UNITED STATES SECURITIES AND EXCHANGE COMMISSION

OR

Commission File Number 0-19032

ATMEL CORPORATION

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 x No o

Indicate by check mark whether the Registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). Yes x No o

On July 21, 2004, Registrant had 475,613,550 outstanding shares of Common Stock.

ATMEL CORPORATION

FORM 10-Q

QUARTER ENDED JUNE 30, 2004

INDEX

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Atmel Corporation

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Atmel Corporation

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Atmel Corporation

The accompanying notes are an integral part of these condensed consolidated financial statements.

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Atmel Corporation

1. Summary of Significant Accounting Policies

     Basis of Presentation

     These unaudited interim financial statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to present fairly, in all material respects, the financial position of Atmel Corporation (“the Company” or Atmel) and its subsidiaries as of June 30, 2004 and the results of operations for the three and six month periods ended June 30, 2004 and 2003 and the cash flows for the six month periods ended June 30, 2004 and 2003. All material intercompany balances have been eliminated. Because all of the disclosures required by generally accepted accounting principles are not included, these interim statements should be read in conjunction with the audited financial statements and accompanying notes in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. The December 31, 2003 year-end condensed balance sheet data was derived from the audited financial statements and does not include all of the disclosures required by generally accepted accounting principles. The statements of operations for the periods presented are not necessarily indicative of results to be expected for any future period, nor for the entire year. Certain prior year and period amounts have been reclassified to conform to current presentations and such reclassifications did not have any effect on the prior periods’ net loss.

     Stock Based Compensation

     Atmel has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123 (SFAS No.123), Accounting for Stock Based Compensation. Accordingly, no compensation cost has been recognized for the 1986 Incentive Stock Option Plan or 1996 Stock Plan or for grants made under the 1991 Employee Stock Purchase Plan (ESPP). If the compensation cost for the 1986 Plan, the 1996 Plan and the ESPP had been determined based on the fair value at the grant date consistent with the provisions of SFAS No.123, Atmel’s net income (loss) and net income (loss) per share for the three and six months ended June 30, 2004 and 2003 would have been adjusted to the pro forma amounts indicated below:

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     The fair value of each option grant for both the 1986 Plan and the 1996 Plan is estimated on the date of the grant using the Black-Scholes option-pricing model with the following weighted average assumptions:

     The fair value of each purchase under the ESPP is estimated on the date at the beginning of the offering period using the Black-Scholes option-pricing model with substantially the same assumptions as the option plans but with expected lives of 0.5 years. The weighted average fair values of ESPP purchases during the first six months of 2004 and 2003 were $1.68 and $0.93, respectively. The weighted average fair values of ESPP purchases during the second quarter of 2004 and 2003 were $3.02 and $0.76, respectively.

     The effects of applying SFAS No.123 on the pro forma disclosures for the three and six months ended June 30, 2004 and 2003 are not likely to be representative of the effects on pro forma disclosures in future periods.

     Derivatives

     The Company uses derivative instruments to manage exposures to foreign currency. The Company’s policy is to use derivatives to minimize the volatility of earnings and cash flows associated with changes in foreign currency. Certain forecasted transactions and foreign currency assets and liabilities expose the Company to foreign currency risk. The Company enters into foreign exchange forward contracts to minimize the short-term impact of currency fluctuations on existing as well as anticipated foreign currency assets and liabilities.

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     For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of accumulated other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For derivative instruments not designated as a FAS No. 133 cash flow hedge, the gain or loss is recognized in earnings in the period of the change, offsetting the gain or loss from revaluation.

     Recent Accounting Pronouncements:

     In December 2003, the FASB issued FIN 46R. FIN 46R is applicable in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after March 15, 2004. The adoption of this standard did not have a material impact on the Company’s results of operations or financial condition.

     At its November 2003 meeting, the Emerging Issues Task Force, or EITF, reached a consensus on disclosure guidance previously discussed under EITF 03-01. The consensus provided for certain disclosure requirements that were effective for fiscal years ending after December 15, 2003. The Company will adopt the disclosure requirements during its fiscal year ending December 31, 2004. The Company does not believe that this consensus on the disclosure guidance will have a significant impact on its financial position or results of operations.

     At its March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115 and investments accounted for under the cost method or the equity method. The recognition and measurement guidance for which the consensus was reached in the March 2004 meeting is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. The Company does not believe that this consensus on the recognition and measurement guidance will have a significant impact on its financial position or results of operations.

     In April 2004, the Emerging Issues Task Force reached a consensus on Issue No. 03-06, (EITF 03-06), “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share”. EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in dividends and earnings of the company when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. The adoption of EITF 03-06 did not have a material effect on Atmel’s results of operations or financial position.

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2. Inventories

     Inventories are stated at the lower of cost (determined on a first-in, first-out basis for raw materials and purchased parts; and an average cost basis for work in progress) or market, and comprised the following:

     Inventory reserves at June 30, 2004 and December 31, 2003 were $104,553 and $100,686 respectively.

     The Company’s policy is to write down its raw materials, work in progress and finished goods to the lower of cost or market at the close of a period. The Company’s inventory represents high technology integrated circuits that are subject to rapid technological obsolescence and are sold in a highly competitive industry. If actual product demand or selling prices are less favorable than the Company’s estimate, the Company may be required to take additional inventory write-downs. Alternatively, if the Company sells more inventory or achieves better pricing than the Company’s forecast, future margins may be higher.

3. Short Term Investments

     Short term investments at June 30, 2004 and December 31, 2003 are primarily comprised of US government and municipal agency debt securities, US and foreign corporate debt securities, commercial paper, and guaranteed variable annuities.

     All marketable securities are deemed by management to be available for sale and are reported at fair value with net unrealized gains or losses reported within stockholders’ equity.

4. Intangible Assets

     Intangible assets as of June 30, 2004 are included in other assets in the condensed consolidated balance sheet and consisted of the following:

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     Intangible assets as of December 31, 2003 consisted of the following:

     Intangible amortization expense for the three months ended June 30, 2004 and 2003 totaled $2,954 and $3,592, respectively. Intangible amortization expense for the six months ended June 30, 2004 and 2003 totaled $6,183 and $6,444, respectively. The following table presents the estimated future amortization of net intangible assets:

5. Income Taxes

     For the three and six months ended June 30, 2004, the Company recorded an estimated income tax expense of $4,094 and $7,962, respectively, primarily related to income from certain foreign subsidiaries and has utilized net operating losses carried forward from prior years to offset the current income of profitable subsidiaries where such losses are available.

     For the three and six months ended June, 2003, the Company recorded an estimated income tax expense of $3,000 and $6,000, respectively, primarily related to income from certain foreign subsidiaries and has provided a full valuation allowance against the deferred tax benefit of its net operating losses.

6. Net Income (Loss) Per Share

     Basic net income (loss) per share is computed using the weighted-average number of common shares outstanding during the period. Diluted net income (loss) per share is computed 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, warrants and convertible securities for all periods.

