financially viable distributors and help them develop quality support services. This process may result in short-term revenue loss, particularly in the third and fourth quarters of fiscal 2007. There can be no assurances that we will be able to manage this optimization process in an efficient and timely manner.

WE ARE NOT PROTECTED BY LONG-TERM CONTRACTS WITH OUR CUSTOMERS.

We do not typically enter into long-term contracts with our customers, and we cannot be certain as to future order levels from our customers. When we do enter into a long-term contract, the contract is

generally terminable at the convenience of the customer. In the event of an early termination by one of our major customers, it is unlikely that we will be able to rapidly replace that revenue source, which would harm our financial results.

OUR FAILURE TO SUCCESSFULLY INTEGRATE BUSINESSES OR PRODUCTS WE HAVE ACQUIRED COULD DISRUPT OR HARM OUR ONGOING BUSINESS.

We have from time to time acquired, and may in the future acquire additional, complementary businesses, facilities, products and technologies. Achieving the anticipated benefits of an acquisition depends, in part, upon whether the integration of the acquired business, products or technology is accomplished in an efficient and effective manner. Moreover, successful acquisitions in the semiconductor industry may be more difficult to accomplish than in other industries because such acquisitions require, among other things, integration of product offerings, manufacturing operations and coordination of sales and marketing and research and development efforts. The difficulties of such integration may be increased by the need to coordinate geographically separated organizations, the complexity of the technologies being integrated, and the necessity of integrating personnel with disparate business backgrounds and combining two different corporate cultures.

The integration of operations following an acquisition requires the dedication of management resources that may distract attention from the day-to-day business, and may disrupt key research and development, marketing or sales efforts. The inability of management to successfully integrate any future acquisition could harm our business. Furthermore, products acquired in connection with acquisitions may not gain acceptance in our markets, and we may not achieve the anticipated or desired benefits of such transactions.

WE ARE SUBJECT TO ENVIRONMENTAL REGULATIONS, WHICH COULD IMPOSE UNANTICIPATED REQUIREMENTS ON OUR BUSINESS IN THE FUTURE. ANY FAILURE TO COMPLY WITH CURRENT OR FUTURE ENVIRONMENTAL REGULATIONS MAY SUBJECT US TO LIABILITY OR SUSPENSION OF OUR MANUFACTURING OPERATIONS.

We are subject to a variety of international, federal, state and local governmental regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in our manufacturing processes. Increasing public attention has been focused on the environmental impact of semiconductor operations. Although we have not experienced any material adverse effect on our operations from environmental regulations, any changes in such regulations or in their enforcement may impose the need for additional capital equipment or other requirements. If for any reason we fail to control the use of, or to restrict adequately the discharge of, hazardous substances under present or future regulations, we could be subject to substantial liability or our manufacturing operations could be suspended.

We also could face significant costs and liabilities in connection with product take-back legislation. We record a liability for environmental remediation and other environmental costs when we consider the costs to be probable and the amount of the costs can be reasonably estimated. The EU has enacted the Waste Electrical and Electronic Equipment Directive, which makes producers of electrical goods, including computers and printers, financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. The deadline for the individual member states of the EU to enact the directive in their respective countries was August 13, 2004 (such legislation, together with the directive, the “WEEE Legislation”). Producers participating in the market became financially responsible for implementing these responsibilities beginning in August 2005. Our potential liability resulting from the WEEE Legislation may be substantial. Similar legislation has been or may be enacted in other jurisdictions, including in the United States, Canada, Mexico, China and Japan, the cumulative impact of which could be significant.

WE DEPEND ON CERTAIN KEY PERSONNEL, AND THE LOSS OF ANY KEY PERSONNEL MAY SERIOUSLY HARM OUR BUSINESS.

Our future success depends in large part on the continued service of our key technical and management personnel, and on our ability to continue to attract and retain qualified employees, particularly those highly

skilled design, process and test engineers involved in the manufacture of existing products and in the development of new products and processes. The competition for such personnel is intense, and the loss of key employees, none of whom is subject to an employment agreement for a specified term or a post-employment non-competition agreement, could harm our business.

BUSINESS INTERRUPTIONS COULD HARM OUR BUSINESS.

