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 SEPTEMBER 30, 2008


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

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

(408) 441-0311
(Registrant’s telephone number)

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, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer þ

Accelerated filer o

Non-accelerated filer o
(Do not check if a smaller reporting company)

Smaller reporting company 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 October 31, 2008, the Registrant had 447,965,003 outstanding shares of Common Stock.

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Atmel Corporation
Condensed Consolidated Balance Sheets
(Unaudited)


	September 30,			December 31,
	2008			2007
	*(in thousands, except par value)*
ASSETS
Current assets
Cash and cash equivalents	$	394,231		$	374,130
Short-term investments		26,702			55,817
Accounts receivable, net of allowances for doubtful accounts of $3,527 and $3,111, respectively		220,978			209,189
Inventories		315,358			357,301
Current assets held for sale		10,537			—
Prepaids and other current assets		83,736			88,781

Total current assets		1,051,542			1,085,218
Fixed assets, net		407,024			579,566
Goodwill		58,005			—
Intangible assets, net		40,535			19,552
Non-current assets held for sale		2,357			—
Other assets		35,184			18,417

Total assets	$	1,594,647		$	1,702,753


LIABILITIES AND STOCKHOLDERS’ EQUITY

Current liabilities
Current portion of long-term debt and capital lease obligations	$	131,383		$	142,471
Trade accounts payable		109,976			191,856
Accrued and other liabilities		221,382			266,987
Liabilities held for sale		5,368			—
Deferred income on shipments to distributors		39,237			19,708

Total current liabilities		507,346			621,022
Long-term debt and capital lease obligations less current portion		15,304			20,408
Long-term liabilities held for sale		23,986			—
Other long-term liabilities		207,267			237,844

Total liabilities		753,903			879,274


Commitments and contingencies (Note 8)

Stockholders’ equity
Common stock; par value $0.001; Authorized: 1,600,000 shares; Shares issued and outstanding: 447,807 at September 30, 2008 and 443,837 at December 31, 2007		448			444
Additional paid-in capital		1,228,562			1,193,846
Accumulated other comprehensive income		138,542			153,140
Accumulated deficit		(526,808	)		(523,951	)

Total stockholders’ equity		840,744			823,479

Total liabilities and stockholders’ equity	$	1,594,647		$	1,702,753

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

Atmel Corporation
Condensed Consolidated Statements of Operations
(Unaudited)


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007
	*(in thousands, except per share data)*
Net revenues	$	400,008		$	418,097		$	1,232,153		$	1,213,657

Operating expenses
Cost of revenues		241,999			269,063			774,564			783,044
Research and development		63,856			63,609			198,451			200,174
Selling, general and administrative		63,898			58,518			196,033			184,458
Acquisition-related charges		6,690			—			17,110			—
Charges for grant repayments		291			1,189			464			1,189
Restructuring charges		26,625			1,386			63,209			528
Asset impairment charges (recovery)		7,969			(1,057	)		7,969			(1,057	)
Gain on sale of assets		—			—			(29,948	)		—

Total operating expenses		411,328			392,708			1,227,852			1,168,336

(Loss) income from operations		(11,320	)		25,389			4,301			45,321
Interest and other income (expense), net		2,530			1,299			(3,716	)		2,888

(Loss) income before income taxes		(8,790	)		26,688			585			48,209
Benefit from (provision for) income taxes		4,052			(10,135	)		(3,442	)		(2,038	)

Net (loss) income	$	(4,738	)	$	16,553		$	(2,857	)	$	46,171


Basic net (loss) income per share:
Net (loss) income	$	(0.01	)	$	0.03		$	(0.01	)	$	0.09

Weighted-average shares used in basic net (loss) income per share calculations		447,013			485,540			445,826			487,731

Diluted net (loss) income per share:
Net (loss) income	$	(0.01	)	$	0.03		$	(0.01	)	$	0.09

Weighted-average shares used in diluted net (loss) income per share calculations		447,013			489,791			445,826			492,747

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

Atmel Corporation
Condensed Consolidated Statements of Cash Flows
(Unaudited)


	Nine Months Ended
	September 30,			September 30,
	2008			2007
	(in thousands)
Cash flows from operating activities
Net (loss) income	$	(2,857	)	$	46,171
Adjustments to reconcile net (loss) income to net cash provided by operating activities
Depreciation and amortization		104,429			94,425
Gain on sale of assets		(29,948	)		(1,657	)
Asset impairment charges (recovery)		7,969			(1,057	)
In-process research and development charges		1,047			—
Other non-cash losses, net		2,627			2,017
Provision for (recovery of) doubtful accounts receivable		592			(45	)
Accretion of interest on long-term debt		1,349			526
Stock-based compensation expense		24,497			11,506
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable		(8,977	)		809
Inventories		33,824			(5,677	)
Current and other assets		16,331			46,948
Trade accounts payable		(96,354	)		(18,005	)
Accrued and other liabilities		3,348			(70,293	)
Deferred income on shipments to distributors		19,529			(228	)

Net cash provided by operating activities		77,406			105,440


Cash flows from investing activities
Acquisitions of fixed assets		(33,873	)		(53,339	)
Proceeds from sale of North Tyneside assets and other assets		82,568			3,000
Proceeds from sale of manufacturing facilities, net of selling costs		—			34,714
Acquisitions of intangible assets		(1,215	)		—
Purchases of marketable securities		(16,320	)		(7,743	)
Sales or maturities of marketable securities		25,356			12,276
Acquisition of Quantum Research Group, net of cash acquired		(96,726	)		—

Net cash used in investing activities		(40,210	)		(11,092	)


Cash flows from financing activities
Principal payments on capital leases and other debt		(16,560	)		(68,615	)
Repurchase of common stock		—			(250,111	)
Proceeds from issuance of common stock		9,570			8,044

Net cash used in financing activities		(6,990	)		(310,682	)

Effect of exchange rate changes on cash and cash equivalents		(10,105	)		4,934

Net increase (decrease) in cash and cash equivalents		20,101			(211,400	)

Cash and cash equivalents at beginning of the period		374,130			410,480

Cash and cash equivalents at end of the period	$	394,231		$	199,080


Supplemental cash flow disclosures:
Interest paid	$	7,280		$	6,393
Income taxes paid, net	$	12,144		$	12,585

Supplemental non-cash investing and financing activities disclosures:
Decreases in accounts payable related to fixed asset purchases	$	(4,727	)	$	(13,600	)
Decreases in liabilities related to intangible assets purchases	$	(1,015	)	$	—

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

Atmel Corporation
Notes to Condensed Consolidated Financial Statements
(In thousands, except per share data, employee data, and where otherwise indicated)
(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 September 30, 2008 and the results of operations in the three and nine months ended September 30, 2008 and 2007 and cash flows in the nine months ended September 30, 2008 and 2007. 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 in the year ended December 31, 2007. The December 31, 2007 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 in the periods presented are not necessarily indicative of results to be expected for any future period, nor for the entire year.

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, warranty reserves, estimates for useful lives associated with long-lived assets (including intangible assets), asset impairment charges (recovery), charges for grant repayments and certain accrued liabilities and income taxes and income tax valuation allowances. Actual results could differ from those estimates.

In the three months ended September 30, 2008, the Company recorded an adjustment to accrue for additional research and development expense of $1,217 for compensation payments related to withholding tax associated with restricted stock units, which were earned in the three months ended June 30, 2008, March 31, 2008, and December 31, 2007, and that should have been recorded in those respective periods. Management has assessed the impact of this error and has concluded that the amounts are not material, either individually or in the aggregate, to any of the prior periods’ annual or interim financial statements, nor is the impact of correcting the 2007 portion of the error in the three months ended September 30, 2008 expected to be material to the full year 2008 financial statements. On that basis, the Company has recorded the correction in the three and nine month periods ended September 30, 2008.

Revenue Recognition

Effective July 1, 2008, the Company entered into revised agreements with certain European distributors that allow additional rights, including future price concessions at the time of resale, price protection, and the right to return products upon termination of the distribution agreement. As a result of uncertainties over finalization of pricing for shipments to these distributors, the Company considers that the sale prices are not “fixed or determinable” at the time of shipment to these distributors. Revenues and related costs will be deferred until the products are sold by the distributors to their end customers.

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 and excess and obsolescence reserves. The determination of obsolete or excess inventory requires an estimation of the future demand for the Company’s products and these reserves are recorded when the inventory on hand exceeds management’s estimate of future demand for each product. Once the inventory is written down, a new cost basis is established; however, for tracking purposes, the write-down is recorded as a reserve on the condensed consolidated balance sheets. These inventory reserves are not relieved until the related inventory has been sold or scrapped. Inventories are comprised of the following:


	September 30,		December 31,
	2008		2007
	(in thousands)
Raw materials and purchased parts	$	18,140	$	22,996
Work-in-progress		217,271		249,863
Finished goods		79,947		84,442

	$	315,358	$	357,301

Grant Recognition

Subsidy grants from government organizations are recorded as a reduction of expenses over the period the related obligations are fulfilled. 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				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2008		2007		2008		2007
			(in thousands)
Cost of revenues	$	436	$	771	$	1,435	$	1,217
Research and development expenses		6,898		5,041		16,802		14,384

Total	$	7,334	$	5,812	$	18,237	$	15,601

During the three months ended March 31, 2008, the Company made $39,519 in government grant repayments to the UK government in connection with the closure of the North Tyneside, UK manufacturing facility, which was previously accrued as of December 31, 2007. The Company recorded charges for grant repayments of $291 and $464 in the three and nine months ended September 30, 2008, respectively, due to interest on the outstanding grant repayment balance to the Greek government. The Company recorded charges for grant repayments of $1,189 in the three and nine months ended September 30, 2007.

Stock-Based Compensation

Upon adoption of Statement of Financial Accounting Standards 123R (“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). For performance-based restricted stock units, these variables also include the Company’s assessment of the probability of achieving certain financial objectives.

Stock-based compensation expense recognized in the Company’s condensed consolidated statements of operations in the three and nine months ended September 30, 2008 and 2007 included a combination of payment awards granted prior to January 1, 2006 and payment awards granted subsequent to January 1, 2006. For stock-based payment 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 nine months ended September 30, 2008 and 2007 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. 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 are measured based on SFAS No. 123R requirements. See Note 6 for further discussion.

Valuation of Goodwill and Intangible Assets

The Company reviews goodwill and intangible assets with indefinite lives for impairment annually during the fourth quarter and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable in accordance with SFAS

No. 142, “Goodwill and Other Intangible Assets.” Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and are reviewed for impairment under SFAS No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets)” (“SFAS No. 144”). Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and forecasted operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. The Company bases its fair value estimates on assumptions it believes to be reasonable. Actual future results may differ from those estimates.

Recent Accounting Pronouncements

In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No.157”, which delays the effective date of SFAS No. 157, “Fair Value Measurements”, for all non-recurring fair value measurements of non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. The Company is currently evaluating the financial impact of FSP No. 157-2 on its financial position and results of operations.

In October 2008, the FASB issued FSP No. 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset Is Not Active”, which clarifies the application of SFAS No. 157 in a market that is not active and provides an example to illustrate key considerations in determining the fair value of a financial asset when the market for that financial asset is not active. FSP No. 157-3 is effective upon its issuance, including prior periods for which financial statements have not been issued. FSP No. 157-3 did not have a material impact on the Company’s consolidated financial statements.

In March 2008, the FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This standard is intended to improve financial reporting by requiring transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS No 133; and how derivative instruments and related hedged items affect its financial position, financial performance and cash flows. This Statement is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 161 on its condensed consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 141R on its condensed consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective as of the beginning of an entity’s fiscal year that begins after December 31, 2008. The Company is currently evaluating the potential impact, if any, of the adoption of SFAS No. 160 on its condensed consolidated results of operations and financial condition.

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” (“SFAS No. 159”). Under SFAS No. 159, a company may elect to use fair value to measure eligible items at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Currently, the Company has not expanded its financial assets and liabilities that it accounts for under the fair value option of SFAS No. 159.

Note 2 BUSINESS COMBINATION

On March 6, 2008, the Company completed its acquisition of Quantum Research Group Ltd. (“Quantum”), a supplier of capacitive sensing IP solutions. The Company acquired all outstanding shares as of the acquisition date and Quantum became a wholly-owned subsidiary of Atmel.

The total purchase price of the acquisition was as follows:


	(in thousands)
Cash	$	88,106
Fair value of common stock issued		405
Direct transaction costs		7,345

		95,856
Adjustments for contingent consideration met		5,322

Total estimated purchase price	$	101,178

Of the $88,106 cash paid to the former Quantum stockholders on the closing date of the acquisition, $13,000 was placed in an escrow account and will be released 18 months from the closing date upon satisfaction of any outstanding obligations related to certain representations and warranties included in the acquisition agreement. As part of the purchase price, the Company also issued 126 shares of its common stock to a Quantum shareholder, which was valued at $405. The share value used was based on fair value determined by calculating the average closing stock prices from March 4, 2008 to March 8, 2008.

The Company agreed to make additional payments of $9,560, contingent on achieving specified financial objectives in 2008. Of this amount, the Company paid $5,322 during the period from acquisition through October 31, 2008 for the achievement of certain financial objectives through September 30, 2008, which was recorded as additional goodwill as of September 30, 2008. Any further amounts to be paid under this arrangement will be recorded as additional goodwill if and when the financial objectives are achieved.

In the nine months ended September 30, 2008, the Company paid $96,726 in cash for the acquisition of Quantum, consisting of the purchase price of $101,178, less fair value of common stock issued of $405, cash acquired of $2,188 and a payment of $1,859 related to the contingent payments described above which was made in October 2008.

The allocation of the purchase price to Quantum’s tangible and identifiable intangible assets acquired and liabilities assumed is based on their estimated fair values. Further adjustments may be included in the final allocation of the purchase price of Quantum, if the adjustments are determined within the purchase price allocation period (up to twelve months from the closing date). The excess of the purchase price over the tangible and identifiable intangible assets acquired and liabilities assumed has been allocated to goodwill. Goodwill is not deductible for tax purposes. Goodwill and intangible assets were recorded on the books of Quantum, an Atmel subsidiary that utilizes the British Pound as its functional currency.

The purchase price was allocated as follows as of the closing date of the acquisition:


	March 6,
	2008
	(in thousands)
Goodwill	$	59,215
Other intangible assets		31,002
Tangible assets acquired and liabilities assumed:
Cash and cash equivalents		2,188
Accounts receivable		3,070
Inventory		966
Prepaids and other current assets		149
Fixed assets		455
Trade accounts payable		(1,013	)
Accrued liabilities		(1,223	)
In-process research and development		1,047

	$	95,856

The movement of the goodwill balance since the date of the acquisition of Quantum was as follows:


			Additional		Cumulative
	March 6,		Consideration		Translation			September 30,
	2008		Earned		Adjustments			2008
	(in thousands)
Goodwill	$	59,215	$	5,322	$	(6,532	)	$	58,005

The movement of the other intangible assets since the date of the acquisition of Quantum was as follows:


			Cumulative
	March 6,		Translation			September 30,
	2008		Adjustments			2008
	(in thousands)
Other intangible assets:
Customer relationships	$	21,482	$	(2,263	)	$	19,219
Developed technology		6,880		(715	)		6,165
Tradename		1,180		(123	)		1,057
Non-compete agreement		990		(103	)		887
Backlog		470		(49	)		421

	$	31,002	$	(3,253	)	$	27,749

The goodwill amount is not subject to amortization. The goodwill balance is included in the Company’s Microcontroller segment. It is tested for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable in accordance with SFAS No. 142. The Company has estimated the fair value of other intangible assets using the income approach and these identifiable intangible assets are subject to amortization. The following table sets forth the components of the identifiable intangible assets subject to amortization as of September 30, 2008, which are being amortized on a straight-line basis:


						Cumulative
						Translation
						Adjustments on
			Accumulated			Accumulated				Estimated
	Gross Value		Amortization			Amortization		Net		Useful Life
	(in thousands, except for years)
Customer relationships	$	19,219	$	(2,478	)	$	236	$	16,977	5 years
Developed technology		6,165		(795	)		76		5,446	5 years
Tradename		1,057		(228	)		22		851	3 years
Non-compete agreement		887		(115	)		11		783	5 years
Backlog		421		(465	)		44		—	< 1 year

	$	27,749	$	(4,081	)	$	389	$	24,057

Customer relationships represent future projected net revenues that will be derived from sales of current and future versions of existing products that will be sold to existing customers. Developed technology represents a combination of processes, patents and trade secrets developed through years of experience in design and development of the products. Tradename represents the Quantum brand that the Company will continue to use to market the current and future capacitive sensing products. Non-compete agreement represents the fair value to the Company from agreements with certain former Quantum executives to refrain from competition for a number of years. Backlog represents committed orders from customers as of the closing date of the acquisition.

The Company recorded the following acquisition-related charges in the condensed consolidated statements of operations in the three and nine months ended September 30, 2008:


	Three Months Ended		Nine Months Ended
	September 30, 2008		September 30, 2008
	(in thousands)
Amortization of intangible assets	$	1,587	$	4,155
In-process research and development		—		1,047
Compensation-related expense — cash		3,213		7,497
Compensation-related expense — shares		1,890		4,411

	$	6,690	$	17,110

The Company recorded amortization of intangible assets of $1,587 and $4,155 associated with customer relationships, developed technology, tradename, non-compete agreements and backlog in the three and nine months ended September, 30, 2008, respectively.

In the three months ended March 31, 2008, the Company recorded a charge of $1,047 associated with acquired in-process research and development (“IPR&D”), in connection with the acquisition of Quantum. No charges were recorded in the three months ended June 30, 2008 and September 30, 2008. The Company’s methodology for allocating the purchase price to IPR&D involves established valuation techniques utilized in the high-technology industry. Each project in process was analyzed by discounted forecasted cash flows directly related to the products expected to result from the subject research and development, net of returns in contributory assets including working capital, fixed assets, customer relationships, trade name, and assembled workforce. IPR&D was expensed upon acquisition because technological feasibility has not been established and no future alternative uses existed. The fair value of technology under development is determined using the income approach, which discounts expected future cash flows to present value. A discount rate of 33% is used for the projects to account for the risks associated with the inherent uncertainties surrounding the successful development of the IPR&D, market acceptance of the technology, the useful life of the technology, the profitability level of such technology and the uncertainty of technological advances, which could impact the estimates recorded. The discount rates used in the present value calculations are typically derived from a weighted-average cost of capital analysis. These estimates did not account for any potential synergies realizable as a result of the acquisition and were in line with industry averages and growth estimates.

The Company agreed to compensate former key executives of Quantum, contingent upon continuing employment over a three year period. The Company has agreed to pay up to $15,049 in cash and issue 5,319 shares of the Company’s common stock valued at $17,285. These amounts are being accrued over the employment period on an accelerated basis. As a result, in the three and nine months ended September 30, 2008, the Company recorded total compensation-related expenses in cash and shares of $5,103 and $11,908, respectively, as disclosed in the table above.

Pro Forma Results

Pro forma consolidated statements of operations information has not been presented because Quantum’s financial results are not material to the Company’s condensed consolidated statements of operations.

Note 3 INVESTMENTS

Investments at September 30, 2008 and December 31, 2007 primarily are comprised of corporate equity securities, U.S. and foreign corporate debt securities, guaranteed variable annuities and auction-rate securities.

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 deemed to be other than temporary are reported within stockholders’ equity on the condensed consolidated balance sheets and as a component of accumulated other comprehensive income. Gross realized gains or losses are recorded based on the specific identification method. During the three and nine months ended September 30, 2008, the Company’s gross realized gain on short-term investments was $37 and $1,326, respectively. The Company’s investments are further detailed in the table below:


	September 30, 2008					December 31, 2007
	Book Value			Fair Value		Book Value			Fair Value
	*(in thousands)*
Corporate equity securities	$	87		$	204	$	87		$	1,542
Auction-rate securities		16,525			15,803		29,075			29,075
Corporate debt securities and other obligations		28,590			29,512		23,817			25,200

	$	45,202		$	45,519	$	52,979		$	55,817

Unrealized gains		1,354					2,900
Unrealized losses		(1,037	)				(62	)

Net unrealized losses		317					2,838

Fair value	$	45,519				$	55,817


Amount included in short-term investments				$	26,702				$	55,817
Amount included in other assets					18,817					—

				$	45,519				$	55,817

At September 30, 2008, the Company had unrealized losses on auction-rate securities of $722. The Company does not believe that the impairment is “other than temporary” due to its ability and intent to hold the securities until they can be liquidated at par value. In the three and nine months ended September 30, 2008 the auctions for the Company’s auction-rate securities have failed and as a result, the securities have become illiquid. The Company concluded that $15,550 (book value) of these securities are unlikely to be liquidated within the next twelve months and classified these securities as long-term investments, which is included in other assets on the condensed consolidated balance sheets. Auction-rate securities of totalling $975 are included in short-term investments as they were redeemed in October 2008.