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     The following table summarizes antidilutive securities which were not included in the calculation of diluted net income (loss) per share:

     As disclosed in Note 8 of the Notes to Condensed Consolidated Financial Statements, the convertible bond holders have the right to put the notes back to the Company at specific future dates, in which case the Company may elect to settle the notes in shares or cash. In accordance with EITF Topic D-72, the calculation of the number of common stock equivalent shares associated with the convertible notes assumes that the notes will be settled in shares at the then fair value. As a result, the number of common stock equivalent shares associated with convertible notes is computed by dividing the total outstanding balance (principal plus interest) of the convertible notes by the average closing sales price of the Company’s common stock for the applicable period.

     This calculation assumes the Company would repurchase the convertible notes using only common stock at the average stock price for the related period and no cash. In the event of redemption of the convertible notes, the actual conversion price will depend on future market conditions.

7. Segment Reporting

     The Company has four reportable segments: Application Specific Integrated Circuits (ASIC), Microcontrollers, Nonvolatile Memories (NVM) and Radio Frequency (RF) and Automotive. Each segment requires different design, development and marketing resources to produce and sell semiconductor integrated circuits. The Company does not allocate assets by segment as management does not use the information to measure or evaluate a segment’s performance.

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Information about segments:

     Reconciliation of segment information to condensed consolidated statements of operations:

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     Geographic sources of revenues for each of the periods ended June 30, 2004 and 2003 (revenues are attributed to countries based on delivery locations):

     Locations of long-lived assets as of June 30, 2004 and December 31, 2003:

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8. Borrowing Arrangements

     Information with respect to Atmel’s debt and capital lease obligations is shown in the following table:

Maturities of the debt and capital lease obligations are as follows:

     Interest rates on interest bearing notes and capital lease obligations are based on either the London Interbank Offered Rate (LIBOR) plus a spread ranging from 1.75% to 2%, the short-term Euro Interbank Offered Rate (EURIBOR) plus a spread ranging from 0.8% to 1.23%, or fixed rates ranging from 6.43% to 6.55%. The six-month LIBOR and EURIBOR rates were approximately 1.94% and 2.20%, respectively, at June 30, 2004.

     In June 2003, the Company entered into a $15,000 revolving line of credit with a domestic bank. The full amount of the line of credit is currently outstanding, the final maturity date of which is June 25, 2006. The interest rate is 3.05% and is based on the LIBOR plus a spread of 1.25%. The spread is based on the level of borrowings under the revolving line of credit and can range from 1.25% to 5%. The Company has pledged certain marketable securities as collateral. At June 30, 2004, the fair market value of these marketable securities was $45,726.

     In July 2003, the Company entered into a $25,000 revolving line of credit with a domestic bank. The maturity date is July 1, 2005. The interest rate is based on the LIBOR plus 2.5%. At June 30, 2004 no amount is outstanding under this line of credit. This line of credit is secured by certain accounts receivable and inventory balances.

     Approximately $19,610 of the debt included in the capital lease obligations requires Atmel to meet certain financial ratios and to comply with other covenants on a periodic basis, and

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approximately $23,272 of the debt obligations have cross default provisions. The financial ratio covenants include, but are not limited to, the maintenance of minimum cash balances and net worth, and debt to capitalization ratios. The Company was in compliance with the covenants as of June 30, 2004. A previous requirement to maintain restricted cash of approximately €21,307 ($26,175) was renegotiated in March 2004 and eliminated. As a result there is no longer a requirement to maintain a restricted cash balance.

     In April 1998, Atmel completed a sale of zero coupon subordinated convertible notes, due 2018, which raised $115,004. On April 21, 2003, the Company paid $134,640 in cash to those note-holders of the 2018 convertible notes that submitted these notes for redemption. Notes with an accreted value of $272 as of June 30, 2004 were not submitted for redemption and remain outstanding. The 2018 convertible notes are convertible at any time, at the option of the holder, into the Company’s common stock at the rate of 55.932 shares per $1 (one thousand dollars) principal amount. The effective interest rate of the notes is 5.5% per annum. At any time, the Company has the option to redeem these notes for cash, in whole at any time or in part from time to time at redemption prices equal to the issue price plus accrued interest. At the option of the holders on April 21, 2008, and 2013, the Company may be required to repurchase the notes at prices equal to the issue price plus accrued original issue discount through date of repurchase. The Company may elect to pay the repurchase price in cash, in shares of common stock or in any combination of the two.

     In May 2001, the Company completed a sale of zero coupon convertible notes, due 2021, which raised $200,027. The notes are convertible at any time, at the option of the holder, into the Company’s common stock at the rate of 22.983 shares per $1 (one thousand dollars) principal amount. The effective interest rate of the debentures is 4.75% per annum. The notes will be redeemable for cash, at the Company’s option, at any time on or after May 23, 2006 in whole or in part at redemption prices equal to the issue price plus accrued original issue discount. At the option of the holders on May 23, 2006, 2011 and 2016, the Company may be required to repurchase the notes at prices equal to the issue price plus accrued original issue discount through date of repurchase. The Company may elect to pay the repurchase price in cash, in shares of common stock or in any combination of the two.

9. Commitments and Contingencies

     Legal Proceedings:

     The Company currently is a party to various legal proceedings. The amount or range of possible loss, if any, is not reasonably subject to estimation at this time with respect to all of the 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 net income and financial position of the Company. The estimate of the potential impact on the Company’s financial position or overall results of operations or cash flow for the legal proceedings described below could change in the future.

     Agere Systems, Inc. (“Agere”) filed suit in the United States District Court, Eastern District of Pennsylvania in February 2002, alleging patent infringement regarding certain semiconductor and related devices manufactured by Atmel. The complaint seeks unspecified damages, costs and attorneys’ fees. Atmel disputes Agere’s claims and is vigorously defending this action.

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     Philips Corporation (“Philips”) filed suit against Atmel in the United States District Court, Southern District of New York, on October 30, 2001 for infringement of its patent, seeking injunctive relief against the alleged infringement and damages. Atmel disputes Philips’ claims and is vigorously defending this action.

     Seagate Technology (“Seagate”) filed suit against Atmel in the Superior Court for the State of California for the County of Santa Clara on July 31, 2002. Seagate contends that certain semiconductor chips sold by Atmel to Seagate between April 1999 and mid-2001 were defective. Seagate contends that this defect has caused millions of disk drives manufactured by Seagate to fail. Seagate believes that the plastic encapsulation of the Atmel chips contain red phosphorus, which in certain highly specific and rare situations can result in an electrical short between the pins in the leadframe of the chip. Seagate seeks unspecified damages as well as disgorgement of profits related to these particular chips. Atmel has cross-complained against Amkor Technology, Inc. and ChipPAC Inc., Atmel’s leadframe assemblers. Amkor and ChipPAC brought suits against Sumitomo Bakelite Co. Ltd., Amkor and ChipPAC’s molding compound supplier. Atmel disputes Seagate’s claims and is vigorously defending this action.

     On February 19, 2003, a derivative class action entitled Cappano v. Perlegos, et al., was filed in the Superior Court for the State of California for the County of Santa Clara against certain directors, officers and a former officer of Atmel, and Atmel is also named as a nominal defendant. The Complaint alleges that between January 2000 and July 31, 2002, defendants breached their fiduciary duties to Atmel by permitting it to sell defective products to customers. The Complaint alleges claims for breach of fiduciary duty, mismanagement, abuse of control, waste, and unjust enrichment. The Complaint seeks unspecified damages and equitable relief as against the individual defendants. Atmel disputes the claims and is vigorously defending this action.

