UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

For the fiscal year ended December 31, 2004
or

Commission file number: 0-19032

ATMEL CORPORATION

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

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

Securities registered pursuant to Section 12(b) of the Act: None

Securities registered pursuant to Section 12(g) of the Act:
Common Stock, par value $0.001 per share
Preferred Share Right (currently attached to and trading only with the Common Stock)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. YES þ NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

As of June 30, 2004, the last business day of the Registrant’s most recently completed second fiscal quarter, there were 475,446,369 shares of the Registrant’s Common Stock outstanding, and the aggregate market value of such shares held by non-affiliates of the Registrant (based on the closing sale price of such shares on the NASDAQ National Market on June 30, 2004) was approximately $2,814,642,504. Shares of Common Stock held by each officer and director have been excluded in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

As of March 9, 2005, Registrant had outstanding 480,380,101 shares of Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

The Registrant’s definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 11, 2005 is incorporated by reference in Part III of this Annual Report on Form 10-K to the extent stated herein.

Table of Contents

PART I

ITEM 1. BUSINESS

FORWARD LOOKING STATEMENTS

          You should read the following discussion in conjunction with our Consolidated Financial Statements and the related “Notes to Consolidated Financial Statements”, and “Financial Statements and Supplementary Data” included in this Annual Report on Form 10-K. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements regarding our outlook for fiscal 2005 and our expectations regarding the effects of exchange rates. Our actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, especially under the caption “Trends, Uncertainties and Risks,” and elsewhere in this 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-K is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. Atmel undertakes no obligation to update any forward-looking statements in this Form 10-K.

BUSINESS

General

          Semiconductor integrated circuits (ICs) are key components in almost all electronic products and systems produced today. Their capacity to process and store information gives manufacturers of electronic products a powerful ability to add new features, adapt to changing demands and quickly develop new products. As additional semiconductor elements are packed into smaller areas, ICs offer valuable new capabilities important to manufacturers of end products.

          We design, develop, manufacture and sell a wide range of IC products, including microcontrollers, advanced logic, mixed-signal, nonvolatile memory and radio frequency (RF) components. Leveraging one of the industry’s broadest intellectual property (IP) portfolios, Atmel is able to provide the electronics industry with complete system solutions. These complex system-on-a-chip solutions are manufactured using our multiple leading-edge process technologies, including complementary metal oxide semiconductor (CMOS), double-diffused metal oxide semiconductor (DMOS), logic, CMOS logic, bipolar, bipolar CMOS (BiCMOS), silicon germanium (SiGe), SiGe BiCMOS, analog, bipolar double diffused CMOS and radiation tolerant process technologies. We develop these process technologies ourselves to ensure they provide the maximum possible performance. We fabricate more than 97% of our products in our own wafer fabrication facilities, or fabs. We believe our broad portfolio of manufacturing capabilities allows us to produce ICs that enable our customers to rapidly introduce leading edge electronic products that are differentiated by higher performance, advanced features, lower cost, smaller size, enable longer battery life and more memory. Our products are used primarily in the following markets: communications, computing, consumer electronics, storage, security, automotive, military and aerospace.

          We were originally incorporated in California in December 1984. In October 1999, we were reincorporated in Delaware. Our principal offices are located at 2325 Orchard Parkway, San Jose, California 95131, and our telephone number is (408) 441-0311. Our website is located at: www.atmel.com; however, the information in, or that can be accessed through, our website is not part of this report. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to such reports are available, free of charge, through the “Investors” section of our website as soon as reasonably practicable after we electronically file such material with, or furnish it to, the Securities and Exchange Commission, or SEC.

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Products

          Our products consist primarily of advanced logic, mixed-signal, nonvolatile memory, radio frequency and system-level integration semiconductor solutions.

          Our business has four operating segments (see Note 14 of Notes to Consolidated Financial Statements). Each segment offers products that compete in one or more of the end markets described below under the caption “Principal Markets and Customers.”

	•	Application specific integrated circuit (ASIC) segment includes semi-custom, single customer ICs that serve the telecommunications, consumer and military markets. In addition, this segment includes application specific standard products that are sold to multiple customers, serving the imaging sensors and processors, as well as the wireless and wired data communications markets. This segment also includes smart card ICs that serve the telecommunications, banking and consumer markets. Finally, this segment includes programmable logic devices that serve the industrial, military and computing markets.
	•	Microcontrollers segment includes a variety of proprietary and standard microcontrollers, the majority of which contain embedded nonvolatile memory, and military and aerospace application specific products.
	•	Nonvolatile Memories segment includes serial and parallel interface electrically erasable programmable read only memories (EEPROMs), serial and parallel interface Flash memories, and erasable programmable read only memories (EPROMs) for use in a broad variety of customer applications.
	•	Radio Frequency (RF) and Automotive segment includes radio frequency and analog circuits for the telecommunications, automotive and industrial markets as well as application specific products for the automotive industry.

          Within each operating segment, we offer our customers products with a range of speed, density, power usage, specialty packaging and other features.

ASIC

          Custom ASICs. We manufacture and market ASICs to meet customer requirements for high-performance logic devices in a broad variety of customer-specific applications. Atmel’s SiliconCITY design platform utilizes our extensive libraries of qualified analog and digital IP blocks. This approach integrates system functionality into a single chip based on this unique architecture platform combined with one of the richest libraries of qualified IP blocks in the industry. By combining a variety of logic functions on a single chip, costs are reduced, design risk is minimized, time-to-market is accelerated, and performance can be optimized.

          We design and manufacture ASICs in a range of products that includes standard digital and analog functions, as well as nonvolatile memory elements and large pre-designed macro functions all mixed on a single chip. We work closely with customers to develop and manufacture custom ASIC products so that we can provide them IC solutions on a sole-source basis. To develop gate arrays and integrated circuits, our customers’ system designers require sophisticated development tools. These CAE tools include logic synthesizers, logic circuit simulators, timing analysis and verification tools, test pattern generators and testability graders, automated circuit placement and interconnection programs and mask tooling generators. Our ASIC products are targeted primarily at customers whose high-end applications require high-speed, high-density or low or mixed-voltage devices.

          Security and Smart Cards. Our advanced design capability expertise in non-volatile memory technology and experience in security products position Atmel as one of the world’s pre-eminent suppliers of smart card ICs. Our smart card ICs primarily serve the cellular phone, banking, health card, national ID card and set-top box markets.

          Atmel has a wide portfolio of secure ICs, including secureAVR™ microcontrollers, CryptoMemory® and CryptoRF™, smart card reader chips and FingerChip™ sensors. Our secure microcontrollers include dual contact/ contactless products complying with the ISO-14443, USB Full-Speed interface and SPI interface.

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          Atmel has obtained independent security certifications and approvals for ICs from third party bodies for MasterCard CAST, VISA Level 3, FIPS 140 and Common Criteria EAL4+.

          The combination of Atmel’s dense non-volatile memory technology and high performance AVR® 8-/16-bit RISC or ARM® 32-bit RISC CPU core offers cost-effective solutions for high density applications such as GSM SIM cards and multi-application smart cards running on open platforms like Java™.

          Imaging Sensors. Our line-up of imaging and sensing products includes CCD and CMOS image sensors and processors that cover the market from entry level to the high resolution required for professional, medical, automotive and military applications. Our portfolio of ICs covers innovative image processor technology needed to satisfy our customers’ needs for complex image processors and industrial grade image sensors, and can also be integrated into complete digital camera modules.

          Multimedia Products. We develop and manufacture complex System-on-a-Chip (SoC) IC’s for wireless and wireline applications such as Wi-Fiä Clients, Access Points/Bridges/Routers, ADSL2/2+ Consumer Premise Equipment (CPE) gateways, wireless and wireline Voice Over IP (“VOIP”) handsets, and Bluetooth headsets. Atmel’s Access Point/Bridging devices provide a seamless connection between wired Ethernet and the WLAN, as well as wireless router and ADSL2/2+ to WLAN capabilities. Our designs include Media Access Controllers (MAC’s) with integrated baseband controllers, supporting all host interfaces such as PCMCIA, CF Card, USB (1.1 and 2.0), PCI, Mini-PCI, ethernet and SDIO, for Wi-Fiä applications, DSL2/2+ CPE/Gateways, VOIP processors, and Bluetooth controllers capable of running fully embedded audio applications software.

          We have also introduced solutions with Multimedia and wireless Communications devices targeting home entertainment, security, and automotive applications.

          FPGAs. Our FPGAs, with FreeRAM and Cache Logic®, offer distributed RAM without loss of logic resources as well as a reconfigurable solution for adaptive DSP and other computationally intensive applications. We offer a family of RAD Hard FPGAs for military and space applications. Our family of reconfigurable FPGA Serial Configuration EEPROMs can replace one-time-programmable devices for FPGAs from other vendors. Our exclusive family of large flash configurators provides a fast low power chip in a small package for large FPGAs from other vendors. Our family of N type configurators provides a competitive alternative to OTP proms. Additionally, FPGA to gate array conversion (ULC) is available for both military and commercial applications.

          PLDs. We have developed a line of PLDs that are reprogrammable and incorporate nonvolatile elements from our EEPROM technology. These devices are sometimes used as prototyping and pre-production devices and allow for later conversion to gate array products for volume production. For these situations, we offer customers the ability to migrate from FPGAs or PLDs (either its own or competitors’) to our gate arrays with minimal conversion effort. We offer CMOS PLDs with high performance and low power consumption.

Microcontrollers

          Our Microcontroller segment offers a variety of products to serve the consumer, automotive, industrial and aerospace marketplaces for embedded controls. Our product portfolio has two 8-bit microcontroller architectures targeted at the high volume embedded-control segment, our proprietary AVR microcontrollers and our 8051 microcontrollers. The AVR microcontroller family uses a RISC architecture that is optimized for C language code density and low power operation. The 8051 family consists of microcontrollers containing a range of memory options, including flash, one-time programmable and read only memory products, plus application specific products designed to enable MP3, CAN or smart card reader systems. Both microcontroller families are offered as standard products, as building blocks in our ASIC library or as application specific products. The microcontroller families offer a large variety of memory densities, package types and peripheral options, including analog capability.

          Embedded control systems typically incorporate a microcontroller as the principal active component. A microcontroller is a self-contained computer-on-a-chip consisting of a central processing unit, non-volatile program memory, random access memory for data storage and various input/output peripheral capabilities. In addition to the microcontroller, a complete embedded control system incorporates application-specific software and may include specialized peripheral device controllers and internal or external non-volatile memory components, such as EEPROMs, to store additional program software, and various analog and interface products.

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          Increased demand for embedded electronic features in applications as diverse as motors, lighting, and automobiles have made the market for microcontrollers one of the fastest growing segments of the semiconductor market. Microcontrollers are currently available in 4-bit through 32-bit architectures. Although 4-bit microcontrollers are least expensive, they generally lack the minimum performance and features required for product differentiation. While 16 and 32-bit architectures provide very high performance, they are generally more expensive than desired for high-volume embedded control applications. Manufacturers of competitive, high-volume products have found 8-bit microcontrollers to be most cost-effective embedded control solution.

          We are a supplier to the aerospace industry, delivering microcontrollers which include radiation-tolerant and radiation-hardened SRAM, Dual Port RAM, FIFO, ASIC and 32-bit SPARC processors.

Nonvolatile Memories

          Serial Interface Products (Serials). Our serials evolved from our EEPROM technology expertise and the market need for low pin count, specialized interface, and delivery of nonvolatile memory content. We currently support the 2-wire, 3-wire and SPI protocols which have industry wide acceptance. Due to our technology, package and broad density offerings we have maintained market leadership for the last several years. For economic reasons, beyond a certain density, it is more advantageous to employ the FLASH technology, which has thus been incorporated in our 512K and higher densities. The similarity of the feature set allows our customers to easily upgrade from the lower densities Serials to the higher densities.

          Atmel is committed to continuously decrease board space consumption of its package options for Serials. A wafer scale BGA (Ball Grid Array) package was developed to accomplish this task. In addition we have a number of innovative DFN (Dual Footprint Non Leaded) packages including SAP, LAP, MAP and MiniMAP, all designed to optimize board space for certain pin configuration and package height. This portfolio of leadless packages is in addition to the offering of industry standard SOIC, PDIP & TSSOP packages.

          The Serials are used in a wide variety of applications for storing manufacturer or user’s data such as: consumer entertainment, home appliances, cordless and cellular phones, Blue-Tooth, LAN, PC & peripherals, medical, automotive, office automation, industrial, smart cards, etc.

          Flash. Flash represents the dominant technology used in nonvolatile devices that can be programmed and reprogrammed within system. We currently manufacture our highest density flash products on 0.13-micron process technology, and anticipate most of our production to be on 0.18-micron and 0.13-micron during 2005. Next generation 0.09 micron technology is being developed for production deployment in 2006.