Contractual maturities (at book value) of debt securities as of September 30, 2008 were as follows:


	(in thousands)
Due within one year	$	23,244
Due in 1-5 years		6,321
Due in 5-10 years		—
Due after 10 years		15,550	*

Total	$	45,115


*		In October 2008, the Company accepted an offer from UBS Financial Services Inc. (“UBS”) to purchase the Company’s eligible auction-rate securities of $12,225 (book value) at par value at any time during a two-year time period from June 30, 2010 to July 2, 2012. As a result of this offer, the Company expects to sell the securities to UBS at par value on June 30, 2010. The remainder of the Company’s auction-rate securities is held with another large financial institution.

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

Note 4 INTANGIBLE ASSETS, NET

Intangible assets, net, consisted of technology licenses and acquisition-related intangible assets as follows:


	September 30,			December 31,
	2008			2007
	(in thousands)
Core/licensed technology	$	84,598		$	102,906
Accumulated amortization		(68,120	)		(83,354	)

Total technology licenses		16,478			19,552


Acquisition-related intangible assets		27,749			—
Accumulated amortization		(3,692	)		—

Total acquisition-related intangible assets		24,057			—

Total intangible assets, net	$	40,535		$	19,552

Amortization expense for technology licenses in the three and nine months ended September 30, 2008 totaled $1,082 and $3,269 respectively and in the three and nine months ended September 30, 2007 totaled $942 and $3,543, respectively. See Note 2 for discussion of amortization of acquisition-related intangible assets in the three and nine months ended September 30, 2008.

The following table presents the estimated future amortization of the technology licenses and acquisition-related intangible assets:


	Technology		Acquisition-Related
	Licenses		Intangible Assets		Total
Years Ending December 31:			(in thousands)
2008 (October 1 through December 31)	$	1,079	$	1,402	$	2,481
2009		4,237		5,606		9,843
2010		3,912		5,606		9,518
2011		3,224		5,313		8,537
2012		3,221		5,254		8,475
Thereafter		805		876		1,681

Total future amortization	$	16,478	$	24,057	$	40,535

Note 5 BORROWING ARRANGEMENTS

Information with respect to Atmel’s debt and capital lease obligations as of September 30, 2008 and December 31, 2007 is shown in the following table:


	September 30,			December 31,
	2008			2007
	(in thousands)
Various interest-bearing notes and term loans	$	2,733		$	6,221
Bank lines of credit		125,000			125,000
Capital lease obligations		18,954			31,658

Total	$	146,687		$	162,879
Less: current portion of long-term debt and capital lease obligations		(131,383	)		(142,471	)

Long-term debt and capital lease obligations due after one year	$	15,304		$	20,408

Maturities of long-term debt and capital lease obligations are as follows:


Years Ending December 31:	(in thousands)
2008 (October 1 through December 31)	$	102,822
2009		32,749
2010		5,797
2011		4,828
2012		1,150
Thereafter		2,733

		150,079
Less: amount representing interest		(3,392	)

Total	$	146,687

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 September 30, 2008, the amount available under this facility was $108,219 based on eligible non-U.S. trade receivables, of which $100,000 was outstanding. Borrowings under the facility bear interest at LIBOR plus 2% per annum (approximately 6.0% at September 30, 2008), while the undrawn portion is subject to a commitment fee of 0.375% per annum. The outstanding balance is subject to repayment in full on the last day of its interest period (every two months). The terms of the facility subject the Company to certain financial and other covenants and cross-default provisions. The Company was in compliance with its covenants as of September 30, 2008. Commitment fees and amortization of up-front fees paid related to the facility in the three and nine months ended September 30, 2008 totaled $232 and $897, respectively, and in the three and nine months ended September 30, 2007 totaled $324 and $1,051, respectively, and are included in interest and other income (expense) net, in the condensed consolidated statements of operations. The outstanding balance under this facility is classified as bank lines of credit in the summary debt table.

In December 2004, the Company established a $25,000 revolving line of credit with a domestic bank, which has been extended until September 2009. The interest rate on the revolving line of credit is either the domestic bank’s prime rate (approximately 5.0% at September 30, 2008) or LIBOR plus 2% (approximately 6.0% at September 30, 2008). In September 2005, the Company obtained a $15,000 term loan from the same bank, which matured at September 30, 2008. The revolving line of credit is secured by the Company’s U.S. trade receivables, and requires the Company to meet certain financial ratios and to comply with other covenants on a periodic basis. The Company was in compliance with its covenants as of September 30, 2008. As of September 30, 2008, the full $25,000 of the revolving line of credit was outstanding and is classified as bank lines of credit in the summary debt table.

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 was collateralized by the financed assets. The balance outstanding under the arrangement was repaid in the quarter ended March 31, 2008. The outstanding balance as of December 31, 2007 of $5,250 was classified as capital lease obligations in the summary debt table.

Of the Company’s remaining $21,687 outstanding debt obligations as of September 30, 2008, $18,954 are classified as capital leases and $2,733 as interest bearing notes in the summary debt table.

Included within the Company’s outstanding debt obligations are $140,912 of variable-rate debt obligations where the interest rates are based on either the Prime Rate, LIBOR index plus 2.0% or the short-term EURIBOR index plus a spread ranging from 0.9% to 2.25%. Approximately $125,000 of the Company’s total debt obligations at September 30, 2008 have cross default provisions.

Note 6 STOCK-BASED COMPENSATION

Option and Employee Stock Purchase Plans

The 2005 Stock Plan was approved by stockholders on May 11, 2005. As of September 30, 2008, 114,000 shares were authorized for issuance under the 2005 Stock Plan, and 35,638 shares of common stock remained available for grant. Under Atmel’s 2005 Stock Plan, Atmel may issue common stock directly, grant options to purchase common stock or grant restricted stock units payable in 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 2005 Stock Plan is set forth below:


							Outstanding Options
									Weighted-
							Exercise		Average
	Available			Number of			Price		Exercise Price
	for Grant			Options			per Share		per Share
	(in thousands, except per share data)
Balances, December 31, 2007		6,104			30,782		$	1.68-$24.44	$	5.81
Restricted stock units issued		(635	)		—			—		—
Options granted		(1,463	)		1,463			3.27-3.41		3.31
Options cancelled/expired/forfeited		963			(963	)		1.98-21.47		5.35
Options exercised		—			(303	)		3.00-4.32		2.09

Balances, March 31, 2008		4,969			30,979		$	1.68-24.44	$	5.73
Authorized additional available for grant		58,000			—			—		—
Restricted stock units issued		(138	)		—			—		—
Adjustment for restricted stock unit issued		(107	)		—			—		—
Options granted		(1,258	)		1,258			3.24-4.37		3.58
Options cancelled/expired/forfeited		1,072			(1,072	)		1.98-20.19		7.97
Options exercised		—			(595	)		1.77-3.70		2.36

Balances, June 30, 2008		62,538			30,570		$	1.68-24.44	$	5.63
Restricted stock units issued		(7,141	)		—			—		—
Performance-based restricted stock units issued		(7,020	)		—			—		—
Adjustment for restricted stock unit issued		(11,045	)		—			—		—
Options granted		(2,423	)		2,423			3.32-4.20		4.00
Options cancelled/expired/forfeited		729			(729	)		2.11-17.13		5.53
Options exercised		—			(244	)		1.68-3.70		2.29

Balances, September 30, 2008		35,638			32,020		$	1.68-24.44	$	5.53

Restricted stock units are granted from the pool of options available for grant. On May 14, 2008, the Company’s stockholders approved an amendment to its 2005 Stock Plan whereby every share underlying restricted stock, restricted stock units, and stock purchase rights issued on or after May 14, 2008 will be counted against the numerical limit for options available for grant as 1.78 shares in the table above. If shares issued pursuant to any restricted stock, restricted stock units, and stock purchase rights are forfeited or repurchased by the Company and would otherwise return to the 2005 Stock Plan, 1.78 times the number of shares will return to the plan and will again become available for issuance. The Company issued 14,299 restricted stock units from May 14, 2008 to September 30, 2008, resulting in a reduction of 25,451 shares available for grant under the 2005 Stock Plan.

Restricted Stock Units


	Number of
	Shares
	(in thousands)
Balances, December 31, 2007		3,968
Restricted stock units issued		635
Restricted stock units vested		(88	)

Balances, March 31, 2008		4,515
Restricted stock units issued		138
Restricted stock units vested		(63	)

Balances, June 30, 2008		4,590
Restricted stock units issued		7,141
Performance-based restricted stock units issued		7,020
Restricted stock units vested		(124	)

Balances, September 30, 2008		18,627

Three Months Ended

Nine Months Ended

September 30,

Weighted Average

Number of

Fair Value

Number of

Fair Value

Shares

Per Share

Shares

Per Share

(in thousands, except per share data)

Restricted stock units issued

7,141

4.03

7,914

3.98

Performance-based restricted stock units issued

7,020

3.94

7,020

3.94

During the three and nine months ended September 30, 2008, 225 and 376 restricted stock units vested, respectively, including 101 shares withheld for taxes, respectively. These vested restricted stock units had a weighted-average fair value of $4.17 and $3.95, respectively, on the vesting dates. As of September 30, 2008, total unearned stock-based compensation related to nonvested restricted stock units previously granted was approximately $73,132, excluding forfeitures, and is expected to be recognized over a weighted-average period of 3.40 years. In the three and nine months ended September 30, 2007, 1,000 restricted stock units were issued. In the three months ended September 30, 2007, 250 restricted stock units vested with a fair value of $1,220.

In the three months ended September 30, 2008, the Company issued performance-based restricted stock units to eligible employees for a maximum of 7,020 shares of the Company’s common stock under the 2005 Stock Plan. These restricted stock units vest only if the Company achieves certain quarterly operating margin performance criteria over the performance period of July 1, 2008 to December 31, 2011. Until the performance-based restricted stock units are vested, they do not have the voting rights of common stock and the shares underlying the awards are not considered issued and outstanding. The Company recognizes the stock-based compensation expense for its performance-based restricted stock units based on the probability of achieving the quarterly operating margin performance criteria. The Company recorded stock-based compensation expense of $513 in the three and nine months ended September 30, 2008 in connection with these performance shares.

Stock Options

The following table summarizes the stock options outstanding at September 30, 2008:


Options Outstanding									Options Exercisable
(in thousands, except for price and term 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 - 3.24		3,876		5.71	$	2.46	$	3,608		2,845		4.50	$	2.22	$	3,330
3.26 - 3.32		3,686		8.04		3.30		323		1,230		7.12		3.29		117
3.33 - 4.70		3,298		8.33		4.19		1		751		3.71		4.05		1
4.74 - 4.89		4,583		8.52		4.79		—		1,570		8.31		4.81		—
4.92 - 5.32		3,214		8.21		5.02		—		1,002		7.35		5.04		—
5.55 - 5.75		4,525		6.42		5.73		—		2,509		5.36		5.73		—
5.85 - 6.27		813		6.29		6.02		—		533		5.25		6.01		—
6.28 - 6.28		3,348		8.21		6.28		—		1,196		8.21		6.28		—
6.47 - 12.13		3,284		2.94		8.60		—		3,273		2.91		8.61		—
12.47 - 24.44		1,393		1.63		16.81		—		1,393		1.63		16.81		—

		32,020		6.81	$	5.53	$	3,932		16,302		5.07	$	6.30	$	3,448

During the three and nine months ended September 30, 2008, the number of stock options that were exercised was 244 and 1,142, respectively, which had an aggregate intrinsic value of $412 and $1,945, respectively on the date of exercise. During the three and nine months ended September 30, 2007, the number of stock options exercised totaled 2,928 and 3,152, respectively, which had an aggregate intrinsic value of $8,698 and $9,353, respectively on the date of exercise.

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						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007
Risk-free interest rate		3.10	%		4.25	%		3.00	%		4.34	%
Expected life (years)		5.79			5.64			5.58			5.70
Expected volatility		54	%		58	%		55	%		59	%
Expected dividend yield		—			—						—

The Company’s weighted-average assumptions in the three and nine months ended September 30, 2008 and 2007 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 and nine months ended September 30, 2008 were $2.13 and $1.95 per share, respectively. The weighted-average estimated fair values of options granted in the three and nine months ended September 30, 2007 were $2.74 and $2.88 per share, respectively.

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 percent of an employee’s eligible compensation. There were 2,431 shares purchased under the ESPP in the nine months ended September 30, 2008 at an average price of $3.02 per share. Of the 42,000 shares authorized for issuance under this plan, 6,890 shares were available for issuance at September 30, 2008. There were 1,269 shares purchased under the ESPP in the three months ended September 30, 2008, at an average price of $2.91, and none during the three and nine months ended September 30, 2007.

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. The following assumptions were utilized to determine the fair value of the Company’s ESPP shares:


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007
Risk-free interest rate		2.07	%		4.09	%		2.08	%		4.09	%
Expected life (years)		0.50			0.50			0.50			0.50
Expected volatility		40	%		34	%		39	%		34	%
Expected dividend yield		—			—			—			—

The weighted-average fair value of the rights to purchase shares under the ESPP for offering periods started in the three and nine months ended September 30, 2008 was $0.76 and $0.75, respectively. Cash proceeds for the issuance of shares under the ESPP was $3,689 and $7,332, respectively in the three and nine months ended September 30, 2008.

The components of the Company’s stock-based compensation expense, net of amounts capitalized in or liquidated from inventory, in the three and nine months ended September 30, 2008 and 2007, are summarized below:


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007
				(in thousands)
Employee stock options	$	3,837		$	3,097		$	11,211		$	9,651
Employee stock purchase plan		413			205			1,307			205
Restricted stock units		3,369			1,648			7,815			1,648
Amounts (capitalized in) liquidated from inventory		(193	)		(57	)		(247	)		2

	$	7,426		$	4,893		$	20,086		$	11,506

The table above excluded stock compensation-related charges of $1,890 and $4,411 included in acquisition-related charges in the three and nine months ended September 30, 2008, respectively.

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 in the three and nine months ended September 30, 2008 and 2007, 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, restricted stock units and employee stock purchases under SFAS No. 123R in the three and nine months ended September 30, 2008 and 2007:


	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2008		2007		2008		2007
			(in thousands)
Cost of revenues	$	1,087	$	487	$	2,908	$	1,488
Research and development		3,059		647		8,569		2,136
Selling, general and administrative		3,280		3,759		8,609		7,882

Total stock-based compensation expense, before income taxes		7,426		4,893		20,086		11,506
Tax benefit		—		—		—		—

Total stock-based compensation expense, net of income taxes	$	7,426	$	4,893	$	20,086	$	11,506

The table above excluded stock compensation-related charges of $1,890 and $4,411 included in acquisition-related charges in the three and nine months ended September 30, 2008, respectively.

There was no non-employee stock-based compensation expense in the three and nine months ended September 30, 2008 and 2007.

As of September 30, 2008, total unearned compensation expense related to nonvested stock options was approximately $37,061, excluding forfeitures, and is expected to be recognized over a weighted-average period of 1.69 years.

Note 7 ACCUMULATED OTHER COMPREHENSIVE INCOME

Comprehensive income 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 and comprehensive income for Atmel arises from foreign currency translation adjustments, unrealized pension gains and losses and unrealized gains on investments.

The components of accumulated other comprehensive income at September 30, 2008 and December 31, 2007, net of tax, are as follows:


	September 30,		December 31,
	2008		2007
	(in thousands)
Foreign currency translation	$	132,685	$	149,127
Actuarial gains related to defined benefit pension plans		5,540		1,175
Net unrealized gains on investments		317		2,838

Total accumulated other comprehensive income	$	138,542	$	153,140

The components of comprehensive income in the three and nine months ended September 30, 2008 and 2007 are as follows:


	Three Months Ended					Nine Months Ended
	September 30,			September 30,		September 30,			September 30,
	2008			2007		2008			2007
				(in thousands)
Net (loss) income	$	(4,738	)	$	16,553	$	(2,857	)	$	46,171

Other comprehensive income:
Foreign currency translation adjustments		(51,851	)		11,905		(16,442	)		26,178
Actuarial gain related to defined benefit pension plans		3,846			3,357		4,365			6,227
Unrealized (losses) gains on investments		(487	)		137		(2,521	)		91

Other comprehensive (loss) income		(48,492	)		15,399		(14,598	)		32,496

Total comprehensive (loss) income	$	(53,230	)	$	31,952	$	(17,455	)	$	78,667

The change in foreign currency translation adjustments in the nine months ended September 30, 2008, compared to September 30, 2007, was primarily due to translation adjustments resulting from the significant change in the Euro/U.S. Dollar exchange rate.

Note 8 COMMITMENTS AND CONTINGENCIES

Commitments

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.

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.

Purchase Commitments

At September 30, 2008, the Company had outstanding capital purchase commitments of $2,905. The Company also has a supply agreement obligation with a subsidiary of XbyBus SAS, a French corporation, of $2,510 for wafer purchases through the remainder of 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.

In August 2006, the Company received Information Document Requests from the Internal Revenue Service (“IRS”) regarding the Company’s investigation into misuse of corporate travel funds and investigation into backdating of stock options. 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 them. Other IRS matters are discussed in the section regarding Income Tax Contingencies.

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. On defendants’ motions, this consolidated amended complaint was dismissed with leave to amend, and a second consolidated amended complaint was filed in August 2007. Atmel and the individual defendants have each moved to dismiss the second consolidated amended complaint on various grounds. The motions have been argued and taken under submission by the Court. On February 20, 2008, a seventh stockholder derivative lawsuit was filed in the U.S. District Court for the Northern District of California, which alleges the same causes of action as alleged in the second consolidated amended complaint. This seventh suit was consolidated with the already-pending consolidated federal action and was served on the Company on May 5, 2008. 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. In June 2008, the federal district court denied the Company’s motion to dismiss for failure to make a demand on the board, and granted in part and denied in part motions to dismiss filed by the individual defendants. Discovery in the case has not yet commenced and no trial date has been set.

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. A hearing took place in October 2007 and in February 2008, and the court appointed an additional, professional judge to decide the matter. Atmel repleaded this matter in June 2008. On July 24, 2008, the court issued an oral ruling in favor of the Company denying the claim for social benefits. Forty of the plaintiffs appealed, and the court has not yet set a schedule for the appeal. Atmel believes that the filing of this action is without merit and intends to vigorously defend this action.

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 early 2008, the parties each filed motions seeking summary judgment, and by Order dated May 5, 2008, the Court granted AuthenTec’s motion for summary judgment of noninfringement. On July 14 2008, the parties filed a stipulation and proposed order of conditional dismissal. This matter has since been dismissed. A related suit, initially filed in the Middle District of Florida, was transferred to the court where this suit was pending, and was also dismissed at the same time as Atmel’s suit.

On September 28, 2007, Matheson Tri-Gas filed suit in Texas state court in Dallas County against the Company. Plaintiff alleges a claim for breach of contract for alleged failure to pay minimum payments under a purchase requirements contract. Matheson seeks unspecified damages, pre- and post-judgment interest, attorneys’ fees and costs. In late November 2007, Atmel filed its answer denying liability. In July 2008, the Company filed an amended answer, counterclaim and cross claim seeking among other things a declaratory judgment that a termination agreement has cut off any claim by Matheson for additional payments. The Company believes that Matheson’s claims are without merit and intends to vigorously defend this action.

On January 23, 2008, Isamtek MG (1999) Ltd filed suit in the District Court in Petach Tikva, Israel against Atmel SARL and two other defendants. Isamtek has alleged that Atmel breached its distributor agreement with Isamtek and has alleged a breach of duty of care in tort and interference with contractual by the other defendants. Isamtek seeks monetary and declaratory relief as well as presentation of accounts. The parties have agreed to participate in mediation, and the case has been stayed pending mediation.

On December 21, 2005, the Company’s recently-acquired subsidiary, Quantum Research Group, Ltd (“QRG”), filed suit against Apple Computer Company, Inc. (“Apple”) and Fingerworks, Ltd (“Fingerworks”) in the United States District Court for the District of Maryland, alleging infringement of U.S. Patent No. 5,730,165 (“the ‘165 Patent”) and, on May 11, 2006, QRG filed an Amended Complaint adding Cypress Semiconductor/MicroSystems, Inc. (“Cypress”) as a defendant and asserting additional claims for Defamation, False Light, and Unfair Competition against Cypress. On or about July 31, 2006, Apple and Fingerworks each filed its Answer denying infringement and asserting counterclaims seeking a declaratory judgment of non-infringement and invalidity, as well as an award of costs and attorneys’ fees under 35 U.S.C. Section 285. During the third quarter, the parties reached a settlement agreement, and the case has been dismissed.

marketplace” in an effort to create an active auction for Atmel, including but not limited to by negotiation with Microchip and ON; act independently so that the interests of Atmel’s shareholders will be protected; and adequately ensure that no conflicts of interest exist. The complaint asks further for an order requiring the individual defendants to “place the Company up for auction and/or to conduct a market-check” and requiring full and fair disclosure of the material facts to shareholders before completing any acquisition; a declaration that the individual defendants have breached their fiduciary duties; and an award of fees, expenses and costs to plaintiff and plaintiff’s counsel.