Our operations are vulnerable to interruption by fire, earthquake, power loss, telecommunications failure and other events beyond our control. We do not have a detailed disaster recovery plan. In addition, business interruption insurance may not be enough to compensate us for losses that may occur and any losses or damages incurred by us as a result of business interruptions could significantly harm our business.

SYSTEM INTEGRATION DISRUPTIONS COULD HARM OUR BUSINESS.

We periodically make enhancements to our integrated financial and supply chain management systems. This process is complex, time-consuming and expensive. Operational disruptions during the course of this process or delays in the implementation of these enhancements could impact our operations. Our ability to forecast sales demand, ship products, manage our product inventory and record and report financial and management information on a timely and accurate basis could be impaired due to these enhancements.

PROVISIONS IN OUR RESTATED CERTIFICATE OF INCORPORATION, BYLAWS AND PREFERRED SHARES RIGHTS AGREEMENT MAY HAVE ANTI-TAKEOVER EFFECTS.

Certain provisions of our Restated Certificate of Incorporation, Bylaws and Delaware law could make it more difficult for a third party to acquire us, even if doing so would benefit our stockholders. Our board of directors has the authority to issue up to 5,000,000 shares of preferred stock and to determine the price, voting rights, preferences and privileges and restrictions of those shares without the approval of our stockholders. The rights of the holders of common stock will be subject to, and may be harmed by, the rights of the holders of any shares of preferred stock that may be issued in the future. The issuance of preferred stock may delay, defer or prevent a change in control, by making it more difficult for a third party to acquire a majority of our stock. In addition, the issuance of preferred stock could have a dilutive effect on our stockholders. We have no present plans to issue shares of preferred stock.

We also have a preferred shares rights agreement with Equiserve Trust Company, N.A., as rights agent, dated as of September 4, 1996, amended and restated on October 18, 1999 and amended as of November 7, 2001, which gives our stockholders certain rights that would likely delay, defer or prevent a change of control of Atmel in a transaction not approved by our board of directors.

OUR STOCK PRICE HAS FLUCTUATED IN THE PAST AND MAY CONTINUE TO FLUCTUATE IN THE FUTURE.

The market price of our common stock has experienced significant fluctuations and may continue to fluctuate significantly. The market price of our common stock may be significantly affected by factors such as the announcement of new products or product enhancements by us or our competitors, technological innovations by us or our competitors, quarterly variations in our results of operations, changes in earnings estimates by market analysts and general market conditions or market conditions specific to particular industries. Statements or changes in opinions, ratings, or earnings estimates made by brokerage firms or industry analysts relating to the market in which we do business or relating to us specifically could result in an immediate and adverse effect on the market price of our stock. In addition, in recent years the stock market has experienced extreme price and volume fluctuations. These fluctuations have had a substantial effect on the market prices for many high technology companies, often unrelated to the operating performance of the specific companies.

ACCOUNTING FOR EMPLOYEE STOCK OPTIONS USING THE FAIR VALUE METHOD COULD SIGNIFICANTLY REDUCE OUR NET INCOME OR INCREASE OUR NET LOSS.

In December 2004, the FASB issued SFAS No. 123R, which is a revision of SFAS No. 123 “Accounting for Stock-Based Compensation” (“SFAS No. 123”), and supersedes our previous accounting under APB No. 25.

We adopted SFAS No. 123R effective January 1, 2006, using the modified prospective transition method and our condensed consolidated financial statements as of June 30, 2007 and December 31, 2006 are based on this method. In accordance with the modified prospective transition method, our condensed consolidated financial statements for prior periods have not been restated to reflect the impact of SFAS No. 123R.

We have elected to adopt FSP No. FAS 123(R)-3 to calculate our pool of windfall tax benefits.

SFAS No. 123R requires companies to estimate the fair value of stock-based payment awards on the date of grant using an option-pricing model. The value of the portion of the award that is ultimately expected to vest will be recognized as expense over the requisite service periods in our consolidated statements of operations. Prior to January 1, 2006, we accounted for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25 as allowed under SFAS No. 123 (and further amended by SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an amendment of FASB Statement No. 123”). Under the intrinsic value method, stock-based compensation expense was recognized in our condensed consolidated statements of operations for stock based awards granted to employees when the exercise price of these awards was less than the fair market value of the underlying stock at the date of grant.