          The majority of our higher density Flash products are being shipped in multi-chip-packages (MCPs) where an Atmel Flash is paired with an SRAM or PSRAM die to achieve small footprint devices. The SRAM and PSRAM dice are purchased as commodities from several suppliers in wafer form. The MCP package has become the package of choice for small hand held devices with the majority of cell phones incorporating them.

          The flexibility and ease of use of our Flash memories make them attractive solutions in systems where program information stored in memory must be rewritten after the system leaves its manufacturing environment. In addition, many customers use Flash memories within their system manufacturing cycle, affording them in-system diagnostic and test programming prior to reprogramming for final shipment configuration. The reprogrammability of Flash memories also serves to support later system upgrades, field diagnostic routines and in-system reconfiguration, as well as capturing voice and data messages for later review. These products are generally used in handsets, personal computers, cable modems, set-top boxes and DVD players.

          DataFlash^®. The SPI compatible DataFlash^® family of serial flash memories deliver reliable solutions to store both embedded program code and data in low pin-count packages. DataFlash is designed to enable advanced features and functionality in a variety of high volume products and applications. Optimization of the CPU or ASIC pin count, simplified PCB routing, reduced power consumption, lower switching noise and smaller footprint all contribute to the net result of higher performance and lower system cost. The industry standard SPI and higher performance RapidS^TM interface are used in a variety of applications due to the simplicity of the 4-pin interface, which greatly eases system design times and constraints. The combination of the DataFlash architecture, very small page size, on board SRAM buffers which allow for self contained rewriting to the flash memory array, low pin count interfaces, and the Atmel Flash and eSTAC^TM memory technologies allow for a very flexible solution, shortened development times and significantly smaller software footprints. These products are generally used in digital answering machines, fax machines, personal computers, set-top boxes and DVD players.

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          Parallel-Interface EEPROMs. We are a leading supplier of high performance in-system programmable parallel-interface EEPROMs. We believe that our parallel-interface EEPROM products, all of which are full featured, represent the most complete parallel-interface EEPROM product family in the industry. We have maintained this leadership role through early introductions of high speed, high capacity and low power consumption CMOS devices. We are the sole-source supplier for several customers for certain parallel-interface EEPROM devices. In the design of this product family, we have emphasized device reliability, achieved partly through the incorporation of on-chip error detection and correction features. These products are generally used to store frequently updated data in communications infrastructure equipment and avionics navigation systems.

          EPROMs. The worldwide EPROM market is intensely competitive and characterized by commodity pricing. Our strategy is to target the high-performance end of this market by offering faster speed, higher density and lower power usage devices. These products are generally used to store the operating programs of embedded microcontroller or DSP-based systems, such as hard disk drives, CD-ROM drives and modems.

RF and Automotive

          Our RF products are designed to serve the automotive, telecommunications, consumer and industrial markets. One focus is to enable data communications through the design and supply of high-frequency products for many types of wireless communications devices in the frequency range of 0.1 to 4.8 GHz. These products, manufactured using SiGe technology, are used in two-way pagers, digitally enhanced cordless telecommunications, mobile telephones, and cellular base stations, among other applications. Additionally, Atmel builds RF solutions that concentrate on remote control applications. Successful product applications currently include broadcast radios, GPS for automobiles and telephones, DVD laser diode drivers, air conditioning control, garage door openers, outside wireless temperature monitoring and security home alarm systems.

          For automotive applications, this segment offers a family of read, read/write and encryption identification ICs, which are used for wireless access control and operate at a frequency in the range of 100 kHz to 800 MHz. These ICs are used in combination with a reader IC to make possible contactless identification for a wide variety of applications, including remote keyless entry for automobiles and tire pressure monitoring. Typical applications include access control and tracking of consumer goods. We also specialize in providing intelligent load driver ICs that are specially suited for the rugged automotive environment. These ICs are manufactured utilizing a 0.8-micron mixed signal high voltage technology, providing analog-bipolar, high voltage DMOS power and CMOS logic function on a single chip. The applications for these automotive products are primarily motor and actuator drivers and smart valve controls.

          We also provide RF BiCMOS foundry services for customers that are serving the cellular phone and emerging wireless markets. Typically, customers of our foundry services use our production capability to manufacture wafers, either on a custom process or Atmel developed RF capable process. In most instances, we will provide the customer with a complete solution of wafer foundry, packaging, test, and shipping. Atmel is preparing RF CMOS wafer technologies to serve foundry customers in addition to the SiGe BiCMOS wafer technologies we have today.

Technology

          From our inception, we have focused our efforts on developing advanced CMOS processes that can be used to manufacture reliable nonvolatile elements for memory and logic integrated circuits. We believe we are a leader in single and multiple-layer metal CMOS processing, which enables us to produce high-density, high-speed and low-power memory and logic products.

          We attempt to meet customers’ demands for constantly increasing functionality on ever-smaller ICs by increasing the number of layers we use to build the circuits on a wafer and by reducing the size of the transistors and other components in the circuit. To accomplish this we develop and introduce new wafer manufacturing techniques as necessary. We also provide our fabrication facilities with state-of-the-art manufacturing equipment and development resources that allow us to produce ICs with increasingly smaller feature sizes. Our current ICs incorporate effective feature sizes as small as 0.13-microns. We are developing processes that support effective feature sizes as small as 0.065-microns. As we migrate to lower geometries, 0.13-micron and below, we are taking advantage of copper being more conductive than aluminum. The higher conductivity of copper allows us to make thinner layers on our wafers, creating faster circuits.

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          We continue to broaden our technology focus by developing expertise for designing and manufacturing high frequency RF products, which are used primarily in cellular telephones and cordless applications. In order to achieve high frequency with high efficiency and very low noise, a SiGe technology was developed. This technology is based on well-established bipolar silicon process technology, with one of the key process steps, the epitaxial layer, modified by adding germanium to the silicon. This technology is designed to replace galium arsenide (GaAs) technology, which is commonly used for power amplifiers in cellular telephones.

          In order to extend the capabilities of SiGe, we have combined the high-frequency features of SiGe with CMOS in order to integrate high-density logic parts and RF analog functions on a single integrated circuit. We believe this SiGe/CMOS technology will enable us to provide single-chip system solutions to the marketplace. Atmel is one of only a few players in the SiGe market.

Principal Markets and Customers

          Communications. Communications, including wireless and wireline telecommunications and data networking, is currently one of our larger end user markets. For the wireless market, we provide nonvolatile memory, standard and secure microcontrollers, and baseband and RF ASICs that are used in global standard for mobile communications (GSM) and code-division multiple access (CDMA) mobile phones and their base stations, as well as two-way pagers, mobile radios, and cordless phones and their base stations. We also have a range of products based on the IEEE 802.11 wireless LAN standard, and on Bluetooth, a short-range wireless protocol that enables instant connectivity between electronic devices. In 2003, we began shipping a GPS receiver chipset that has been well received in the market, and we sell ASICs to major GSM makers. Our principal customers in the wireless market include Ericsson, Motorola, Nokia, Philips, Qualcomm, Samsung, Siemens, Thales-Magellan, and Vitelcom.

          We also serve the data networking and wireline telecommunications markets, which continue to evolve due to the rapid adoption of new technologies. For these markets, we provide ASIC, nonvolatile memory and programmable logic products that are used in the switches, routers, cable modem termination systems and digital subscriber line (DSL) access multiplexers, that are currently being used to build internet infrastructure. Our principal data networking and wireline telecommunications customers include Alcatel, Cisco and Siemens.

          Consumer Electronics. Our products are also used in a broad variety of consumer electronics products. We provide microcontrollers for batteries and battery chargers that minimize the power usage by being “turned on” only when necessary. Microcontrollers are also offered for fluorescent light ballasts. We provide multimode audio processors and MPEG2-based decoders with programmable transport for complex digital audio streams used in digital TVs, set top boxes and DVD players. For digital cameras, we provide a single chip digital camera processor solution, as well as medium and high-resolution image sensors. We provide ASIC demodulators and decoders for cable modems. We also offer media access controllers for wireless local area networks (LANs) and baseband controllers and network protocol stacks for voice-over-internet-protocol (VoIP) telephone terminals. In addition, we provide secure, encryption enabled, tamper resistant circuits for smart cards and embedded PC security applications. Our principal consumer electronics customers include FujiFilm, Invensys, LG Electronics, Matsushita, Microsoft, Philips, Samsung, Sony, and Toshiba.

          Computing, Storage and Printing. The computing and computing peripherals markets are also growing with increasing Internet use, network connectivity, and digital imaging requirements. For computing applications, we provide Flash memory, serial memory, universal serial bus (USB) hubs and ASICs for personal computers, servers and USB drives. Our biometric security IC verifies a user’s identity by scanning a finger. In today’s security conscious environment we believe this IC is finding application where access to information, equipment and similar resources needs to be controlled or monitored. For storage applications, we provide servo controllers, laser drivers, read channels, and data interfaces for data storage subsystems, hard drives and DVD players. We provide ASICs, nonvolatile memory and microcontrollers for laser printers, inkjet printers, copy machines and scanners. Our principal customers in these markets include Dell, Hewlett-Packard, IBM, Intel, M-Systems, Seagate and Western Digital.

          Security. The issue of increased security for electronic applications is a key issue for the development of computing and communications equipment. Atmel addresses increased security requirements with its secure product portfolio, which includes secure microcontrollers and memory as well as contactless and biometric sensors. For example, our Smart Card and Smart Card reader IC’s are targeted towards the established European markets and rapidly emerging secure applications in the USA and throughout Asia. Smart Card technology is used for mobile communications, credit cards, drivers’ licenses, identity cards, health cards, TV set top boxes, internet commerce and related applications where data security is essential. Our principal customers in these markets include Axalto, GemPlus, NDS, Oberthur, Sagem and SCM.

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          Automotive. The automotive electronics market has grown modestly, driven by demand for more sophisticated electronic systems, yet it remains stable during times when other sectors fluctuate. For automotive applications, we provide body electronics for passenger comfort and convenience; safety related subsystems such as air-bag drivers, anti-lock brake control, tire pressure monitors; keyless entry transmitters and receivers; and in-vehicle entertainment components. Virtually all of these are application-specific mixed signal ICs. Our principal customers in these markets include Continental-Temic, Daimler-Chrysler, Delphi, Hella, Marelli, Robert Bosch, Siemens-VDO and TRW.

          Military and Aerospace. The military and aerospace industries require products that will operate under extreme conditions and are tested to higher standards than commercial products. Our circuits are available in radiation-hardened versions that meet stringent requirements (cumulative dose, latch-up and transient phenomena) of space, avionic and industrial applications . For these applications, we provide radiation hardened ASICs, FPGAs, non-volatile memories and microcontrollers. Our principal customers in these markets include BAE Systems, Honeywell, Litton, Northrop, Raytheon and Roche.

Manufacturing

          We currently manufacture our products at our wafer fabrication facilities located in Colorado Springs, Colorado; Heilbronn, Germany; Grenoble, France; Nantes, France; Rousset, France; and North Tyneside, United Kingdom.

          As a result of the muted growth in the semiconductor industry in the second half of 2004, we have taken actions to limit the increase of our manufacturing capacity. Much of the manufacturing equipment purchased at the end of 2004 was related to technology advancements. It is anticipated that capital equipment purchases for 2005 will also be focused on technology advances. The facility at Irving, Texas was acquired in 2000, and Atmel originally intended to commence commercial production in the second half of 2002. However, given the market conditions in the semiconductor industry, we reassessed our overall manufacturing capacity against the potential anticipated demand and decided to close the facility in 2002. The facility was placed on the market in August 2002. In late 2003 and in early 2004, we moved much of the equipment from our Irving, Texas facility to our North Tyneside, UK and Rousset, France facilities and utilized the equipment to meet increasing demand that we experienced during the first half of 2004. An asset impairment charge of $27.6 million was recorded in the fourth quarter of 2003. See Note 16 of Notes to Consolidated Financial Statements for more information regarding asset impairment charges.

          If market demand for our products increases during 2005 and 2006, we believe that we will be able to substantially meet our production needs from our wafer fabrication facilities through at least the end of 2006; however this date may vary depending on, among other things, our rate of growth and our ability to increase production levels. We will need to hire, train and manage additional production personnel in order to increase our production capacity from current levels. To remain technologically and economically competitive, we must continuously implement new manufacturing technologies such as 0.13-micron and 0.09-micron line widths in our wafer manufacturing facilities regardless of demand for our products.

