UNITED STATES SECURITIES AND EXCHANGE COMMISSION

x	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTER ENDED SEPTEMBER 30, 2004

OR

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______ TO _________

Commission File Number 0-19032

ATMEL CORPORATION

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 October 27, 2004, Registrant had 477,349,883 outstanding shares of Common Stock.

ATMEL CORPORATION

FORM 10-Q

QUARTER ENDED SEPTEMBER 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 September 30, 2004 and the results of operations for the three and nine month periods ended September 30, 2004 and 2003 and the cash flows for the nine month periods ended September 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 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 amended by SFAS No. 148. 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 nine months ended September 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 nine months of 2004 and 2003 were $1.54 and $0.98, respectively. The weighted average fair values of ESPP purchases during the third quarter of 2004 and 2003 were $1.81 and $0.89, respectively.

     The effects of applying SFAS No. 123 on the pro forma disclosures for the three and nine months ended September 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:

     At its November 2003 meeting, the Emerging Issues Task Force (EITF) reached a consensus on disclosure guidance previously discussed under EITF 03-01, “The Meaning of Other Than Temporary Impairment and its Application to Certain Investments”. 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 consensus provided for disclosure of amounts of impairment of investments in securities not yet recognized in income effective for fiscal years ending after December 15, 2003. The Company adopted the disclosure requirements during its quarter ended September 30, 2004 (See Note 3).

     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. In September 2004, the FASB issued FASB Staff Position 03-01-1, which delays the effective date of the recognition and measurement guidance. 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.

     In October 2004, the EITF reached a consensus on 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. EITF 04-8 addresses the issue of when “Co-Cos” should be included in diluted earnings per share computations, regardless of whether the market price trigger has been met. The effective date of this consensus will coincide with the effective date of

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the proposed Statement that revises FASB Statement 128, Earnings per Share, which is expected to be December 15, 2004. If the effective date of Statement 128 (revised) is postponed until after December 15, the staff will ask the Task Force to consider making the Statement effective for fiscal periods beginning after December 15, 2004. The adoption of EITF 04-8 is not expected to have a material effect on Atmel’s results of operations or financial position.

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 are comprised of the following:

     Inventory reserves at September 30, 2004 and December 31, 2003 were $89,529 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 September 30, 2004 and December 31, 2003 are primarily comprised of US and foreign corporate debt securities, US government and municipal agency debt securities, commercial paper, and guaranteed variable annuities.

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

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     Included in Net unrealized gains on Marketable Securities as of September 30, 2004 are $266 of unrealized losses related to Corporate securities purchased in 2004.

4. Accounts Receivable and Allowance for Doubtful Accounts

     Trade accounts receivable are recorded at the invoiced amount and do not bear interest. An allowance for doubtful accounts is calculated based on several factors including historical experience, specific customer or product issues, and management judgment. Past due balances over 90 days are reviewed individually for collectibility on a monthly basis. Account balances are charged off against the allowance after collection efforts are exhausted. There is no off-balance-sheet credit exposure related to our customers.

     Accounts receivable balances consist of the following:

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5. Intangible Assets

     Intangible assets as of September 30, 2004 are included in Intangibles and Other Assets in the condensed consolidated balance sheet and consisted of the following:

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

     Intangible amortization expense for the three months ended September 30, 2004 and 2003 totaled $2,792 and $3,481, respectively. Intangible amortization expense for the nine months ended September 30, 2004 and 2003 totaled $8,975 and $9,925, respectively. The following table presents the estimated future amortization of net intangible assets:

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6. Income Taxes

     For the three and nine months ended September 30, 2004, the Company recorded an income tax expense of $17,867 and $25,829, respectively, compared to an income tax expense of $3,000 and $9,000 for the three and nine months ended September 30, 2003, respectively.

     The provision for income taxes for these periods relates to certain profitable foreign subsidiaries as the Company is not recognizing any tax benefits for unprofitable entities due to the full valuation allowance provided against their related deferred tax assets. As a result, the provision for income taxes was at a higher effective rate than the Company expected if all entities were profitable.

7. 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.

     The following table summarizes antidilutive securities which were not included in the “Weighted-average shares – diluted” used for calculation of diluted net income (loss) per share:

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     As disclosed in Note 9 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.