Income from continuing operations in the three months ended June 30, 2007 and 2006 and the six months ended June 30, 2007 and 2006 was reduced by stock-based compensation expense of $3 million, $3 million, $7 million and $5 million, respectively, calculated in accordance with SFAS No. 123R.

OUR FOREIGN PENSION PLANS ARE UNFUNDED, AND ANY REQUIREMENT TO FUND THESE PLANS IN THE FUTURE COULD NEGATIVELY IMPACT OUR CASH POSITION AND OPERATING CAPITAL.

We sponsor defined benefit pension plans that cover substantially all our French and German employees. Plan benefits are managed in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. Long-term pension benefits payable totaled $51 million and $53 million at June 30, 2007 and December 31, 2006, respectively. The plans are non-funded, in compliance with local statutory regulations, and we have no immediate intention of funding these plans. Benefits are paid when amounts become due, commencing when participants retire. Cash funding for benefits to be paid for 2007 is estimated to be approximately $1 million. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively impact our cash position and operating capital.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

None.

Item 3. Defaults Upon Senior Securities

None.

Item 4. Submission of Matters to a Vote of Security Holders

At our Special Meeting of Stockholders held on May 18, 2007, 353,581,646 shares of Common Stock, or 72% of the total outstanding shares, were voted. The table below presents the voting results with respect to the proposal to remove five directors of the Company, which proposal was not adopted by the stockholders:


	Total Votes		Total Votes
	for		Against		Total
	Removal		Removal		Abstentions
Pierre Fougere		59,401,302		276,483,756		17,696,588
Dr. Chaiho Kim		139,262,895		196,685,221		17,633,530
Steven Laub		58,850,232		276,706,418		18,024,996
David Sugishita		59,275,527		276,674,489		17,631,630
T. Peter Thomas		61,859,498		274,027,560		17,694,588

The table below presents the voting results with respect to the proposal to elect nominees proposed by George Perlegos to fill vacancies created by the removal of the five directors listed above, which proposal was not adopted by the stockholders:


			Total Votes
	Total Votes		Against
	for Each		Each		Total
	Nominee		Nominee		Abstentions
Brian S. Bean		142,967,466		188,752,478		21,861,702
Joseph F. Berardino		60,109,934		188,752,478		104,719,234
Bernd U. Braune		60,004,992		188,752,478		108,824,176
Dr. John D. Kubiatowicz		60,011,277		188,752,478		104,817,891
George A. Vandeman		59,999,643		188,752,478		104,829,525

Item 5. Other Information

None.

Item 6. Exhibits

The following Exhibits have been filed with, or incorporated by reference into, this Report:

10.1		Description of Amendment of Certain Option Agreements (which is incorporated herein by reference to Item 5.02 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on April 12, 2007).

31.1		Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).

31.2		Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).

32.1		Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

32.2		Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.


	Page
PART I: FINANCIAL INFORMATION
Item 1. Financial Statements		3
Condensed Consolidated Balance Sheets at June 30, 2007 and December 31, 2006		3
Condensed Consolidated Statements of Operations for the three and six months ended June 30, 2007 and June 30, 2006		4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2007 and June 30, 2006		5
Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
Item 3. Quantitative and Qualitative Disclosures About Market Risk		47
Item 4. Controls and Procedures		49
PART II: OTHER INFORMATION
Item 1. Legal Proceedings		50
Item 1A. Risk Factors		53
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		66
Item 3. Defaults Upon Senior Securities		66
Item 4. Submission of Matters to a Vote of Security Holders		67
Item 5. Other Information		67
Item 6. Exhibits		67
Signatures		68
Exhibits		69
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2


		ATMEL CORPORATION

		(Registrant)

August 9, 2007		/s/ STEVEN LAUB

		Steven Laub
		President & Chief Executive Officer
		(Principal Executive Officer)

August 9, 2007		/s/ ROBERT AVERY

		Robert Avery
		Vice President Finance & Chief Financial Officer
		(Principal Financial and Accounting Officer)