          The cost of expanding our manufacturing capacity at our existing facilities, acquiring additional facilities, and implementing new manufacturing technologies is typically funded through a combination of available cash resources, cash from operations and additional lease, debt, or equity financing. We may not be able to generate the cash from operations or obtain the additional financing necessary to fund the maintenance or expansion of our manufacturing facilities or the implementation of new manufacturing technologies.

          The 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 in connection with the expansion of our manufacturing capacity and related transitions. Because of long lead times associated with increasing manufacturing output, our revenues may not increase in proportion to increases in manufacturing capacity associated with any expanded or new facility. The interruption of wafer fabrication or the failure to achieve acceptable manufacturing yields at any of our wafer fabrication facilities would harm our business.

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          Once we have fabricated the wafers, we test probe the individual circuits on them to identify those that do not function. This saves us the cost of putting mechanical packages around circuits whose failure can be determined in advance. After probe, we send all of our wafers to one of our independent assembly contractors, located in China, Hong Kong, Indonesia, Japan, Malaysia, the Philippines, South Korea, Taiwan, or Thailand where they are cut into individual chips, assembled into packages and given a final test. Many of the packaged integrated circuits, however, are shipped back to our final test facilities where we perform electrical testing and visual inspection before shipping them to customers. Although we mitigate our risk by doing some of our assembly, our reliance on independent subcontractors to assemble our products into packages involves risks, including reduced control over quality and delivery schedules, a potential lack of capacity at our subcontractors and a risk the subcontractor may abandon assembly processes we need. We cannot be sure that our current assembly subcontractors will continue to assemble, package and test products for us. In addition, because our assembly subcontractors are located in foreign countries, we are subject to some risks commonly associated with contracting with foreign suppliers, including currency exchange fluctuations, political and economic instability, trade restrictions and changes in tariff and freight rates. As a result, we may experience production delays, insufficient volumes or inadequate quality of assembled products, any of which could harm our operations. To mitigate these risks we execute a strategy of qualifying multiple subcontractors in different countries. However, there can be no guarantee that any strategy will eliminate these risks.

          We expect to utilize outside foundries to expand our capacity in the future, especially for high volume commodity type products, such as Flash memory and certain aggressive technology ASIC products. Use of outside foundries will allow us to better manage capacity and costs with the sharp cyclical swings in product demand that we have experienced in the past. However, reliance on outside foundries to fabricate wafers involves significant risks, including reduced control over quality and delivery schedules, a potential lack of capacity, and a risk the subcontractor may abandon the fabrication processes we need if the process is not economically viable. We will mitigate these risks with a strategy of qualifying multiple subcontractors, however, there can be no guarantee that any strategy will eliminate these risks.

          The raw materials and equipment we use to produce our integrated circuits are available from several suppliers and we are not dependent upon any single source of supply. However, some materials have been in short supply in the past and lead times for new equipment have lengthened, especially during semiconductor expansion cycles.

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

Marketing and Sales

          We generate our revenue by selling our products to original equipment manufacturers (OEMs) and distributors. We market our products worldwide to a diverse base of OEMs serving primarily commercial markets. In the United States and Canada, we sell our products to large OEM accounts primarily through manufacturers’ representatives and through national and regional distributors. Our agreements with our representatives and distributors are generally terminable by either party on short notice, subject to local laws. Sales to OEMs as a percentage of worldwide net revenues for 2004 totaled 64% while sales to distributors totaled 36% of worldwide net revenues.

          Sales to North American OEMs, as a percentage of net revenues totaled 10%, 11% and 15% for 2004, 2003 and 2002, respectively. Sales to North American distributors, as a percentage of net revenues, totaled 7%, 7% and 7% for 2004, 2003 and 2002, respectively. We support this sales network from our headquarters in San Jose, California and through North American regional offices in California, Colorado, Florida, Illinois, Massachusetts, Michigan, Minnesota, New Jersey, North Carolina, Oregon, Texas, Mexico, and Canada.

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          We sell to customers outside of North America primarily through international sales representatives and distributors, who are managed from our foreign sales offices. We maintain sales offices in Denmark, Finland, France, Germany, Hong Kong, Italy, Japan, Korea, Singapore, Sweden, Switzerland, Taiwan and U.K. Our sales outside North America were approximately 83%, 82% and 78% of net revenues in 2004, 2003 and 2002, respectively. See Note 14 of Notes to Consolidated Financial Statements. Although the U.S. government imposes some restrictions on export sales we have not experienced any serious difficulties because of such restrictions. We expect revenues from our international sales will continue to represent a significant portion of our net revenues. International sales are subject to a variety of risks, including those arising from currency fluctuations, tariffs, trade barriers, taxes, export license requirements and foreign government regulations.

          We allow certain distributors, primarily based in the United States, rights of return and credits for price protection. Given the uncertainties associated with the levels of returns and other credits to these distributors based on contractual terms we defer recognition of revenue from sales to these distributors until they have resold our products. Sales to certain other primarily non-US based distributors carry either no or very limited rights of return. We have historically been able to estimate returns and other credits from these distributors and accordingly have historically recognized revenue from sales to these distributors upon shipment, with a related allowance for potential returns established at the time of our sale.

Research and Development

          We believe significant investment in research and development is vital to our success, growth and profitability, and we will continue to devote substantial resources, including management time, to this activity. Our primary objectives are to increase performance of our existing products, to develop new wafer processing and design technologies, and to draw upon these technologies to create new 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, and as a result, our new products may not achieve expected functionality, market acceptance, or cost or pricing expectations.

          During 2004, 2003 and 2002, we spent $247 million, $248 million and $253 million, respectively, on research and development. Research and development expenses are charged to operations as incurred. We expect these expenditures will increase in the future as we continue to invest in new products and new processing technology.

Competition

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

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

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	•	product introductions by our competitors
	•	the number and nature of our competitors in a given market
	•	the incumbency of our competitors’ products, 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.

Patents and Licenses

          We maintain a portfolio of United States patents and we have patent applications on file with the U.S. Patent and Trademark Office. We also operate an internal program to identify patentable developments and we file patent applications wherever necessary to protect our proprietary technologies. However, because technology changes very rapidly in the semiconductor industry, we believe our continued success depends primarily on the technological and innovative skills of our employees and their abilities to rapidly commercialize discoveries.

          The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights or positions, which have on occasion 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 we are currently involved in a significant lawsuit alleging patent infringement. See Item 3, Legal Proceedings. Although we intend to vigorously defend against any such lawsuits, we may not prevail given the complex technical issues and inherent uncertainties in patent and intellectual property litigation. Moreover, the cost of defending against such litigation, in terms of management time and attention, legal fees and product delays, could be substantial, whatever the outcome. If any patent or other intellectual property claims against us are successful, we may be prohibited from using the technologies subject to these claims, and if we are unable to obtain a license on acceptable terms, license a substitute technology, or design new technology to avoid infringement, our business and operating results may be significantly harmed.

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

Employees

          At December 31, 2004, we employed approximately 8,800 persons. 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 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.

Backlog

          We accept purchase orders for deliveries covering periods from one day up to approximately one year. However, purchase orders can generally be revised or cancelled by the customer without penalty. In addition, significant portions of our sales are ordered with short lead times, often referred to as “turns business”. Considering these practices and our experience, we do not believe the total of customer purchase orders outstanding (backlog) provides meaningful results that can be relied on to predict actual sales for future periods.

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Geographic Areas

          In 2004, 17% of our sales were made to customers in North America, 48% to customers in Asia, 33% to customers in Europe, and 2% to customers in other regions. See Note 14 to the Notes to Consolidated Financial Statements. We determine where our sales are made by the destination of our products when they are shipped. At the end of 2004, we owned long-lived assets in the United States amounting to $324 million, in France, $459 million, in Germany, $26 million and in the United Kingdom, $382 million.

ITEM 2. PROPERTIES

          At December 31, 2004, we owned the major facilities described below:

          In addition to the facilities we own, we lease numerous research and development facilities and sales offices in North America, Europe and Asia. We believe that existing facilities are adequate for our current requirements.

          Atmel does not identify facilities or other assets by operating segment. Each facility serves or supports all of our products and the product mix changes frequently.

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ITEM 3. LEGAL PROCEEDINGS

          Atmel 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 our financial position or overall trends in results of operations, litigation is subject to inherent uncertainties. If an unfavorable ruling were to occur, there exists the possibility of a material adverse impact on the net income and financial position of Atmel. The estimate of the potential impact on our financial position or overall results of operations or cash flows 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 sought unspecified damages, costs and attorneys’ fees. Atmel disputed Agere’s claims. A jury trial for this action commenced on March 1, 2005 and on March 22, 2005, the jury returned a unanimous decision in favor of Atmel. Agere has 30 days from the date of this decision in which to file an appeal to this decision.

          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 were paid in full in 2004 and in the first quarter of 2005.

          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 alleged 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 alleged claims for breach of fiduciary duty, mismanagement, abuse of control, waste, and unjust enrichment. The Complaint sought unspecified damages and equitable relief as against the individual defendants. Atmel demurred on Plaintiffs’ Second Amended Compliant and, on January 4, 2005, the Court dismissed the action without leave to amend.

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

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ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

          There were no matters submitted to a vote of security holders during the fourth quarter of 2004.

Executive Officers of the Registrant

          The executive officers of Atmel, who are elected by and serve at the discretion of the Board of Directors, and their ages, are as follows (ages are as of December 31, 2004):

          George Perlegos has served as Atmel’s President and Chief Executive Officer and a director since our inception in 1984. George Perlegos holds degrees in electrical engineering from San Jose State University (B.S.) and Stanford University (M.S.). George Perlegos is a brother of Gust Perlegos.

          Gust Perlegos has served as a director since January 1985, as Vice President, General Manager from January 1985 to January 1996, as Executive Vice President and General Manager from January 1996 to 2001 and as Executive Vice President, Office of the President since 2001. Gust Perlegos holds degrees in electrical engineering from San Jose State University (B.S.), Stanford University (M.S.) and Santa Clara University (Ph.D.). Gust Perlegos is a brother of George Perlegos.

          Tsung-Ching Wu has served as a director of Atmel since 1985, as Vice President, Technology from January 1986 to January 1996, as Executive Vice President and General Manager from January 1996 to 2001 and as Executive Vice President, Office of the President since 2001. Mr. Wu holds degrees in electrical engineering from the National Taiwan University (B.S.), the State University of New York at Stony Brook (M.S.) and the University of Pennsylvania (Ph.D.).

          Francis Barton has served as Executive Vice President and Chief Financial Officer since May 15, 2003. From October 2001 to September 2002, he held the position of Executive Vice President and Chief Financial Officer for Broadvision, Inc., an enterprise business applications company. From September 1998 to September 2000, Mr. Barton served as Senior Vice President and Chief Financial Officer for Advanced Micro Devices, a semiconductor company, and from 1996 to 1998, he served as Chief Financial Officer of Amdahl Corporation, a computer hardware company. He holds an M.B.A in Finance from Northeastern University and a B.S. in Chemical Engineering from Worcester Polytechnic Institute.

          Robert McConnell has served as Atmel’s Vice President and General Manager, RF and Automotive Segment since January 2003. Prior to joining Atmel, Mr. McConnell was President and Chief Executive Officer of Cypress MicroSystems, a semiconductor company and subsidiary of Cypress Semiconductor Corporation, from September 1999 to December 2002. From January 1972 to September 1999, Mr. McConnell was Vice President and General Manager, Embedded Processor Division at Advanced Micro Devices, Inc. a semiconductor manufacturer. Mr. McConnell holds a B.S.E.E. degree from Northwestern University and an M.B.A. from Pepperdine University.

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          Bernard Pruniaux has served as Atmel’s Vice President and General Manager, ASIC Segment since November 2001, and as Chief Executive Officer of Atmel Rousset from May 1995 to November 2001. Mr. Pruniaux holds a master’s degree in electrical engineering from Ecole Superieure d’Ingenieurs in Toulouse, France and a PhD from the LETI in Grenoble, France.

          Steve Schumann has served as Atmel’s Vice President and General Manager, Non-Volatile Memory Segment since January 2002, as Vice President of Non-Volatile Memory Products from February 1996 to January 2002, and prior to February 1996, he has held various other positions (including Managing Director of EEPROM and Flash Products) since joining Atmel in 1985. Mr. Schumann holds a B.S. in electrical engineering and computer science from the University of California, Berkeley.

          Graham Turner has served as Atmel’s Vice President and General Manager, Microcontroller Segment since October 2001, as Vice President of European Operations from 1993 to October 2001, and has held various other positions since joining Atmel in 1989.

PART II

ITEM 5.	MARKET FOR THE REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

          Atmel’s Common Stock is traded on the Nasdaq Stock Market’s National Market under the symbol “ATML.” The last reported price for our stock on March 9, 2005, was $3.55. The following table presents the high and low closing sales price per share for our Common Stock as quoted on the NASDAQ National Market for the periods indicated.