     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.

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     Warranty Liability:

     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 one year. The following table summarizes the activity related to the product warranty liability for the six months ended June 30, 2004 and 2003:

     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 contain similar indemnification obligations to 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.

     Purchase Commitments:

     At June 30, 2004, the Company had outstanding commitments for purchases of capital equipment of $145,340 which are expected to be delivered over the next several quarters.

     Derivative Instruments:

     The Company conducts business on a global basis in several currencies. As such, it is exposed to adverse movements in foreign currency exchange rates. The Company uses derivative instruments to manage exposures to foreign currency risk. The Company’s objective in holding derivatives is to minimize the volatility of earnings and cash flows associated with changes in foreign currency rates.

     The Company recognizes derivative instruments as either assets or liabilities on the Condensed Consolidated Balance Sheets and measures those instruments at fair value. The accounting for changes in the fair value of a derivative depends on the intended use of the derivative and the designation at inception. The Company does not enter into foreign exchange forward contracts for trading purposes.

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     Gains and losses on contracts intended to offset foreign exchange gains or losses from the revaluation of current assets and liabilities, including intercompany balances, denominated in currencies other than the functional currency are included in interest and other expenses, net, in the Condensed Consolidated Statements of Operations. The Company’s foreign exchange forward contracts related to current assets and liabilities generally range from one to three months in original maturity. As of June 30, 2004, forward contracts outstanding were $43,856.

     The Company periodically hedges forecasted transactions related to certain anticipated foreign currency operating expenses, primarily related to European manufacturing subsidiaries, with forward contracts. These transactions are designated as cash flow hedges. As of June 30, 2004, the effective portion of the derivative’s gain or loss, reported as a component of accumulated other comprehensive income, was $1,336. This amount will be reclassified into cost of revenues when the related expenses are recognized. For the three and six month periods ended June 30, 2004, the effective portion of the derivative’s loss that was reclassed into cost of revenues was $3,310 and $5,030, respectively. This loss was substantially offset by lower cost of revenues as a result of favorable exchange rates realized on transactions incurred in foreign currencies. The ineffective portion of the gain or loss is reported in interest and other expense immediately. For the three and six month periods ended June 30, 2004, gains or losses recognized in earnings for hedge ineffectiveness and the time value excluded from effectiveness testing, were not material. As of June 30, 2004, outstanding cash flow hedges, which have maturities of up to three months, totaled $71,776.

     The fair value of derivative instruments as of June 30, 2004 and changes in fair value during the three and six month periods ended June 30, 2004 were not material. The Company did not recognize any gains or losses as a result of a change in probability that the original forecasted transactions would not occur.

     The Company’s foreign exchange forward contracts expose the Company to credit risk to the extent that the counterparties may be unable to meet the terms of the agreement. The Company minimizes such risk by limiting its counterparties to high credit quality financial institutions. In addition, the potential risk of loss with any one counterparty resulting from this type of credit risk is monitored. Management does not expect any material losses as a result of default by counterparties.

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10. Comprehensive Income (Loss)

     The components of comprehensive income (loss) are as follows:

11. Restructuring and Asset Impairment Charges

     The following table summarizes the activity related to the restructuring accrual during the six months ended June 30, 2004:

     The restructuring accrual balance of $11,395 at June 30, 2004 is for the termination of a contract with a supplier and will be paid out over approximately the next 10 years.

12. Interest and Other Expenses, Net

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

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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 for the year ended December 31, 2003.

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 Form 10-Q. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934. 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, especially under the caption “Trends, Uncertainties and Risks,” and elsewhere in this Form 10-Q, and similar discussions in our other filings with the Securities and Exchange Commission, including the Company’s Annual Report on Form 10-K. Generally, the words “may,” “will,” “could,” “would,” “anticipate,” “expect,” “intend,” “believe,” “seek,” “estimate,” “plan,” “view,” “continue,” the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Form 10-Q is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. The Company undertakes no obligation to update any forward looking statements in this Form 10-Q.

OVERVIEW

     Our revenues in the first six months of 2004 increased 35% from the same period in 2003 primarily due to growth in our ASIC , Microcontrollers, and Nonvolative Memory business units. Gross margin improved to 29% for the first six months of 2004 compared to 20% for the same period in 2003 primarily due to manufacturing efficiencies stemming from increased demand and improved factory utilization. Revenues were also favorably impacted by foreign currency exchange rate changes, primarily the Euro. However, the stronger Euro had a negative effect on our costs and expenses when expenses denominated in Euro were converted to US dollars. The net impact of foreign currency exchange rate fluctuations was $26 million in lower net income, calculated by comparing average Euro exchange rates for the first six months of 2004 to the same period in 2003, as a greater percentage of our expenses are denominated in Euros than our revenues. The Euro rates used for this comparison were 1.23 and 1.10 (USD to Euro) for the first six months of 2004 and 2003, respectively. Our improvement in net income to $23 million in the first six months of 2004 when compared to the first six months of 2003, was primarily due to

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increased revenues and higher gross margins partially offset by the net impact of foreign currency exchange fluctuations.

     Our revenues in the second quarter of 2004 increased 32% from the same period in 2003 primarily due to growth in our ASIC, Microcontrollers, and Nonvolative memories business units. Gross margin improved to 28% for the second quarter of 2004 compared to 22% for the same period in 2003 primarily due to manufacturing efficiencies stemming from increased demand and improved factory utilization. Revenue was also favorably impacted by foreign currency exchange rate changes, primarily the Euro. However, the stronger Euro had a negative effect on our costs and expenses when expenses denominated in Euro were converted to US dollars. The net impact of foreign currency exchange rate fluctuations was $9 million in lower net income, calculated by comparing average Euro exchange rates for the second quarter of 2004 to the same period in 2003. The Euro rates used for this comparison were 1.22 and 1.13 (USD to Euro) for the second quarter of 2004 and 2003, respectively. Our improvement in net income to $12 million in the second quarter of 2004 when compared to the second quarter of 2003, was primarily due to increased revenues and higher gross margins, partially offset by the net impact of foreign currency exchange fluctuations.

CRITICAL ACCOUNTING POLICIES

     Except for our new critical accounting policy regarding derivatives which is disclosed below, our critical accounting policies have not changed from those disclosed in Item 7 of “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the year ended December 31, 2003.

Derivatives

     We use derivative instruments to manage exposures to foreign currency. Our policy is to use derivatives to minimize the volatility of earnings and cash flows associated with changes in foreign currency exchange rates. Certain forecasted transactions and foreign currency assets and liabilities expose us to foreign currency risk. We enter into foreign exchange forward contracts to minimize the short-term impact of currency fluctuations on existing as well as anticipated foreign currency assets and liabilities.

     For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of other comprehensive income (loss) and subsequently reclassified into earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is reported in earnings immediately. For derivative instruments not designated as a FAS No. 133 cash flow hedge, the gain or loss is recognized in earnings in the period of the change, offsetting the gain or loss from revaluation.

RESULTS OF OPERATIONS

     The following table sets forth for the periods indicated certain operating data as a percentage of net revenues:

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Net Revenues — By Segment

     Atmel’s 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).

     Our net revenues by segment compared to prior periods are summarized as follows (in thousands):

ASIC

     In the first six months of 2004, revenues increased by $77 million compared to the same period in 2003. The increase resulted from a 61% increase in unit shipments partially offset by a 15% decline in average selling prices.

     Compared to the same period in 2003, revenues increased by $34 million in the second quarter of 2004. The increase resulted from a 66% increase in unit shipments partially offset by a 21% decline in average selling prices.

     The increase in revenue in 2004 was predominately driven by increased demand for SmartCard products, as we introduced new products and achieved market share gains in this

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growing market. With our new product introductions, we serve the personal computer, industrial, set-top box, and smart card reader markets. Currently, SmartCard products represent approximately 32% of the ASIC business segment’s revenues.

Microcontroller

     Revenues increased by $57 million in the first six months of 2004 compared to the same period in 2003. The increase resulted from a 52% increase in unit shipments partially offset by a 2% decrease in average selling prices.

     In the second quarter of 2004, revenues increased by $28 million when compared to the same period in 2003. The increase resulted from a 48% increase in unit shipments partially offset by a 4% decrease in average selling prices.

     The growth in revenue in 2004 can be attributed to sales of our proprietary AVR Microcontroller products. This product family has benefited from the overall increase in shipments of consumer and industrial electronics, as well as market share gains.

Nonvolatile Memory

     Revenues increased by $59 million in the first six months of 2004 compared to the same period in 2003. The increase resulted from a 55% increase in unit shipments partially offset by a 12% decrease in average selling prices.

     Revenues increased by $36 million in the second quarter of 2004 compared to the same period in 2003. The increase resulted from a 49% increase in unit shipments partially offset by a 5% decrease in average selling prices.

     The growth in revenue in the second quarter of 2004 can be attributed to improved demand for our Flash, Data Flash, and Serial EEPROM products. Although our nonvolatile memory segment was profitable in the second quarter of 2004, competitive pressure and the need to migrate continually to new technology are among several factors that contribute to gross margins below that of our other products, and are likely to continue for the foreseeable future.

RF and Automotive

     In the first six months of 2004, revenues increased by $20 million compared to the same period in 2003. The increase resulted from a 22% increase in unit shipments and a 2% decrease in average selling prices.

     Compared to the same period in 2003, revenues increased by $4 million in the second quarter of 2004. The increase resulted from a 19% increase in unit shipments partially offset by an 8% decline in average selling prices.

     In 2004, demand for RF and Automotive products remains strong as the automotive industry continues to increase the use of electronic content in cars, especially in European auto markets where we have a strong market position. In the second quarter of 2004, our RF sales to 3G phones were not as strong as we had expected, however, demand was strong from CDMA phones. While automotive markets have seen relatively stable demand, telecom end-markets are

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often volatile and subject to significant changes in demand because of competition, innovation, and supply-chain factors.

Net Revenues — By Geographic Area

     Our net revenues by geographic areas are summarized as follows (in thousands):

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

     Over the last several years, revenues have increased significantly in Asia. We believe that part of this shift reflects changes in customer manufacturing trends, with many customers increasing production in Asia.

     In the first six months of 2004, revenues from North America increased by $16 million compared to the same period in 2003 due to a 10% increase in average selling prices, partially offset by a 6% decrease in unit shipments. Revenues increased by $7 million in the second quarter of 2004 compared to the same period in 2003 due to a 33% increase in average selling prices, partially offset by a 16% decrease in unit shipments.

     Revenues from Europe increased by $79 million in the first six months of 2004 compared to the same period in 2003 due to a 40% increase in unit shipments while average selling prices remained flat. Compared to the same period in 2003, revenues from Europe in the second quarter of 2004 increased by $39 million due to a 47% increase in unit shipments, partially offset by a 5% decrease in average selling prices.

     Compared to the same period in 2003, revenues from Asia increased by $116 million in the first six months of 2004 due to a 62% increase in unit shipments partially offset by a 7% decrease in average selling prices. Revenues from Asia increased by $54 million in the second quarter of 2004 compared to the same period in 2003 due to a 56% increase in unit shipments, partially offset by a 13% decrease in average selling prices.

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Revenues and Costs — Impact from Changes to Currency Rates

     In the first six months of 2004, approximately 27% of sales were denominated in foreign currencies, primarily the Euro. Had exchange rates in the first six months of 2004 remained the same as the average exchange rates in the same period in 2003, our revenues in the first six months of 2004 would have been approximately $25 million lower than actually reported. In the first six months of 2004 approximately 57% of costs were denominated in foreign currencies, primarily the Euro. Had exchange rates in the first six months of 2004 remained the same as the average exchange rates in the same period in 2003 our costs would have been approximately $51 million lower than actually reported for the first six months of 2004 (cost of revenues $38 million, research and development $8 million, selling, general and administrative $4 million, net interest and other expenses $1 million). The effective portion of derivative losses that were reclassed into cost of revenues in the first six months of 2004 were $5 million.

     In the second quarter of 2004, approximately 26% of sales were denominated in foreign currencies, primarily the Euro. Had exchange rates in the second quarter of 2004 remained the same as the average exchange rates in the same period in 2003, our revenues in the second quarter of 2004 would have been approximately $8 million lower than actually reported. In the second quarter of 2004 approximately 57% of costs were denominated in foreign currencies, primarily the Euro. Had exchange rates in the second quarter of 2004 remained the same as the average exchange rates in the same period in 2003, our costs would have been approximately $17 million lower than actually reported for the second quarter of 2004 (cost of revenues $13 million, research and development $3 million, sales, general and administrative $1 million). The effective portion of derivative losses that were reclassed into cost of revenues in the second quarter of 2004 were $3 million.

Cost of Revenues and Gross Margin

     Our cost of revenues represents the costs of our wafer fabrication, assembly and test operations and freight costs, including the cost of shipping our products to subcontractors. Our cost of revenues as a percentage of net revenues fluctuates, depending on product mix, manufacturing yields, the level of utilization of manufacturing capacity, foreign exchange rate fluctuations, and average selling prices, among other factors. Cost of revenues as a percentage of net revenues was 71% in the first six months of 2004, compared to 80% for the same period in 2003. Cost of revenues improved to 72% for the second quarter of 2004, compared to 78% for the same period in 2003.

     Gross margin was 29% for the first six months of 2004, increased from 20% for the same period of 2003. The improvement in gross margin percentage is a result of significantly improved factory utilization, partially offset by lower average selling prices and the negative effect of foreign exchange fluctuations. In addition, gross margins for the first six months of 2003 were negatively affected by a $10 million charge related to a patent license agreement. Had exchange rates in the first six months of 2004 remained the same as the average exchange rates in the same period in 2003 our reported gross margin would have been 32% for the first six months of 2004.

     Gross margin improved to 28% for the second quarter of 2004 compared to 22% for the same period in 2003. The gross margin percentage improvement is a result of significantly

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improved factory utilization and product mix, partially offset by lower average selling prices and the negative effect of foreign exchange rate fluctuations. Had exchange rates in the second quarter of 2004 remained the same as the average exchange rates in the same period in 2003 our reported gross margin would have been 30% for the second quarter of 2004.