On October 13, 2008, a separate class action complaint was filed in Delaware Chancery Court against the Company and all of the members of the current board relating to the proposed acquisition of Atmel by Microchip Technology and ON Semiconductor. This complaint also alleges that the proposed acquisition price is a premium over the current share price, but says the proposed acquisition is an attempt “to take advantage of the artificially low trading price of Atmel’s stock.” The case does not delineate a cause of action, but makes breach of fiduciary duty allegations. The complaint alleges that the individual defendants have fiduciary duties to: undertake an appropriate evaluation of Atmel’s worth as an acquisition candidate; actively evaluate the proposed transaction and engage in a meaningful auction with third parties in an attempt to obtain the best value; structure the proposed transaction in a fair and non-coercive manner; refrain from favoring the individual defendants’ interests over those of the company’s minority, public shareholders; and disclose all material facts necessary to permit the shareholders to make an informed decision. The complaint seeks an order that would preliminarily and permanently enjoin defendants from consummating or closing the proposed transaction; rescind the transaction in the event it is closed and award rescission-type damages to plaintiffs; direct defendants to account to plaintiff for their damages sustained because of the wrongs complained of; and award attorneys fees, expert fees and costs.

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

Other Contingencies

The Company investigated a transaction from 2001 involving its Greek subsidiary (which was substantially shut down in 2007). The transaction was with an entity that was not a legitimate third-party vendor, and was entered into for an inappropriate purpose. Based on the results of its investigation, the Company has determined that its consolidated financial results did not require adjustment as a result of this transaction. The Company also determined that none of the individuals involved in the transaction are currently employed by the Company, and further, that pertinent controls have been revised or put in place since the time of the transaction. The Company voluntarily disclosed the investigation of the circumstances surrounding the transaction, and the results of that investigation, to the Department of Justice (“DOJ”) and the Securities and Exchange Commission (“SEC”). The DOJ has not indicated any intent to pursue further inquiry, and the SEC’s Division of Enforcement has terminated its investigation and has indicated that it is not taking further action.

In October 2008, officials of the European Union Commission (the “Commission”) conducted an inspection at the offices of one of the Company’s French subsidiaries. The Company has been informed that the Commission was seeking evidence of potential violations by Atmel or its subsidiaries of the European Union’s competition laws in connection with the Commission’s investigation of suppliers of integrated circuits for smart cards. The Company is cooperating with the Commission’s investigation and has not received any specific findings, monetary demand or judgment through the date of filing. The Company is not aware of any evidence identified as of the date of filing that would allow management to conclude that there has been a probable violation of the relevant articles of the EC Treaty or EEA Agreement resulting from the acts of any of the current or prior employees of the Company. As a result, the Company has not recorded any provision in its financial statements related to this matter.

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 U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”). Products and technology exported from other countries may also be subject to local laws and regulations governing international trade. Under these laws, the Company is responsible for obtaining all necessary licenses or other approvals, if required, for exports of hardware, technical data, and software, or for the provision of technical assistance. The Company is also required to obtain export licenses, if required, prior to transferring technical data or software to foreign persons. In addition, the Company is required to obtain necessary export licenses prior to the export or re-export of products, software, and technology (i) to any person, entity, organization or other party identified on the U.S. Department of Commerce Denied Persons or Entity List, the U.S. Department of Treasury’s Specially Designated Nationals or Blocked Persons List, or the Department of State’s Debarred List; or (ii) for use in nuclear, chemical/biological weapons, or rocket systems or unmanned air vehicle applications. A determination by the U.S. or local government that the Company has failed to comply with one or more of these export control laws or trade sanctions, including failure to properly restrict an export to the persons, entities or countries set forth on the government restricted party lists, 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. Further, a change in

these laws could restrict our ability to export to previously permitted countries, customers, distributors, or other third parties. Any one or more of these sanctions or a change in law 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 carry back 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 addressing the matter with the IRS Appeals Division.

In May 2007, the IRS completed its audit of the Company’s U.S. income tax returns in the years 2002 and 2003 and has proposed various adjustments to these income tax returns. The Company has protested all of these proposed various adjustments and is currently addressing the matter with the IRS Appeals Division.

The income tax returns for the Company’s subsidiary in Rousset, France in the 2003, 2004 and 2005 tax years are currently under examination by the French tax authorities. The examination has resulted in an 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.

In addition, the Company has tax audits in progress in various foreign jurisdictions.

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. The Company recognizes tax liabilities based upon its estimate of whether, and the extent to which, additional taxes will be due when such estimates are more-likely-than-not to be sustained. An uncertain tax position will not be recognized if it has less than a 50% likelihood of being sustained. To the extent the final tax liabilities are different than the amounts originally accrued, the increases or decreases are recorded as income tax expense or benefit in the condensed consolidated statements of operations. Income taxes and related interest and penalties due for potential adjustments 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.

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 nine months ended September 30, 2008 and 2007:


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007
				(in thousands)
Balance at beginning of period	$	6,804		$	5,318		$	6,789		$	4,773
Accrual for warranties during the period, net of change in estimates		738			2,275			4,146			5,873
Actual costs incurred		(1,347	)		(1,708	)		(4,740	)		(4,761	)

Balance at end of period	$	6,195		$	5,885		$	6,195		$	5,885

Product warranty liability is included in accrued and other liabilities on the condensed consolidated balance sheets.

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 the Company or its subsidiaries. As of September 30, 2008, the maximum potential amount of future payments that the Company could be required to make under these guarantee agreements is approximately $2,050. 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 9 INCOME TAXES

In the three and nine months ended September 30, 2008, the Company recorded an income tax benefit of $4,052 and an income tax provision of $3,442 respectively, compared to an income tax provision of $10,135 and $2,038 in the three and nine months ended September 30, 2007, respectively.

The provision for income taxes for these periods was first 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.

Other than the items noted as follows, there were no significant changes in estimates or provision for income taxes in the nine months ended September 30, 2008:

The sale of assets and restructuring charges of a foreign subsidiary as well as in-process research and development costs of Quantum Research Group were treated as discrete events in a previous quarter. Due to a full valuation allowance position in these jurisdictions, there is no tax provision impact associated with these discrete events in the three and nine months ended September 30, 2008.

At December 31, 2007, there was no provision for U.S. income tax for undistributed earnings, as it was the Company’s intention to reinvest these earnings indefinitely in operations outside the U.S. For 2008, the Company determined that it would require a transfer of funds to the U.S. from select foreign subsidiaries. As such, for 2008, the Company changed its position to no longer assert permanent reinvestment of undistributed earnings for certain foreign entities, which is expected to increase the Company’s tax provision in 2008 by approximately $1,848.

The Company recognized tax benefits of $6,610 and $9,833 in the three and nine months ended September 30, 2008, respectively, resulting from the refund of unutilized French research tax credits for its 2003 and 2004 fiscal years, which were received during 2008.

The “Emergency Economic Stabilization Act of 2008,” which contains the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008”, was signed into law on October 3, 2008. Under the Act, the tax research credit was retroactively extended for amounts paid or incurred after December 31, 2007 and before January 1, 2010. The Company is currently in the process of analyzing the impact of the new law on its financial statements. The potential effects of the changes would be recognized in the fourth quarter as an increase to the deferred tax assets with a corresponding increase to the valuation allowance.

On September 30, 2008, California enacted Assembly Bill 1452 which among other provisions, suspends net operating loss deductions for 2008 and 2009 and limits the utilization of tax credits to 50 percent of a taxpayer’s taxable income. The Company expects the impact to its effective tax rate as the result of this law change to be immaterial.

In 2005, the Internal Revenue Service (“IRS”) completed its audit of the Company’s U.S. income tax returns in the 2000 and 2001 fiscal years. 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 addressing the matter with the IRS Appeals Division.

In May 2007, the IRS completed its audit of the Company’s U.S. income tax returns in the years 2002 and 2003 fiscal years and has proposed various adjustments to these income tax returns. The Company has protested all of these proposed adjustments and is currently addressing the matter with the IRS Appeals Division.

In addition, the Company has tax audits in progress in various 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 tax years in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).

While the Company believes that the resolution of these audits is not expected to 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 tax authorities on the various proposed adjustments, there exists the possibility of an adverse material impact on the results of the operations, cash flows and financial position of the Company.

On January 1, 2007, the Company adopted 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. At December 31, 2007, the Company had $166,180 of unrecognized tax benefits. During the nine months ended September 30, 2008, the Company had changes in unrecognized tax benefits of $4,786 related primarily to the tax refund for French research tax credits as noted above. Additionally, during the three months ended June 30, 2008, as a result of ongoing discussions with foreign tax authorities related to open audits, the Company remeasured its FIN 48 reserve amounts and recorded an adjustment to unrecognized tax benefits of $20,500. This adjustment was a decrease to foreign net operating loss carry forwards with a corresponding adjustment to the valuation allowance. This change had no impact on income tax provision.

Additionally, the Company believes that it is reasonably possible that the IRS audit may be resolved within the next twelve months. However, because of the continuing uncertainty regarding the resolution of the various issues under audit, the Company is not able to accurately estimate a possible range of the change to the reserve for the uncertain tax positions.

The Company’s continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Interest and penalties of $5,725 have been expensed in the nine months ended September 30, 2008, related to uncertain tax positions.

Note 10 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.

Retirement 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 in the three and nine months ended September 30, 2008 and 2007 are as follows:


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,		September 30,
	2008			2007			2008		2007
	(in thousands)
Service costs-benefits earned during the period	$	497		$	660		$	1,570	$	1,955
Interest cost on projected benefit obligation		735			621			2,230		1,832
Amortization of actuarial (gain) loss		(26	)		(75	)		73		108

Net pension cost	$	1,206		$	1,206		$	3,873	$	3,895

Interest cost on projected benefit obligation increased to $735 and $2,230 in the three and nine months ended September 30, 2008, respectively, from $621 and $1,832 in the three and nine months ended September 30, 2007, respectively, primarily due to an increase in interest rates in Germany to 7.1% in the three and nine months ended September 30, 2008, compared to 5.6% in the three and nine months ended September 30, 2007.

The Company made $700 of benefit payments during the nine months ended September 30, 2008. The Company expects to make $1,664 in benefit payments in 2008.

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 2008, a decrease in the exchange rate assumptions used to calculate the present value of the pension obligation resulted in a decrease in the pension liability of approximately $5,071 in the nine months ended September 30, 2008. This decrease in liability was offset in part by an increase in discount rate. This resulted in an increase of $3,846 and $4,365, net of tax, to accumulated other comprehensive income in stockholders’ equity in the condensed consolidated balance sheets in the three and nine months ended September 30, 2008, in accordance with SFAS No. 158, “Employers’ Accounting for Defined Benefit Pension and Other

Postretirement Plans.” In connection with the sale of Heilbronn manufacturing operations (see Note 12) and restructuring initiatives in Rousset, France (see Note 13), the Company expects to record a curtailment gain for the employees to be transferred to the buyer or terminated in the three months ending December 31, 2008.

Note 11 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 consists of 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. This segment also includes products with military and aerospace applications. In the nine months ended September 30, 2008, the Company acquired Quantum. Results from the acquired operations are considered complementary to sales of microcontroller products and are included in this segment.

	•		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 interface 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 acquisition-related charges, charges for grant repayments, restructuring charges, asset impairment charges, and gain on sale of assets. 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. Segments are defined by the products they design. 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. The Company’s net revenues and segment (loss) income from operations for each reportable segment in the three and nine months ended September 30, 2008 and 2007 are as follows:

Information about Reportable Segments


			Micro-		Nonvolatile		RF and
	ASIC		Controllers		Memories		Automotive		Total
	(in thousands)
Three months ended September 30, 2008
Net revenues from external customers	$	114,657	$	129,755	$	91,760	$	63,836	$	400,008
Segment income from operations		2,026		13,444		11,656		3,129	$	30,255
Three months ended September 30, 2007
Net revenues from external customers	$	128,200	$	118,610	$	96,829	$	74,458	$	418,097
Segment income from operations		1,430		11,560		7,034		6,883	$	26,907


				Micro-		Nonvolatile		RF and
	ASIC			Controllers		Memories		Automotive		Total
	(in thousands)
Nine months ended September 30, 2008
Net revenues from external customers	$	350,210		$	403,124	$	274,448	$	204,371	$	1,232,153
Segment (loss) income from operations		(9,625	)		35,598		31,351		5,781	$	63,105
Nine months ended September 30, 2007
Net revenues from external customers	$	363,695		$	337,251	$	271,969	$	240,742	$	1,213,657
Segment (loss) income from operations		(21,431	)		19,822		30,238		17,352	$	45,981

Reconciliation of Segment Information to Condensed Consolidated Statements of Operations


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007
	(in thousands)
Total segment income from operations	$	30,255		$	26,907		$	63,105		$	45,981
Unallocated amounts:
Acquisition-related charges		(6,690	)		—			(17,110	)		—
Charges for grant repayments		(291	)		(1,189	)		(464	)		(1,189	)
Restructuring charges		(26,625	)		(1,386	)		(63,209	)		(528	)
Asset impairment (charges) recovery		(7,969	)		1,057			(7,969	)		1,057
Gain on sale of assets		—			—			29,948			—

Consolidated (loss) income from operations	$	(11,320	)	$	25,389		$	4,301		$	45,321

Geographic sources of revenues were as follows:


	Three Months Ended				Nine Months Ended
	September 30,		September 30,		September 30,		September 30,
	2008		2007		2008		2007
	(in thousands)
United States	$	53,146	$	59,140	$	170,924	$	165,138
Germany		73,390		58,224		204,751		169,425
France		30,588		39,781		111,570		116,222
United Kingdom		4,331		7,292		14,966		23,912
Japan		16,638		23,147		60,594		71,086
China, including Hong Kong		96,405		96,346		278,003		266,614
Singapore		20,722		35,792		79,641		119,771
Rest of Asia-Pacific		53,802		54,810		168,849		147,834
Rest of Europe		45,410		37,648		125,389		118,407
Rest of the World		5,576		5,917		17,466		15,248

Total net revenues	$	400,008	$	418,097	$	1,232,153	$	1,213,657

Net revenues are attributed to countries based on delivery locations. Net revenues and income from operations in the three and nine months ended September 30, 2008 reflect the impact of the change in revenue recognition timing for certain of the Company’s European distributors, as a result of a change to contract terms in effect from July 1, 2008.

No single customer accounted for more than 10% of net revenues in the three and nine months ended September 30, 2008 and 2007.

Locations of long-lived assets as of September 30, 2008 and December 31, 2007 were as follows:


	September 30,		December 31,
	2008		2007
	(in thousands)
United States	$	127,721	$	137,334
Germany		24,186		34,337
France		214,662		268,358
United Kingdom		9,027		106,651
Asia-Pacific		32,723		28,541
Rest of Europe		14,753		17,756

Total	$	423,072	$	592,977

Excluded from the table above for September 30, 2008 and December 31, 2007 are auction-rate securities of $14,828 and $0, respectively, which are included in other assets on the condensed consolidated balance sheets. Also excluded from the table above as of September 30, 2008 and December 31, 2007 are goodwill of $58,005 and $0, respectively, intangible assets of $40,535 and $19,552, respectively, deferred tax assets of $4,308 and $5,006, respectively, and assets held-for-sale of $2,357 and $0, respectively.

Note 12 GAIN ON SALE OF ASSETS AND ASSET IMPAIRMENT CHARGES

Under 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, including assets not available for immediate sale in their present condition. The Company reports assets 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. Assets classified as held for sale are not depreciated.

Heilbronn, Germany and North Tyneside, United Kingdom

The Company announced its intention to sell its fabrication facility in Heilbronn, Germany in December 2006. Subsequently, the Company decided to sell only the manufacturing operations related to the fabrication facility. In the three months ended September 30, 2008, the Company entered into an agreement to sell the manufacturing operations to Tejas Silicon Holding Limited (“TSI”). TSI will be acquiring from the Company certain fixed assets and inventory while assuming certain employee-related liabilities, including pension obligations, and trade taxes. In connection with the sale, the Company will license certain process technology to TSI and TSI will assume the pension liability at a lower value. The Company will purchase from TSI a certain amount of wafers for five years (first three years with minimum annual purchase commitment) starting from the closing date of the sale. The total proceeds from the sale are expected to be nominal as the balance of the liabilities that TSI will assume approximate the value of the assets and rights to the license for process technology it will acquire from the Company. The Company has classified the assets and liabilities of the Heilbronn manufacturing operations as held for sale as of September 30, 2008. The assets and liabilities held for sale are carried on the condensed consolidated balance sheets at the lower of carrying amount or fair value, less cost to sell. The fixed assets are no longer depreciated as of September 30, 2008. Therefore, the Company recorded an impairment loss of $7,969 in the three months ended September 30, 2008, consisting of $3,025 for the net book value of the fixed assets and $4,944 for selling costs related to legal, commissions and other direct incremental costs. The sale of the Heilbronn manufacturing operations does not qualify as discontinued operations as the operations and future cash flows will not be eliminated from the Company’s RF and Automotive segment. The Company expects to have continuing involvement in the operations of the Heilbronn fabrication facility.

The following table details the items which are reflected as assets and liabilities held for sale in the condensed consolidated balance sheet as of September 30, 2008:


	Heilbronn
	(in thousands)
Current assets
Inventory	$	9,990
Prepaid and other current assets		547

Total current assets held for sale		10,537
Non-current assets
Fixed assets, net		2,357

Total non-current assets held for sale		2,357

Total assets held for sale	$	12,894

Current Liabilities
Payroll related	$	3,221
Trade tax		1,780
Others		367

Total current liabilities held for sale		5,368
Pension liability		23,986

Total non-current liabilities held for sale		23,986

Total liabilities held for sale	$	29,354

On October 8, 2007, the Company entered into definitive agreements to sell certain wafer fabrication equipment and land and buildings at North Tyneside to TSMC and Highbridge for a total of approximately $124,000. The disposal group previously classified as held for sale included all assets (excluding cash and inventory) and liabilities of the North Tyneside legal entity. Upon entering into the agreements noted above, the Company determined that certain equipment and all of the related liabilities were no longer included in the disposal group as they were not being acquired or assumed by the buyer. As a result, the Company reassessed whether the assets to be sold in this transaction continued to meet the criteria for classification as held for sale as of September 30, 2007. The Company concluded that the assets to be sold under the above agreements were no longer available for immediate sale in their present condition as the terms of the these agreements require the Company to perform significant additional steps, including the dismantling, decommissioning and testing of the wafer fabrication equipment before TSMC will accept transfer of title of the purchased equipment, as well as the delivery of a vacated building to Highbridge. The Company recognized a gain of $29,948 for the sale of the equipment in the nine months ended September 30, 2008. The Company received proceeds of $42,951 ($47,414 due to cumulative translation adjustments) from Highbridge for the closing of the real property portion of the transaction in November 2007. The Company vacated the facility in May 2008. The gain recognized in the three months ended March 31, 2008 was primarily related to the $81,849 proceeds the Company received from the sale of its fabrication equipment from its North Tyneside, UK facility.

Note 13 RESTRUCTURING CHARGES

The following table summarizes the activity related to the accrual for restructuring and other charges and loss on sale detailed by event in the three and nine months ended September 30, 2008 and 2007, respectively.