          As of March 9, 2005, there were approximately 2,336 stockholders of record of Atmel’s Common Stock. Because many of our shares of Common Stock are held by brokers and other institutions on behalf of stockholders, we are unable to estimate the total number of stockholders represented by theses record holders.

No cash dividends have been paid on the Common Stock, and we currently have no plans to pay cash dividends in the future.

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ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA

FINANCIAL HIGHLIGHTS

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ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     You should read the following discussion of our financial condition and results of operations in conjunction with our Consolidated Financial Statements and the related “Notes to Consolidated Financial Statements”, and “Financial Statements and Supplementary Data” included in this Annual Report on Form 10-K. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements regarding our outlook for fiscal 2005 and our expectations regarding the effects of exchange rates. Our actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, especially under the caption “Trends, Uncertainties and Risks,” and elsewhere in this 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-K is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. Atmel undertakes no obligation to update any forward-looking statements in this Form 10-K.

Overview

          We are a leading provider of semiconductor IC products. We leverage our expertise in nonvolatile memories by combining them with microcontrollers, digital signal processors, RF devices, and other logic to enable our customers to rapidly introduce leading edge electronic products that are differentiated by higher performance, advanced features, lower cost, smaller size, longer battery life and more memory. Our products are used primarily in the following markets: communications, computing, consumer electronics, storage, security, automotive, military and aerospace.

          We design, develop, manufacture and sell our products. We develop process technologies ourselves to ensure they provide the maximum possible performance. We manufacture more than 97% of our products in our own wafer fabrication facilities, or (“fabs”).

          Net revenues increased to $1,650 million in 2004 from $1,331 million in 2003, an increase of $319 million or 24%, as a result of higher volume shipments partially offset by lower average selling prices. Revenue growth across all operating segments increased significantly over the prior year, driven by increased demand in the telecommunications and consumer markets. Revenue growth was strongest in our ASIC segment, boosted significantly by higher shipments of Smart Card IC products.

          During 2004, changes in foreign exchange rates had a significant impact on net revenues and operating costs. Had average exchange rates during 2004 remained the same as the average exchange rates in effect for 2003, our reported revenues in 2004 would have been approximately $39 million lower, while our operating costs would have been approximately $88 million lower (cost of revenues $67 million, research and development $15 million, sales, general and administrative $6 million). The net effect resulted in a reduction to income from operations of $49 million as a result of less favorable exchange rates in effect for 2004 compared to the average exchange rates in effect for 2003.

          During 2004, we achieved income from operations of $46 million, compared to a loss from operations of $107 million in 2003. The improvement in 2004 resulted from improved gross margins related to both higher volumes and better factory utilization, partially offset by unfavorable foreign exchange rates and lower average selling prices. In addition, results for 2003 were negatively impacted by asset impairment and restructuring charges of $27 million.

          Although we incurred net losses for 2002, 2003, and 2004, we still generated cash from operating activities in each year. Over the past three years, we used this cash flow to significantly reduce our outstanding debt. During this period, we also made significant investments, in advanced manufacturing processes, and related equipment. In 2004, we paid $241 million for new equipment necessary to maintain our competitive position technologically as well as to increase capacity. As a result, at the end of 2004, our cash and cash equivalents, and short-term investment balances totaled $405 million, down from $458 million at the end of fiscal 2003 (including restricted cash), while total indebtedness decreased from $513 million to $465 million during that same period.

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Critical Accounting Policies and Estimates

          The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires us to make judgments, assumptions, and estimates that affect the amounts reported in the Consolidated Financial Statements and accompanying notes. Note 1 of Notes to Consolidated Financial Statements describes the significant accounting policies and methods used in the preparation of the Consolidated Financial Statements. We consider the accounting policies described below to be our critical accounting policies. These critical accounting policies are impacted significantly by judgments, assumptions, and estimates used in the preparation of the Consolidated Financial Statements and actual results could differ materially from the amounts reported based on these policies.

          Revenue recognition

          We generate our revenue by selling our products to OEMs and distributors. Our policy is to recognize revenue upon shipment of products to customers, where shipment represents the point when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable and collection of the resulting receivable is reasonably assured.

          Contracts and customer purchase orders are generally used to determine the existence of an arrangement. Shipping documents are used to verify delivery, and shipment terms are mostly Free Carrier (“FCA”) Seller’s Facility. We assess whether the price is fixed or determinable based on the payment terms associated with the transaction and whether the sales price is subject to refund or adjustment. We assess collectability based primarily on the creditworthiness of the customer as determined by credit checks and analysis, as well as the customer’s payment history. Sales terms do not include post shipment obligations except for product warranty, as described in Note 10 of Notes to Consolidated Financial Statements.

          We allow certain distributors, primarily based in the United States, rights of return and credits for price protection. Given the uncertainties associated with the levels of returns and other credits to these distributors, we defer recognition of revenue from sales to these distributors until they have resold our products. Deferred revenue for distributor sales were $18 million and $19 million as of December 31, 2004 and 2003, respectively. Sales to certain other primarily non-US based distributors carry either no or very limited rights of return. We have historically been able to estimate returns and other credits from these distributors and accordingly have historically recognized revenue from sales to these distributors on shipment, with a related allowance for potential returns established at the time of our sale.

          Allowance for Doubtful Accounts and Sales Returns

          We must make estimates of potential future product returns and revenue adjustments related to current period product revenue. Management analyzes historical returns, current economic trends in the semiconductor industry, changes in customer demand and acceptance of our products when evaluating the adequacy of our allowance for sales returns. If management made different judgments or utilized different estimates, material differences in the amount of our reported revenue may result. We provide for sales returns based on our customer experience, and our expectations for revenue adjustments based on economic conditions within the semiconductor industry.

          During 2004 and 2003, we improved our credit procedures and experienced fewer bad debt write offs. As a result, the allowance required for doubtful accounts has decreased even though sales levels and related receivable balances have increased. We credited $5 million and $1 million to Selling, General and Administrative expense for the years ended December 31, 2004 and 2003, respectively.

          We maintain an allowance for doubtful accounts for losses that we estimate will arise from our customers’ inability to make required payments. We make our estimates of the uncollectability of our accounts receivable by analyzing specific customer creditworthiness, historical bad debts, and current economic trends. At December 31, 2004, the allowance for doubtful accounts was $10 million and at December 31, 2003 it was $16 million.

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          Accounting for income taxes

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

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

          Our income tax calculations are based on application of the respective U.S. Federal, state or foreign tax law. Our tax filings, however, are subject to audit by the respective tax authorities. Accordingly, we recognize tax liabilities based upon our estimate of whether, and the extent to which, additional taxes will be due. To the extent the final tax liabilities are different from the amounts originally accrued, the increases or decreases are recorded as income tax expense.

          Valuation of inventory

          Our inventories are stated at the lower of cost or market value. Cost includes labor, materials, depreciation and other overhead costs, as well as factors for estimated production yields and scrap. Determining market value of inventories involves numerous judgments, including average selling prices and sales volumes for future periods. We primarily utilize selling prices in our period ending backlog for measuring any potential declines in market value below cost. Any adjustment for market value provision is charged to cost of revenues at the point of market value decline.

          We evaluate our ending inventories for excess quantities and obsolescence on a quarterly basis. This evaluation includes analysis of historical and forecasted sales levels by product. Inventories on hand in excess of forecasted demand are provided for. In addition, we write off inventories that are considered obsolete. Obsolescence is determined from several factors, including competitiveness of product offerings, market conditions and product life cycles when determining obsolescence . Charges to increase the allowance are charged to cost of revenues. At the point of the loss recognition, a new, lower-cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis. If this lower-costed inventory is subsequently sold, the related allowance is matched to the movement of related product inventory, resulting in lower costs and higher gross margins for those products.

          Our inventories include high-technology parts that may be subject to rapid technological obsolescence and which are sold in a highly competitive industry. If actual product demand or selling prices are less favorable than we estimate, we may be required to take additional inventory write-downs.

          Product and process technology

          Costs that we incur to acquire completed product and process technology are capitalized and amortized on a straight-line basis over two to five years. Capitalized product and process technology costs are amortized over the shorter of the estimated useful life of the technology or the term of the technology agreement.

          Fixed Assets

          We review the carrying value of fixed assets for impairment when events and circumstances indicate that the carrying value of an asset or group of assets may not be recoverable from the estimated future cash flows expected to result from its use and/or disposition. In cases where undiscounted expected future cash flows are less than the carrying value, an impairment loss is recognized equal to the amount by which the carrying value exceeds the estimated fair value of the assets. The estimation of future cash flows involves numerous assumptions, which require our judgment, including, but not limited to, future use of the assets for our operations versus sale or disposal of the assets, future-selling prices for our products and future production and sales volumes. In addition, we must use our judgment in determining the groups of assets for which impairment tests are separately performed.

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          Our business requires heavy investment in manufacturing facilities that are technologically advanced but can quickly become significantly underutilized or rendered obsolete by rapid changes in demand for semiconductors produced in those facilities.

          We estimate the useful life of our manufacturing equipment, which is the largest component of our fixed assets, to be five years. We base our estimate on our experience with acquiring, using and disposing of equipment over time.

          Depreciation expense is a major element of our manufacturing cost structure. We begin depreciation on new equipment when it is put into use for production. The aggregate amount of fixed assets under construction for which depreciation was not being recorded amounted to $142 million at December 31, 2004 and $98 million at December 31, 2003.

          Litigation

          The semiconductor industry is characterized by frequent litigation regarding patent and other intellectual property rights. We are currently involved in such intellectual property litigation (see Note 10 of Notes to Consolidated Financial Statements). We accrue for losses related to litigation if a loss is probable and the loss can be reasonably estimated. We regularly evaluate current information available to determine whether accruals for litigation should be made. If we were to determine that such a liability was probable and could be reasonably estimated, the adjustment would be charged to income in the period such determination was made.

RESULTS OF OPERATIONS

Net Revenues

          Net revenues increased to $1,650 million in 2004 from $1,331 million in 2003, an increase of $319 million or 24%, as a result of higher volume shipments partially offset by lower average selling prices.

          Net revenues improved to $1,331 million in 2003 from $1,194 million in 2002, an increase of $137 million, or 11%. The increase resulted from higher shipment volumes, especially for ASIC and Microcontroller products, as a result of new products introduced in 2003 and improved market conditions.

Net Revenues By Operating Segment

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

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

ASIC

          ASIC segment revenues increased by 23% or $110 million to $589 million in 2004, and grew 26% or $99 million to $479 million in 2003 compared to 2002. Both 2004 and 2003 saw higher unit shipments, partially offset by lower average selling prices. The majority of this growth came from increased revenues in Smart Card IC and ARM-based digital products. Smart Card IC products saw growing demand for applications requiring small memory with high security, such as GSM cell phone applications, bank cards and set-top boxes. ARM-based digital products benefited from introduction of new design wins for “Disk-on-Key” and other consumer-type electronics.

          Although many of the products within the ASIC business segment are profitable, Smart Card ICs are not, which makes the entire business segment unprofitable. It is our intention to improve profitability for our Smart Card ICs via product shrinks and increased asset utilization. Due to competition, conditions may remain challenging in the Smart Card IC space for the foreseeable future.

Microcontroller

          The Microcontroller segment revenues increased 24% or $65 million to $337 million in 2004, and grew 16% or $37 million to $272 million in 2003 compared to 2002. The growth in both 2004 and 2003 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. In addition, average selling prices were steady to slightly higher in 2003 compared to 2002, while volumes increased with demand.

Nonvolatile Memory

          Nonvolatile Memory (“NVM”) segment revenues increased 25% or $90 million to $445 million in 2004 as compared to $355 million in 2003. NVM segment revenue was slightly lower in 2003, decreasing by 1%, or $5 million to $355 million compared to $360 million in 2002. During 2004, the increasing NVM revenues were attributed to higher volumes coupled with the higher average pricing experienced during the first half of the year. However, during the second half of 2004, average-selling prices began to decline. During 2003, both volumes and pricing for Flash products declined significantly due to both a commodity-oriented pricing environment, as well as our delays in introducing higher density products. The decline in 2003 revenues from Flash products was largely offset, however, by an increase in shipment volumes for our DataFlash products along with Serial EEPROM products. Our DataFlash products continue to gain market share in the serial interface market, and have achieved design wins in many PC and consumer electronic products.

          Because NVM products are commodity oriented, they are subject to greater declines in average selling prices than products in our other segments. Our nonvolatile memory segment continues to be unprofitable. Competitive pressures and the need to continually migrate to new technology are among several factors causing continued pricing declines. Conditions in this segment are expected to remain challenging for the foreseeable future.