8. 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 three and nine month periods ended September 30, 2004 and 2003 (revenues are attributed to countries based on delivery locations):

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

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9. 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:

     In September 2004, the Company entered into a Euro 32,421 ($40,274) loan agreement with a European bank. The full amount of the loan was outstanding at September 30, 2004. The loan is to be repaid in equal principal installments of Euro 970 per month plus interest on the unpaid balance, with the final payment due on October 1, 2007. The interest rate is fixed at 4.85%. The Company has pledged certain manufacturing equipment as collateral. This note requires Atmel to meet certain financial ratios and to comply with other covenants on a periodic basis. The Company was in compliance with the covenants as of September 30, 2004.

     Interest rates on other 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 2.17% and 2.24%, respectively, at September 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 September 30, 2004, the fair market value of these marketable securities was $45,841.

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     In July 2003, the Company entered into a revolving line of credit with a domestic bank for up to $25,000 of borrowings with a maturity date of July 1, 2005. The interest rate was based on the LIBOR plus 2.5%, and amounts borrowed were to be secured by certain accounts receivable and inventory balances. During September 2004, this agreement was terminated by mutual agreement of both parties. No amounts were borrowed or outstanding under this line of credit.

     Approximately $15,149 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 approximately $20,835 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 September 30, 2004. A previous requirement to maintain restricted cash of approximately Euro 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 $275 as of September 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.

10. Commitments and Contingencies

     Legal Proceedings:

     The Company currently is a party to various legal proceedings. While management currently believes that the ultimate outcome of these proceedings, individually and in the aggregate, will not have a material adverse effect on the Company’s financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the net income and financial

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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.

     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 filed counterclaims that the patent in suit is invalid and not infringed by Atmel. In August 2004, Atmel and Phillips reached a confidential settlement agreement mutually releasing each other from all claims relating thereto. Amounts required to be paid under this settlement have been fully accrued in prior periods.

     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. This accrual is included in “Accrued liabilities and other” in the condensed consolidated balance sheets. 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 nine months ended September 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 September 30, 2004, the Company had outstanding commitments for purchases of capital equipment of $70,490 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 September 30, 2004, forward contracts outstanding were $93,233.

     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 September 30, 2004, the effective portion of the derivative’s gain or loss, reported as a component of accumulated other comprehensive income, was $1,368. This amount will be reclassified into cost of revenues when the related expenses are recognized. For the three and nine month periods ended September 30, 2004, the effective portion of the derivative’s gain or (loss) that was reclassified into cost of revenues was $1,398 and ($3,632), respectively. The year to date 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 nine month periods ended September 30, 2004, gains or losses recognized in earnings for hedge ineffectiveness and the time value excluded from effectiveness testing, were not material. As of September 30, 2004, outstanding cash flow hedges, which have maturities of up to three months, totaled $91,834.

     The fair value of derivative instruments as of September 30, 2004 and changes in fair value during the three and nine month periods ended September 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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11. Comprehensive Income (Loss)

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

12. Restructuring and Asset Impairment Charges

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

     The restructuring accrual balance of $11,188 at September 30, 2004 is included within “Accrued liabilities and other” and “Other long term liabilities” in the condensed consolidated balance sheets and is for the termination of a contract with a supplier and will be paid out over approximately the next 10 years.

13. 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 our Annual Report on Form 10-K. Generally, the words “may,” “will,” “could,” “would,” “anticipate,” “expect,” “intend,” “believe,” “seek,” “estimate,” “plan,” “view,” “continue,” the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Form 10-Q is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. We undertake no obligation to update any forward looking statements in this Form 10-Q.

OVERVIEW

     Our revenues in the first nine months of 2004 increased 31%, or $291 million, from the same period in 2003 due to significant growth in all of our business units. Gross margin improved to 29% for the first nine months of 2004 compared to 21% 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 $36 million in lower net income, calculated by comparing average Euro exchange rates for the first nine months of 2004 to the same period in 2003, resulting from a greater percentage of expenses denominated in Euros than our revenues. The Euro rates used for this comparison were 1.23 and 1.09 (USD to Euro) for the first nine months of 2004 and 2003, respectively. As a result of increased revenues and improved gross margins, our income (loss) before taxes improved by $150 million in the first nine months of 2004 compared to the first nine months of 2003.