	January 1,							Currency		March 31,							Currency			June 30,								Currency			September 30,
	2008							Translation		2008							Translation			2008		Charges						Translation			2008
	Accrual		Charges		Payments			Adjustment		Accrual		Charges		Payments			Adjustment			Accrual		(Credits)			Payments			Adjustment			Accrual
	(in thousands)
Third quarter of 2002
Termination of contract with supplier	$	1,592	$	—	$	—		$	—	$	1,592	$	—	$	—		$	—		$	1,592	$	—		$	—		$	—		$	1,592	(2)

Fourth quarter of 2006
Employee termination costs		1,324		17		(767	)		78		652		14		(131	)		(1	)		534		(255	)		(228	)		(5	)		46

Fouth quarter of 2007
Employee termination costs		12,759		1,106		(7,527	)		559		6,897		325		(7,222	)		—			—		—			—			—			—

Termination of contract with supplier		—		11,636		(493	)		780		11,923		570		(10,475	)		33			2,051		—			(2,051	)		—			—

Other exit related costs		—		15,149		(5,766	)		892		10,275		4,974		(14,546	)		13			716		521			(1,023	)		—			214

Second quarter of 2008
Employee termination costs		—		—		—			—		—		2,793		(591	)		4			2,206		334			(1,029	)		(183	)		1,328

Third quarter of 2008
Employee termination costs		—		—		—			—		—		—		—			—			—		26,025			(473	)		(1,578	)		23,974	(1)

Total 2008 activity	$	15,675	$	27,908	$	(14,553	)	$	2,309	$	31,339	$	8,676	$	(32,965	)	$	49		$	7,099	$	26,625		$	(4,804	)	$	(1,766	)	$	27,154


	January 1,							Currency		March 31,								Currency		June 30,							Currency		September 30,
	2007							Translation		2007		Charges						Translation		2007							Translation		2007
	Accrual		Charges		Payments			Adjustment		Accrual		(Credits)			Payments			Adjustment		Accrual		Charges		Payments			Adjustment		Accrual
	(in thousands)
Third quarter of 2002

Termination of contract with supplier	$	8,896	$	—	$	(249	)	$	—	$	8,647	$	(3,071	)	$	(3,984	)	$	—	$	1,592	$	—	$	—		$	—	$	1,592
Fourth quarter of 2005

Nantes fabrication facility sale		115		—		—			—		115		(27	)		—			—		88		—		(90	)		2		—

Fouth quarter of 2006
Employee termination costs		7,490		1,782		(1,743	)		41		7,570		458			(3,899	)		111		4,240		1,386		(3,094	)		284		2,816

Total 2007 activity	$	16,501	$	1,782	$	(1,992	)	$	41	$	16,332	$	(2,640	)	$	(7,883	)	$	111	$	5,920	$	1,386	$	(3,184	)	$	286	$	4,408


(1)		Accrued restructuring charges are classified within accrued and other liabilities on the condensed consolidated balance sheets and are expected to be paid prior to September 30, 2009.

(2)		Relates to contractual obligation subject to litigation.

2008 Restructuring Charges

In the three and nine months ended September 30, 2008, the Company incurred restructuring charges of $26,625 and $63,209, respectively, as the Company continued to implement additional restructuring actions to improve operational efficiencies and reduce costs.

The Company incurred restructuring charges related to the signing of definitive agreements in October 2007 to sell certain wafer fabrication equipment and real property at North Tyneside to TSMC and Highbridge. As a result of this action, this facility was closed and all of the employees of the facility were terminated by June 30, 2008. During the three and nine months ended September 30, 2008, the Company recorded the following restructuring charges (credits):

	•		Charges of $0 and $1,462 in the three and nine months ended September 30, 2008, respectively, related to severance costs resulting from involuntary termination of employees. Employee severance costs were recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with exit or Disposal Activities” (“SFAS No. 146”).

	•		Charges of $521 and $20,644 in the three and nine months ended September 30, 2008, respectively, related to equipment removal and facility closure costs. After production activity ceased, the Company utilized employees as well as outside services to disconnect fabrication equipment, fulfill equipment performance testing requirements of the buyer, and perform facility decontamination and other facility closure-related activity. Included in these costs are labor costs, facility related costs, outside service provider costs, and legal and other fees. Equipment removal, building decontamination and closure related cost activities were completed as of June 30, 2008.

	•		Charges of $0 and $12,206 in the three and nine months ended September 30, 2008, respectively, related to contract termination charges, primarily associated with a long term gas supply contract for nitrogen gas utilized in semiconductor manufacturing. The Company is required to pay an early termination penalty including de-installation and removal costs. Other contract termination costs relate to semiconductor equipment support services with minimum payment clauses extending beyond the current period.

•

A credit of $255 in the three and nine months ended September 30, 2008 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”).

In addition, during the second and third quarters of 2008, the Company began implementing new cost reduction initiatives, primarily targeting manufacturing and research and development labor costs. The Company recorded $26,359 and $29,152 in the three and nine months ended September 30, 2008, respectively, consisting of the following:

	•		Charges of $25,742 and $28,313 in the three and nine months ended September 30, 2008, related to severance costs for involuntary termination of employees. These employee severance costs were recorded in accordance with SFAS No. 146.

	•		Charges of $617 and $839 in the three and nine months ended September 30, 2008 related to one-time minimum statutory termination benefits recorded in accordance with SFAS No. 112.

2007 Restructuring Activities

In the three and nine months ended September 30, 2007, the Company implemented further restructuring initiatives announced prior to 2007 and recorded a net restructuring charge of $1,386 and $528, respectively, consisting of the following:

	•		Charges of $506 and $2,508 in the three and nine months ended September 30, 2007, respectively, related to one-time minimum statutory termination benefits recorded in accordance with SFAS No. 112.

	•		Charges of $914 and $2,050 in the three and nine months ended September 30, 2007, respectively, related to severance costs for involuntary termination of employees. These employee severance costs were recorded in accordance with SFAS No. 146.

	•		A credit of $34 and $932 in the three and nine months ended September 30, 2007 related to changes in estimates of termination benefits originally recorded in accordance with SFAS No. 112.

	•		A credit of $3,071 in the nine months ended September 30, 2007 related to the settlement of a long-term gas supply contract initially recorded in the third quarter of 2002, for which the original estimated restructuring accrual was $12,437. On May 1, 2007, in connection with the sale of the Irving, Texas facility, the Company paid $5,600 to terminate this contract, and was reimbursed $1,700 by the buyer of the facility towards the contract termination fee.

Note 14 NET (LOSS) INCOME PER SHARE

Basic and diluted net (loss) income per share is calculated by using the weighted-average number of common shares outstanding during that period. Diluted net (loss) 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, upon vesting of restricted stock units and contingent issuable shares 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.

A reconciliation of the numerator and denominator of basic and diluted net (loss) income per share is provided as follows:


	Three Months Ended					Nine Months Ended
	September 30,			September 30,		September 30,			September 30,
	2008			2007		2008			2007
	(in thousands, except per share data)
Net (loss) income	$	(4,738	)	$	16,553	$	(2,857	)	$	46,171


Weighted-average shares — basic		447,013			485,540		445,826			487,731
Incremental shares and share equivalents		—			4,251		—			5,016

Weighted-average shares — diluted		447,013			489,791		445,826			492,747

Net (loss) income share:
Basic
Net (loss) income per share — basic	$	(0.01	)	$	0.03	$	(0.01	)	$	0.09

Diluted
Net (loss) income per share — diluted	$	(0.01	)	$	0.03	$	(0.01	)	$	0.09

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


	Three Months Ended					Nine Months Ended
	September 30,		September 30,			September 30,		September 30,
	2008		2007			2008		2007
	(in thousands)
Employee stock options and restricted stock units outstanding		46,113		32,208			40,506		31,911
Incremental shares and share equivalents		—		(4,251	)		—		(5,016	)

Total weighted-average potential shares excluded from per share calculation		46,113		27,957			40,506		26,895

Note 15 INTEREST AND OTHER (EXPENSE) INCOME, NET

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


	Three Months Ended						Nine Months Ended
	September 30,			September 30,			September 30,			September 30,
	2008			2007			2008			2007
	(in thousands)
Interest and other income	$	3,855		$	3,806		$	10,407		$	14,222
Interest expense		(2,889	)		(2,802	)		(9,812	)		(9,345	)
Foreign exchange transaction gain (loss)		1,564			295			(4,311	)		(1,989	)

Total	$	2,530		$	1,299		$	(3,716	)	$	2,888

Note 16 FAIR VALUES OF ASSETS AND LIABILITIES

On January 1, 2008, the Company adopted Statement of Financial Accounting Standards 157, “Fair Value Measurements,” (SFAS No. 157). The standard defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (exit price).” The standard establishes a consistent framework for measuring fair value and expands disclosure requirements about fair value measurements. SFAS No. 157, among other things, requires the Company to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.

Fair Value Hierarchy

SFAS No. 157 discusses valuation techniques, such as the market approach (comparable market prices), the income approach (present value of future income or cash flow), and the cost approach (cost to replace the service capacity of an asset or replacement cost). The statement utilizes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three broad levels. The following is a brief description of those three levels:

	•		Level 1 - Valuation is based upon quoted prices for identical instruments traded in active markets.

	•		Level 2 - Valuation is based upon quoted prices for similar instruments in active markets, quoted prices for identical or similar instruments in markets that are not active, and model-based valuation techniques for which all significant assumptions are observable in the market.

	•		Level 3 - Valuation is generated from model-based techniques that use significant assumptions not observable in the market. These unobservable assumptions reflect our own estimates of assumptions that market participants would use in pricing the asset or liability. Valuation techniques include use of option pricing models, discounted cash flows models and similar techniques.

The table below presents the balances of assets measured at fair value on a recurring basis:


	September 30, 2008
	Total		Level 1		Level 2		Level 3
	(in thousands)
*Assets*
Corporate equity securities	$	204	$	204	$	—	$	—
Auction-rate securities		15,803		—		—		15,803
Corporate debt securities and other obligations		29,512		—		29,512		—

Total	$	45,519	$	204	$	29,512	$	15,803

The Company’s cash and investment instruments, with the exception of auction-rate securities, are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of instruments valued based on quoted market prices in active markets include most U.S. government and agency securities, sovereign government obligations, and money market securities. Such instruments are generally classified within Level 1 of the fair value hierarchy. The types of instruments valued based on other observable inputs include corporate debt securities and other obligations. Such instruments are generally classified within Level 2 of the fair value hierarchy.

Auction-rate securities are classified within Level 3 as significant assumptions are not observable in the market. During the three and nine months ended September 30, 2008, the Company recorded an unrealized loss of $159 and $722, respectively relating to decline in the value of auction-rate securities which is recorded as comprehensive loss. There were no realized gains or losses recorded for these auction-rate securities in the three and nine months ended September 30, 2008. There were no transfers in or out of Level 3 in the three and nine months ended September 30, 2008. The Company does not believe that the impairment is “other than temporary” due to its intent and ability to hold the securities until they can be liquidated at par value. The auction-rate securities were primarily valued based on income approach using an estimate of future cash flows. The assumptions used in preparing these discounted cash flow models included estimates for the amount and timing of future interest and principal payments and the creditworthiness of the issuers. The total amount of assets measured using Level 3 valuation methodologies represented approximately 1% of total assets as of September 30, 2008.

In October 2008, the Company accepted an offer from UBS Financial Services Inc. (“UBS”) to purchase the Company’s eligible auction-rate securities of $12,225 (book value) at par value at any time during a two-year time period from June 30, 2010 to July 2, 2012. As a result of this offer, the Company expects to sell the securities to UBS at par value on June 30, 2010. The remainder of the Company’s auction-rate securities is held with another large financial institution.

A summary of the changes in Level 3 assets measured at fair value on a recurring basis is as follows:


						Balance				Sales and			Balance					Sales and			Balance
	Balance		Total Unrealized			March 31,		Total Unrealized		Other			June 30,		Total Unrealized			Other			September 30,
	January 1, 2008		Losses			2008		Gains		Settlements			2008		Losses			Settlements			2008
	(in thousands)
Auction-rate securities	$	29,057	$	(1,113	)	$	27,944	$	550	$	(9,944	)	$	18,550		(159	)		(2,588	)	$	15,803

Total	$	29,057	$	(1,113	)	$	27,944	$	550	$	(9,944	)	$	18,550	$	(159	)	$	(2,588	)	$	15,803

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 in the year ended December 31, 2007.

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 2008, our anticipated revenues, the effect of our conversion from a sell-in to a sell-through revenue model for our independent distributors in Europe, by geographic area, operating expenses and liquidity, factory utilization, the effect of our strategic transactions, restructuring and other strategic efforts and our expectations regarding the effects of exchange rates and efforts to manage exposure to exchange rate fluctuation. 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 SEC, 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 SEC 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 and intellectual property (IP) 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.

Our operating segments consist of: (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).

On March 6, 2008, we acquired Quantum Research Group Ltd. (“Quantum”) for $97 million. The results of operations of Quantum are included in our Microcontroller segment from the date of acquisition.

compared to the three months ended September 30, 2007 was primarily due to the conversion of certain European distributors to a sell through revenue model and a decrease in net revenues in the RF and Automotive segment in the three and nine months ended September 30, 2008 as discussed further below. The decrease to the RFA segment resulted primarily from reduced shipment quantities of BiCMOS foundry products related to communication chipsets for code-division multiple access (“CDMA”) phones. These decreases were offset in part by higher shipments in our Microcontroller segment in the three and nine months ended September 30, 2008, primarily driven by growth of our AVR and ARM products.

Revenue Recognition Related to European Distributors in the Quarter Ended September 30, 2008

During the six months ended June 30, 2008, our sales agreements with independent distributors in Europe were accounted for using a “sell-in” revenue recognition model. Sales to these distributors before July 1, 2008 were made under arrangements where pricing was fixed at the time of shipment. In addition, the arrangements did not provide these distributors with allowances such as price protection or right of return upon termination of the agreement. As a result, our policy was to recognize revenue upon shipment to these distributors.

Effective July 1, 2008, we entered into agreements with certain European distributors that allow additional rights, including future price concessions at the time of resale, price protection, and the right to return products upon termination of the distribution agreement. As a result of uncertainties over finalization of pricing for shipments to these distributors, revenues and related costs will be deferred until the products are sold by the distributors to their end customers. We consider that the sale prices are not “fixed or determinable” at the time of shipment to these distributors.

The objective of the conversion to a “sell-through” revenue recognition model is to enable us to better manage end-customer pricing, track design registrations for proprietary products, and improve our visibility into distribution inventory and sales levels. We expect that this conversion will result in improved operating results for us and our distribution partners in the future. Management estimates that the impact of this one-time adjustment lowered net revenues and cost of revenues by approximately $20 million and $9 million, respectively, in both the three and nine months ended September 30, 2008.

The segment breakout of this change to revenue recognition terms on our net revenues and cost of revenues are estimated to be as follows for the three months ended September 30, 2008:


	Reduction in		Reduction in
	Net Revenues		Cost of Revenues
	(in thousands)
ASIC	$	1,232	$	575
Microcontroller		14,022		7,044
Nonvolatile Memory		2,439		892
RF and Automotive		2,198		672

Total	$	19,891	$	9,183

Gross margin improved to 39.5% in the three months ended September 30, 2008, compared to 35.6% in the three months ended September 30, 2007. Gross margin improved to 37.1% in the nine months ended September 30, 2008 compared to 35.5% in the nine months ended September 30, 2007. These improvements were primarily a result of improved manufacturing utilization as a result of our strategic restructuring initiatives and an increase in the proportion of higher margin Microcontroller products included in total revenues.

We continue to take significant actions to improve operational efficiencies and reduce costs. Charges related to restructuring, acquisitions and grant repayments, and asset impairments, offset by gain on sale of assets, totaled approximately $42 million and $59 million in the three and nine months ended September 30, 2008, respectively, compared to net charges of $2 million and $1 million in the three and nine months ended September 30, 2007, respectively. During the three months ending September 30, 2008, we incurred $26 million in restructuring charges related to headcount reductions in our manufacturing operations that we expect will result in lower costs to produce products beginning in the first quarter of 2009. In addition, we recorded impairment charges of $8 million related to the sale of the manufacturing operations of the Heilbronn, Germany fabrication facility in the three months ended September 30, 2008. We expect to enter into a supply agreement for supply of products from this facility for up to five years (first three years with minimum annual purchase commitment). Cost savings related to this sale are not expected to be significant until the supply agreement is concluded.

Including the charges noted above, we incurred a loss from operations of $11 million in the three months ended September 30, 2008, compared to income of $25 million in the three months ended September 30, 2007. Income from operations totaled $4 million in the nine months ended September 30, 2008, compared to $45 million in the nine months ended September 30, 2007.

Cash provided by operating activities totaled $77 million in the nine months ended September 30, 2008, compared to approximately $105 million in the nine months ended September 30, 2007. At September 30, 2008, our cash, cash equivalents and short-term investments totaled $421 million, down from $430 million at December 31, 2007, primarily due to $97 million invested in the Quantum acquisition and payments of $34 million for fixed assets during the nine months ended September 30, 2008 offset by cash flows from operations. Our total indebtedness decreased to $147 million at September 30, 2008 from $163 million at December 31, 2007.

We are continuing to evaluate ways to improve our competitive position in the market and further increase future operating results. In this context, we are continually reviewing potential changes in our business and asset portfolio throughout our worldwide operations, including those located in Europe, which may result in further restructuring, impairment, loss on sale, or acquisition related charges in the future, reduction in headcount, or reduction in revenues, or other significant changes to our results from operations.

RESULTS OF OPERATIONS


	Three Months Ended										Nine Months Ended
	September, 2008					September, 2007					September, 2008					September, 2007
	(in thousands, except percentage of net revenues)
Net revenues	$	400,008		100.0	%	$	418,097		100.0	%	$	1,232,153		100.0	%	$	1,213,657		100.0	%
Gross profit		158,009		39.5	%		149,034		35.6	%		457,589		37.1	%		430,613		35.5	%
Research and development		63,856		16.0	%		63,609		15.2	%		198,451		16.1	%		200,174		16.5	%
Selling, general and administrative		63,898		16.0	%		58,518		14.0	%		196,033		15.9	%		184,458		15.2	%
Acquisition-related charges		6,690		1.7	%		—		—			17,110		1.4	%		—		0.0	%
Charges for grant repayments		291		0.1	%		1,189		0.3	%		464		0.0	%		1,189		0.1	%
Restructuring charges		26,625		6.7	%		1,386		0.3	%		63,209		5.1	%		528		0.0	%
Asset impairment charges (recovery)		7,969		2.0	%		(1,057	)	-0.3	%		7,969		0.6	%		(1,057	)	-0.1	%
Gain on sale of assets		—		0.0	%		—		—			(29,948	)	-2.4	%		—		0.0	%

(Loss) income from operations	$	(11,320	)	-2.8	%	$	25,389		6.1	%	$	4,301		0.3	%	$	45,321		3.7	%

Net Revenues

Net revenues decreased by 4% to $400 million in the three months ended September 30, 2008, compared to $418 million in the three months ended September 30, 2007. Net revenues increased by 1% to $1,232 million in the nine months ended September 30, 2008, compared to $1,214 million in the nine months ended September 30, 2007. The decrease in net revenues in the three months ended September 30, 2008, compared to the three months ended September 30, 2007 was primarily due to the conversion of certain European distributors to a sell through revenue model and a decrease in net revenues in the RF and Automotive segment in the three and nine months ended September 30, 2008 which were primarily a result of reduced shipment quantities for BiCMOS foundry products related to communication chipsets for code-division multiple access (“CDMA”) phones. These decreases were offset in part by higher shipments in our Microcontroller segment in the three and nine months ended September 30, 2008, primarily driven by growth of our AVR and ARM products.

Net Revenues — By Operating Segment

Our net revenues by segment in the three and nine months ended September 30, 2008 compared to the three and nine months ended September 30, 2007 are summarized as follows:


	Three Months Ended
	September 30, 2008		September 30, 2007		Change			% Change
	(in thousands, except for percentages)
ASIC	$	114,657	$	128,200	$	(13,543	)		-11	%
Microcontroller		129,755		118,610		11,145			9	%
Nonvolatile Memory		91,760		96,829		(5,069	)		-5	%
RF and Automotive		63,836		74,458		(10,622	)		-14	%

Total net revenues	$	400,008	$	418,097	$	(18,089	)		-4	%


	Nine Months Ended
	September 30, 2008		September 30, 2007		Change			% Change
	(in thousands, except for percentages)
ASIC	$	350,210	$	363,695	$	(13,485	)		-4	%
Microcontroller		403,124		337,251		65,873			20	%
Nonvolatile Memory		274,448		271,969		2,479			1	%
RF and Automotive		204,371		240,742		(36,371	)		-15	%

Total net revenues	$	1,232,153	$	1,213,657	$	18,496			2	%

As discussed in the “Overview” section above, consolidated results for the three months ended September 30, 2008 were negatively impacted by the deferral of approximately $20 million of net revenue and $9 million of cost of revenues due to the conversion of certain distributors in Europe to a “sell-through” model. The following table presents the impact of this adjustment for the three months ended September 30, 2008 by reporting segments:


	Reduction in		Reduction in
	Net Revenues		Cost of Revenues
	(in thousands)
ASIC	$	1,232	$	575
Microcontroller		14,022		7,044
Nonvolatile Memory		2,439		892
RF and Automotive		2,198		672

Total	$	19,891	$	9,183

ASIC

ASIC segment net revenues decreased by 11% or $13 million to $115 million in the three months ended September 30, 2008, compared to $128 million in the three months ended September 30, 2007. ASIC segment net revenues decreased in the three months ended September 30, 2008 compared to the three months ended September 30, 2007 primarily due to lower shipments for PC crypto memory products, Smartcard IC and imaging products. ASIC segment net revenues decreased by 4% or $13 million to $350 million in the nine months ended September 30, 2008, compared to $364 million in the nine months ended September 30, 2007. This decrease was primarily a result of lower shipments for PC crypto memory products as well as a decrease of imaging products.