     Gross margin on SmartCard products have been below our company average for the last several quarters, while product volumes have increased significantly. Gross margins have been negatively affected by start-up costs at our North Tyneside manufacturing facility, competitive pricing pressures, and delays in achieving target yields. The increase in sales volumes for both SmartCards and Flash memories, combined with below average margins for both products, have negatively affected gross margins for the three and six months ended June 30, 2004 when compared to the same periods of 2003. However, we expect that gross margin on SmartCard products will improve as we continue to increase volumes and move production to 0.18 technology.

     The effect of inventory write-downs on our gross margin for the three and six months ended June 30, 2004 and 2003 was immaterial.

     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 operating or capital costs. We recognized $8.5 million in the first six months of 2004 compared to $4.5 million in the same period in 2003. We recognized $3.7 million in the second quarter of 2004 compared to $2.3 million in the second quarter of 2003.

Research and Development (R&D)

     We believe that continued strategic investments in process technology and product development are essential for us to remain competitive in the markets we serve and we are committed to appropriate levels of expenditures for research and development.

     Research and development (R&D) expenses decreased to $114 million in the first six months 2004 compared to $130 million for the same period in 2003. R&D expenses as a percentage of net revenues for the first six months of 2004 were 14% compared to 21% in the same period in 2003. The decrease in R&D expenses is primarily the result of lower process development costs and increased R&D grants, partially offset by the negative effect of foreign exchange rate fluctuations. Process development costs at our North Tyneside, UK wafer fabrication site declined as this facility transitioned to production volume levels during the second half of 2003. Had exchange rates in the first six months of 2004 remained the same as the average exchange rates in the same period in 2003, R&D expenses would have been $7.4 million lower than actually reported for the first six months of 2004.

     R&D expenses decreased to $57 million in the second quarter of 2004 compared to $66 million for the same period in 2003. As a percentage of net revenues, R&D expenses decreased to 14% in the second quarter of 2004 compared to 21% for the same period in 2003. The decrease in R&D expenses is primarily the result of lower process development costs and increased R&D grants, partially offset by the negative effect of foreign exchange rate fluctuations. Process development costs at our North Tyneside, UK wafer fabrication site declined as this facility transitioned to production volume levels during the second half of 2003.

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Had exchange rates in the second quarter of 2004 remained the same as the average exchange rates in the same period in 2003, R&D expenses would have been $2.5 million lower than actually reported for the quarter ended June 30, 2004.

     We receive R&D grants from various European research organizations, the benefit for which is recognized as an offset to related costs. For the second quarter of 2004, we recognized $5.0 million in research grant benefits, compared to $1.5 million in the second quarter of 2003. We recognized $7.3 million in research grant benefits in the first six months of 2004, compared to $3.9 million in the first six months of 2003.

Selling, General and Administrative (SG&A)

     SG&A expenses increased to $87 million in the first six months of 2004 compared to $68 million for the same period in 2003. SG&A expenses were 11% of net revenues for the first six months of 2004 and 2003. The increase is primarily due to increased legal expenses, increased spending related to sales volume, spending related to Sarbanes-Oxley Section 404 compliance, and the negative effect of foreign exchange rate fluctuations. Had exchange rates in the first six months of 2004 remained the same as the average exchange rates in the same period in 2003, SG&A expenses would have been $4 million lower than actually reported in the first six months of 2004.

     SG&A expenses increased to $44 million in the second quarter of 2004, compared to $37 million in the second quarter of 2003. SG&A expenses were 10% of net revenues for the second quarter of 2004 compared to 11% for the same period in 2003. The increase is primarily due to increased legal expenses, increased spending related to sales volume, spending related to Sarbanes-Oxley Section 404 compliance, and the negative effect of foreign exchange rate fluctuations. Had exchange rates in the second quarter of 2004 remained the same as the average exchange rates in the same period in 2003 SG&A expenses would have been $1 million lower than actually reported in the second quarter of 2004.

Interest and Other Expenses, Net

     Interest and other expenses, net decreased to $9 million in the first six months of 2004 compared to $17 million for the same period in 2003. As a percentage of net revenues, interest and other expenses, net was 1% in the first six months of 2004 compared to 3% for the same period in 2003. Interest and other expenses, net decreased to $3 million in the second quarter of 2004 compared to $8 million for the same period in 2003. As a percentage of net revenues, interest and other expenses, net was 1% in the second quarter of 2004 compared to 3% for the same period in 2003. The decrease in interest and other expenses, net is primarily due to decreased interest expense, as we have reduced our outstanding borrowings, and lower foreign exchange losses from the remeasurement of assets and liabilities denominated in currencies other than the respective functional currency. Lower foreign exchange losses is partly a result of our use of derivative instruments, starting in the first quarter of 2004, to manage exposures to foreign currency risk. Interest rates on borrowings did not change significantly in the second quarter or the first six months of 2004 compared to the same periods in 2003.

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Income Taxes

     For the second quarter of 2004, we recorded an income tax expense of $4.1 million. The income tax expense relates to the operations of our foreign subsidiaries where there are no available net operating losses. In subsidiaries where we have available tax net operating losses, we have utilized these losses to offset current year income. To the extent that losses exceed expected taxable income for the current year, any future tax benefit of net operating losses is not recognized as realization of the related benefit is not assured.

     For the second quarter of 2003, we recorded an income tax expense of $3 million. The income tax expense relates to the operations of our foreign subsidiaries. The future tax benefit of net operating losses was not recognized as realization of the related benefit was not assured.

Liquidity and Capital Resources

     At June 30, 2004, we had $348 million of cash and cash equivalents, compared to $386 million at December 31, 2003. Current ratio, calculated as total current assets divided by total current liabilities, remained flat at 1.8 at June 30, 2004 compared to December 31, 2003. The decrease in cash is primarily due to capital expenditures and debt repayments partially offset by positive cash flow generated from operating activities.

     Operating Activities: During the first six months of 2004, net cash provided by operating activities was $123 million, compared to $50 million in the same period in 2003. The increase in cash provided by operating activities is primarily due to our net income position in the first six months of 2004 as opposed to our net loss position in the same period in 2003.

     Our accounts receivable was $245 million at June 30, 2004 compared to $215 million at December 31, 2003. Our days sales outstanding (“DSO”) increased to 53 days at June 30, 2004 compared to 52 days at December 31, 2003. 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, this could negatively affect our DSO and cash flows from operating activities.

     Inventories increased to $303 million at June 30, 2004 from $268 million at December 31, 2003. Days sales in inventory was 92 days at June 30, 2004, compared to 90 days at December 31, 2003. Inventories consist of raw wafers, purchased specialty wafers, work in process, and finished units. The increase in inventory by $35 million or 13% compared to December 31, 2003 is primarily due to higher shipment levels, increased process complexity, and longer delivery times experienced from our assembly subcontractors. We are continuing to take measures to reduce manufacturing cycle times and improve production planning efficiency.

     Trade accounts payable was $178 million at June 30, 2004 compared to $144 million at December 31, 2003. The increase in trade accounts payable by $34 million or 23% compared to December 31, 2003 is primarily due to increased purchases related to capital equipment and manufacturing activity.

     Investing Activities: Net cash used by investing activities was $83 million during the first six months of 2004 compared to $12 million net cash provided by investing activities in the same period of 2003. The increase in cash used by investing activities was primarily due to increased capital spending and investment purchases, partially offset by the release of restricted

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cash. In March 2004, a previous requirement to maintain restricted cash of approximately €21 ($26) million was renegotiated and eliminated.