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     Our revenues in the third quarter of 2004 increased 23%, or $78 million, from the same period in 2003 primarily due to growth in our ASIC, RF and Automotive and Nonvolatile memories business units. Gross margin improved to 28% for the third 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. 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 $10 million in lower net income, calculated by comparing average Euro exchange rates for the third quarter of 2004 to the same period in 2003. The Euro rates used for this comparison were 1.21 and 1.07 (USD to Euro) for the third quarter of 2004 and 2003, respectively. As a result of increased revenues and improved gross margins, our loss before taxes improved by $29 million in the third quarter of 2004 compared to the third quarter of 2003.

     For the three and nine months ended September 30, 2004, we recorded provision for income taxes of $18 million and $26 million, compared to provision for income taxes of $3 million and $9 million for the three and nine months ended September 30, 2003, respectively. Provision for income taxes for these periods primarily resulted from taxable income in certain profitable foreign subsidiaries.

     Revenues in the third quarter of 2004 increased 23% from the same period in 2003, but declined 2% on a sequential basis from the second quarter of 2004. Revenues from our ASIC and RF and Automotive segments increased 7% and 18%, respectively, on a sequential basis from the second quarter of 2004 primarily due to increased unit shipments. Revenues in our Nonvolatile Memory segment declined 6% on a sequential basis from the second quarter of 2004 principally due to a decrease in average selling prices, primarily for Flash memory products. Revenues from our Microcontroller segment declined 22% on a sequential basis from the second quarter of 2004 primarily due to lower average selling prices and lower demand for our Military and Aerospace products, partially offset by an increase in unit shipments of our AVR products.

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

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(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:

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):

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ASIC

     In the first nine months of 2004, revenues increased by 30%, or $102 million, compared to the same period in 2003. The increase resulted from a 59% increase in unit shipments partially offset by a 18% decline in average selling prices.

     Compared to the same period in 2003, revenues increased by 22%, or $27 million, in the third quarter of 2004. The increase resulted from a 57% increase in unit shipments partially offset by a 22% decline in average selling prices.

     The increases in revenues in 2004 for our ASIC business unit was predominately driven by increased demand for SmartCard products, due to new product introductions, and market share gains achieved in this growing market. Our product offerings in this area serve the telecommunications, set-top box, personal computer, industrial, and smart card reader markets. Currently, SmartCard products represent approximately 30% of the ASIC business segment’s revenues.

     Segment operating loss improved to $10 million for the third quarter of 2004, compared to $17 million loss for the third quarter of 2003, due to higher revenues as well as improved gross margins from higher factory utilization.

     Our ASIC segment was unprofitable in the third quarter of 2004 due primarily to competitive pricing pressures on SmartCard products and delays in achieving higher yields necessary to achieve targeted gross margins. Gross margins for this product segment are expected to improve over the next year as product mix is migrated to 0.18 micron manufacturing technology.

Microcontroller

     Revenues increased by 36%, or $69 million, in the first nine months of 2004 compared to the same period in 2003. The increase resulted from a 41% increase in unit shipments partially offset by a 3% decrease in average selling prices.

     In the third quarter of 2004, revenues increased by 12%, or $8 million, when compared to the same period in 2003. The increase resulted from a 20% increase in unit shipments partially offset by a 6% decrease in average selling prices.

     The growth in revenues 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.

     Segment operating income improved to $14 million for the third quarter of 2004, compared to $12 million segment operating income for the third quarter of 2003, due to higher revenues.

Nonvolatile Memory

     Revenues increased by 32%, or $82 million, in the first nine months of 2004 compared to the same period in 2003. The increase resulted from a 44% increase in unit shipments partially offset by a 6% decrease in average selling prices.

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     Revenues increased by 29%, or $25 million, in the third quarter of 2004 compared to the same period in 2003. The increase resulted from a 25% increase in unit shipments along with a 5% increase in average selling prices.

     The growth in revenues in 2004 can be attributed to improved demand for our Flash, Data Flash, and Serial EEPROM products. Growth for these products is related to design wins and new product introductions for products related to the consumer and personal computer markets.

     Segment operating loss improved to $5 million for the third quarter of 2004, compared to $26 million loss for the third quarter of 2003, due to higher revenues as well as improved gross margins from higher factory utilization.

     Our Nonvolatile memory segment was unprofitable in the third quarter of 2004 due primarily to competitive pricing pressures for Flash products and higher costs associated with migrating to new manufacturing technology. Gross margins for this product segment remain below that of our other products, which is likely to continue for the foreseeable future.

RF and Automotive

     In the first nine months of 2004, revenues increased by 23%, or $38 million, compared to the same period in 2003. The increase resulted from a 19% increase in unit shipments and a 4% increase in average selling prices.

     Compared to the same period in 2003, revenues increased by 31%, or $18 million, in the third quarter of 2004. The increase resulted from a 15% increase in unit shipments and a 14% increase 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 third quarter of 2004, demand increased for RF Bi-CMOS products that service the CDMA phone market. While automotive markets have seen relatively stable demand, telecom end-markets are often volatile and subject to significant changes in demand due to competition, innovation, and supply-chain factors.

     Segment operating income decreased to $6 million for the third quarter of 2004, compared to $9 million segment operating income for the third quarter of 2003, due to lower gross margins on CDMA products and higher R&D costs associated with new product development for Wireless products.

Net Revenues — By Geographic Area

     Our net revenues by geographic areas are summarized as follows (revenues are attributed to countries based on delivery locations):

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     * 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. While difficult to ascertain, shipments by region are often re-exported, and may not reflect the geographic regions where end-user products are consumed.

     In the first nine months of 2004, revenues from North America increased by $41 million compared to the same period in 2003 due to an 8% increase in average selling prices and a 3% increase in unit shipments. Revenues increased by $24 million in the third quarter of 2004 compared to the same period in 2003 due to a 16% increase in average selling prices along with a 23% increase in unit shipments.

     Revenues from Europe increased by $111 million in the first nine months of 2004 compared to the same period in 2003 due to a 43% increase in unit shipments, partially offset by a 1% decrease in average selling prices. Compared to the same period in 2003, revenues from Europe in the third quarter of 2004 increased by $32 million due to a 47% increase in unit shipments, partially offset by a 10% decrease in average selling prices.

     Compared to the same period in 2003, revenues from Asia increased by $137 million in the first nine months of 2004 due to a 47% increase in unit shipments partially offset by a 5% decrease in average selling prices. Revenues from Asia increased by $21 million in the third quarter of 2004 compared to the same period in 2003 due to a 23% increase in unit shipments, partially offset by a 9% decrease in average selling prices.

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Revenues and Costs – Impact from Changes to Currency Rates

     In the first nine months of 2004, approximately 27% of sales were denominated in foreign currencies, primarily the Euro. Had exchange rates in the first nine months of 2004 remained the same as the average exchange rates in the same period in 2003, our revenues in the first nine months of 2004 would have been approximately $32 million lower than actually reported. In the first nine months of 2004 approximately 57% of our expenses were denominated in foreign currencies, primarily the Euro. Had exchange rates in the first nine months of 2004 remained the same as the average exchange rates in the same period in 2003 our expenses would have been approximately $69 million lower than actually reported for the first nine months of 2004 (cost of revenues $51 million, research and development $11 million, selling, general and administrative $5 million, net interest and other expenses $2 million). The effective portion of net derivative losses that were reclassified into cost of revenues in the first nine months of 2004 was $4 million.

     In the third quarter of 2004, approximately 26% of sales were denominated in foreign currencies, primarily the Euro. Had exchange rates in the third quarter of 2004 remained the same as the average exchange rates in the same period in 2003, our revenues in the third quarter of 2004 would have been approximately $8 million lower than actually reported. In the third quarter of 2004 approximately 58% of our expenses were denominated in foreign currencies, primarily the Euro. Had exchange rates in the third quarter of 2004 remained the same as the average exchange rates in the same period in 2003, our expenses would have been approximately $17 million lower than actually reported for the third quarter of 2004 (cost of revenues $13 million, research and development $3 million, sales, general and administrative $1 million). The effective portion of net derivative gains that were reclassified into cost of revenues in the third quarter of 2004 was $1 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. 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 improved to 71% in the first nine months of 2004, compared to 79% for the same period in 2003. Cost of revenues improved to 72% for the third quarter of 2004, compared to 78% for the same period in 2003.

     Gross margin was 29% for the first nine months of 2004, increased from 21% 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 nine months of 2003 were negatively affected by a $10 million charge related to a patent license agreement. Had exchange rates in the first nine months of 2004 remained the same as the average exchange rates in the same period in 2003 our reported gross margin would have been 31% for the first nine months of 2004.

     Gross margin improved to 28% for the third 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 third 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 third quarter of 2004.

     Gross margins on SmartCard products have been below our 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 both revenues and relative mix of both SmartCards and Flash memories, combined with below average margins for both products, have negatively affected our gross margins for the three and nine months ended September 30, 2004 when compared to the same periods of 2003. However, we expect that gross margin on SmartCard products will improve over the next year as we continue to increase volumes and move production to 0.18 micron technology.

     The effect of inventory write-downs on our gross margin for the three and nine months ended September 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 $11 million from grants in the first nine months of 2004 compared to $6 million in the same period in 2003. We recognized $3 million from grants in the third quarter of 2004 compared to $2 million in the third 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 $180 million in the first nine months of 2004 compared to $192 million for the same period in 2003. R&D expenses as a percentage of net revenues for the first nine months of 2004 were 15% compared to 20% 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 nine months of 2004 remained the same as the average exchange rates in the same period in 2003, R&D expenses would have been $11 million lower than actually reported for the first nine months of 2004.

     R&D expenses increased to $66 million in the third quarter of 2004 compared to $62 million for the same period in 2003. As a percentage of net revenues, R&D expenses decreased to 16% in the third quarter of 2004 compared to 19% for the same period in 2003. The increase in R&D expenses was primarily due to higher costs associated with the development of 0.18 and 0.13 process technology, including more R&D masks and wafers, along with the negative effect of foreign exchange rate fluctuations. Had exchange rates in the third quarter of 2004 remained the

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same as the average exchange rates in the same period in 2003, R&D expenses would have been $3 million lower than actually reported for the quarter ended September 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 third quarter of 2004, we recognized $2 million in research grant benefits, compared to $2 million in the third quarter of 2003. We recognized $10 million in research grant benefits in the first nine months of 2004, compared to $6 million in the first nine months of 2003.

Selling, General and Administrative (SG&A)

     SG&A expenses increased to $132 million in the first nine months of 2004 compared to $103 million for the same period in 2003. SG&A expenses were 11% of net revenues for the first nine months of 2004 and 2003. The increase in S&GA expenses 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 nine months of 2004 remained the same as the average exchange rates in the same period in 2003, SG&A expenses would have been $5 million lower than actually reported in the first nine months of 2004.

     SG&A expenses increased to $45 million in the third quarter of 2004, compared to $34 million in the third quarter of 2003. SG&A expenses were 11% of net revenues for the third quarter of 2004 compared to 10% for the same period in 2003. The increase in SG&A expenses 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, partially offset by a reduction of bad debt reserves of $2 million. Had exchange rates in the third 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 third quarter of 2004.

Interest and Other Expenses, Net

     Interest and other expenses, net decreased to $14 million in the first nine months of 2004 compared to $23 million for the same period in 2003. As a percentage of net revenues, interest and other expenses, net was 1% in the first nine months of 2004 compared to 3% for the same period in 2003. Interest and other expenses, net decreased to $5 million in the third quarter of 2004 compared to $6 million for the same period in 2003. As a percentage of net revenues, interest and other expenses, net was 1% in the third quarter of 2004 compared to 2% 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, as well as lower foreign exchange losses from the remeasurement of assets and liabilities denominated in currencies other than the respective functional currency. Lower foreign exchange loss is partly a result of our use of derivative instruments, beginning in the first quarter of 2004, to manage exposures to foreign currency risk. Interest rates on borrowings did not change significantly in the third quarter or the first nine months of 2004 compared to the same periods in 2003.

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Income Taxes

     For the three and nine months ended September 30, 2004, we recorded an income tax expense of $18 million and $26 million, respectively, compared to an income tax expense of $3 million and $9 million for the three and nine months ended September 30, 2003, respectively.

     The provision for income taxes for these periods relates to certain profitable foreign subsidiaries as we are not recognizing any tax benefits for unprofitable entities due to the full valuation allowance provided against their related deferred tax assets. As a result, the provision for income taxes was calculated at a higher rate than the customary rate expected if all entities were profitable.

     During the three months ended September 30, 2004, we revised our estimate of forecasted taxable income as well as geographic mix of income for the full 2004 tax period. The provision for income taxes for the three and nine months ended September 30, 2004 increased significantly from prior periods due to the relative proportion of foreign taxable income resulting from the exclusion of losses in jurisdictions where tax benefits previously forecasted could no longer be recognized in the current year.

     Income tax expense is forecasted to total $28 million for the full year 2004, compared to $26 million for the 9 months ended September 30, 2004. We expect to record a provision for income taxes in the fourth quarter of 2004 of approximately $2 million.

Liquidity and Capital Resources

     At September 30, 2004, we had $354 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, decreased to 1.6 at September 30, 2004 compared to 1.8 at December 31, 2003. The decrease in both cash and current ratio is primarily due to capital expenditures and debt repayments partially offset by positive cash flow generated from operating activities along with new borrowing.

     Operating Activities: During the first nine months of 2004, net cash provided by operating activities was $141 million, compared to $172 million in the same period in 2003. The decrease in cash provided by operating activities for the nine months ended September 30, 2004 compared to the nine months ended September 30, 2003 is primarily due to increased working capital requirements resulting from higher levels of unit shipments, revenues, and related accounts receivable during 2004.

     Our accounts receivable was $251 million at September 30, 2004 compared to $215 million at December 31, 2003. Our days sales outstanding (“DSO”) increased to 55 days at September 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 $323 million at September 30, 2004 from $268 million at December 31, 2003. Days sales in inventory was 99 days at September 30, 2004, compared to 90 days at

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December 31, 2003. Inventories consist of raw wafers, purchased specialty wafers, work in process, and finished units. The increase in inventory of $55 million or 21% 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.

     Current and other assets increased from $54 million at December 31, 2003 to $82 million at September 30, 2004. The increase relates primarily to higher VAT receivables at European subsidiaries associated with higher manufacturing levels in 2004 compared to 2003.

     Trade accounts payable was $239 million at September 30, 2004 compared to $144 million at December 31, 2003. The increase in trade accounts payable by $95 million or 65% compared to December 31, 2003 is primarily due to increased purchases of capital equipment and higher levels of manufacturing activity. The change in fixed asset purchases included in accounts payable of $86 million from December 31, 2003 through September 30, 2004, was excluded from net cash provided by operating activities.

     Investing Activities: Net cash used in investing activities was $110 million during the first nine months of 2004 compared to $8 million net cash provided by investing activities in the same period of 2003.

     The increase in cash used in investing activities for the first nine months of 2004 was primarily due to increased capital spending and investment purchases compared to the same period in 2003, partially offset by the release of restricted cash. We are making significant investments in 2004 for equipment for both increased capacity and new manufacturing technology development, primarily at our North Tyneside, UK and Rousset, France wafer fabrication facilities.

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

     Financing Activities: Net cash used in financing activities decreased to $59 million in the first nine months of 2004 compared to $226 million during the same period in 2003. In 2004, cash used for financing activities was primarily principal payments on debt and capital leases of $111 million, offset by new borrowings of Euro 33 ($42) million in September 2004. For the first nine months of 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 $55 million of debt obligations require Atmel to meet certain financial ratios and to comply with other covenants on a periodic basis and approximately $21 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 September 30, 2004.

     Included in other long term liabilities, are obligations of $98 million for repayments of advances from customers, of which $14 million has been classified within current liabilities and is expected to be repaid within the next twelve months.

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     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 $250 to $275 million, of which $126 million has been paid and $86 million was payable to vendors at September 30, 2004. We have outstanding commitments for purchases of capital equipment of $70 million at September 30, 2004 which are expected to be delivered over the next several quarters. In 2005 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

     At its November 2003 meeting, the Emerging Issues Task Force (EITF) reached a consensus on disclosure guidance previously discussed under EITF 03-01, “The Meaning of Other Than Temporary Impairment and its Application to Certain Investments”. 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 consensus provided for disclosure of amounts of impairment of investments in securities not yet recognized in income effective for fiscal years ending after December 15, 2003. Atmel adopted the disclosure requirements during our quarter ended September 30, 2004.