Microcontroller

Microcontroller segment net revenues increased by 9% or $11 million to $130 million in the three months ended September 30, 2008, compared to $119 million in the three months ended September 30, 2007. Microcontroller segment net revenues increased by 20% or $66 million to $403 million in the nine months ended September 30, 2008, compared to $337 million in the nine months ended September 30, 2007. The increase in net revenues in the three months ended September 30, 2008, compared to the three months ended September 30, 2007 resulted primarily from increased shipments from sales of products with 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 three months ended September 30, 2008, while ARM based products grew 10%, compared to the three months ended September 30, 2007. In

the nine months ended September 30, 2008, AVR microcontroller revenue grew 22% while ARM-based microcontroller products grew 26% compared to the nine months ended September 30, 2007.

Microcontroller net revenues would have increased by approximately 21% or $25 million to $144 million in the three months ended September 30, 2008, compared to the three months ended September 30, 2007 and by approximately 24% or $80 million to $417 million in the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, after considering the adjustment of $14 million related to the conversion of certain European distributors to a “sell-through” model.

To supplement our Microcontroller segment financial results presented in accordance with GAAP, the preceding sentence includes non-GAAP Microcontroller segment net revenue for the three and nine months ended September 30, 2008, which are adjusted from Microcontroller segment net revenue presented in accordance with GAAP to exclude the adjustment of $14 million related to the conversion of certain distributors in Europe to a “sell-through” model. Management believes that this non-GAAP financial measure reflects an additional and useful way of viewing aspects of our operations that, when viewed in conjunction with our GAAP results, provides a more comprehensive understanding of the various factors and trends affecting our business and operations.

We have used non-GAAP Microcontroller segment net revenue for the three and nine months ended September 30, 2008 for internal purposes and believes that this non-GAAP financial measure provides meaningful supplemental information regarding operational and financial performance. Management uses this non-GAAP financial measure for strategic and business decision making, internal budgeting, forecasting and resource allocation processes.

We believe that providing this non-GAAP financial measure, in addition to the GAAP financial results, is useful to investors because the non-GAAP financial measure allows investors to see our results “through the eyes” of management as this non-GAAP financial measure reflects our internal measurement processes. Management believes that this non-GAAP financial measure enables investors to better assess changes in a key element of our operating results across different reporting periods on a consistent basis. Thus, management believes that this non-GAAP financial measure provides investors with another method for assessing our operating results in a manner that is focused on the performance of our ongoing operations. In addition, this non-GAAP financial measure facilitates comparisons to our historical operating results and to competitors’ operating results.

There are limitations in using non-GAAP financial measures because they are not prepared in accordance with GAAP and may be different from non-GAAP financial measures used by other companies. In addition, non- GAAP financial measures may be limited in value because they exclude certain items that may have a material impact upon our reported financial results. Management compensates for these limitations by providing investors with reconciliations of the non-GAAP financial measures to the most directly comparable GAAP financial measures. The presentation of non-GAAP financial information is not meant to be considered in isolation or as a substitute for or superior to the most directly comparable GAAP financial measures. Non-GAAP financial measures supplement, and should be viewed in conjunction with, GAAP financial measures.

Nonvolatile Memory

Nonvolatile memory segment net revenues decreased by 5% or $5 million to $92 million in the three months ended September 30, 2008, compared to $97 million in the three months ended September 30, 2007. Nonvolatile memory segment net revenues increased by 1% or $2 million to $274 million in the nine months ended September 30, 2008, compared to $272 million in the nine months ended September 30, 2007. The decrease in the three months ended September 30, 2008, compared with the three months ended September 30, 2007 was primarily due to competitive pricing pressures for Serial EEPROM products, offset in part by increased shipments of serial flash memory products. The increase in the nine months ended September 30, 2008, compared with the nine months ended September 30, 2007 was primarily due to an increase in serial flash memory products of 37% from higher unit volumes, partially offset by a reduction in Serial EEPROM of 5% and other serial flash memory products of 16% from lower pricing. 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 of products are among several factors causing continued pricing declines in 2008.

RF and Automotive

RF and Automotive segment net revenues decreased by 14% or $10 million to $64 million in the three months ended September 30, 2008, compared to $74 million in the three months ended September 30, 2007. RF and Automotive segment net revenues decreased by 15% or $37 million to $204 million in the nine months ended September 30, 2008, compared to $241 million in the nine months ended September 30, 2007. The decreases in net revenues in the RF and Automotive segment in the three and nine months ended September 30, 2008 were 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. In the three months ended September 30, 2008, net revenues decreased approximately $10 million for BiCMOS foundry products, compared to the three months ended September 30, 2007. In the nine months ended September 30, 2007, net revenues decreased approximately $40 million for BiCMOS foundry products, partially offset by a $3 million increase in revenue from other automotive products, compared to the nine months ended September 30, 2007.

Net Revenues — By Geographic Area

Our net revenues by geographic areas in the three and nine months ended September 30, 2008 compared to the three and nine months ended September 30, 2007 are summarized as follows (revenues are attributed to countries based on delivery locations):


	Three Months Ended
	September 30, 2008		September 30, 2007		Change			% Change
	(in thousands, except for percentages)
United States	$	53,146	$	59,140	$	(5,994	)		-10	%
Europe		153,719		142,945		10,774			8	%
Asia		187,567		210,095		(22,528	)		-11	%
Other*		5,576		5,917		(341	)		-6	%

Total net revenues	$	400,008	$	418,097	$	(18,089	)		-4	%


	Nine Months Ended
	September 30, 2008		September 30, 2007		Change			% Change
	(in thousands, except for percentages)
United States	$	170,924	$	165,138	$	5,786			4	%
Europe		456,676		427,966		28,710			7	%
Asia		587,087		605,305		(18,218	)		-3	%
Other*		17,466		15,248		2,218			15	%

Total net revenues	$	1,232,153	$	1,213,657	$	18,496			2	%


*		Primarily includes South Africa and Central and South America

Sales outside the United States accounted for 87% and 86% of our net revenues in the three and nine months ended September 30, 2008, compared to 86% in the three and nine months ended September 30, 2007.

Our sales in the United States decreased by $6 million, or 10% in the three months ended September 30, 2008, compared to the three months ended September 30, 2007, and increased by $6 million, or 4% in the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007. The decrease in the three months ended September 30, 2008 was primarily due to United States based customers continuing to redirect deliveries from domestic operations to lower cost overseas operations, as well as reduced shipments to United States based distributors. The increase in sales in the nine months ended September 30, 2008 compared to the nine months ended September 30, 2007 was primarily due to United States based customers increasing deliveries to domestic operations and increased shipments to United States based distributors in the first six months of 2008.

Our sales in Europe increased by $11 million, or 8%, in the three months ended September 30, 2008, compared to the three months ended September 30, 2007, and increased by $29 million, or 7% in the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007. These increases are primarily due to both higher volume shipments of Quantum and ARM-based microcontrollers.

Our sales in Asia decreased $23 million, or 11% in the three months ended September 30, 2008, compared to the three months ended September 30, 2007, and decreased by $18 million, or 3% in the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007. The decrease in sales in the three and nine months ended September 30, 2008 compared to the three and nine months ended September 30, 2007 was primarily due to lower shipments Nonvolatile memory products and shipments for communication chipsets for CDMA phones.

The trend over the last several years has been an increase in revenues in Asia (excluding Singapore), while revenues in the United States has 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. Although revenues in Asia decreased in 2008 compared to 2007, we expect that Asia revenues will continue to grow more rapidly than other regions in the future. Revenues in Asia may be impacted in the future as we refine our distribution strategy and optimize our distributor base in this region. It may take time for us to identify financially viable distributors and help them develop high quality support services. There can be no assurances that we will be able to manage this optimization process in an efficient and timely manner.

Impact to Revenues and Costs from Changes to Foreign Exchange Rates

Changes in foreign exchange rates, primarily the Euro, have had a significant impact on our net revenues and operating costs. Net revenues denominated in Euro were approximately 18% and 20% in the three months ended September 30, 2008 and 2007, respectively. In each of the nine months ended September 30, 2008 and 2007, net revenues denominated in Euro were approximately 21%. Operating expenses denominated in Euro were 40% and 47% in the three months ended September 30, 2008 and 2007, respectively. In the nine months ended September 30, 2008 and 2007, operating expenses denominated in Euro were 43% and 51%, respectively. Net revenues included 46 million Euros and 169 million Euros in the three and nine months ended September 30, 2008, respectively, compared to 61 million Euros and 190 million Euros in the three and nine months ended September 30, 2007, respectively. Operating expenses in Euro decreased to approximately 96 million and 328 million Euros in the three and nine months ended September 30, 2008, respectively, compared to 126 million and 413 million Euros in operating expenses in the three and nine months ended September 30, 2007, respectively.

Average exchange rates utilized to translate foreign currency revenues and expenses were 1.54 and 1.36 Euro to the U.S. Dollar in the three months ended September 30, 2008 and 2007, respectively. Average exchange rates utilized to translate foreign currency revenues and expenses were 1.52 and 1.34 Euro to the U.S. Dollar in the nine months ended September 30, 2008 and 2007, respectively.

During the three and nine months ended September 30, 2008, changes in foreign exchange rates had an unfavorable impact on operating costs and income from operations. Had average exchange rates remained the same in the three and nine months ended September 30, 2008 as the average exchange rates in effect in the three and nine months ended September 30, 2007 our reported net revenues would have been $10 million and $32 million lower, respectively. However, as discussed above, our foreign currency expenses exceed foreign currency revenues. Operating expenses were denominated in foreign currencies, primarily the Euro, of 40% and 43%, respectively in the three and nine months ended September 30, 2008. Had average exchange rates in the three and nine months ended

September 30, 2008 remained the same as the average exchange rates in the three and nine months ended September 30, 2007, our operating expenses would have been $18 million lower (related to cost of revenues of $11 million; research and development expenses of $5 million; and sales, general and administrative expenses of $2 million) and $62 million lower (related to cost of revenues of $38 million; research and development expenses of $17 million; and sales, general and administrative expenses of $7 million), respectively.

The net effect of changes in foreign currency exchange rates resulted in a decrease to income from operations of $9 million and $30 million in the three and nine months ended September 30, 2008, compared to the three and nine months ended September 30, 2007, respectively. We expect to take additional actions in the future to reduce this exposure. However, there can be no assurances that we will be able to reduce the exposure to additional unfavorable changes to exchange rates and the results on gross margin.

Cost of Revenues and Gross Margin

We develop process technologies to ensure our products provide the maximum possible performance. During the three and nine months ended September 30, 2008, we manufactured approximately 94% of our products in our own wafer fabrication facilities.

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.

Gross margin improved during the three and nine months ended September 30, 2008 as a result of improved manufacturing utilization due to our strategic restructuring initiatives and by a stronger mix of higher margin microcontroller and other core products. Manufacturing utilization improvements result primarily from higher production levels at our Colorado Springs and Rousset, France fabrication facilities following the closure of our North Tyneside, UK facility in the second quarter of 2008. We anticipate further gross margin improvement over the next several quarters from further increases in factory utilization, a more favorable product mix, and additional cost reduction measures. Our manufacturing cycle ranges from approximately 60 to 90 days, and our average days of inventory has ranged from 110 to 120 days during 2008. Because of the cycle-time required to complete manufacturing processes and deliver products to our customers, significant changes to our manufacturing costs are reflected in operating results at the end of this cycle-time period, or approximately one quarter after the change has occurred.

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 $0.4 million and $1 million in the three months ended September 30, 2008 and 2007, respectively, and $1 million in both of the nine months ended September 30, 2008 and 2007.

Research and Development

Research and development (“R&D”) expenses remained relatively flat at $64 million in the three months ended September 30, 2008 , compared to the three months ended September 30, 2007 and decreased by 1% or $2 million to $198 million in the nine months ended September 30, 2008 from $200 million in the nine months ended September 30, 2007. The decrease in R&D expenses in the nine months ended September 30, 2008, compared to the nine months ended September 30, 2008 was in part primarily due to a reduction in the costs of development wafers used in process technology development of $12 million, partially offset by increases in stock based compensation of $6 million, employee salaries and benefits of $3 million and non-recurring engineering project costs of $2 million. R&D expenses in the three and nine months ended September 30, 2008 benefited from elimination of certain development programs that were determined to be non-strategic over the last year. However, these reductions were offset by the unfavorable impact of approximately $5 million and $17 million due to adverse foreign exchange rate fluctuations in the three and nine months ended September 30, 2008. As a percentage of net revenues, research and development expenses totaled 16% and 15% in the three months ended September 30, 2008 and 2007, respectively, and 16% and 17% in the nine months ended September 30, 2008 and 2007.

We have continued to invest in developing a variety of product areas and process technologies, including embedded 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. We are continuing to re-focus our R&D resources on fewer, but 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. In the three and nine months ended September 30, 2008, we recognized $7 million and $17 million in research grant benefits, respectively. In the three and nine months ended September 30, 2007, we recognized $5 million and $14 million in research grant benefits, respectively.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses increased by 9% or $5 million to $64 million in the three months ended September 30, 2008 from $59 million in the three months ended September 30, 2007 and increased by 6% or $12 million to $196 million in the nine months ended September 30, 2008 from $184 million in the nine months ended September 30, 2007. The increase in SG&A expenses in the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007, was primarily due to increased employee salaries and benefits of $6 million and bonuses and commissions of $6 million, offset in part by a decrease in professional service fees of $4 million. The increase in SG&A expenses in the three months ended September 30, 2008, compared to the three months ended September 30, 2007, was primarily due to increased employee salaries and benefits of $2 million and increased legal related costs for our ongoing legal matters of $3 million. SG&A expenses in the three and nine months ended September 30, 2008 were unfavorably impacted by approximately $2 million and $7 million, respectively, due to foreign exchange rate fluctuations. As a percentage of net revenues, SG&A expenses totaled 16% and 14% in the three months ended September 30, 2008 and 2007, respectively, and 16% and 15% in the nine months ended September 30, 2008 and 2007, respectively.

Stock-Based Compensation

Stock-based compensation expense under SFAS 123R was $7 million and $5 million in the three months ended September 30, 2008 and 2007, respectively. Stock-based compensation expense under SFAS 123R was $20 million and $12 million in the nine months ended September 30, 2008 and 2007, respectively. Stock-based compensation expense increased in the three and nine months ended September 30, 2008, respectively, compared to the three and nine months ended September 30, 2007, primarily due to annual stock option and restricted stock unit replenishment grants, performance-based restricted stock units and retention awards for certain key executives and employees. As a result of equity awards issued during the third quarter of 2008, we anticipate stock-based compensation to rise further in the fourth quarter of 2008.

Acquisition-Related Charges

We recorded total acquisition-related charges of $7 million and $17 million in the three and nine months ended September 30, 2008 related to the acquisition of Quantum as described below:

We recorded amortization of intangible assets of $2 million and $4 million associated with customer relationships, developed technology, trade name, non-compete agreements and backlog in the three and nine months ended September 30, 2008. These assets are amortized over three to five years. We estimate charges related to amortization of intangible assets will be approximately $2 million in the fourth quarter of 2008.

In the three months ended March 31, 2008, we recorded a charge of $1 million associated with acquired in-process research and development (“IPR&D”), in connection with the acquisition of Quantum. No charges were recorded in the three months ended June 30, 2008 and September 30, 2008. Our methodology for allocating the purchase price to IPR&D involves established valuation techniques utilized in the high-technology industry. Each project in process was analyzed by discounted forecasted cash flows directly related to the products expected to result from the subject research and development, net of returns in contributory assets including working capital, fixed assets, customer relationships, trade name, and assembled workforce. IPR&D was expensed upon acquisition because technological feasibility has not been established and no future alternative uses existed. The fair value of technology under development is determined using the income approach, which discounts expected future cash flows to present value. A discount rate of 33% is used for the projects to account for the risks associated with the inherent uncertainties surrounding the successful development of the IPR&D, market acceptance of the technology, the useful life of the technology, the profitability level of such technology and the uncertainty of technological advances, which could impact the estimates recorded. The discount rates used in the present value calculations are typically

derived from a weighted-average cost of capital analysis. These estimates did not account for any potential synergies realizable as a result of the acquisition and were in line with industry averages and growth estimates.

We agreed to compensate former key executives of Quantum contingent upon continuing employment over a three year period. We have agreed to pay up to $15 million in cash and issue 5.3 million shares of our common stock valued at $17 million. These amounts are being accrued over the employment period on an accelerated basis. As a result in the three and nine months ended September 30, 2008, we recorded total compensation-related expenses in cash and shares of $5 million and $12 million, respectively. We estimate charges related to these compensation agreements to total approximately $5 million in the fourth quarter of 2008.

Restructuring Charges

The following table summarizes the activity related to the accrual for restructuring charges detailed by event in the three and nine months ended September 30, 2008 and 2007.


	January 1,							Currency		March 31,							Currency			June 30,								Currency			September 30,
	2008							Translation		2008							Translation			2008		Charges						Translation			2008
	Accrual		Charges		Payments			Adjustment		Accrual		Charges		Payments			Adjustment			Accrual		(Credits)			Payments			Adjustment			Accrual
														(in thousands)
Third quarter of 2002
Termination of contract with supplier	$	1,592	$	—	$	—		$	—	$	1,592	$	—	$	—		$	—		$	1,592	$	—		$	—		$	—		$	1,592
Fourth quarter of 2006
Employee termination costs		1,324		17		(767	)		78		652		14		(131	)		(1	)		534		(255	)		(228	)		(5	)		46
Fouth quarter of 2007
Employee termination costs		12,759		1,106		(7,527	)		559		6,897		325		(7,222	)		—			—		—			—			—			—
Termination of contract with supplier		—		11,636		(493	)		780		11,923		570		(10,475	)		33			2,051		—			(2,051	)		—			—
Other exit related costs		—		15,149		(5,766	)		892		10,275		4,974		(14,546	)		13			716		521			(1,023	)		—			214
Second quarter of 2008
Employee termination costs		—		—		—			—		—		2,793		(591	)		4			2,206		334			(1,029	)		(183	)		1,328
Third quarter of 2008
Employee termination costs		—		—		—			—		—		—		—			—			—		26,025			(473	)		(1,578	)		23,974

Total 2008 activity	$	15,675	$	27,908	$	(14,553	)	$	2,309	$	31,339	$	8,676	$	(32,965	)	$	49		$	7,099	$	26,625		$	(4,804	)	$	(1,766	)	$	27,154


	January 1,							Currency		March 31,								Currency		June 30,							Currency		September 30,
	2007							Translation		2007		Charges						Translation		2007							Translation		2007
	Accrual		Charges		Payments			Adjustment		Accrual		(Credits)			Payments			Adjustment		Accrual		Charges		Payments			Adjustment		Accrual
															(in thousands)
Third quarter of 2002
Termination of contract with supplier	$	8,896	$	—	$	(249	)	$	—	$	8,647	$	(3,071	)	$	(3,984	)	$	—	$	1,592	$	—	$	—		$	—	$	1,592
Fourth quarter of 2005
Nantes fabrication facility sale		115		—		—			—		115		(27	)		—			—		88		—		(90	)		2		—
Fouth quarter of 2006
Employee termination costs		7,490		1,782		(1,743	)		41		7,570		458			(3,899	)		111		4,240		1,386		(3,094	)		284		2,816

Total 2007 activity	$	16,501	$	1,782	$	(1,992	)	$	41	$	16,332	$	(2,640	)	$	(7,883	)	$	111	$	5,920	$	1,386	$	(3,184	)	$	286	$	4,408

2008 Restructuring Charges

In the three and nine months ended September 30, 2008, we incurred restructuring charges of $27 million and $63 million, respectively, as we continued to implement additional restructuring actions to improve operational efficiencies and reduce costs.

We incurred restructuring charges related to the signing of definitive agreements in October 2007 to sell certain wafer fabrication equipment and real property at North Tyneside to TSMC and Highbridge. As a result of this action, this facility was closed and all of the employees of the facility were terminated by June 30, 2008. During the three and nine months ended September 30, 2008, we recorded the following restructuring charges (credits):

	•		Charges of $0 and $1 million in the three and nine months ended September 30, 2008, respectively, related to severance costs resulting from involuntary termination of employees. Employee severance costs were recorded in accordance with SFAS No. 146, “Accounting for Costs Associated with exit or Disposal Activities” (“SFAS No. 146”).