     Financing Activities: Net cash used in financing activities decreased to $69 million in the first six months of 2004 compared to $194 million during the same period in 2003. In 2004, cash used for financing activities was primarily principal payments on debt and capital leases. In 2003, in addition to principal payments on debt and capital leases, we paid $135 million in cash to those note-holders of the 2018 convertible notes that submitted these notes for repurchase.

     Approximately $20 million of debt included in the capital lease obligations require Atmel to meet certain financial ratios and to comply with other covenants on a periodic basis and approximately $23 million of debt obligations have cross default provisions. The financial ratio covenants include, but are not limited to, the maintenance of minimum cash balances and net worth, and debt to capitalization ratios. We were in compliance with the covenants as of June 30, 2004.

     Included in other long term liabilities, are obligations of $102 million, consisting primarily of future repayments of advances from customers, of which $8 million has been classified within current liabilities.

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

     We expect our operations to generate positive cash flow for the remainder of 2004; however, a significant portion of this cash will be used to repay debt and make capital investments. The amount of cash we use in 2004 will depend largely on the amount of cash generated from our operations. Currently, we expect our 2004 capital expenditures to be approximately $180 to $200 million, of which $93 million was acquired through June 30, 2004. We have outstanding commitments for purchases of capital equipment of $145 million at June 30, 2004 which are expected to be delivered over the next several quarters. In 2004 and future years, our capacity to make significant capital investments will depend on our ability to generate substantial cash flow from operations and on our ability to obtain adequate financing.

Recent Accounting Pronouncements

     In December 2003, the FASB issued FIN 46R. FIN 46R is applicable in financial statements of public entities that have interests in variable interest entities or potential variable interest entities commonly referred to as special-purpose entities for periods ending after December 15, 2003. Application by public entities (other than small business issuers) for all other types of entities is required in financial statements for periods ending after March 15, 2004. The adoption of this standard did not have a material impact on our results of operations or financial condition.

     At its November 2003 meeting, the Emerging Issues Task Force, or EITF, reached a consensus on disclosure guidance previously discussed under EITF 03-01. The consensus provided for certain disclosure requirements that were effective for fiscal years ending after December 15, 2003. We will adopt the disclosure requirements during our fiscal year ending

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December 31, 2004. We do not believe that this consensus on the disclosure guidance will have a significant impact on our financial position or results of operations.

     At its March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115 and investments accounted for under the cost method or the equity method. The recognition and measurement guidance for which the consensus was reached in the March 2004 meeting is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. We do not believe that this consensus on the recognition and measurement guidance will have a significant impact on our financial position or results of operations.

     In April 2004, the Emerging Issues Task Force reached a consensus on Issue No. 03-06, (EITF 03-06), “Participating Securities and the Two-Class Method Under FASB Statement No. 128, Earnings Per Share”. EITF 03-06 addresses a number of questions regarding the computation of earnings per share by companies that have issued securities other than common stock that contractually entitle the holder to participate in our dividends and earnings when, and if, it declares dividends on its common stock. The issue also provides further guidance in applying the two-class method of calculating earnings per share, clarifying what constitutes a participating security and how to apply the two-class method of computing earnings per share once it is determined that a security is participating, including how to allocate undistributed earnings to such a security. EITF 03-06 is effective for fiscal periods beginning after March 31, 2004. The adoption of EITF 03-06 did not have a material effect on our results of operations or financial position.

     In July 2004, the EITF issued a draft abstract, EITF Issue No. 04-8, “The Effect of Contingently Convertible Debt on Diluted Earnings per Share,” which addressed the issue of when the dilutive effect of contingently convertible debt instruments (Co-Cos) should be included in diluted earnings per share. The draft abstract reflects the Task Force’s tentative conclusion that Co-Cos should be included in diluted earnings per share computations regardless of whether the market price trigger has been met. The tentative conclusion reached by the Task Force will not be finalized until it is ratified by the Financial Accounting Standards Board, which is expected to be in September 2004. We do not believe that this consensus will have a material effect on our results of operations or financial position.

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Trends, Uncertainties and Risks

     Keep these trends, uncertainties and risks in mind when you read “forward-looking” statements elsewhere in this Form 10-Q and in the documents incorporated herein by reference. They could affect our actual results of operations, causing them to differ materially from those expressed in “forward-looking” statements.

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

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

•

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

•

ability to meet our debt obligations

•

availability of additional financing

•

the extent of utilization of manufacturing capacity

•

fluctuations in manufacturing yields

•

the highly competitive nature of our markets

•

the pace of technological change

•

natural disasters or terrorist acts

•

political and economic risks

•

fluctuations in currency exchange rates

•

our ability to maintain good relationships with our customers

•

integration of new businesses or products

•

third party intellectual property infringement claims

•

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

•

assessment of internal controls over financial reporting

•

environmental regulations

•

personnel changes

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•

business interruptions

•

system integration disruptions, and

•

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

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

     We believe that our future sales will depend substantially on the success of our new products. Our new products are generally incorporated into our customers’ products or systems at the design stage. However, design wins may precede volume sales by a year or more. We may not be successful in achieving design wins or design wins may not result in future revenues, which depend in large part on the success of the customer’s end product or system. The average selling price of each of our products usually declines as individual products mature and competitors enter the market. To offset average selling price decreases, we rely primarily on reducing costs to manufacture those products, increasing unit sales to absorb fixed costs and introducing new, higher priced products which incorporate advanced features or integrated technologies to address new or emerging markets. Our operating results could be harmed if such cost reductions and new product introductions do not occur in a timely manner. From time to time, our quarterly revenues and operating results can become more dependent upon orders booked and shipped within a given quarter and, accordingly, our quarterly results can become less predictable and subject to greater variability.

     In addition, our future success will depend in large part on the resurgence of economic growth generally and of 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 product than demand requires. Our successful return to profitability will depend heavily upon a better supply and demand balance within the semiconductor industry.

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

     The semiconductor industry has historically been cyclical, characterized by wide fluctuations in product supply and demand. The industry has also experienced significant downturns, often in connection with, or in anticipation of, maturing product cycles and declines in general economic conditions. The semiconductor industry faced severe business conditions with global semiconductor revenues for the industry declining 32% to approximately $139 billion in 2001, compared to revenues in 2000. The semiconductor industry began to turnaround in 2002 with global semiconductor sales increasing modestly by 1% to approximately $141 billion. In 2003, global semiconductor sales increased 18% to $166 billion.

     Atmel’s operating results have been harmed by industry-wide fluctuations in the demand for semiconductors, which resulted in under-utilization of our manufacturing capacity and declining gross margins. In 2001, we recorded a $463 million charge to recognize impairment in value of our manufacturing equipment in Colorado Springs, Colorado, Rousset, France and Nantes, France. In addition, we recorded a $19 million charge for the costs of reducing our workforce in our European manufacturing operations. We also recorded an asset impairment

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charge of $341 million in the second quarter 2002 to write down to fair value the book value of our fabrication equipment in Irving, Texas and North Tyneside, U.K. We recorded a restructuring and asset impairment charge in the third quarter of 2002 of $42 million, primarily in connection with the closing of our Irving, Texas 8-inch wafer fabrication facility and making it available for sale. The charges consisted of costs for reduction in headcount, asset write-downs, and expenses associated with our decision to close the facility. We recorded a restructuring and asset impairment charge in the fourth quarter 2002 of $3 million. This charge related to plans for reorganizing certain programs and a reduction in headcount in Europe. In December 2003, we re-evaluated the status of the fabrication equipment in our Irving, Texas facility and because of increasing demand we decided to utilize much of this equipment in other facilities. An asset impairment charge of $27.6 million was recorded in the fourth quarter of 2003. 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 customer products.