RF and Automotive

          RF and Automotive segment revenues increased by 24% or $54 million to $278 million in 2004. RF and Automotive segment revenues increased slightly in 2003 by $4 million to $224 million, a 2% increase over 2002 levels of $220 million. During 2004, revenue increased primarily due to significant increases in sales of SiGe BiCMOS products that are sold into CDMA handsets. In addition, we have a significant presence in the European automotive sector, which has given us a steady customer base utilizing our products for function controllers, as well as ASSP’s for power train, convenience, and safety systems. RF communication applications include GPS and car radio products. During 2003, increases in sales volumes for automotive and networking applications were offset by decreases in sales volumes in BiCMOS products. The decline in volumes for BiCMOS products was primarily a result of lower OEM shipments for legacy cellular phone products.

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Net Revenues By Geographic Area

          Our net revenues by geographic delivery location (see Note 14 of Notes to Consolidated Financial Statements) for the three years ended December 31, 2004, 2003 and 2002 are summarized as follows (in thousands):

          Over the last year, revenues have increased significantly in Asia, North America and Europe.

          Sales outside North America accounted for 83% of our net revenues in 2004, 82% of our net revenues in 2003, and 78% of our net revenues in 2002.

          Our sales to North America increased $42 million, or 18% for 2004 compared to 2003, due to higher volume shipments. Our sales declined $21 million, or 8% in 2003 compared to 2002 primarily due to lower average selling prices partially offset by slightly higher volume shipments.

          Our sales to Europe increased $141 million or 35% when comparing 2004 to 2003, due to higher volume shipments and an increase in the value of the Euro. Sales were flat at $398 million, when comparing 2003 to 2002 primarily due to flat volume shipments and lower average selling prices, offset by an increase in the value of the Euro.

          Our sales to Asia increased $134 million, or 20% for 2004 compared to 2003, and increased $149 million, or 29% in 2003 compared to 2002. The increases in 2004 and 2003 were primarily due to higher volume shipments partially offset by lower average selling prices.

Revenues and Costs – Impact from Changes to Foreign Exchange Rates

          In 2004, approximately 27% of net revenues were denominated in foreign currencies, primarily the Euro. For 2003, sales denominated in foreign currencies were approximately 28% of net revenues. Sales in Euros amounted to 25%, 26% and 22% of net revenues in 2004, 2003, and 2002, respectively. Sales in Japanese yen accounted for 1%, 2% and 3% of net revenues for the same periods.

          During 2004, changes in foreign exchange rates had a significant impact on net revenues and operating costs. Had average exchange rates during 2004 remained the same as the average exchange rates in effect for 2003, our reported revenues in 2004 would have been approximately $39 million lower. However, our foreign currency costs exceed foreign currency revenues. During 2004, approximately 59% of costs were denominated in foreign currencies, primarily the Euro. Had average exchange rates for 2004 remained the same as the average exchange rates for 2003 our operating costs would have been approximately $88 million lower (cost of revenues, $67 million; research and development, $15 million; sales, general and administrative, $6 million). The net effect resulted in a reduction to income from operations of $49 million as a result of less favorable exchange rates in effect for 2004 compared to the average exchange rates in effect for 2003.

          Starting in the first quarter of 2004, we began a program to hedge a portion of forecasted transactions related to certain foreign currency operating expenses anticipated to occur within twelve months, primarily for European manufacturing subsidiaries, with forward contracts. These transactions are designated as cash flow hedges under SFAS No. 133. These contracts are designed to reduce the short-term impact of exchange rate changes on operating results. However, our practice in 2004 was to hedge exposures for the next 90-120 days. As hedging activity didn’t begin until after the start of 2004, we were unable to offset the most significant part of the exchange rate changes between 2003 and 2004, most of which occurred in the fourth quarter of 2003. During the fourth quarter of 2004, cash flow hedge contracts did significantly reduce our exposure to exchange rate changes, and resulted in a benefit to cost of revenues of $3.9 million for the period. For the year ended December 31, 2004, the portion of the derivative’s gain reclassified into cost of revenues was $0.2 million.

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          Had average exchange rates during 2003 remained the same as the average exchange rates in effect for 2002, our reported revenues in 2003 would have been approximately $60 million lower. However, our foreign currency costs exceed foreign currency revenues. During 2003, approximately 53% of costs were denominated in foreign currencies, primarily the Euro. Had average exchange rates for 2003 remained the same as the average exchange rates for 2002, our operating costs would have been approximately $119 million lower (cost of revenues, $91 million; research and development, $21 million; sales, general and administrative $7 million). The net effect resulted in a reduction to income from operations of $59 million as a result of less favorable exchange rates in effect for 2003 compared to the average exchange rates in effect for 2002.

          For comparison purposes, the average annual exchange rates in effect during 2004, 2003 and 2002 for the Euro were 1.25, 1.12 and 0.95 Dollars per Euro, respectively.

          In 2005, we again expect exchange rates to have a negative effect on our operating results, as foreign currency rates compared to the US dollar have continued to move significantly higher, especially the Euro. We have lengthened the period of forecasted transactions for hedging with forward contracts to approximately six months. However, due to the timing for initiation of these contracts, and the length of maturities utilized for cash flow derivative contracts, it is unlikely that we will be able to significantly reduce the exchange rate impact of rates experienced in 2005 when compared to the average exchange rates in effect for 2004.

Cost of Revenues and Gross Margin

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

          Gross margin was 28% for 2004 compared to 23% for 2003. The gross margin percentage improvement in 2004 is a result of higher volume shipments with only slightly higher manufacturing costs. Had exchange rates for 2004 remained the same as the average exchange rates in effect for 2003, our reported gross margin would have been 31%.

          Gross margin was 23% for 2003 compared to 19% for 2002. The gross margin percentage improvement is a result of increased capacity utilization, allowing us to ship higher unit volumes while manufacturing costs remained relatively flat. Manufacturing costs also benefited from cost containment programs and the sale of inventory previously reserved, but were partially offset by lower average selling prices, the negative effect of foreign exchange rate fluctuations, and a patent license charge recorded in March 2003. Had exchange rates for 2003 remained the same as the average exchange rates in effect for 2002, our reported gross margin would have been 27%.

          Our gross margin has been impacted by the timing of inventory adjustments related to inventory write-downs and subsequent sale of these written-down products. The annual impact to gross margins was 1% or less for the years ended December 31, 2004, 2003 and 2002.

          In recent periods, average selling prices for some of our semiconductor products have been below manufacturing costs, and accordingly, our results of operations, cash flows and financial condition have been adversely affected. As these charges are recorded in advance of when written-down inventory is sold, subsequent gross margins in the period of sale may be higher than they would be absent the effect of the previous write-downs. Our excess and obsolete inventory write-offs taken in prior years relate to all of our product categories, while lower-of-cost or market reserves relate primarily to our non-volatile memory products.

          We receive economic assistance grants in some locations as an incentive to achieve certain hiring and investment goals related to manufacturing operations, the benefit for which is recognized as an offset to related costs. We recognized a $12 million reduction to cost of revenues for such grants in 2004 compared to $7 million in 2003, and $5 million in 2002.

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Research and Development

          Research and Development (“R&D”) expenses in 2004 decreased by $1.0 million to $247 million from $248 million in 2003. Reduced spending on engineering labor and experimental wafers were offset by the unfavorable impact of exchange rates. Had exchange rates for 2004 remained the same as the average exchange rates incurred in 2003, R&D expenses in 2004 would have been $15 million lower than the amount reported in 2004.

          R&D expenses in 2003 decreased by $5 million or 2% to $248 million from $253 million in 2002. The decrease in R&D expenses was primarily due to a decrease in expenditures on process development at our North Tyneside, UK wafer fabrication facility as this facility transitioned to production volume levels during the second half of the year. Had exchange rates for 2003 remained the same as the average exchange rates incurred in 2002, R&D expenses in 2003 would have been $21 million lower than the amount reported in 2003.

          We have continued to invest in R&D efforts in a wide variety of product areas and process technologies, including Flash, Logic, and embedded EEPROM CMOS technology to be manufactured at 0.13 and 0.09 micron line widths, as well as investments in Silicon Germanium BiCMOS technology to be manufactured at 0.18 micron line widths. We have also continued to purchase or license technology in order to bring a broad range of products to market in a timely fashion. We believe that continued strategic investments in process technology and product development are essential for us to remain competitive in the markets we serve.

          We receive R&D grants from various European research organizations, the benefit for which is recognized as an offset to related costs. For 2004, we recognized $17 million in research grant benefits, compared to $11 million for 2003 and $13 million for 2002.

Selling, General and Administrative

          Selling, General and Administrative (“SG&A”), expenses increased 26% or $36 million to $175 million in 2004 from $139 million in 2003. As a percentage of net revenues, SG&A expenses increased to 11% in 2004 compared to 10% in 2003. The increase in SG&A expenses from 2003 to 2004 was due to spending related to Sarbanes-Oxley Section 404 compliance of $9 million, higher employee salaries and benefits of $14 million, spending related to our increased sales volume of $7 million and the negative effect of foreign exchange rate fluctuations. Had exchange rates for 2004 remained the same as the average exchange rates incurred in 2003, SG&A expenses would have been $6 million lower than the amount reported in 2004.

          SG&A expenses increased 9% or $12 million to $139 million in 2003 from $127 million in 2002. As a percentage of net revenues, SG&A expenses decreased to 10% in 2003 compared to 11% in 2002. The increase of $12 million was primarily related to higher selling costs of $5 million as a result of higher net revenues, and the negative effect of foreign exchange rates incurred in 2003. Had exchange rates for 2003 remained the same as the average exchange rates incurred in 2002, SG&A expenses would have been $3 million lower than the amount reported in 2003.

Asset Impairment and Restructuring Charges

          During the period from fiscal 1998 to fiscal 2000, our sales volume grew significantly, from $1.1 billion to $2.0 billion. As business conditions improved during this time, Atmel took steps to significantly expand its manufacturing capacity. During the period from January 1998 to September 2001, we spent approximately $2.0 billion for acquisitions of property and equipment in anticipation of significant growth in our business during 2001, 2002 and beyond from the historical levels achieved in 2000. Beginning late in the fourth quarter 2000, business conditions in the semiconductor industry deteriorated rapidly.

          As a result of the difficult operating conditions that existed in the semiconductor industry, we performed asset impairment reviews of our fixed assets during the third quarter of 2001. An estimate of fair market value was made by management, which considered an outside appraisal that assumed the assets would continue in use at their current locations. During the third quarter of 2001, we recorded a $462.8 million asset impairment charge related to certain of our fabrication facilities in Colorado Springs, Colorado, Rousset, France and Nantes, France and a $18.5 million charge related to a headcount reduction in Europe. The charges were part of a restructuring plan that included a workforce reduction and the consolidation of manufacturing operations in both the U.S. and Europe.

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          Starting in the fourth quarter of 2001, the asset impairment and restructuring actions taken in the third quarter of 2001, were expected to result in estimated expense reductions of approximately $130 million per year, consisting of a $105 million reduction in cost of revenues and a $25 million reduction in operating expenses. Actual expense reductions were approximately the same as original estimates.

          As a result of the downturn experienced in 2001, we delayed the completion of construction of our fabrication facilities in North Tyneside, UK, and Irving, Texas, to 2002, when we anticipated the industry to rebound. However, after further evaluation of market conditions, we recorded a $341.4 million asset impairment charge in the second quarter of 2002 related to the equipment and facilities for wafer fabrication facilities in Irving, Texas and North Tyneside, U.K. An estimate of fair market value was made by management, which considered an outside appraisal that assumed the assets would continue in use at their current locations.

          In the third quarter of 2002, we reassessed the overall manufacturing capacity of the Irving facility against the potential anticipated demand and decided to close the Irving, Texas facility, without conducting any commercial production there. The facility was placed on the market for sale in August 2002. As a result of the decision to close the facility and make it available for sale, we recorded $42.2 million of charges in the third quarter of 2002 consisting of an asset impairment charge of $23.5 million, $13.9 million for terminating contracts with suppliers, employee termination costs of $3.7 million for 272 employees, and a $1.1 million charge related to the repayment of a property tax abatement. Also during the third quarter of 2002, we recorded a $2.6 million reversal of restructuring charges as a result of changes to estimates of termination costs related to headcount reduction charges taken in third quarter of 2001. Actual costs incurred for the reductions of European employees were lower than original estimates, primarily for severance and re-hiring incentives.

          We also recorded an asset impairment and restructuring charge of $2.8 million in the fourth quarter of 2002. This charge related to plans for reorganizing certain programs and a 32-person workforce reduction in Europe.