	•		Charges of $1 million and $21 million in the three and nine months ended September 30, 2008, respectively, related to equipment removal and facility closure costs. After production activity ceased, we utilized employees as well as outside services to disconnect fabrication equipment, fulfill equipment performance testing requirements of the buyer, and perform facility

decontamination and other facility closure-related activity. Included in these costs are labor costs, facility related costs, outside service provider costs, and legal and other fees. Equipment removal, building decontamination and closure related cost activities were completed as of June 30, 2008.

	•		Charges of $0 and $12 million in the three and nine months ended September 30, 2008, respectively, related to contract termination charges, primarily associated with a long term gas supply contract for nitrogen gas utilized in semiconductor manufacturing. We are required to pay an early termination penalty including de-installation and removal costs. Other contract termination costs relate to semiconductor equipment support services with minimum payment clauses extending beyond the current period.

	•		A credit of $0.3 million in the three and nine months ended September 30, 2008 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”).

In addition, during the second and third quarters of 2008, we began implementing new cost reduction initiatives, primarily targeting manufacturing and research and development labor costs. We recorded $26 million and $29 million in the three and nine months ended September 30, 2008, respectively, consisting of the following:

	•		Charges of $26 million and $28 million in the three and nine months ended September 30, 2008, related to severance costs for involuntary termination of employees. These employee severance costs were recorded in accordance with SFAS No. 146.

	•		Charges of $1 million and $1 million in the three and nine months ended September 30, 2008 related to one-time minimum statutory termination benefits recorded in accordance with SFAS No. 112

2007 Restructuring Activities

In the three and nine months ended September 30, 2007, we implemented further restructuring initiatives announced prior to 2007 and recorded a net restructuring charge of $1 million and $1 million, respectively, consisting of the following:

	•		Charges of $1 million and $3 million in the three and nine months ended September 30, 2007, respectively, related to one-time minimum statutory termination benefits recorded in accordance with SFAS No. 112.

	•		Charges of $1 million and $2 million in the three and nine months ended September 30, 2007, respectively, related to severance costs for involuntary termination of employees. These employee severance costs were recorded in accordance with SFAS No. 146.

	•		A credit of $0.1 million and $1 million in the three and nine months ended September 30, 2007 related to changes in estimates of termination benefits originally recorded in accordance with SFAS No. 112.

	•		A credit of $3 million in the nine months ended September 30, 2007 related to the settlement of a long-term gas supply contract initially recorded in the third quarter of 2002, for which the original estimated restructuring accrual was $12 million. On May 1, 2007, in connection with the sale of the Irving, Texas facility, we paid $6 million to terminate this contract, and we were reimbursed $2 million by the buyer of the facility towards the contract termination fee.

Gain on Sale of Assets and Asset Impairment Charges

Under Statement of Financial Accounting Standards No. 144 “Accounting for the Impairment or Disposal of Long-Lived Assets,” (“SFAS No. 144”) 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 classify long-lived assets to be disposed of other than by sale as held and used until they are disposed. We report assets and liabilities to be disposed of by sale as held for sale and recognize these 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.

Heilbronn, Germany and North Tyneside, United Kingdom

We announced our intention to sell our fabrication facility in Heilbronn, Germany in December 2006. Subsequently, we decided to sell only the manufacturing operations related to the fabrication facility. In the three months ended September 30, 2008, we entered into an agreement to sell the manufacturing operations to Tejas Silicon Holding Limited (“TSI”). TSI will be acquiring from us certain fixed assets and inventory while assuming certain employee-related liabilities, including pension obligations, and trade taxes. In connection with the sale, we will also license certain process technology to TSI and TSI will assume the pension liability at a lower value. We will purchase from TSI a certain amount of wafers for five years (first three years with minimum annual purchase commitment) starting from the closing date of the sale. The total proceeds from the sale are expected to be nominal as the balance of the liabilities that TSI will assume approximate the value of the assets and rights to the license for process technology it will acquire from us. We have classified the assets and liabilities of the Heilbronn manufacturing operations as held for sale as of September 30, 2008. The assets and liabilities held for sale are carried on the condensed consolidated balance sheets at the lower of carrying amount or fair value, less cost to sell. The fixed assets are no longer depreciated. We recorded an impairment loss of $8 million in the three months ended September 30, 2008, consisting of $3 million for the net book value of the fixed assets and $5 million for selling costs related to legal, commissions and other direct incremental costs. The sale of the Heilbronn manufacturing operations does not qualify as discontinued operations as the operations and future cash flows will not be eliminated from our RF and Automotive segment. We expect to have continuing involvement in the operations of the Heilbronn fabrication facility.

On October 8, 2007, we entered into definitive agreements to sell certain wafer fabrication equipment and land and buildings at North Tyneside to TSMC and Highbridge for a total of approximately $124 million. We recognized a loss of $1 million and a gain of $31 million for the sale of the equipment in the three and six months ended June 30, 2008, respectively. We received proceeds of $43 million ($47 million due to cumulative translation adjustments) from Highbridge for the closing of the real property portion of the transaction in November 2007. We vacated the facility in May 2008. The gain recognized in the three months ended March 31, 2008 was primarily related to the $82 million proceeds we received from the sale of fabrication equipment from our North Tyneside, UK facility.

Interest and Other (Expense) Income, Net

Interest and other (expense) income, net, was a net income of $3 million and a net expense of $4 million in the three and nine months ended September 30, 2008, compared to net income of $1 million and $3 million in the three and nine months ended September 30, 2007. The change to net income in the three months ended September 30, 2008, compared to the three months ended September 30, 2007 was primarily due to a $2 million increase in foreign exchange transaction gain, as well as proceeds from a legal settlement and lower interest expense. The change in net expense in the nine months ended September 30, 2008, compared to the nine months ended September 30, 2007 was primarily due to a $4 million decrease in interest income due to lower cash average cash balances and an increase in foreign exchange transaction losses of $3 million.

Interest rates on our outstanding borrowings did not change significantly in the three and nine months ended September 30, 2008, as compared to the three and nine months ended September 30, 2007.

Income Taxes

In the three and nine months ended September 30, 2008, we recorded an income tax benefit of $4 million and an income tax provision of $3 million, respectively, compared to an income tax provision of $10 million and $2 million in the three and nine months ended September 30, 2007, respectively.

Other than the items noted as follows, there were no significant changes in estimates or provision for income taxes in the six months ended September 30, 2008:

At December 31, 2007, there was no provision for U.S. income tax for undistributed earnings, as it was our intention to reinvest these earnings indefinitely in operations outside the U.S. For 2008, we determined that we would require a transfer of funds to the U.S. from select foreign subsidiaries. As such, for 2008, we changed our position to no longer assert permanent reinvestment of undistributed earnings for certain foreign entities, which are expected to increase our tax provision in 2008 by approximately $2 million.

We recognized tax benefits of $7 million and $10 million in the three and nine month periods ended September 30, 2008 respectively, resulting from the refund of unutilized French research tax credits for its 2003 and 2004 fiscal year, which were received during 2008.

The “Emergency Economic Stabilization Act of 2008,” which contains the “Tax Extenders and Alternative Minimum Tax Relief Act of 2008”, was signed into law on October 3, 2008. Under the Act, the research tax credit was retroactively extended for amounts paid or incurred after December 31, 2007 and before January 1, 2010. We are currently in the process of analyzing the impact of the new law on its financial statements. The potential effects of the changes would be recognized in the fourth quarter as an increase to the deferred tax assets with a corresponding increase to the valuation allowance.

On September 30, 2008, California enacted Assembly Bill 1452 which among other provisions, suspends net operating loss deductions for 2008 and 2009 and limits the utilization of tax credits to 50 percent of a taxpayer’s taxable income. We expect the impact to our effective tax rate as the result of this law change to be immaterial.

In 2005, the Internal Revenue Service (“IRS”) completed its audit of our U.S. income tax returns in the years 2000 and 2001. In January 2007, after subsequent discussions with us, the IRS revised its proposed adjustments for these years. We have protested these proposed adjustments and are currently addressing the matter with the IRS Appeals Division.

In May 2007, the IRS completed its audit of our U.S. income tax returns in the 2002 and 2003 fiscal years and has proposed various adjustments to these income tax returns. We have protested all of these proposed adjustments and are currently addressing the matter with the IRS Appeals Division.

In addition, we have tax audits in progress in various 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 tax years in accordance with FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”).

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

On January 1, 2007, we adopted 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. At December 31, 2007, we had $166 million of unrecognized tax benefits. During the nine months ended September 30, 2008, we had changes to unrecognized tax benefits of $5 million related primarily to the tax refund for French research tax credits as noted above. Additionally, during the three months ended June 30, 2008, as a result of ongoing discussions with foreign tax authorities related to open audits, we remeasured our FIN 48 reserve amounts and recorded an adjustment in unrecognized tax benefits of $21 million. This adjustment was a decrease to foreign net operating loss carry forwards with a corresponding adjustment to the valuation allowance. This change had no impact on income tax provision.

Additionally, we believe that it is reasonably possible that the IRS audit may be resolved within the next twelve months. However, because of the continuing uncertainty regarding the resolution of the various issues under audit, we are not able to accurately estimate a possible range of the change to the reserve for the uncertain tax positions.

Our continuing practice is to recognize interest and/or penalties related to income tax matters in income tax expense. Interest and penalties of $6 million have been expensed in the nine months ended September 30, 2008, related to uncertain tax positions.

Liquidity and Capital Resources

At September 30, 2008, we had $421 million of cash and cash equivalents and short-term investments compared to $430 million at December 31, 2007. This decrease resulted from payment of approximately $97 million for the Quantum acquisition, along with payments of $34 million for fixed assets, offset by $77 million of cash flows generated from operations during the same period. Our current ratio, calculated as total current assets divided by total current liabilities, was 2.07 at September 30, 2008, an increase of 0.32 from 1.75 at December 31, 2007. We have reduced our debt obligations to $147 million at September 30, 2008, from $163 million at December 31, 2007. Working capital (total current assets less total current liabilities) increased by $80 million to $544 million at

September 30, 2008, compared to $464 million at December 31, 2007 primarily due to reduction of our accounts payable balances and accrued liabilities along with the receipt of $82 million in cash proceeds from the sale of fabrication equipment at our North Tyneside, UK facility in the first quarter of 2008.

Approximately $16 million of our investment portfolio at September 30, 2008 was invested in auction-rate securities, down from $19 million at June 30, 2008. In the three months ended September 30, 2008, $3 million of auction-rate securities were redeemed at par value. Of the $16 million auction-rate securities that we still hold, approximately $15 million were classified as long-term investments within other assets on the condensed consolidated balance sheets, as they are not expected to be liquidated within the next twelve months, while the remaining $1 million were redeemed in October 2008. In October 2008, we accepted an offer from UBS Financial Services Inc. (“UBS”) to purchase our eligible auction-rate securities of $12 million (book value) at par value at any time during a two-year time period from June 30, 2010 to July 2, 2012. As a result of this offer, we expect to sell the securities to UBS at par value on June 30, 2010. The remainder of the Company’s auction-rate securities is held with another large financial institution.

Operating Activities: Net cash provided by operating activities was $77 million in the nine months ended September 30, 2008 compared to $105 million provided by operating activities in the nine months ended September 30, 2007. Net cash provided by operating activities in the nine months ended September 30, 2008 resulted from strong operating results, excluding depreciation and stock-based compensation, offset by restructuring and grant repayment expenditures incurred in the course of closing our North Tyneside, UK manufacturing facility.

Accounts receivable balances increased by 6% or $12 million to $221 million at September 30, 2008 from $209 million at December 31, 2007. The average days of outstanding accounts receivable (“DSO”) was 50 days at September 30, 2008, compared to 45 days at December 31, 2007 due to reduced revenue reported during the third quarter of 2008 related to the change in recognition timing for European distributors. While revenue was deferred on certain shipments, accounts receivable balances reflect the higher level of shipment activity. 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 from operating activities would be negatively affected.

Inventories decreased and provided $34 million of operating cash flows in the nine months ended September 30, 2008 compared to $6 million of cash utilized in the nine months ended September 30, 2007 primarily as a result of the closure of our North Tyneside, UK fabrication facility in the first quarter of 2008. Because of the deferral of revenue and related manufacturing costs related to the change in revenue recognition timing for European distributors, our days of inventory increased to 119 days at September 30, 2008, compared to 118 days at December 31, 2007. Inventory balances were also reduced by reclassification of $10 million of work in process inventory to “assets held for sale” related to the Heilbronn, Germany facility following the announced agreement to sell the facility, and related assets and liabilities in September 2008. 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.

Reduction of accounts payable balances utilized $96 million of operating cash flows in the nine months ended September 30, 2008, which included $40 million of grant repayment for North Tyneside, UK, paid in the first quarter of 2008.

Decreases in accrued and other liabilities provided $3 million of operating cash flows in the nine months ended September 30, 2008, primarily related to lower legal fees.

Investing Activities: Net cash used in investing activities was $40 million in the nine months ended September 30, 2008, compared to $11 million in the nine months ended September 30, 2007. During the nine months ended September 30, 2008, we paid approximately $97 million for the acquisition of Quantum, net of cash acquired, and $34 million for capital expenditures, offset in part by $83 million we received from the sale of fabrication equipment from our North Tyneside, UK facility. This compares to approximately $53 million paid for capital expenditures in the nine months ended September 30, 2007. We anticipate that expenditures for capital purchases will be between $45 million and $55 million for the remainder of 2008, which will be used to maintain existing equipment, provide additional testing capacity and, to a limited extent, for equipment to develop advanced process technologies.

Financing Activities: Net cash used in financing activities was $7 million in the nine months ended September 30, 2008, compared to $311 million in the nine months ended September 30, 2007. We continued to pay down debt, with repayments of principal balances on capital leases and other debt totaling $17 million in the nine months ended September 30, 2008, compared to $69 million in the nine months ended September 30, 2007. Proceeds from issuance of common stock totaled $9 million in the nine months ended September 30,2008, compared to $8 million in the nine months ended September 30, 2008. In the nine months ended September 30, 2007, we repurchased $250 million of common stock.

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.

Cash and cash equivalents decreased $10 million in the nine months ended September 30, 2008, compared to an increase of $5 million in the nine months ended September 30, 2007 due to the effect of exchange rate changes on cash balances During 2008, higher levels of cash balances were held in certain subsidiaries in Euro denominated accounts and decreased in value due to the weakening of the Euro compared to the U.S. Dollar during the period.

During the next twelve months, we expect our operations to generate positive cash flow. We expect that we will have sufficient cash from operations and financing sources to meet all debt obligations. Debt obligations outstanding at September 30, 2008, which are classified as short-term, totaled $131 million. During the remainder of 2008 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. In the event that we cannot obtain adequate financing due to the current credit markets or have to pay down our $100 million line of credit with a large financial institution, we believe we have sufficient funds due to the $421 million in cash, cash equivalents and short-term investments we held as of September 30, 2008 and cash flows from operations, which amounted to $77 million for the nine months ended September 30, 2008. Further, we have the ability to transfer cash back to the U.S., as a majority of our cash is held in cash and cash equivalents in Switzerland, which does not restrict the flow of cash between these two countries.

There were no material changes in our contractual obligations and rights outside of the ordinary course of business or other material changes in our financial condition in the nine months ended September 30, 2008, other than the unrecognized tax benefits associated with the adoption of FIN No. 48. Unrecognized tax benefits at September 30, 2008 were approximately $161 million, the timing of the resolution of which is uncertain.

Off-Balance Sheet Arrangements (Including Guarantees)

In the ordinary course of business, we have investments in privately held companies, which we review to determine if they should be considered variable interest entities. We have evaluated our investments in these other privately held companies and have determined that there was no material impact on our operating results or financial condition upon our adoption of FASB Interpretation No. 46R, “Consolidation of Variable Interest Entities — an Interpretation of ARB No. 51” (“FIN 46R”). Under FIN 46R certain events can require a reassessment of our investments in privately held companies to determine if they are variable interest entities and which of the stakeholders will be the primary beneficiary. As a result of such events, we may be required to make additional disclosures or consolidate these entities. We may be unable to influence these events.

During the ordinary course of business, we provide 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 September 30, 2008, the maximum potential amount of future payments that we could be required to make under these guarantee agreements is approximately $2 million. We have not recorded any liability in connection with these guarantee arrangements. Based on historical experience and information currently available, we believe we will not be required to make any payments under these guarantee arrangements.

Critical Accounting Policies and Estimates

Management’s Discussion and Analysis of Financial Condition and Results of Operations are 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 us to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. We base our estimates on historical experience and on various other assumptions that we believe 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.

We believe that the estimates, assumptions and judgments involved in revenue recognition, allowances for doubtful accounts and sales returns, accounting for income taxes, valuation of inventory, fixed assets, stock-based compensation, restructuring charges and

litigation have the greatest potential impact on our Condensed Consolidated Financial Statements, so we consider these to be our critical accounting policies. Historically, our estimates, assumptions and judgments relative to our critical accounting policies have not differed materially from actual results. The critical accounting estimates associated with these policies are described in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our Annual Report on Form 10-K filed with the SEC on February 29, 2008, except for Goodwill and Intangible Assets and an update to Revenue Recognition which are discussed below.

Valuation of Goodwill and Intangible Assets

We review goodwill and intangible assets with indefinite lives for impairment annually and whenever events or changes in circumstances indicate the carrying value of goodwill may not be recoverable in accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (“SFAS No. 142”). Purchased intangible assets with finite useful lives are amortized using the straight-line method over their estimated useful lives and are reviewed for impairment under SFAS No. 144, “Accounting for the Impairment of Disposal of Long-Lived Assets” (“SFAS No. 144”). Determining the fair value of a reporting unit is judgmental in nature and involves the use of significant estimates and assumptions. These estimates and assumptions include revenue growth rates and forecasted operating margins used to calculate projected future cash flows, risk-adjusted discount rates, future economic and market conditions and determination of appropriate market comparables. We base our fair value estimates on assumptions we believe to be reasonable. Actual future results may differ from those estimates.

Revenue Recognition

Effective July 1, 2008, we entered into revised agreements with certain European distributors that allow additional rights, including future price concessions at the time of resale, price protection, and the right to return products upon termination of the distribution agreement. As a result of uncertainties over finalization of pricing for shipments to these distributor, we consider that the sale prices are not “fixed or determinable” at the time of shipment to these distributors. Revenues and related costs will be deferred until the products are sold by the distributors to their end customers. Our revenue reporting is highly dependent on receiving pertinent, accurate and timely data from our distributors. Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of our products they still have in stock. Because the data set is large and complex and because there may be errors in the reported data, we must use estimates and apply judgements to reconcile distributors’ reported inventories to their activities. Actual results could vary from those estimates.

Recent Accounting Pronouncements

In February 2008, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) No. 157-2, “Effective Date of FASB Statement No.157”, which delays the effective date of SFAS No. 157, “Fair Value Measurements”, for all non-recurring fair value measurements of non-financial assets and non-financial liabilities until fiscal years beginning after November 15, 2008. We are currently evaluating the financial impact of FSP No. 157-2 on our financial position and results of operations.

In March 2008, FASB issued Statement of Financial Accounting Standard (“SFAS”) No. 161, “Disclosures about Derivative Instruments and Hedging Activities.” This standard is intended to improve financial reporting by requiring transparency about the location and amounts of derivative instruments in an entity’s financial statements; how derivative instruments and related hedged items are accounted for under SFAS No 133; and how derivative instruments and related hedged items affect its financial position, financial performance and cash flows. We are currently evaluating the potential impact, if any, of the adoption of SFAS No. 161 on our condensed consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations” (“SFAS No. 141R”). SFAS No. 141R establishes principles and requirements for how an acquirer recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, any noncontrolling interest in the acquiree and the goodwill acquired. SFAS No. 141R also establishes disclosure requirements to enable the evaluation of the nature and financial effects of the business combination. SFAS No. 141R is effective as of the beginning of an entity’s fiscal year that begins after December 15, 2008. We are currently evaluating the potential impact, if any, of the adoption of SFAS No. 141R on our condensed consolidated results of operations and financial condition.

In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interest in Consolidated Financial Statements” (“SFAS No. 160”). SFAS No. 160 establishes accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. SFAS No. 160 is effective as of the beginning of an entity’s fiscal year that begins after December 31, 2008. We are currently evaluating the potential impact, if any, of the adoption of SFAS No. 160 on our condensed consolidated results of operations and financial condition.

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” (“SFAS No. 159”). Under SFAS No. 159, a company may elect to use fair value to measure eligible items at specified election dates and report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. If elected, SFAS No. 159 is effective for fiscal years beginning after November 15, 2007. Currently, we have not expanded our financial assets and liabilities that we account for under the fair value option of SFAS No. 159.

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 September 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 $147 million at September 30, 2008. Approximately $3 million of these borrowings have fixed interest rates. We have $141 million of floating interest rate debt, of which approximately $16 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 September 30, 2008. All fair market values are shown net of applicable premium or discount, if any:


													Total
													Variable-rate
													Debt
	Payments by Due Year												Outstanding at
	2008*		2009		2010		2011		2012		Thereafter		September 30, 2008
	(in thousands)
60 day USD LIBOR weighted-average interest rate basis (1) — Revolving line of credit	$	100,000	$	—	$	—	$	—	$	—	$	—	$	100,000

Total of 60 day USD LIBOR rate debt	$	100,000	$	—	$	—	$	—	$	—	$	—	$	100,000

90 day USD LIBOR or PRIME weighted-average interest rate basis (1) — Revolving line of credit due 2009	$	—	$	25,000	$	—	$	—	$	—	$	—	$	25,000

Total of 90 day USD LIBOR or PRIME rate debt	$	—	$	25,000	$	—	$	—	$	—	$	—	$	25,000

90 day EURIBOR weighted-average interest rate basis (1) — Capital leases	$	1,139	$	4,545	$	4,545	$	4,545	$	1,138	$	—	$	15,912

Total of 90 day USD LIBOR rate debt	$	1,139	$	4,545	$	4,545	$	4,545	$	1,138	$	—	$	15,912


Total variable-rate debt	$	101,139	$	29,545	$	4,545	$	4,545	$	1,138	$	—	$	140,912


*		Represents payments due over the three months remaining for 2008.

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

The following tables present the hypothetical changes in interest expense, in the three and nine month period ended September 30, 2008 related to our outstanding borrowings that are sensitive to changes in interest rates as of September 30, 2008. 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 the three months ended September 30, 2008:


							Interest Expense
	Interest Expense Given an Interest						with No Change in		Interest Expense Given an Interest
	Rate Decrease by X Basis Points						Interest Rate		Rate Increase by X Basis Points
	150 BPS		100 BPS		50 BPS		(in thousands)		50 BPS		100 BPS		150 BPS

Interest expense	$	718	$	1,442	$	2,166	$	2,889	$	3,613	$	4,336	$	5,060

In the nine months ended September 30, 2008:


							Interest Expense
	Interest Expense Given an Interest						with No Change in		Interest Expense Given an Interest
	Rate Decrease by X Basis Points						Interest Rate		Rate Increase by X Basis Points
	150 BPS		100 BPS		50 BPS		(in thousands)		50 BPS		100 BPS		150 BPS

Interest expense	$	7,607	$	8,342	$	9,077	$	9,812	$	10,547	$	11,282	$	12,017

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 we have 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 in the three and nine months ended September 30, 2008, compared to the average exchange rates in the three and nine months ended September 30, 2007, resulted in a decrease in income from operations of $9 million and $30 million in the three and nine months ended September 30, 2008 (as discussed in this report in Part I, 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 nine months ended September 30, 2008 were recorded using the average foreign currency exchange rates in the same period in 2007. Sales denominated in foreign currencies, primarily the Euro, were 18% and 20% in the three months ended September 30, 2008 and 2007, respectively, and 21% in both the nine months ended September 30, 2008 and 2007. Sales denominated in Yen were 1% in the three months ended September 30, 2008 and 2007 and 1% for both the nine months ended September 30, 2008 and 2007. Costs denominated in foreign currencies, primarily the Euro, were 40% and 47% in the three months ended September 30, 2008 and 2007, respectively, and 43% and 51% in the nine months ended September 30, 2008 and 2007, respectively.

We 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 28% and 23% of our accounts receivables were denominated in foreign currencies as of September 30, 2008 and December 31, 2007, 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 54% of our accounts payable were denominated in foreign currencies as of September 30, 2008 and December 31, 2007, respectively. Approximately 13% and 18% of our debt obligations were denominated in foreign currencies as of September 30, 2008 and December 31, 2007, respectively.

Liquidity and Valuation Risk

Approximately $16 million of our investment portfolio at September 30, 2008 was invested in highly-rated auction-rate securities, compared to approximately $19 million at June 30, 2008. In the three months ended September 30, 2008, $3 million of auction-rate securities were redeemed at par value. Auction-rate securities are securities that are structured with short-term interest rate reset dates of generally less than ninety days but with contractual maturities that can be well in excess of ten years. At the end of each reset period, investors can sell or continue to hold the securities at par. These securities are subject to fluctuations in fair value depending on the supply and demand at each auction. If the auctions for the securities we own fail, the investments may not be readily convertible to cash until a future auction of these investments is successful. If the credit rating of either the security issuer or the third-party insurer underlying the investments deteriorates, we may be required to adjust the carrying value of the investment through an impairment charge. As of September 30, 2008, we recorded an impairment of $1 million, relating to decline in the value of auction-rate securities which is recorded as comprehensive loss. We do not believe that the impairment is “other than temporary” due to our intent and ability to hold the securities until they can be liquidated at par value.

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

Our management, including the Chief Executive Officer and Chief Financial Officer, does not expect that our 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 Atmel 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

Litigation

On October 10, 2008, a class action complaint was filed in Delaware Chancery Court against the Company and all of the members of the current board relating to the proposed acquisition of Atmel by Microchip Technology and ON Semiconductor. The case has one cause of action, for breach of fiduciary duty, against all of the individual defendants. The complaint alleges that the proposed acquisition price is a premium over the current share price and is a “superior alternative” to the Company’s current turnaround plan. The complaint alleges that the individual defendants have fiduciary duties to: undertake an appropriate evaluation of Atmel’s worth as an acquisition candidate; take all appropriate steps to enhance Atmel’s attractiveness as a candidate; take all appropriate steps to “effectively expose Atmel to the marketplace” in an effort to create an active auction for Atmel, including but not limited to by negotiation with Microchip and ON; act independently so that the interests of Atmel’s shareholders will be protected; and adequately ensure that no conflicts of interest exist. The complaint asks further for an order requiring the individual defendants to “place the Company up for auction and/or to conduct a market-check” and requiring full and fair disclosure of the material facts to shareholders before completing any acquisition; a declaration that the individual defendants have breached their fiduciary duties; and an award of fees, expenses and costs to plaintiff and plaintiff’s counsel.

On October 13, 2008 a separate class action complaint was filed in Delaware Chancery Court against the Company and all of the members of the current board relating to the proposed acquisition of Atmel by Microchip Technology and ON Semiconductor. This complaint also alleges that the proposed acquisition price is a premium over the current share price, but says the proposed acquisition is an attempt “to take advantage of the artificially low trading price of Atmel’s stock.” The case does not delineate a cause of action, but makes breach of fiduciary duty allegations. The complaint alleges that the individual defendants have fiduciary duties to: undertake an appropriate evaluation of Atmel’s worth as an acquisition candidate; actively evaluate the proposed transaction and engage in a meaningful auction

with third parties in an attempt to obtain the best value; structure the proposed transaction in a fair and non-coercive manner; refrain from favoring the individual defendants’ interests over those of the company’s minority, public shareholders; and disclose all material facts necessary to permit the shareholders to make an informed decision. The complaint seeks an order that would preliminarily and permanently enjoin defendants from consummating or closing the proposed transaction; rescind the transaction in the event it is closed and award rescission-type damages to plaintiffs; direct defendants to account to plaintiff for their damages sustained because of the wrongs complained of; and award attorneys fees, expert fees and costs.

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

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 U.S. Department of the Treasury, Office of Foreign Assets Control (“OFAC”). Products and technology exported from other countries may also be subject to local laws and regulations governing international trade. Under these laws, the Company is responsible for obtaining all necessary licenses or other approvals, if required, for exports of hardware, technical data, and software, or for the provision of technical assistance. The Company is also required to obtain export licenses, if required, prior to transferring technical data or software to foreign persons. In addition, we are required to obtain necessary export licenses prior to the export of re-export of products, software, and technology (i) to any person, entity, organization or other party indentified on the U.S. Department of Commerce’s Denied Persons or Entity List, the U.S. Department of Treasury’s Specially Designated Nationals or Blocked Persons Lists, or the Department of State’s Debarred Parties List; or (ii) for use in nuclear, chemical/biological weapons, or rocket systems or unmanned air vehicle applications. A determination by the U.S. or local government that the Company has failed to comply with one or more of these export control laws or trade sanctions, including failure to properly restrict an export to the persons, entities or countries set forth on the government restricted party lists, 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. Further, a change in these laws could restrict our ability to export to previously permitted countries, customers, distributors, or other third parties. Any one or more of these sanctions or a change in law could have a material adverse effect on the Company’s business, financial condition and results of operations.

Item 1A. Risk Factors

In addition to the other information contained in this Form 10-Q, we have identified the following risks and uncertainties that may have a material adverse effect on our business, financial condition, or results of operation. Investors should carefully consider the risks described below before making an investment decision. The trading price of our common stock could decline due to any of these risks, and investors may lose all or part of their investment. In addition, these risks and uncertainties may impact the “forward-looking” statements described elsewhere in this Form 10-Q and in the documents incorporated herein by reference. They could also affect our actual results of operations, causing them to differ materially from those expressed in “forward-looking” statements.

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

	•		our transition to a fab-lite strategy;

	•		our dependence on selling through distributors;

	•		our increased dependence on outside foundries and their ability to meet our volume, quality, and delivery objectives, particularly during times of increasing demand along with inventory excesses or shortages due to reliance on third party manufacturers;

	•		global economic and political conditions;

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

	•		fluctuations in currency exchange rates and revenues and costs denominated in foreign currencies;

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

	•		success with disposal or restructuring activities, including disposition of our Heilbronn facility;

	•		fluctuations in manufacturing yields;

	•		the average margin of the mix of products we sell;

	•		third party intellectual property infringement claims;

	•		the highly competitive nature of our markets;

	•		the pace of technological change;

	•		natural disasters or terrorist acts;

	•		assessment of internal controls over financial reporting;

	•		ability to meet our debt obligations;

	•		availability of additional financing;

	•		potential impairment and liquidity of auction-rate securities;

	•		our ability to maintain good relationships with our customers;

	•		long-term contracts with our customers;

	•		integration of new businesses or products;

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

	•		personnel changes;

	•		business interruptions;

	•		system integration disruptions;

	•		anti-takeover effects in our certificate of incorporation, bylaws, and preferred shares rights agreement;

	•		changes in accounting rules, such as recording expenses for employee stock option grants, or our accounting policies, such as the recent change to a sell through model for distributors in Europe;

	•		the unfunded nature of our foreign pension plans and that any requirement to fund these plans could negatively impact our cash position;

	•		the effects of our acquisition strategy, such as unanticipated accounting charges, which may adversely affect our results of operations;

	•		utilization of our manufacturing capacity;

	•		disruptions to the availability of raw materials can disrupt our ability to supply products to our customers;

	•		costs associated with, and the outcome of, any litigation to which we are, or may become, a party;

	•		product liability claims may arise resulting in significant costs and damage to reputation;

	•		audits of our income tax returns, both in the U.S. and in foreign jurisdictions; and

	•		compliance with economic incentive terms in certain government grants.

Any unfavorable changes in any of these factors could harm our operating results and may result in volatility or a decline in our stock price. In addition, the unsolicited proposal, subject to conditions, from Microchip Technology Inc. and ON Semiconductor to engage in negotiations for a three-way agreement to acquire Atmel, and Atmel’s response thereto, may cause additional substantial volatility in our stock price.

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 can 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 continued economic growth generally and on 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 be profitable 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 3% to $256 billion in 2007, and are estimated by the Semiconductor Industry Association to increase 8% to $277 billion in 2008.

Our 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.

The semiconductor industry is increasingly characterized by annual seasonality and wide fluctuations of supply and demand. A significant portion of our revenue comes from sales to customers supplying consumer markets and international sales. As a result, our business may be subject to seasonally lower revenues in particular quarters of our fiscal year. The industry has also been impacted by significant shifts in consumer demand due to economic downturns or other factors, which may result in diminished product demand and production over-capacity. We have experienced substantial quarter-to-quarter fluctuations in revenues and operating results and expect, in the future, to continue to experience short term period-to-period fluctuations in operating results due to general industry or economic conditions.

WE COULD EXPERIENCE DISRUPTION OF OUR BUSINESS AS WE TRANSITION TO A FAB-LITE STRATEGY AND INCREASE DEPENDENCE ON OUTSIDE FOUNDRIES, WHERE 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.

As part of our fab-lite strategy, we have reduced the number of manufacturing facilities we own. In December 2005, we sold our Nantes, France fabrication facility and the related foundry activities, to XbyBus SAS. In July 2006, we sold our Grenoble, France subsidiary (including the fabrication facility in Grenoble) to e2v technologies plc. In May 2008, we sold our North Tyneside, United Kingdom wafer fabrication facility. In September 2008, we announced an agreement for the sale of our wafer fabrication operation in Heilbronn, Germany. As a result of these transactions, we will be increasingly relying on the utilization of third-party foundry manufacturing and assembly and test capacity. As part of this transition we must expand our foundry relationships by entering into new agreements with third-party foundries. If these agreements are not completed on a timely basis, or the transfer of production is delayed for other reasons, the supply 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.

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.

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 future 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.

OUR REVENUES ARE DEPENDENT ON SELLING THROUGH DISTRIBUTORS.

Sales through distributors accounted for 49% and 48% of our net revenues for the three and nine months ended September 30, 2008, respectively, and accounted for 43% of our net revenues in both the three and nine months ended September 30, 2007. We market and sell our products through third-party distributors pursuant to agreements that can generally be terminated for convenience by either party upon relatively short notice to the other party. These agreements are non-exclusive and also permit our distributors to offer our competitors’ products.

During the six months ended June 30, 2008, our sales agreements with independent distributors in Europe were accounted for using a “sell-in” revenue recognition model. Sales to these distributors before July 1, 2008 were made under arrangements where pricing was fixed at the time of shipment. In addition, the arrangements did not provide these distributors with allowances such as price protection or rights of return upon termination of the arrangement. As a result our policy was to recognize revenue upon shipment to these distributors.

Effective July 1, 2008, we entered into revised agreements with certain European distributor agreements that allow additional rights, including future price concessions at the time of resale, price protection, and the right to return products upon termination of the distribution agreement. As a result of uncertainties over finalization of pricing for shipments to these distributors, we consider that the sale prices are not “fixed or determinable” at the time of shipment to these distributors. Revenues and related costs will be deferred until the products are sold by the distributor to their end customers.

The objective of this conversion is to enable us to better manage end-customer pricing, track design registrations for proprietary products, and improve our visibility into distribution inventory and sales levels. We expect that this conversion will result in improved operating results for us and our distribution partners in the future. Management estimates that the revenue impact of this one-time adjustment lowered revenue and costs of sales by approximately $20 million and $9 million, respectively, in the three and nine months ended September 30, 2008. Our revenue reporting is highly dependent on receiving pertinent, accurate and timely data from our distributors. Distributors provide us periodic data regarding the product, price, quantity, and end customer when products are resold as well as the quantities of our products they still have in stock. Because the data set is large and complex and because there may be errors in the reported data, we must use estimates and apply judgements to reconcile distributors’ reported inventories to their activities. Actual results could vary from those estimates.

We are dependent on our distributors to supplement our direct marketing and sales efforts. If any significant distributor or a substantial number of our distributors terminated their relationship with us or decided to market our competitors’ products over our products, our ability to bring our products to market would be negatively impacted, we may have difficulty in collecting outstanding receivable balances, and we may incur other charges or adjustments resulting in material adverse impact to our revenues and operating results.

Additionally, distributors typically maintain an inventory of our products. For certain distributors, we have signed agreements which protect the value of their inventory of our products against price reductions, as well as provide for rights of return under specific conditions. In addition, certain agreements with our distributors also contain standard stock rotation provisions permitting limited levels of product returns. We defer the gross margins on our sales to these distributors, until the applicable products are re-sold by the distributors. However, in the event of an unexpected significant decline in the price of our products or significant return of unsold

inventory, we may experience inventory write-downs, charges to reimburse costs incurred by distributors, or other charges or adjustments which could harm our revenues and operating results.

WE BUILD SEMICONDUCTORS BASED ON FORECASTED DEMAND, AND AS A RESULT, CHANGES TO FORECASTS FROM ACTUAL DEMAND MAY RESULT IN EXCESS INVENTORY OR OUR INABILITY TO FILL CUSTOMER ORDERS ON A TIMELY BASIS WHICH MAY HARM OUR BUSINESS.

We schedule production and build semiconductor devices based primarily on our internal forecasts, as well as non-binding forecasts from customers for orders which may be cancelled or rescheduled with short notice. Our customers frequently place orders requesting product delivery in a much shorter period than our lead time to fully fabricate and test devices. Because the markets we serve are volatile and subject to rapid technological, price, and end user demand changes, our forecasts of unit quantities to build may be significantly incorrect. Changes to forecasted demand from actual demand may result in us producing unit quantities in excess of orders from customers, which could result in the need to record additional expense for the write-down of inventory, negatively affecting gross margin and results from operations.

As we transition to increased dependence on outside foundries, we will have less control over modifying production schedules to match changes in forecasted demand. If we commit to obtaining foundry wafers and cannot cancel or reschedule commitments without material costs or cancellation penalties, we may be forced to purchase inventory in excess of demand, which could result in a write-down of inventories negatively affecting gross margin and results of operations.

Conversely, failure to produce or obtain sufficient wafers for increased demand could cause us to miss revenue opportunities and, if significant, could impact our customers’ ability to sell products, 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, AND A VIOLATION OF, OR CHANGE IN THESE LAWS 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 U.S. Department of Treasury, Office of Foreign Assets Control (“OFAC”). Products and technology exported from other countries may also be subject to local laws and regulations governing international trade. Under these laws and regulations, we are responsible for obtaining all necessary licenses or other approvals, if required, for exports of hardware, technical data, and software, or for the provision of technical assistance. We are also required to obtain export licenses, if required, prior to transferring technical data or software to foreign persons. In addition, under these laws and regulations we are required to obtain necessary export licenses prior to the export or re-export of products, software, and technology (i) to any person, entity, organization or other party identified on the U.S. Department of Commerce’s Denied Persons or Entity List, the U.S. Department of Treasury’s Specially Designated Nationals or Blocked Persons Lists, or the Department of State’s Debarred Parties List; or (ii) for use in nuclear, chemical/biological weapons, or rocket systems or unmanned air vehicle applications. A determination by the U.S. or local government that Atmel has failed to comply with one or more of these export control laws or trade sanctions, including failure to properly restrict an export to the persons, entities or countries set forth on the government restricted party lists, 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. Further, a change in these laws and regulations could restrict our ability to export to previously permitted countries, customers, distributors, or other third parties. Any one or more of these changes could have a material adverse effect on our business, financial condition and results of operations.

We are enhancing our export compliance program, including 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 additional operational procedures. 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, AND REVENUES AND COSTS DENOMINATED IN FOREIGN CURRENCIES COULD ADVERSELY IMPACT OUR OPERATING RESULTS WITH CHANGES IN THESE FOREIGN CURRENCIES AGAINST THE DOLLAR.

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.

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 we have significant operations with 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 in the three and nine months ended September 30, 2008, compared to the average exchange rates in the three and nine months ended September 30, 2007, resulted in a decrease in income from operations of $9 million and $30 million in the three and nine months ended September 30, 2008 (as discussed in this report in Part I, 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 nine months ended September 30, 2008 were recorded using the average foreign currency exchange rates in the same period in 2007. Sales denominated in foreign currencies, primarily Euro were 18% and 20% in the three months ended September 30, 2008 and 2007, respectively, and 21% in both the nine months ended September 30, 2008 and 2007, respectively. Sales denominated in Yen were 1% in the three months ended September 30, 2008 and 2007 and 1% for both the nine months ended September 30, 2008 and 2007. Costs denominated in foreign currencies, primarily the Euro, were 40% and 47% in the three months ended September 30, 2008 and 2007, respectively, and 43% and 51% in the nine months ended September 30, 2008 and 2007, 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 28% and 23% of our accounts receivables are denominated in foreign currency as of September 30, 2008 and December 31, 2007, 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 54% of our accounts payable were denominated in foreign currency as of September 30, 2008 and December 31, 2007, respectively. Approximately 13% and 18% of our debt obligations were denominated in foreign currency as of September 30, 2008 and December 31, 2007, respectively.

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, 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. In May 2008, we sold our North Tyneside, United Kingdom manufacturing facility. In September 2008, we announced an agreement for the sale of our wafer fabrication operation in Heilbronn, Germany. In July 2008, we announced that we are continually reviewing potential changes in our business and asset portfolio throughout our worldwide operations, including

those located in Europe in order to enhance our overall competitiveness and viability. However, reducing our wafer fabrication capacity involves significant potential costs and delays, particularly in Europe, where the extensive statutory protection of employees imposes substantial restrictions 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 the potential requirement to repay governmental subsidies. We have in the past and may in the future experience labor union or workers council objections, or other difficulties, while implementing a reduction of the number of employees. Significant difficulties that we experience could harm our business and operating results, either by deterring needed headcount reduction or by the additional employee severance costs resulting from employee reduction actions 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 or recoveries of previous charges. However, we may incur additional restructuring and asset impairment charges in connection with additional 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.

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 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 87% and 86% of net revenues in the three months ended September 30, 2008 and 2007, respectively, and 86% of net revenues in both the nine months ended September 30, 2008 and 2007. 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 and German 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 18% and 20% of our net revenues in the three months ended September 30, 2008 and 2007, respectively, were denominated in foreign currencies, respectively, and 21% of our net revenues in each of the nine months ended September 30, 2008 and 2007, respectively, were denominated in foreign currencies, Operating costs denominated in foreign currencies, primarily the euro, were approximately 40% and 47% of total operating costs in the three months ended September 30, 2008 and 2007, respectively, and were approximately 43% and 51% of total operating costs in the nine months ended September 30, 2008 and 2007, 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 a 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 products 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 September 30, 2008, our total debt was $147 million, compared to $163 million at December 31, 2007. Our debt-to-equity ratio was 0.90 and 1.07 at September 30, 2008 and December 31, 2007, 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 all of our covenants as of September 30, 2008 and as of December 31, 2007.

Of our total debt of $147 million as of September 30, 2008, $100 million is due in the next three months, and we may not be able to obtain additional financing due to the current credit market conditions. However, we believe that our current cash and cash equivalent balance and cash from operations are sufficient in the event we are not able to obtain additional financing.

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 amount to us, whether by dividends, distributions, loans or any other form.

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

We intend to continue to make capital investments to support new products and manufacturing processes that achieve manufacturing cost reductions and improved yields. We may seek additional equity or debt financing to fund operations, strategic transactions, or 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.

A SUBSTANTIAL PORTION OF OUR INVESTMENT PORTFOLIO IS INVESTED IN AUCTION-RATE SECURITIES. FAILURES IN THESE AUCTIONS MAY AFFECT OUR LIQUIDITY, WHILE RATING DOWNGRADES OF THE SECURITY ISSUER AND/OR THE THIRD-PARTIES INSURING SUCH INVESTMENTS MAY REQUIRE US TO ADJUST THE CARRYING VALUE OF THESE INVESTMENTS THROUGH AN IMPAIRMENT CHARGE.

Approximately $16 million of our investment portfolio at September 30, 2008 is invested in auction-rate securities, of which $1 million was sold in October 2008. Auction-rate securities are securities that are structured with short-term interest rate reset dates of generally less than ninety days but with contractual maturities that can be well in excess of ten years. At the end of each reset period, investors can sell or continue to hold the securities at par. These securities are subject to fluctuations in fair value depending on the supply and demand at each auction. These auction-rate securities have failed auctions in the three and nine months ended September 30, 2008. If the auctions for the securities we own continue to fail, the investments may not be readily convertible to cash until a future auction of these investments is successful. If the credit rating of either the security issuer or the third-party insurer underlying the investments deteriorates, we may be required to adjust the carrying value of the investment through an impairment charge.

At September 30, 2008, we recorded an impairment of $1 million, relating to decline in the value of auction-rate securities which is recorded as comprehensive loss. We do not believe that the impairment is “other than temporary” due to our intent and ability to hold the securities until they can be liquidated at par value.

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. Also, one or more of our distributors or their affiliates may be identified in the future on the U.S. Department of Commerce’s Denied Persons or Entity List, the U.S. Department of Treasury’s Specially Designated Nationals or Blocked Persons Lists, or the Department of State’s Debarred Parties List, in which case we would not be permitted to sell our products through such distributors. In any of these cases, our business or results from operations could be materially harmed. Our sales terms for European distributors generally include very limited rights of return and stock rotation privileges. However, as we evaluate how to refine our distribution strategy, we may need to modify our sales terms or make changes to our distributor base, which may impact our future revenues in this region. It may take time for us to convert systems and processes to support modified sales terms. In addition, revenues in Asia may be impacted in the future as we refine our distribution strategy and optimize our distributor base in this region. It may take time for us to identify financially viable distributors and help them develop high quality support services. There can be no assurances that we will be able to manage these changes in an efficient and timely manner, or that our net revenues, result of operations and financial position will not be negatively impacted as a result.

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. For example, we acquired Quantum Research Group on March 6, 2008 for $96 million. 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.

In addition, under U.S. GAAP, we are required to review our intangible assets for impairment whenever events or changes in circumstances indicate that the carrying value of these assets may not be recoverable. In addition, we are required to review our goodwill and indefinite-lived intangible assets on an annual basis. If presently unforeseen events or changes in circumstances arise which indicate that the carrying value of our goodwill or other intangible assets may not be recoverable, we will be required to perform impairment reviews of these assets, which had carrying values of approximately $82 million as of September 30, 2008. An impairment review could result in a write-down of all or a portion of these assets to their fair values. We intend to perform an annual impairment review during the fourth quarter of each year or more frequently if we believe indicators of impairment exist. In light of the large carrying value associated with our goodwill and intangible assets, any write-down of these assets may result in a significant charge to our condensed consolidated statement of operations in the period any impairment is determined and could cause our stock price to decline.

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 while we are making 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, our 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 million 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.

CHANGES IN STOCK OPTION ACCOUNTING RULES MAY ADVERSELY IMPACT OUR REPORTED OPERATING RESULTS, OUR STOCK PRICE, AND OUR ABILITY TO OFFER COMPETITIVE COMPENSATION ARRANGEMENTS WITH OUR EMPLOYEES.

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 consolidated financial statements as of and in the years ended December 31, 2007 and 2006 are based on this method. In accordance with the modified prospective transition method, our 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 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 and nine months ended September 30, 2008 was reduced by stock-based compensation expenses of $7 million and $20 million, respectively. Income from continuing operations in the three and nine months ended September 30, 2007 was reduced by $5 million and $12 million, respectively. These charges were calculated in accordance with SFAS No. 123R.

The implementation of SFAS No. 123R has resulted in lower reported operating results, net income, and earnings per share, which could negatively impact our future stock price. In addition, this could impact our ability to utilize employee stock plans to reward employees, and could result in a competitive disadvantage to us in attracting or retaining employees in the future.

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. Pension benefits payable totaled $49 million and $53 million at September 30, 2008 and December 31, 2007. 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 paid in 2007 was approximately $1 million, and we expect to pay $2 million in 2008. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively impact our cash position and operating capital.

OUR ACQUISITION STRATEGY MAY RESULT IN UNANTICIPATED ACCOUNTING CHARGES OR OTHERWISE ADVERSELY AFFECT OUR RESULTS OF OPERATIONS, AND RESULT IN DIFFICULTIES IN ASSIMILATING AND INTEGRATING THE OPERATIONS, PERSONNEL, TECHNOLOGIES, PRODUCTS AND INFORMATION SYSTEMS OF ACQUIRED COMPANIES OR BUSINESSES, OR BE DILUTIVE TO EXISTING STOCKHOLDERS.

A key element of our business strategy includes expansion through the acquisitions of businesses, assets, products or technologies that allow us to complement our existing product offerings, expand our market coverage, increase our skilled engineering workforce or enhance our technological capabilities. Between January 1, 1999 and December 31, 2007, we acquired two companies and certain assets of three other businesses. We continually evaluate and explore strategic opportunities as they arise, including business combination transactions, strategic partnerships, and the purchase or sale of assets, including tangible and intangible assets such as intellectual property. For example, on March 6, 2008, we completed the purchase of Quantum Research Group Ltd. (“Quantum”), a developer of capacitive sensing IP and solutions for user interfaces.

Acquisitions may require significant capital infusions, typically entail many risks, and could result in difficulties in assimilating and integrating the operations, personnel, technologies, products and information systems of acquired companies or businesses. We have in the past and may in the future experience delays in the timing and successful integration of an acquired company’s technologies and product development through volume production, unanticipated costs and expenditures, changing relationships with customers, suppliers and strategic partners, or contractual, intellectual property or employment issues. In addition, key personnel of an acquired company may decide not to work for us. The acquisition of another company or its products and technologies may also require us to enter into a geographic or business market in which we have little or no prior experience. These challenges could disrupt our ongoing business, distract our management and employees, harm our reputation and increase our expenses. These challenges are magnified as the size of the acquisition increases. Furthermore, these challenges would be even greater if we acquired a business or entered into a business combination transaction with a company that was larger and more difficult to integrate than the companies we have historically acquired.

Acquisitions may require large one-time charges and can result in increased debt or contingent liabilities, adverse tax consequences, additional stock-based compensation expense, and the recording and later amortization of amounts related to certain purchased intangible assets, any of which items could negatively impact our results of operations. In addition, we may record goodwill in connection with an acquisition and incur goodwill impairment charges in the future. Any of these charges could cause the price of our common stock to decline. Beginning January 1, 2009, the accounting for future business combinations will change. We expect that the new requirements will have an impact on our consolidated financial statements when effective, but the nature and magnitude of the specific effects will depend upon the nature, terms and size of the acquisitions we consummate after the effective date.

Acquisitions or asset purchases made entirely or partially for cash may reduce our cash reserves. We may seek to obtain additional cash to fund an acquisition by selling equity or debt securities. Any issuance of equity or convertible debt securities may be dilutive to our existing stockholders.

We cannot assure you that we will be able to consummate any pending or future acquisitions or that we will realize any anticipated benefits from these acquisitions. We may not be able to find suitable acquisition opportunities that are available at attractive valuations, if at all. Even if we do find suitable acquisition opportunities, we may not be able to consummate the acquisitions on commercially acceptable terms, and any decline in the price of our common stock may make it significantly more difficult and expensive to initiate or consummate additional acquisitions.

WE MAY NOT BE ABLE TO EFFECTIVELY UTILIZE ALL OF OUR MANUFACTURING CAPACITY, WHICH MAY NEGATIVELY IMPACT OUR BUSINESS.

The manufacture and assembly of semiconductor devices requires significant fixed investment in manufacturing facilities, specialized equipment, and a skilled workforce. If we are unable to fully utilize our own fabrication facilities due to decreased demand, significant shift in product mix, obsolescence of the manufacturing equipment installed, lower than anticipated manufacturing yields, or other

reasons, our operating results will suffer. Our inability to produce at anticipated output levels could include delays in the recognition of revenue, loss of revenue or future orders, customer-imposed penalties for failure to meet contractual shipment deadlines.

Our operating results are also adversely affected when we operate at production levels below optimal capacity. Lower capacity utilization results in certain costs being charged directly to expense and lower gross margins. During 2007, we lowered production levels significantly at our North Tyneside, United Kingdom manufacturing facility to avoid building more inventory than we were forecasting orders for. As a result, operating costs for these periods were higher than in prior periods negatively impacting gross margins. We closed our North Tyneside manufacturing facility in the first quarter of 2008. In addition, other Atmel manufacturing facilities could experience similar conditions requiring production levels to be reduced below optimal capacity levels. If we are unable to operate our manufacturing facilities at optimal production levels, our operating costs will increase and gross margin and results from operations will be negatively impacted.

DISRUPTIONS TO THE AVAILABILITY OF RAW MATERIALS CAN DISRUPT OUR ABILITY TO SUPPLY PRODUCTS TO OUR CUSTOMERS, WHICH COULD SERIOUSLY HARM OUR BUSINESS.

The manufacture of semiconductor devices requires specialized raw materials, primarily certain types of silicon wafers. We generally utilize more than one source to acquire these wafers, but there are only a limited number of qualified suppliers capable of producing these wafers in the market. The raw materials and equipment necessary for our business could become more difficult to obtain as worldwide use of semiconductors in product applications increases. We have experienced supply shortages from time to time in the past, and on occasion our suppliers have told us they need more time than expected to fill our orders. Any significant interruption of the supply of raw materials could harm our business.

WE COULD FACE PRODUCT LIABILITY CLAIMS THAT RESULT IN SIGNIFICANT COSTS AND DAMAGE TO REPUTATION WITH CUSTOMERS, WHICH WOULD NEGATIVELY IMPACT OUR OPERATING RESULTS.

All of our products are sold with a limited warranty. However, we could incur costs not covered by our warranties, including additional labor costs, costs for replacing defective parts, reimbursement to customers for damages incurred in correcting their defective products, costs for product recalls, or other damages. These costs could be disproportionately higher than the revenue and profits we receive from the sales of these devices.

Our products have previously experienced, and may in the future experience, manufacturing defects, software or firmware bugs, or other similar defects. If any of our products contains defects or bugs, or has reliability, quality or compatibility problems, our reputation may be damaged and customers may be reluctant to buy our products, which could materially and adversely affect our ability to retain existing customers and attract new customers. In addition, these defects or bugs could interrupt or delay sales or shipment of our products to our customers.

We have implemented significant quality control measures to mitigate this risk; however, it is possible that products shipped to our customers will contain defects or bugs. In addition, these problems may divert our technical and other resources from other development efforts. If any of these problems are not found until after we have commenced commercial production of a new product, we may be required to incur additional costs or delay shipments for revenue which would negatively affect our business, financial condition and results of operations.

THE OUTCOME OF CURRENTLY ONGOING AND FUTURE AUDITS OF OUR INCOME TAX RETURNS, BOTH IN THE U.S. AND IN FOREIGN JURISDICTIONS, COULD HAVE AN ADVERSE EFFECT ON OUR NET INCOME (LOSS) AND FINANCIAL CONDITION.

We are subject to continued examination of our income tax returns by the Internal Revenue Service and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the adequacy of our provision for income taxes. 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 uncertainties. If we are unable to obtain agreements with the tax authority on the various proposed adjustments, there could be an adverse material impact on our results of operations, cash flows and financial position.

IF WE ARE UNABLE TO COMPLY WITH ECONOMIC INCENTIVE TERMS IN CERTAIN GOVERNMENT GRANTS, WE MAY NOT BE ABLE TO RECEIVE OR RECOGNIZE GRANT BENEFITS OR WE MAY BE REQUIRED TO REPAY GRANT BENEFITS PREVIOUSLY PAID TO US AND RECOGNIZE RELATED CHARGES, WHICH WOULD ADVERSELY AFFECT OUR OPERATING RESULTS AND FINANCIAL POSITION.

We receive economic incentive grants and allowances from European governments targeted at increasing employment at specific locations. The subsidy grant agreements typically contain economic incentive and other covenants that must be met to receive and retain grant benefits. Noncompliance with the conditions of the grants could result in the forfeiture of all or a portion of any future amounts to be received, as well as the repayment of all or a portion of amounts received to date. For example, in the three months ended March 31, 2008 we paid $40 million of government grants as a result of closing our North Tyneside manufacturing facility. In addition, we may need to record charges to reverse grant benefits recorded in prior periods as a result of changes to our plans for headcount, project spending, or capital investment at any of these specific locations. If we are unable to comply with any of the covenants in the grant agreements, our results of operations and financial position could be materially adversely affected.

CURRENT AND FUTURE LITIGATION AGAINST US COULD BE COSTLY AND TIME CONSUMING TO DEFEND.

We are subject to legal proceedings and claims that arise in the ordinary course of business. Litigation may result in substantial costs and may divert management’s attention and resources, which may seriously harm our business, results of operations, financial condition and liquidity.

In October 2008, officials of the European Union Commission (the “Commission”) conducted an inspection at the offices of one of our French subsidiaries. We have been informed that the Commission was seeking evidence of potential violations by us or our subsidiaries of the European Union’s competition laws in connection with the Commission’s investigation of suppliers of integrated circuits for smart cards. We are cooperating with the Commission’s investigation and have not received any specific findings, monetary demand or judgment through the date of filing. We are not aware of any evidence identified as of the date of filing that would allow management to conclude that there has been a probable violation of the relevant articles of the EC Treaty or EEA Agreement resulting from the acts of any of the current or prior employees of ours. As a result, we have not recorded any provision in our financial statements related to this matter. We are currently under investigation and a determination by the Commission that we or our subsidiaries have infringed the European Union’s competition laws could lead to the imposition of significant fines and penalties that could have a material effect on our financial condition.

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

Not applicable

Item 3. Defaults Upon Senior Securities

Not applicable

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

Not applicable

Item 5. Other Information

On July 30, 2008, we announced that our French management was commencing a consultation procedure with the works councils in France in relation to potential redundancies in the operations in Rousset and Nantes, France. We also announced that we are continually reviewing potential changes in our business and asset portfolio throughout our worldwide operations, including those located in Europe in order to enhance our overall competitiveness and viability.

As a result of this review, in the third quarter of 2008, we began implementing new cost reduction initiatives, primarily targeting manufacturing and research and development labor costs. We recorded charges of $26.4 million in the three months ended September 30, 2008, consisting of the following:

	•		Charges of $25.7 million in the three months ended September 30, 2008, related to severance costs for involuntary termination of employees. These employee severance costs were recorded in accordance with SFAS No. 146.

	•		Charges of $0.6 million in the three months ended September 30, 2008 related to one-time minimum statutory termination benefits recorded in accordance with SFAS No. 112.

We anticipate that these charges will be paid in cash prior to September 30, 2009.

Item 6. Exhibits

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


10.1+		Employment Agreement by and between the Company and Stephen Cumming, dated June 16, 2008.

10.2+		Principal Design Terms for Change of Control Severance Plan (which is described in Item 5.02 of the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed with the Securities and Exchange Commission on August 11, 2008 and incorporated herein by reference).

10.3.1+		Forms of Restricted Stock Unit Agreement (which are incorporated herein by reference to Exhibit 10.1 and Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on August 11, 2008).

10.3.2+		Forms of Restricted Stock Unit Agreement

10.4+		2005 Stock Plan (as amended).

10.5+		2005 Stock Plan Forms of Agreement.

10.6+		1991 Employee Stock Purchase Plan (as amended).

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.


+		Indicates management compensatory plan, contract or arrangement.

EXHIBIT INDEX


10.1+		Employment Agreement by and between the Company and Stephen Cumming, dated June 16, 2008.

10.2+		Principal Design Terms for Change of Control Severance Plan (which is described in Item 5.02 of the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed with the Securities and Exchange Commission on August 11, 2008 and incorporated herein by reference).

10.3.1+		Forms of Restricted Stock Unit Agreement (which are incorporated herein by reference to Exhibit 10.1 and Exhibit 10.2 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on August 11, 2008).

10.3.2+		Forms of Restricted Stock Unit Agreement

10.4+		2005 Stock Plan (as amended).

10.5+		2005 Stock Plan Forms of Agreement.

10.6+		1991 Employee Stock Purchase Plan (as amended).

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.


+		Indicates management compensatory plan, contract or arrangement.


	Page
PART I: FINANCIAL INFORMATION		3
Item 1. Financial Statements (Unaudited)		3
Condensed Consolidated Balance Sheets at September 30, 2008 and December 31, 2007		3
Condensed Consolidated Statements of Operations in the three and nine months ended September 30, 2008 and September 30, 2007		4
Condensed Consolidated Statements of Cash Flows in the nine months ended September 30, 2008 and September 30, 2007		5
Notes to Condensed Consolidated Financial Statements		6

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		34
Item 3. Quantitative and Qualitative Disclosures About Market Risk		49
Item 4. Controls and Procedures		51
PART II: OTHER INFORMATION		52
Item 1. Legal Proceedings		52
Item 1A. Risk Factors		54
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		70
Item 3. Defaults Upon Senior Securities		70
Item 4. Submission of Matters to a Vote of Security Holders		70
Item 5. Other Information		70
Item 6. Exhibits		71
Signatures		72
Exhibits		73
EX-10.1
EX-10.3.2
EX-10.4
EX-10.5
EX-10.6
EX-31.1
EX-31.2
EX-32.1
EX-32.2


	ATMEL CORPORATION (Registrant)
November 10, 2008	/s/ STEVEN LAUB
	Steven Laub
	President & Chief Executive Officer (Principal Executive Officer)


November 10, 2008	/s/ STEPHEN CUMMING
	Stephen Cumming
	Vice President Finance & Chief Financial Officer (Principal Financial Officer)


November 10, 2008	/s/ DAVID MCCAMAN
	David McCaman
	Vice President Finance & Chief Accounting Officer (Principal Accounting Officer)