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

     As of June 30, 2004, our long term convertible notes and long term debt less current portion was $305 million compared to $358 million at December 31, 2003. Our long-term debt (less current portion) to equity ratio was 0.3 and 0.4 at June 30, 2004 and December 31, 2003, respectively. Our current debt levels as well as any increase 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.

     Our ability to meet our debt obligations will depend upon 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.

     Our ability to service long-term debt or to obtain cash for other needs of the Atmel group from our foreign subsidiaries may be structurally impeded. Since a substantial portion of our operations is conducted through our 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 US parent corporation. These subsidiaries are separate and distinct legal entities and may have limited or no obligation, contingent or otherwise, to pay any amounts to the US parent corporation, whether by dividends, distributions, loans or other payments. However, the US parent corporation owes much of our consolidated long-term debt, including our two outstanding issues of convertible notes.

     In addition, the payment of dividends or distributions and the making of loans and advances to the US parent corporation by any of our subsidiaries could in the future be subject to statutory or contractual restrictions or depend on other business considerations and be contingent upon the earnings of those subsidiaries. Any right held by the US parent corporation to receive any cash or other assets of any of our subsidiaries upon its liquidation or reorganization will be effectively subordinated to the claims of that subsidiary’s creditors, including trade creditors.

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Although the US parent corporation may be recognized as a creditor, its interests will be subordinated to other creditors whose interests will be given higher priority.

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

     Semiconductor companies that maintain their own fabrication facilities have substantial capital requirements. We made capital expenditures aggregating $1,951 million in 1999, 2000 and 2001, in large part preparing for expected increases in demand. However, in light of falling demand we have recognized asset impairment charges aggregating $855 million in 2001, 2002, and 2003. We intend to continue to make capital investments to support new products and manufacturing processes that achieve manufacturing cost reductions and improved yields. Currently, we expect our 2004 capital expenditures to be approximately $180 to $200 million. We may seek additional equity or debt financing to fund further enhancement of our wafer fabrication capacity or to fund other projects. The timing and amount of such capital requirements cannot be precisely determined at this time and will depend on a number of factors, including demand for products, product mix, changes in semiconductor industry conditions and competitive factors. Additional debt or equity financing may not be available when needed or, if available, may not be available on satisfactory terms.

     IF WE DO NOT SUCCESSFULLY ADJUST OUR MANUFACTURING CAPACITY IN LINE WITH DOWNTURNS IN OUR INDUSTRY OR INCREASES IN DEMAND, OUR BUSINESS COULD BE HARMED.

     In 2000 and 2001, we made substantial capital expenditures to increase our wafer fabrication capacity at our facilities in Colorado Springs, Colorado and Rousset, France. We also currently manufacture our products at our facilities in Heilbronn, Germany; Grenoble, France; Nantes, France; and North Tyneside, United Kingdom.

     During economic upturns in the semiconductor industry we may need to increase our manufacturing capacity to a level that meets demand for our products in order to achieve and maintain profitability. During economic downturns in our industry, expensive manufacturing machinery may be underutilized or may need to be sold off at significantly discounted prices, although we continue to be liable to make payments on the debt that financed its purchase. At the same time, employee and other manufacturing costs may need to be reduced.

     We announced in the third quarter 2001 that we were ceasing high volume production at one of our two wafer fabrication facilities in Colorado Springs, Colorado and at one of our facilities in Europe. We announced in July 2002 that we were closing, prior to beginning commercial production, our wafer fabrication facility located in Irving, Texas that we acquired in 2000, and we have put the facility on the market.

     In December 2003, we re-evaluated the status of the fabrication equipment in our Irving, Texas facility. Because of significant improvements in market conditions, we decided to utilize much of this equipment in other facilities to meet increasing demand. An asset impairment charge of $27.6 million to write down asset values to the lower of their then fair value or original net book value, prior to holding these assets for sale less depreciation relating to the period the assets were held for sale, was recorded in the fourth quarter of 2003.

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     We continue to evaluate the current restructuring and asset impairment reserves as the restructuring plans are being executed and as a result, there may be additional restructuring charges or reversals of previously established reserves.

     During economic downturns in our industry we may have to reduce our wafer fabrication capacity. Reducing our wafer fabrication capacity involves significant potential costs and delays, particularly in Europe, where we have substantial manufacturing facilities and where the extensive statutory protection of employees imposes substantial costs and delays on their employers when the market requires downsizing. Such costs and delays include compensation to employees and local government agencies, requirements and approvals of governmental and judicial bodies, and losses of governmental subsidies. We may experience labor union objections or other difficulties while implementing a downsizing. Any such difficulties that we experience would harm our business and operating results, either by deterring needed downsizing or by the additional costs of accomplishing it in Europe relative to America or Asia.

     If we cannot expand our capacity on a timely basis during economic upturns in the semiconductor industry, we could experience significant capacity constraints that would prevent us from meeting increased customer demand, which would also harm our business.

     In light of losses incurred from 2001 through 2003, we may not be able to obtain from external sources the additional financing necessary to fund the expansion of our manufacturing facilities or the implementation of new manufacturing technologies.

     IF WE ARE UNABLE TO EFFECTIVELY UTILIZE OUR WAFER MANUFACTURING CAPACITY AND 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.

     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. We may experience problems in achieving acceptable yields in the manufacture of wafers, particularly when we expand our manufacturing capacity or during a transition in the manufacturing process technology that we use.

     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 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.

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     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, Fujitsu, Hitachi, Intel, LSI Logic, Microchip, Motorola, Sharp, STMicroelectronics and Texas Instruments. Some of these competitors have substantially greater financial, technical, marketing and management resources than we do. As we have introduced our 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.

     We are experiencing significant price competition in our nonvolatile memory business and especially for EPROM and Flash products. We expect continuing competitive pressures in our markets from existing competitors and new entrants, which, among other things, 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, 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

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

     Since the attacks on the World Trade Center and the Pentagon, certain insurance coverage has either been reduced or made subject to additional conditions by our insurance carriers, and we have not been able to maintain all necessary insurance coverage at reasonable cost. Instead, we have relied to a greater degree on self-insurance. For example, we now cover the expense of property loss up to $10 million per event. Our headquarters, some manufacturing facilities 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 transport product and we could suffer damages of an amount sufficient to harm our business, financial condition and results of operations.

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     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 North America accounted for approximately 82%, 78% and 75% of net revenues in 2003, 2002 and 2001. In the first six months of 2004, sales to customers outside of North America accounted for 84% of net revenues. 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:

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greater difficulty in protecting intellectual property

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greater difficulty in staffing and managing foreign operations

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

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greater risk of uncollectible accounts

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longer collection cycles

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potential unexpected changes in regulatory practices, including export license requirements, trade barriers, tariffs and tax laws

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sales seasonality, and

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general economic and political conditions in these foreign markets.

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

     Approximately 72%, 75% and 79% of our net revenues in 2003, 2002 and 2001 were denominated in U.S. dollars. Approximately 73% of our net revenues in the first six months of 2004 were denominated in U.S. dollars. During these periods our products became less price competitive in countries with currencies declining in value against the dollar. In 1998, business conditions in Asia were severely affected by banking and currency issues that adversely affected our operating results. Approximately 49%, 43% and 38% of net revenues were generated in Asia in 2003, 2002 and 2001. Approximately 49% of net revenues were generated in Asia in the first six months of 2004.

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     WHEN WE TAKE ORDERS DENOMINATED IN FOREIGN CURRENCIES, WE RISK RECEIVING FEWER DOLLARS WHEN THESE CURRENCIES WEAKEN AGAINST THE DOLLAR, AND MAY NOT BE ABLE TO ADEQUATELY HEDGE AGAINST THIS RISK.

     When we take an order denominated in a foreign currency we will receive fewer dollars than initially anticipated if that local currency weakens against the dollar before we collect our funds. In addition to reducing revenues, this risk will negatively affect our operating results. In Europe, where our significant operations have costs denominated in European currencies, a negative impact on revenues can be partially offset by a positive impact on costs. However, in Japan, while our yen denominated sales are also subject to exchange rate risk, we do not have significant operations with which to counterbalance our exposure. Sales denominated in European currencies and yen as a percentage of net revenues were 26% and 2% in 2003, 22% and 3% in 2002 and 16% and 5% in 2001, respectively. Sales denominated in European currencies and yen as a percentage of net revenues were 26% and 1% in the first six months of 2004. We also face the risk that our accounts receivable denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar.

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

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

     Currently, we enter into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on certain foreign currency assets and liabilities. In addition, we periodically hedge certain anticipated foreign currency cash flows. Our attempts to hedge against these risks may not be successful, resulting in an adverse impact on our net income.

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

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

     We sell many of our products through distributors. Our distributors could experience financial difficulties or otherwise reduce or discontinue sales of our products. Our distributors could commence or increase sales of our competitors’ products. In any of these cases, our business could be harmed.

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

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

     WE 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. Although we intend to vigorously defend

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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.

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

     OUR INTERNAL CONTROL OVER FINANCIAL REPORTING MAY NOT BE CONSIDERED EFFECTIVE WHICH COULD RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS, AND IN TURN HAVE AN ADVERSE EFFECT ON OUR STOCK PRICE.

     Pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, beginning with our Annual Report on Form 10-K for the fiscal year ending December 31, 2004, we will be required to furnish a report by our management on our internal control over financial reporting. Such report will contain, among other matters, an assessment of the effectiveness of our internal control over financial reporting as of the end of our fiscal year, including a statement as to whether or not our internal control over financial reporting is effective. This assessment must include disclosure of any material weaknesses in our internal control over financial reporting identified by management. Such report will also contain a statement that our auditors have issued an attestation report on management’s assessment of such internal controls.

     The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a framework for companies to assess and improve their internal control systems. While we feel that our key controls are currently effective, we continue to enhance our internal control

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over financial reporting by adding additional resources in key functional areas and bringing all of our operations up to the level of documentation, segregation of duties, and systems security necessary, as well as transactional control procedures required, under the new standard issued by the Public Company Accounting Oversight Board.

     We are currently performing the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we will be unable to assert such internal control is effective. If we are unable to assert that our internal control over financial reporting is effective as of December 31, 2004 (or if our auditors are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on our management’s evaluation or on the effectiveness of the internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which in turn could have an adverse effect on our stock price.

     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 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.

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     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 are currently making enhancements to our integrated financial and supply chain management system and transitioning some of our operational procedures at the same time. This transition process is complex, time-consuming and expensive. Operational disruptions during the course of this transition process or delays in the implementation of this new system could adversely 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 during the transition period.

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

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

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

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

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

     IF WE ACCOUNT FOR EMPLOYEE STOCK OPTIONS USING THE FAIR VALUE METHOD, IT COULD SIGNIFICANTLY REDUCE OUR NET INCOME.

     There has been ongoing public debate whether stock options granted to employees should be treated as a compensation expense and, if so, how to properly value such charges. On March 31, 2004, the Financial Accounting Standard Board (FASB) issued an Exposure Draft, Share-Based Payment: an amendment of FASB statements No. 123 and 95, which would require a company to recognize, as an expense, the fair value of stock options and other stock-based compensation to employees beginning in 2005 and subsequent reporting periods. If we elect or are required to record an expense for our stock-based compensation plans using the fair value method as described in the Exposure Draft, we could have significant and ongoing accounting charges, which could significantly reduce our net income.

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Item 3. Quantitative and Qualitative Disclosures about Market Risk

Market Risk Sensitive Instruments

     We do not use derivative financial instruments in our operations.

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 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 statement of operations through December 31, 2004. In addition, some of our borrowings are at floating rates, so this would act as a natural hedge.

     We have short-term debt, long-term debt, capital leases and convertible notes totaling $445 million at June 30, 2004. Approximately $334 million of these borrowings have fixed interest rates. We have $111 million of floating interest rate debt of which $73 million is Euro denominated. We do not hedge against this interest rate risk and could be negatively affected should interest rates increase significantly.

     The following table presents the hypothetical changes in interest expense, related to our outstanding borrowings, for the first six months of 2004 that are sensitive to changes in interest rates. The modeling technique used measures the change in interest expense arising from hypothetical parallel shifts in yield, of plus or minus 5%, 10% and 15% (in thousands).

     For the six month period ended June 30, 2004:

     The following table presents the hypothetical changes in interest expense, related to our outstanding borrowings, for the second quarter of 2004 that are sensitive to changes in interest rates. The modeling technique used measures the change in interest expense arising from hypothetical parallel shifts in yield, of plus or minus 5%, 10% and 15% (in thousands).

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     For the three month period ended June 30, 2004:

     The following table presents the hypothetical changes in fair value in our outstanding convertible notes at June 30, 2004 that are sensitive to the changes in interest rates. The modeling technique used measures the change in fair values arising from hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS and 150 BPS over a twelve-month time horizon. The base value represents the fair market value of the notes (in thousands):

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 collect our funds, which will reduce revenues. Conversely, revenues will be positively impacted if the local currency strengthens against the dollar. In Europe, where our significant operations have costs denominated in European currencies, costs will decrease if the local currency weakens. Conversely, costs will increase if the local currency strengthens against the dollar. In the first six months of 2004, the impact of the change in foreign currency resulted in net income being $26 million lower when compared to the same period in 2003 (as discussed in the overview section of 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 2004 were recorded using the average 2003 foreign currency rates. Sales denominated in foreign currencies were 27% and 28% in the first six months of 2004 and 2003 respectively. Sales denominated in Euros were 26% and 25% in the first six months of 2004 and 2003 respectively. Sales denominated in yen were 1% and 2% in the first six months of 2004 and 2003 respectively. Costs denominated in foreign currencies, primarily the Euro, were approximately 57% and 54% in the first six months of 2004 and 2003, 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 31% and 36% of our accounts receivable are denominated in foreign currency as of June 30, 2004 and December 31, 2003, respectively.

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