          The asset impairment and restructuring actions taken in the second, third and fourth quarter of 2002 was expected to result in a reduction of $73 million in depreciation expense, $2 million in manufacturing services, and of $17 million in employee expenses per year. Actual expense reductions were approximately the same as original estimates.

          In December 2003, we re-evaluated the status of our Irving, Texas facility, which we subsequently reclassified as “held-in-use”, and also re-evaluated the related fabrication equipment. 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, was recorded in the fourth quarter of 2003. While this facility was held-for-sale, assets were not in use, and were not depreciated. During 2004, the facility and wafer fabrication equipment was depreciated at rates appropriate for each type of asset. Nearly all of the fabrication equipment was re-deployed to other manufacturing facilities that we own. During the fourth quarter of 2004, the building and related improvements were evaluated for impairment based on management’s estimates which considered an outside appraisal, among other factors, in determining fair market value. No additional impairment adjustment was required. As of December 31, 2004, the building and related improvements had a book value of $58 million.

          The restructuring actions underlying the asset impairment and restructuring charges are proceeding as planned. The 2001 asset impairment and restructuring actions resulted in expense reductions of approximately $107 million in 2002, consisting of a $105 million reduction in cost of revenues and a $2 million reduction in operating expenses. The 2002 asset impairment and restructuring actions resulted in expense reductions of approximately $96 million in 2003, consisting of $95 million reduction in cost of revenues and $1 million reduction in operating expenses. These cost reduction figures exclude subsequent impact of changes in foreign exchange rates.

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Proceeds from Legal Award

          During the fourth quarter of 2003, we received approximately $38 million from Silicon Storage Technologies, Inc. (“SST”), constituting the $37 million jury award, plus pre- and post-judgment interest, granted in relation to the May 7, 2002 judgment by the District Court for the Northern District of California.

Interest and Other Expenses, Net

          Interest and other expenses, net, decreased by $14 million to $20 million in 2004 compared to $34 million in 2003. As a percentage of net revenues, interest and other expenses, net was 1% in 2004 compared to 3% 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 our outstanding borrowings did not change significantly in 2004 compared to 2003.

          Interest and other expenses, net, increased by $15 million to $34 million in 2003 compared to $19 million in 2002. The increase was due to a combination of gains recognized in 2002, primarily on the repurchase of convertible notes of $15 million and sale of land in San Jose of $3 million. In addition, we had a lower average level of invested funds, lower interest rates received and higher losses realized on foreign exchange transactions. Interest expense decreased by $9 million to $36 million in 2003 from $46 million in 2002 due to a decrease in outstanding borrowings.

Provision for Income Taxes

          We recorded tax expense of $28 million, $14 million and $90 million for the fiscal years ended December 31, 2004, 2003 and 2002, respectively. This resulted in an effective tax rate of 109%, 13% and 16% for 2004, 2003 and 2002, respectively, expressing tax expense as a percentage of the applicable year’s loss in years 2003 and 2002. The difference between the effective tax rates of 2004 and 2003 is partially due to tax expense expressed as a percentage of the respective year’s income (loss) before income taxes.

          The significant components of income tax expense recorded for 2004 are attributed to taxes incurred by our profitable foreign subsidiaries and an increase in tax accruals related to certain U.S. Federal, state and foreign tax liabilities.

          During 2004, we reassessed our intentions regarding repatriation of undistributed earnings from non-U.S. subsidiaries and concluded that we intend to reinvest all undistributed foreign earnings indefinitely in operations outside the U.S. Thus, in 2004, we reversed approximately $11 million of deferred tax liabilities that had been provided in prior years for the potential repatriation of certain undistributed earnings of our foreign subsidiaries.

          During 2004, we recognized $2 million in tax benefits from the release of valuation allowance on a deferred tax asset of a profitable foreign subsidiary for which management believes it is more likely than not that forecasted income, together with the tax effects of the deferred tax liabilities, will be sufficient to fully recover the remaining deferred tax asset. In addition, we realigned the legal structure for certain foreign subsidiaries in 2004 that resulted in the recognition of $6 million in tax benefits from the release of a foreign valuation allowance on a deferred tax asset in a profitable foreign jurisdiction that management now believes it is more likely than not that the deferred tax asset is realizable.

          The income tax expense recorded for 2003 resulted primarily from taxes incurred by our profitable foreign subsidiaries. Additionally, we released $6 million of tax reserves related to issues in tax audits that closed during the year.

          The income tax expense recorded for 2002 was primarily due to the increase in the valuation allowance recorded against deferred tax assets during the year. During 2002, we made an assessment of our prior two years of losses and determined that it was more likely than not that the deferred tax assets will not be realized. As a result, substantially all deferred tax assets were reserved, resulting in income tax expense for the year ended December 31, 2002. The income tax expense was partially offset by tax refunds of $60 million expected to be realized in the U.S. and increased further by additional tax liabilities incurred by our profitable foreign subsidiaries.

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          At December 31, 2004, we had net operating loss carryforwards in non-U.S. jurisdictions of approximately $419 million. There is no expiration on the use of the majority of these loss carryforwards. We also have U.S. Federal and state net operating loss carryforwards of approximately $251 million and $415 million, respectively, at December 31, 2004. These loss carryforwards expire in different periods from 2006 through 2024. We also have U.S. Federal and state tax credits of approximately $40 million at December 31, 2004, which will expire beginning in 2008.

          In 2004, we settled all issues for the 1994 through 1996 tax years with the Internal Revenue Service (“IRS”) Appeals Division with no material change in tax expense. Our U.S. income tax returns for the years 2000 and 2001 are currently under examination by the IRS. In addition, we have various tax audits in progress in certain U.S. states and foreign jurisdictions. We have provided our best estimate of taxes and related interest and penalties due for potential adjustments that may result from the resolution of these examinations, and examinations of open U.S. Federal, state and foreign tax years. We believe that these potential adjustments primarily relate to U.S. domestic and foreign transfer pricing.

Liquidity and Capital Resources

          At December 31, 2004, we had a total of $405 million of cash and cash equivalents and short-term investments compared to $458 million at December 31, 2003 (including restricted cash balances for 2003). Current ratio, calculated as total current assets divided by total current liabilities, was 1.7 at December 31, 2004, a decrease of 0.1 from 1.8 at December 31, 2003. Despite reporting losses during 2004, 2003, and 2002, we have generated positive cash flow from operating activities, as net losses were impacted by non-cash depreciation and asset impairment charges. We have used this cash generated to reduce our net debt obligations by $48 million to $465 million at December 31, 2004 from $513 million at December 31, 2003. Working capital increased by $30 million to $458 million at December 31, 2004 compared to $428 million at December 31, 2003.

          Operating Activities: Net cash provided by operating activities was $228 million in 2004, compared to $258 million in 2003. We generated strong operating cash flow in spite of incurring losses due primarily to depreciation, and other non-cash charges reflected in the Consolidated Statements of Operations. Accounts receivable increased 6% or $14 million to $229 million at December 31, 2004 from $215 million at December 31, 2003. The average days of accounts receivable outstanding (“DSO”) improved to 51 days at the end of the fourth quarter of 2004 as compared to 52 days at the end of the fourth quarter of 2003. Our accounts receivable and DSO are primarily impacted by shipment linearity, payment terms offered, and collection performance. We made improvements during 2004 in shipment linearity and collection performance. Should we need to offer longer payment terms in the future due to competitive pressures, this could negatively affect our DSO.

          Inventories increased by $79 million or 29% to $347 million at December 31, 2004 from $268 million at December 31, 2003. Average days of sales in inventory increased to 107 days at December 31, 2004 compared to 90 days at December 31, 2003. Inventories consist of raw wafers, purchased specialty wafers, work in process, and finished units. Inventory increased in 2004 as a result of higher shipment volumes and competitive pressures to reduce delivery lead-time. We are continuing to take measures to reduce manufacturing cycle times and improve production planning efficiency. However, increased shipment levels, higher levels of process complexity, and the strategic need to offer competitive lead times may result in an increase in inventory levels in the future.

          Other current assets increased $38 million to $92 million at December 31, 2004 from $54 million at December 31, 2003 due to an increase in derivative assets and receivables for derivative contracts that were due at December 31, 2004. These increases relate to derivative contracts utilized for hedging purposes, and were driven by the significant change in the Euro exchange rates in the fourth quarter of 2004. In addition, higher receivable balances for VAT were incurred related to increased European purchase activity during the year.

          U.S. Federal income tax refunds were a significant source of cash from operating activities in 2003. These refunds were received as a result of taxable losses applied to income taxes paid in prior years on the annual tax returns.

          Investing Activities: Net cash used for investing activities was $231 million in 2004 compared to $11 million used in 2003. During the year, we made significant investment in advanced manufacturing processes, and related equipment. In 2004, we paid $241 million for new equipment necessary to maintain our competitive position technologically as well as to increase capacity.

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          Financing Activities: Net cash used in financing activities decreased to $59 million in 2004 compared to $264 million in 2003. The decrease is primarily due to the repurchase of convertible notes for $135 million that occurred in 2003. Proceeds from equipment financing and other debt totaled $70 million in 2004 compared to $27 million in 2003, and were used primarily for new equipment purchases. We continued to pay down debt, with repayments of principal balances on capital leases and other debt totaling $141 million in 2004 compared to $167 million in 2003.

          We believe that our existing balance of cash, cash equivalents and short term investments, together with cash flow from operations, 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.

          Net increase (decrease) in cash and cash equivalents in 2004, 2003 and 2002 included increases of $21 million, $57 million and $36 million, respectively, due to the effect of exchange rate changes on cash balances denominated in foreign currencies. These cash balances were primarily held in certain subsidiaries in Euro denominated accounts and increased in value due to the strengthening of the Euro compared to the U.S. Dollar during these periods.

          During 2005, we expect our operations to generate positive cash flow; however, a significant portion of this cash will be used to repay debt and make capital investments. The amount of cash we use in 2005 will depend largely on the amount of cash generated from our operations. Currently, we expect our 2005 cash payments for capital expenditures to be approximately $190 million. 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.

          The following table describes our commitments to settle contractual obligations in cash as of December 31, 2004. (See Note 7 of Notes to Consolidated Financial Statements).

          Other long-term obligations consist principally of future repayments of $95 million of advances from customers, of which $10 million is included in the column for payments due within 1 year, and have been classified as current liabilities (see Note 3 of Notes to Consolidated Financial Statements).

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          Approximately $11 million of the debt included in the capital lease obligations, term loans and a $25 million revolving line of credit (with no outstanding borrowing at December 31, 2004) require Atmel to meet certain financial ratios and to comply with other covenants on a periodic basis, and approximately $19 million 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. A previous requirement to maintain restricted cash of approximately Euro 21 million ($27 million) was renegotiated in March 2004 and eliminated. As a result there is no longer a requirement to maintain a restricted cash balance.

          We were in compliance with all of our debt covenants at the end of 2004. If we need to renegotiate any of these covenants in the future, and the lenders refuse and we are unable to comply with the covenants, then we may immediately be required to repay the loans concerned. In the event we are required to repay these loans ahead of their due dates, we believe that we have the resources to make such repayments, but such payments could adversely impact our liquidity.

          Our ability to service long-term debt in the U.S. or to obtain cash for other needs from our foreign subsidiaries may be structurally impeded. Since a substantial portion of our operations are conducted through our foreign subsidiaries, our cash flow and ability to service debt are partially dependent upon the liquidity and earnings of our subsidiaries as well as the distribution of those earnings, or repayment of loans or other payments of funds by those subsidiaries, to the US parent corporation. These foreign subsidiaries are separate and distinct legal entities and may have limited or no obligation, contingent or otherwise, to pay any amounts to us, whether by dividends, distributions, loans or other payments. However, the US parent corporation owes much of our consolidated long-term debt, including our outstanding issue of convertible notes.

Off Balance Sheet Arrangements

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

          At December 31, 2004, we had outstanding capital purchase commitments of $44 million.

          During the ordinary course of business, we provide standby letters of credit or other guarantee instruments to certain parties as required for certain transactions initiated by either our subsidiaries or us. As of December 31, 2004, the maximum potential amount of future payments that we could be required to make under these guarantee agreements is $11 million. We have not recorded any liability in connection with these guarantee arrangements. Based on historical experience and information currently available, we believe we will not be required to make any payments under these guarantee arrangements.

Recent Accounting Pronouncements

          In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share Based Payment” (“SFAS No. 123R”). SFAS No. 123R is a revision of SFAS No. 123.This Statement supersedes APB No. 25, which is the basis for our current policy on accounting for stock-based compensation described in Note 1 of Notes to Consolidated Financial Statements. SFAS No. 123R will require companies to recognize as an expense in the Statement of Operations the grant-date fair value of stock options and other equity-based compensation issued to employees. Pro-forma disclosures about the fair value method and the impact on net loss and net loss per share appear in Notes 1 and 13 of Notes to Consolidated Financial Statements. SFAS No. 123R is effective for us as of the beginning of the third quarter of 2005. Under the methods of adoption allowed by the standard, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS No. 123R. The fair value of unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS No. 123 except that amounts must be recognized in the Statement of Operations. Previously reported amounts may be restated (either to the beginning of the year of adoption or for all periods presented) to reflect the SFAS No. 123R amounts in the Statement of Operations.