     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. In September 2004, the FASB issued FASB Staff Position 03-01-1, which delays the effective date of the recognition and measurement guidance. 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

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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 October 2004, the EITF reached a consensus on 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. EITF 04-8 addresses the issue of when “Co-Cos” should be included in diluted earnings per share computations, regardless of whether the market price trigger has been met. The effective date of this consensus will coincide with the effective date of the proposed Statement that revises FASB Statement 128, Earnings per Share, which is expected to be December 15, 2004. If the effective date of Statement 128 (revised) is postponed until after December 15, the staff will ask the Task Force to consider making the effective date of is effective for fiscal periods beginning after December 15, 2004. The adoption of EITF 04-8 is not expected to have a material effect on Atmel’s 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 September 30, 2004, our long term convertible notes and long term debt less current portion was $315 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 September 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. 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.

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     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 $250 to $275 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 nine months of 2004, sales to customers outside of North America accounted for 82% 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:

•		greater difficulty in protecting intellectual property
•		greater difficulty in staffing and managing foreign operations
•		reduced flexibility and increased cost of staffing adjustments, particularly in France and Germany
•		greater risk of uncollectible accounts
•		longer collection cycles
•		potential unexpected changes in regulatory practices, including export license requirements, trade barriers, tariffs and tax laws
•		sales seasonality, and
•		general economic and political conditions in these foreign markets.

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

     Approximately 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 nine 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 48% of net revenues were generated in Asia in the first nine 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%, respectively, in the first nine 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.

     WHILE WE BELIEVE WE CURRENTLY HAVE ADEQUATE INTERNAL CONTROL OVER FINANCIAL REPORTING, WE ARE REQUIRED TO EVALUATE OUR INTERNAL CONTROL OVER FINANCIAL REPORTING UNDER SECTION 404 OF THE SARBANES OXLEY ACT OF 2002 AND ANY ADVERSE RESULTS FROM SUCH EVALUATION COULD RESULT IN A LOSS OF INVESTOR CONFIDENCE IN OUR FINANCIAL REPORTS AND 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.

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     The Committee of Sponsoring Organizations of the Treadway Commission (COSO) provides a framework for companies to assess and improve their internal control systems.

     The new Auditing Standard No. 2 issued by the Public Company Accounting Oversight Board (PCAOB) provides the professional standards and related performance guidance for auditors to attest to, and report on, management’s assessment of the effectiveness of internal control over financial reporting under Section 404. Management’s assessment of internal controls over financial reporting requires management to make subjective judgments and, particularly because Auditing Standard No. 2 is newly effective, some of the judgments will be in areas that may be open to interpretation and therefore the report may be uniquely difficult to prepare and our independent auditors may not agree with our assessments.

     We currently believe our internal control over financial reporting is effective. However, we are still performing the system and process documentation and evaluation needed to comply with Section 404, which is both costly and challenging. Our documentation and testing to date have identified certain gaps in the documentation and design of internal controls over financial reporting that we are in the process of remediating. Our independent auditors are also still in the process of evaluating our assessment and testing the design and operating effectiveness of our internal controls over financial reporting. We continue to enhance our internal control over financial reporting, including addition of resources in key functional areas, steps to ensure adequate segregation of duties and systems security, review of controls around outsourced services, and improvement of transactional control procedures in our overseas operations. We routinely discuss and disclose these matters to the audit committee of our board of directors and to our independent auditors.

     During this process, if our management identifies one or more material weaknesses in our internal control over financial reporting, we may 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 independent auditors are unable to attest that our management’s report is fairly stated or they are unable to express an opinion on the effectiveness of our internal controls), we could lose investor confidence in the accuracy and completeness of our financial reports, which could in turn have an adverse effect on our stock price.

     While we currently anticipate being able to satisfy the requirements of Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and any required remediation due, in part, to the fact that there is no precedent available by which to measure compliance with the new Auditing Standard No. 2. If we are not able to complete our assessment under Section 404 in a timely manner, we and our independent auditors would be unable to conclude that our internal control over financial reporting is effective as of December 31, 2004.

     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

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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.

     BUSINESS INTERRUPTIONS COULD HARM OUR BUSINESS.