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          We are evaluating the requirements of SFAS 123R and we expect that the adoption of SFAS 123R will have a material impact on our consolidated results of operations and earnings per share. We have not yet determined the method of adoption or the effect of adopting SFAS 123R, and we have not determined whether the adoption will result in amounts that are similar to the current pro forma disclosures under SFAS 123.

          In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets – an amendment of Accounting Principles Board Opinion No. 29 (“APB No. 29”). The guidance in APB No. 29, “Accounting for Nonmonetary Transactions”, is based on the principle that gains or losses on exchanges of nonmonetary assets may be recognized based on the differences in the fair values of the assets exchanged. The guidance in that Opinion, however, included certain exceptions to that principle which allowed the asset received to be recognized at the book value of the asset surrendered. This Statement amends APB No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for “exchanges of nonmonetary assets that do not have commercial substance”. A nonmonetary exchange has commercial substance if the future cash flows of the entity are expected to change significantly as a result of the exchange. The provisions of this Statement should be applied prospectively, and are effective for us for nonmonetary asset exchanges occurring from the third quarter of 2005. Earlier application is permitted for nonmonetary asset exchanges occurring in our first quarter of 2005. The adoption of this statement is not expected to have a material impact on our Consolidated Financial Statements.

          In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of Accounting Research Bulletin (“ARB”) No. 43, Chapter 4” (“ARB No. 43, Chapter 4”). This statement amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material (spoilage). Paragraph 5 of ARB 43, Chapter 4, previously stated that “. . . under some circumstances, items such as idle facility expense, excessive spoilage, double freight, and rehandling costs may be so abnormal as to require treatment as current period charges. . . .” This Statement requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this Statement requires that allocation of fixed production overheads to the costs of conversion be based on the normal capacity of the production facilities. This Statement is effective for us for inventory costs incurred beginning in 2006. Earlier application is permitted. The provisions of this Statement should be applied prospectively. The adoption of this statement is not expected to have a material impact on our Consolidated Financial Statements.

          In October 2004, the Emerging Issue Task Force (“EITF 04-8”) 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. This consensus is effective for fiscal periods ending after December 15, 2004. The adoption of EITF 04-8 did not have a material effect on our Consolidated Financial Statements.

          At its November 2003 meeting, the 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” (“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. 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. We adopted the disclosure requirements during its 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. 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 Consolidated Financial Statements.

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          In September 2004, the EITF reached a consensus on issue number 04-10, “Determining Whether to Aggregate Operating Segments That Do Not Meet the Quantitative Thresholds” (“EITF 04-10”) of reportable operating segments. FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), requires that a public business enterprise report financial and descriptive information about its reportable operating segments. Reportable operating segments are those that meet at least one specified quantitative criteria, such as at least 10% of the enterprise’s revenues, assets, or net income or loss. SFAS No. 131 permits two or more operating segments to be aggregated into a single operating segment if aggregation is consistent with the objective and basic principles of SFAS No. 131, if the segments have similar economic characteristics, and if the segments are similar in each of the other specified key areas including nature of products and services, production processes, type or class of customer, methods used to distribute their products or provide their services, and regulatory environment. The question addressed by EITF 04-10 is how an enterprise should evaluate the aggregation criteria of SFAS No. 131 when determining whether operating segments that do not meet the quantitative thresholds may be aggregated. The consensus of EITF 04-10 is that operating segments that do not meet the quantitative thresholds can be aggregated only if aggregation is consistent with the objective and basic principles of SFAS 131, the segments have similar economic characteristics, and the segments share a majority of the SFAS No. 131 aggregation criteria. EITF 04-10 was effective for our fiscal year 2004 consolidated financial statements. Adoption of EITF 04-10 did not have an impact on our Consolidated Financial Statements.

Trends, Uncertainties and Risks

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 products 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. Global semiconductor sales in 2004 increased 27% to $211 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 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.

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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 December 31, 2004, our long term convertible notes and long term debt less current portion was $324 million compared to $358 million at December 31, 2003. Our long-term debt (less current portion) to equity ratio was 0.3 at December 31, 2004 and 2003. 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.

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 $856 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 2005 capital expenditures to be approximately $190 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.

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          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. In the third quarter of 2002, we reassessed the overall manufacturing capacity of the Irving facility against the potential anticipated demand and decided to close the Irving, Texas facility, without conducting any commercial production there. The facility was placed on the market for sale in August 2002. As a result of the decision to close the facility and make it available for sale, we recorded $42.2 million of charges in the third quarter of 2002 consisting of an asset impairment charge of $23.5 million, $13.9 million for terminating contracts with suppliers, employee termination costs of $3.7 million for 272 employees, and a $1.1 million charge related to the repayment of a property tax abatement.

          In December 2003, we re-evaluated the status of our Irving, Texas facility, which we subsequently reclassified as “held-in-use” and also re-evaluated the related fabrication equipment. 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. While this facility was held-for-sale, assets were not in use, and were not depreciated. During 2004, the facility and wafer fabrication equipment were depreciated at rates appropriate for each type of asset. Nearly all of the fabrication equipment was re-deployed to other manufacturing facilities that we own. During the fourth quarter of 2004, the building and related improvements were evaluated for impairment based on management’s estimates which considered an outside appraisal, among other factors, in determining fair market value. No additional impairment adjustment was required. As of December 31, 2004, the building and related improvements had a book value of $58 million.

          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 2004, 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 such as 0.09-microns.

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          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.

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

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

	•	our success in designing and manufacturing new products that implement new technologies and processes
	•	our ability to offer integrated solutions using our advanced nonvolatile memory process with other technologies
	•	the rate at which customers incorporate our products into their systems
	•	product introductions by our competitors
	•	the number and nature of our competitors in a given market
	•	the incumbency of our competitors at potential new customers, 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.

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WE MUST KEEP PACE WITH TECHNOLOGICAL CHANGE TO REMAIN COMPETITIVE.

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

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

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

OUR 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.

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 83%, 82% and 78% of net revenues in 2004, 2003 and 2002. 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

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	•	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 73%, 72% and 75% of our net revenues in 2004, 2003 and 2002 were denominated in U.S. dollars. In 1998, business conditions in Asia were severely affected by banking and currency issues that adversely affected our operating results. Approximately 48%, 49% and 43% of net revenues were generated in Asia in 2004, 2003 and 2002.

REVENUE DENOMINATED IN FOREIGN CURRENCIES COULD DECLINE IF THESE CURRENCIES WEAKEN AGAINST THE DOLLAR, AND WE MAY NOT BE ABLE TO ADEQUATELY HEDGE AGAINST THIS RISK.

          When we take an order denominated in a foreign currency we may receive fewer dollars than initially anticipated if that local currency weakens against the dollar before we collect our funds. 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 25% and 1% in 2004, 26% and 2% in 2003 and 22% and 3% in 2002, respectively. We also face the risk that our accounts receivable denominated in foreign currencies could be devalued if such foreign currencies weaken quickly and significantly against the dollar.

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

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

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          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.

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 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.

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          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.

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

     Effective internal controls are necessary for us to provide reliable financial reports. If we cannot provide reliable financial reports or prevent fraud, our business and operating results could be harmed. We have in the past discovered, and may in the future discover, deficiencies in our internal controls. For example, in connection with our management’s evaluation of our internal control over financial reporting as of December 31, 2004, management identified two control deficiencies that constitute material weaknesses. As more fully described in Item 9A of this Annual Report on Form 10-K, as of December 31, 2004, our management concluded that we did not maintain effective controls over:

•

The accounting for income taxes, including the determination of income taxes payable, deferred income tax assets and liabilities and the related income tax provision. Our control procedures did not include adequate review over the completeness and accuracy of income tax accounts to ensure compliance with GAAP; and

•

The accounting for inventory reserves and cost of revenues. We did not consistently apply GAAP, as the local review of inventory reserves at two of our sites did not identify that certain inventory reserves had been released without the related inventory being sold or disposed of, and there was no review performed at the corporate level to detect inappropriate releases of inventory reserves.

     Atmel’s management determined that these control deficiencies could result in a misstatement of income taxes payable, deferred income tax assets and liabilities or the related income tax provision, or inventory and cost of revenues, that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that these control deficiencies constitute material weaknesses. The above deficiencies resulted in audit adjustments to the financial statements for the fourth quarter of 2004. As a result of the material weaknesses identified, our management concluded that our internal control over financial reporting was not effective as of December 31, 2004. See Item 9A of this Annual Report on Form 10-K.

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

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

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

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

          Our future success depends in large part on the continued service of our key technical and management personnel, and on our ability to continue to attract and retain qualified employees, particularly those highly skilled design, process and test engineers involved in the manufacture of existing products and in the development of new products and processes. The competition for such personnel is intense, and the loss of key employees, none of whom is subject to an employment agreement for a specified term or a post-employment non-competition agreement, could harm our business.

BUSINESS INTERRUPTIONS COULD HARM OUR BUSINESS.

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

SYSTEM INTEGRATION DISRUPTIONS COULD HARM OUR BUSINESS.

          We are currently making enhancements to our integrated financial and supply chain management system and transitioning some of our operational procedures at the same time. This transition process is complex, time-consuming and expensive. Operational disruptions during the course of this transition process or delays in the implementation of this new system could adversely impact our operations. Our ability to forecast sales demand, ship products, manage our product inventory and record and report financial and management information on a timely and accurate basis could be impaired during the transition period.

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

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

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

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

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

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

           In December 2004, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 123 (Revised 2004), “Share Based Payment” (“SFAS No. 123R”). SFAS No. 123R is a revision of SFAS No. 123.This Statement supersedes APB No. 25, which is the basis for our current policy on accounting for stock-based compensation described in Note 1 of Notes to Consolidated Financial Statements. SFAS No. 123R will require companies to recognize as an expense in the Statement of Operations the grant-date fair value of stock options and other equity-based compensation issued to employees. Pro-forma disclosures about the fair value method and the impact on net loss and net loss per share appear in Notes 1 and 12 of Notes to Consolidated Financial Statements. SFAS No. 123R is effective for us as of the beginning of the third quarter of 2005. Under the methods of adoption allowed by the standard, awards that are granted, modified, or settled after the date of adoption should be measured and accounted for in accordance with SFAS No. 123R. The fair value of unvested equity-classified awards that were granted prior to the effective date should continue to be accounted for in accordance with SFAS No. 123 except that amounts must be recognized in the Statement of Operations. Previously reported amounts may be restated (either to the beginning of the year of adoption or for all periods presented) to reflect the SFAS No. 123R amounts in the Statement of Operations.

           When we are required to record an expense for our stock-based compensation plans using the fair value method as described in the SFAS No. 123R, we could have significant and ongoing accounting charges, which will have an adverse effect on our results from operations.

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

          We sponsor defined benefit pension plans that cover substantially all our French and German employees. Plan benefits are managed in accordance with local statutory requirements. Benefits are based on years of service and employee compensation levels. Long term pension benefits payable totaled $42 million and $34 million at December 31, 2004 and 2003, respectively. The plans are non-funded, in compliance with local statutory regulations, and we have no immediate intention of funding these plans. Benefits are paid when amounts become due, commencing when participants retire. Cash funding for benefits to be paid for 2005 is expected to be approximately $1.0 million. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively impact our cash position and operating capital.

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ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

          We maintain investment portfolio holdings of various issuers, types and maturities whose values are dependent upon short-term interest rates. We generally classify these securities as available for sale, and consequently record them on the balance sheet at fair value with unrealized gains and losses being recorded as a separate part of stockholders’ equity. We do not currently hedge these interest rate exposures. Given our current profile of interest rate exposures and the maturities of our investment holdings, we believe that an unfavorable change in interest rates would not have a significant negative impact on our investment portfolio or Statement of Operations through December 31, 2005. In addition, some of our borrowings are at floating rates, so this would act as a natural hedge.

          We have short-term debt, long-term debt, capital leases and convertible notes totaling approximately $465 million at December 31, 2004. Approximately $323 million of these borrowings have fixed interest rates. We have approximately $142 million of floating interest rate debt, of which $76 million is Euro denominated. We do not hedge against this interest rate risk and could be negatively affected should either of these rates increase significantly. A hypothetical 100 basis point increase in interest rates would have had a $1.1 million adverse impact on income before taxes on our Consolidated Statements of Operations for 2004. While there can be no assurance that both of these rates will remain at current levels, we believe that any rate increase will not cause significant negative impact to our operations and to our financial position.

          The following table summarizes our variable-rate debt exposed to interest rate risk as of December 31, 2004. All fair market values are shown net of applicable premium or discount, if any (dollars in thousands):

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          The following table presents the hypothetical changes in interest expense, for the twelve-month period ended December 31, 2004 related to our outstanding borrowings, that are sensitive to changes in interest rates. The modeling technique used measures the change in interest expense arising from hypothetical parallel shifts in yield, of plus or minus 50 Basis Points (“BPS”), 100 BPS and 150 BPS (in thousands).

          For the twelve month period ended December 31, 2004:

          The following table presents the hypothetical changes in interest expense, related to our outstanding borrowings, for the fourth quarter of 2004 that are sensitive to changes in interest rates. The modeling technique used measures the change in interest expense arising from hypothetical parallel shifts in yield, of plus or minus 50 BPS, 100 BPS and 150 BPS, for the three month period ended December 31, 2004 (in thousands):

          The following table presents the hypothetical changes in fair value in our outstanding convertible notes at December 31, 2004 that is sensitive to the changes in interest rates. The modeling technique used measures the change in fair values arising from hypothetical parallel shifts in the yield curve of plus or minus 50 BPS, 100 BPS and 150 BPS over a twelve-month time horizon. The base value represents the fair market value of the notes (in thousands):

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Market Risk Sensitive Instruments

          During 2004, we began to use foreign currency forward exchange contracts to help mitigate the risk to earnings and cash flows associated with currency exchange rate fluctuations. We do not use other derivative financial instruments in our operations. The fair value of outstanding derivative instruments and the fair value that would be expected after a ten percent adverse price change are shown in the table below (in thousands):

          We recognize derivative instruments as either assets or liabilities on the Consolidated Balance Sheets and measures those instruments at fair value. Our objective in holding derivatives is to minimize the volatility of earnings and cash flows associated with changes in foreign currency rates. We do not enter into foreign exchange forward contracts for trading purposes. Any change in fair value due to adverse exchange rate changes will be equally offset by the underlying exposure in either balance sheet translation or cash flows from operations that were the basis for the derivative contract. Therefore, adverse changes in the fair value of derivative contracts will not necessarily result in an adverse impact to our consolidated balance sheet or consolidated statement of operations.

          See Note 1 of Notes to Consolidated Financial Statements for more information concerning our accounting policy on derivative instruments.

Foreign Currency Risk

          When we take an order denominated in a foreign currency we will receive fewer dollars than we initially anticipated if that local currency weakens against the dollar before we collect our funds, which will reduce revenue. Conversely, revenues will be positively impacted if the local currency strengthens against the dollar. In Europe, where our significant operations have costs denominated in European currencies, costs will decrease if the local currency weakens. Conversely, costs will increase if the local currency strengthens against the dollar. In 2004, the impact of the change in foreign currency resulted in net loss being $49 million greater than if exchange rates remained the same as the average exchange rates in effect during 2003 (as discussed in the overview section of Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations). This impact is determined assuming that all foreign denominated transactions that occurred in 2004 were recorded using the average 2003 foreign currency rates. Sales denominated in foreign currencies were 27%, 28% and 25% in 2004, 2003 and 2002, respectively. Sales denominated in Euros were 25%, 26% and 22% in 2004, 2003 and 2002 respectively. Sales denominated in yen were 1%, 2% and 3% in 2004, 2003 and 2002 respectively. Costs denominated in foreign currencies, primarily the Euro, were approximately 59% in 2004 and 53% in 2003 and 2002.

          For comparison purposes, the average annual exchange rates in effect during 2004, 2003 and 2002 for the Euro were 1.25, 1.12 and 0.95 Dollars per Euro, respectively.

          We also face the risk that our accounts receivables denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. Approximately 30% and 36% of our accounts receivable are denominated in foreign currency as of December 31, 2004 and 2003, respectively.

          We also face the risk that our accounts payable and debt obligations denominated in foreign currencies will increase if such foreign currencies strengthen quickly and significantly against the dollar. Approximately 56% and 53% of our accounts payable were denominated in foreign currency as of December 31, 2004 and 2003, respectively. Approximately 32% and 39% of our debt obligations were denominated in foreign currency as of December 31, 2004 and 2003, respectively.

          We conduct business on a global basis in several currencies. As such, it is exposed to adverse movements in foreign currency exchange rates. We use derivative instruments to manage exposures to foreign currency risk. Our objective in holding derivatives is to minimize the volatility of earnings and cash flows associated with changes in foreign currency rates. See Note 1 of Notes to Consolidated Financial Statements for more information concerning our accounting policy on derivative instruments.

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          We recognize derivative instruments as either assets or liabilities on the 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. We do not enter into foreign exchange forward contracts for trading purposes.

          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 Consolidated Statements of Operations. Our foreign exchange forward contracts related to current assets and liabilities generally range from one to three months in original maturity. As of December 31, 2004, the notional value of forward contracts outstanding was 102 million Euro or a fair value of $138 million.

          We periodically hedge forecasted transactions related to certain foreign currency operating expenses anticipated to occur within twelve months, primarily for European manufacturing subsidiaries, with forward contracts. These transactions are designated as cash flow hedges under SFAS No. 133. As of December 31, 2004, the effective portion of the derivative’s gain, reported as a component of accumulated other comprehensive income, was $4.0 million. This amount will be reclassified into cost of revenues when the related expenses are recognized. For the year ended December 31, 2004, the effective portion of the derivative’s gain that was reclassified into cost of revenues was $0.2 million. The ineffective portion of the gain or loss, if any, is reported in interest and other expense immediately. For the year ended December 31, 2004, gains or losses recognized in earnings for hedge ineffectiveness and the time value excluded from effectiveness testing were not material. As of December 31, 2004, outstanding cash flow hedges, which have maturities of up to three months, had a notional value of 90 million Euro or a fair value of $122 million.

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ITEM 8. CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

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Atmel Corporation

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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Atmel Corporation

CONSOLIDATED BALANCE SHEETS

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

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Atmel Corporation

CONSOLIDATED STATEMENTS OF CASH FLOWS

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

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Atmel Corporation

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
AND COMPREHENSIVE INCOME (LOSS)

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

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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(In thousands, except per share data, employee data, and where otherwise indicated)

Note 1

Nature of Operations

          Atmel Corporation designs, develops, manufactures and markets a broad range of high-performance nonvolatile memory and logic integrated circuits using its proprietary complementary metal-oxide semiconductor (“CMOS”) technologies. Atmel’s products are used in a broad range of applications in the telecommunications, computing, networking, consumer and automotive electronics and other markets. Atmel’s customers comprise a diverse group of U.S. and non-U.S. original equipment manufacturers (“OEMs”) and distributors.

Principles of Consolidation

          The Consolidated Financial Statements include the accounts of Atmel and its wholly owned subsidiaries. All significant intercompany accounts and transactions have been eliminated.

Use of Estimates

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

Fair Value of Financial Instruments

          For certain of Atmel’s financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and other assets and current liabilities, the carrying amounts approximate their fair short term investments value due to the relatively short maturity of these items. Investments in debt securities are carried at fair value based on quoted market prices. At December 31, 2004, the estimated fair value of the convertible notes was approximately $211,000, as compared to book value of $213,648. The estimated fair value has been determined by the Company using available market information. However, considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the estimates presented are not necessarily indicative of the amounts that Atmel could realize in a current market exchange. The use of different market assumptions and/or estimation methodologies could have a material effect on the estimated fair value amounts.

Cash and Investments

          Investments with an original or remaining maturity of 90 days or less, as of the date of purchase, are considered cash equivalents, and consist of highly liquid money market instruments.

          Atmel maintains its cash balances at a variety of financial institutions and has not experienced any material losses relating to such instruments. Atmel invests its excess cash in accordance with its investment policy that has been reviewed and approved by the Board of Directors.

Accounts Receivable

          An allowance for doubtful accounts is calculated based on the aging of Atmel’s accounts receivable, historical experience, and management judgment. Atmel writes off accounts receivable against the allowance when Atmel determines a balance is uncollectible and no longer actively pursues collection of the receivable.

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Inventories

          Inventories are stated at the lower of cost or market value. Cost approximates actual cost, (determined on a first-in, first-out basis for raw materials and purchased parts, and an average cost basis for work in progress and finished goods). Inventory balances by category are comprised of the following:

Fixed Assets

          Fixed assets are stated at cost. Depreciation is computed using the straight-line method over the following estimated useful lives:

          Maintenance, repairs and minor upgrades are expensed as incurred.

Investments in Privately-Held Companies

          Investments in privately held companies are accounted for at historical cost or, if Atmel has significant influence over the investee, using the equity method of accounting. Atmel’s proportionate share of income or losses from investments accounted for under the equity method, and any gain or loss on disposal, are recorded in interest and other expenses, net. Investments in privately held companies are included in intangible and other assets.

Revenue Recognition

          The Company sells its products to OEM’s and distributors and recognizes revenue when the rights and risks of ownership have passed to the customer, when persuasive evidence of an arrangement exists, the product has been delivered, the price is fixed or determinable, and collection of the resulting receivable is reasonably assured. Reserves for sales returns and allowances are estimated and provided at the time of shipment.

          For sales to certain distributors (primarily based in the United States) with agreements allowing for price protection and product returns, the Company recognizes revenue at the time the distributor sells the product to its end customer. Revenue is not recognized upon shipment since, due to price protection rights, the sales price is not substantially fixed or determinable at that time. Additionally, these distributors have contractual rights to return products, up to a specified amount for a given period of time. Revenue is recognized when the distributor sells the product to an end-user, at which time the sales price becomes fixed. At the time of shipment to these distributors, the Company records a trade receivable for the selling price since there is a legally enforceable right to payment, relieves inventory for the carrying value of goods shipped since legal title has passed to the distributor, and records the gross margin in “Deferred income on shipments to distributors” on the Consolidated Balance Sheets. Deferred income represents the gross margin on the sale to the distributor; however, the amount of gross margin recognized by the Company in future periods could be less than the deferred margin as a result of price protection concessions related to market pricing conditions. The Company does not reduce deferred margin by estimated price protection; instead, such price concessions are recorded when incurred, which is generally at the time the distributor sells the product to an end-user. Sales to certain other primarily non-U.S. based distributors carry either no or very limited rights of return. The Company has historically been able to estimate returns and other credits from these distributors and accordingly has historically recognized revenue from sales to these distributors upon shipment, with a related allowance for potential returns established at the time of sale.

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Grant Recognition

          Atmel receives grants from certain government authorities for expanding operations or performing research related technical services. Grants are recognized as receivable upon achievement of milestones for billing. Grants are amortized as a reduction of expenses over the period the related obligations are fulfilled.

Advertising Costs

          Atmel expenses all advertising costs as incurred. Advertising costs were not significant in 2004, 2003 and 2002.

Foreign Currency Translation

          Most of Atmel’s major international subsidiaries use their local currencies as their respective functional currencies. Financial statements of these foreign subsidiaries are translated into U.S. dollars at current rates, except that revenues, costs and expenses are translated at average current rates during each reporting period. The effect of translating the accounts of these foreign subsidiaries into U.S. dollars has been included in the Consolidated Statements of Stockholders’ Equity and Comprehensive Income (Loss) as a cumulative foreign currency translation adjustment. Gains and losses from remeasurement of assets and liabilities denominated in currencies other than the respective functional currencies are included in the Consolidated Statements of Operations. Losses due to foreign currency remeasurement included in interest and other expenses, net for the years ended December 31, 2004, 2003 and 2002 were ($2,128), ($7,312) and ($3,135), respectively.

Stock-based Compensation

          Atmel accounts for stock-based compensation, including stock options granted and shares issued under the Employee Stock Purchase Plan, using the intrinsic value method prescribed in Accounting Principles Board (“APB”) No. 25, “Accounting for Stock Issued to Employees,” (“APB No. 25”) and related interpretations. Compensation cost for stock options is recognized ratably over the vesting period. Atmel’s policy is to grant options with an exercise price equal to the quoted market price of its common stock on the grant date. Accordingly, no compensation cost has been recognized for employee stock options granted for the years’ ended December 31, 2004, 2003 and 2002.

          If compensation cost for the Company’s stock option and stock purchase plans had been determined based on the fair value method consistent with the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”, (“SFAS No. 123”) as amended by SFAS No. 148, “Accounts for Stock-Based Compensation-Transition and Disclosure, (“SFAS No. 148”), Atmel’s net loss and net loss per share for the years ended December 31, 2004, 2003 and 2002 would have been adjusted to the pro forma amounts indicated below: