Atmel (ATML) 10-Q 2006 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ	QUARTERLY REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	FOR THE QUARTER ENDED MARCH 31, 2006

OR

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

Commission File Number 0-19032

ATMEL CORPORATION

(Registrant)

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

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

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

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

Yesþ Noo

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

Large accelerated filerþ Accelerated filero Non-accelerated filero

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

Yeso Noþ

On April 30, 2006, the Registrant had 486,797,048 outstanding shares of Common Stock.

ATMEL CORPORATION

FORM 10-Q

QUARTER ENDED MARCH 31, 2006

			Page
Part I:	Financial Information
	Item 1.	Financial Statements
		Condensed Consolidated Balance Sheets at March 31, 2006 and December 31, 2005		1
		Condensed Consolidated Statements of Operations for the three months ended March 31, 2006 and March 31, 2005		2
		Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2006 and March 31, 2005		3
		Notes to Condensed Consolidated Financial Statements		4
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		25
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		38
	Item 4.	Controls and Procedures		41
Part II:	Other Information
	Item 1.	Legal Proceedings		41
	Item 1A.	Risk Factors		42
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds		56
	Item 3.	Defaults Upon Senior Securities		56
	Item 4.	Submission of Matters to a Vote of Security Holders		56
	Item 5.	Other Information		56
	Item 6.	Exhibits		57
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I: FINANCIAL INFORMATION

Item 1. Financial Statements

Atmel Corporation

Condensed Consolidated Balance Sheets

(Unaudited)

	March 31,			December 31,
(In thousands, except per share data)	2006			2005
ASSETS
Current assets
Cash and cash equivalents	$	343,400		$	300,323
Short-term investments		54,774			47,932
Accounts receivable, net of allowance for doubtful accounts of $4,197 in 2006 and $3,976 in 2005		253,261			235,341
Inventories		317,126			309,702
Other current assets		93,654			105,407
Total current assets		1,062,215			998,705
Fixed assets, net		862,427			890,948
Intangible and other assets		36,533			37,692
Total assets	$	1,961,175		$	1,927,345
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities
Current portion of long-term debt	$	104,783		$	112,107
Convertible notes		144,085			142,401
Trade accounts payable		150,009			140,717
Accrued and other liabilities		207,512			201,398
Deferred income on shipments to distributors		19,643			18,345
Total current liabilities		626,032			614,968
Long-term debt less current portion		116,873			133,184
Convertible notes less current portion		299			295
Other long-term liabilities		236,838			238,607
Total liabilities		980,042			987,054
Commitments and contingencies (Note 12)
Stockholders’ equity
Common Stock, par value $0.001; Authorized: 1,600,000 shares; Shares issued and outstanding:
486,498 at March 31, 2006 and 483,366 at December 31, 2005		486			483
Additional paid-in capital		1,302,754			1,293,420
Accumulated other comprehensive income		160,282			138,412
Accumulated deficit		(482,389	)		(492,024	)
Total stockholders’ equity		981,133			940,291
Total liabilities and stockholders’ equity	$	1,961,175		$	1,927,345

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

1

Atmel Corporation

Condensed Consolidated Statements of Operations

(Unaudited)

	Three Months Ended
	March 31,
(In thousands, except per share data)	2006			2005
Net revenues	$	436,784		$	419,777
Operating expenses
Cost of revenues		295,103			332,775
Research and development		70,698			68,721
Selling, general and administrative		47,166			52,316
Restructuring charges		202			—
Total operating expenses		413,169			453,812
Income (loss) from operations		23,615			(34,035	)
Interest and other expenses, net		(6,375	)		(3,923	)
Income (loss) before income taxes		17,240			(37,958	)
Provision for income taxes		(7,606	)		(5,063	)
Net income (loss)	$	9,634		$	(43,021	)
Basic net income (loss) per share	$	0.02		$	(0.09	)
Diluted net income (loss) per share	$	0.02		$	(0.09	)
Shares used in basic net income (loss) per share calculations		485,575			479,609
Shares used in diluted net income (loss) per share calculations		490,819			479,609
	��

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

2

Atmel Corporation

Condensed Consolidated Statements of Cash Flows

(Unaudited)

	Three Months Ended March 31,
(In thousands)	2006			2005
Cash from operating activities
Net income (loss)	$	9,634		$	(43,021	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities
Depreciation and amortization		59,825			77,677
Unrealized losses on derivative contracts		—			7,055
Gain on sale of equity investment		(1,635	)		—
(Gain) loss on sales of fixed assets		(1,465	)		25
Provision for (recovery of) doubtful accounts receivable		84			(33	)
Accrued interest on zero coupon convertible debt		1,688			2,528
Accrued interest on other long term debt		461			986
Non-cash foreign exchange transaction (gains) losses		5,603			(444	)
Stock-based compensation expense		2,958			—
Changes in operating assets and liabilities, net of acquisitions
Accounts receivable		(17,970	)		(14,483	)
Inventories		(5,399	)		7,780
Current and other assets		13,077			(10,359	)
Trade accounts payable		12,991			(8,099	)
Accrued and other liabilities		1,661			25,377
Deferred income on shipments to distributors		1,298			(1,274	)
Net cash provided by operating activities		82,811			43,715
Cash from investing activities
Acquisition of fixed assets		(17,787	)		(86,961	)
Sales of fixed assets		2,323			—
Sale of equity investment		1,799			—
Acquisition of intangible assets		(209	)		(2,150	)
Purchase of short-term investments		(6,590	)		(2,337	)
Sale or maturity of short-term investments		1,054			12,867
Net cash used by investing activities		(19,410	)		(78,581	)
Cash from financing activities
Proceeds from equipment financing and other debt		—			54,005
Principal payments on capital leases and other debt		(27,969	)		(36,942	)
Issuance of common stock		5,983			6,222
Net cash provided by (used in) financing activities		(21,986	)		23,285
Effect of exchange rate changes on cash and cash equivalents		1,662			(11,922	)
Net increase (decrease) in cash and cash equivalents		43,077			(23,503	)
Cash and cash equivalents at beginning of period		300,323			346,350
Cash and cash equivalents at end of period	$	343,400		$	322,847
Supplemental cash flow disclosures:
Interest paid	$	3,938		$	3,610
Income taxes paid, net		1,116			7,029
Decreases in accounts payable related to fixed asset purchases		(2,900	)		(43,890	)
Fixed assets acquired under capital leases		715			54,005

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

3

Atmel Corporation

Notes to Condensed Consolidated Financial Statements

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

1. Summary of Significant Accounting Policies

     Basis of Presentation

     These unaudited interim Condensed Consolidated Financial Statements reflect all normal recurring adjustments which are, in the opinion of management, necessary to state fairly, in all material respects, the financial position of Atmel Corporation (“the Company” or “Atmel”) and its subsidiaries as of March 31, 2006 and the results of operations and the cash flows for the three months ended March 31, 2006 and 2005. All material intercompany balances have been eliminated. Because all of the disclosures required by generally accepted accounting principles are not included, these interim Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated Financial Statements and accompanying notes included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. The December 31, 2005 year-end condensed balance sheet data was derived from the audited Consolidated Financial Statements and does not include all of the disclosures required by generally accepted accounting principles. The Condensed Consolidated Statements of Operations for the periods presented are not necessarily indicative of results to be expected for any future period, nor for the entire year. Certain prior period amounts have been reclassified to conform to current presentations and such reclassifications did not have any effect on the prior periods’ net income.

     Inventories

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

	March 31, 2006		December 31, 2005
Raw materials and purchased parts	$	14,818	$	15,076
Work in progress		232,538		221,438
Finished goods		69,770		73,188
	$	317,126	$	309,702

4

     Grant Recognition

     Grants from government organizations are amortized as a reduction of expenses over the period the related obligations are fulfilled. Recognition of future benefits will depend on the Company’s achievement of certain capital investment, research and development spending and employment goals. During the three months ended March 31, 2006 and 2005, the Company recognized the following amount of grant benefits as a reduction of either cost of revenues or research and development expenses, depending on the nature of the grant:

Three Months Ended	March 31, 2006		March 31, 2005
Cost of revenues	$	2,216	$	3,529
Research and development expenses		4,018		6,651
Total	$	6,234	$	10,180

     Stock-Based Compensation

     Employee Options

     Atmel has two stock option plans — the 1986 Stock Plan and the 2005 Stock Plan (an amendment and restatement of the 1996 Stock Plan). The 1986 Stock Plan expired in April 1996 but there are still options outstanding under the 1986 Stock Plan. The 2005 Stock Plan was approved by stockholders on May 11, 2005. As of March 31, 2006, 17,723 shares of common stock remain available for grant under this plan. Under Atmel’s 2005 Stock Plan, Atmel may issue common stock directly or grant options to purchase common stock to employees, consultants and directors of Atmel. Options, which generally vest over four years, are granted at fair market value on the date of the grant and generally expire ten years from that date.

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

				Outstanding Options
									Weighted
							Exercise		Average
	Available			Number of			Price		Exercise Price
	For Grant			Options			Per Share		Per Share
Balances, December 31, 2005		17,833			30,235		$	1.00 - 24.44	$	5.46
Options Granted		(258	)		258			3.68 - 4.78		4.05
Options Cancelled		148			(200	)		1.80 - 21.47		6.45
Options Exercised		—			(1,035	)		1.68 - 4.40		2.06
Balances, March 31, 2006		17,723			29,258		$	1.00 - 24.44	$	5.56

     During the period ended March 31, 2006, stock options to purchase 52 shares were cancelled, but were not available for future stock option grants due to the expiration of these shares under the 1986 Stock Plan.

5

     The following table summarizes the stock options outstanding and exercisable at March 31, 2006:

	Options Outstanding
					Weighted		Weighted
	Range of				Average		Average		Aggregate
	Exercise		Number		Remaining		Exercise		Intrinsic
	Prices		Outstanding		Contractual Life (years)		Price		Value
	$	1.00 - 1.98		4,205		2.14	$	1.97	$	11,564
		2.06 - 2.11		4,860		6.81		2.11		12,685
		2.13 - 3.26		1,928		8.92		2.72		3,856
		3.29 - 3.29		3,026		8.89		3.29		4,327
		3.33 - 5.61		1,875		5.74		4.18		1,013
		5.75 - 5.75		4,374		7.73		5.75		—
		5.91 - 7.76		3,283		5.54		6.82		—
		7.83 - 24.44		5,707		4.26		12.87		—
Total Outstanding	$	1.00 - 24.44		29,258		5.92	$	5.56	$	33,445

	Options Exercisable
					Weighted		Weighted
	Range of				Average		Average		Aggregate
	Exercise		Number		Remaining		Exercise		Intrinsic
	Prices		Exercisable		Contractual Life (years)		Price		Value
Total Exercisable	$	1.98 - 13.03		18,808		4.76	$	6.44	$	20,391

     During the three months ended March 31, 2006, 1,035 options were exercised which had an aggregate intrinsic value of $2,756.

     Employee Stock Purchase Plan

     Under the 1991 Employee Stock Purchase Plan (“ESPP”), qualified employees are entitled to purchase shares of Atmel’s common stock at the lower of 85% of the fair market value of the common stock at the date of commencement of the six-month offering period or at the last day of the offering period. Purchases are limited to 10% of an employee’s eligible compensation. Purchases under the ESPP were 2,096 shares of common stock during the period ended March 31, 2006, at a price of $1.84 per share. Of the 42,000 shares authorized for issuance under this plan, 9,294 shares were available for issuance at March 31, 2006.

     Adoption of SFAS No. 123R

     On January 1, 2006, the Company adopted Statement of Financial Accounting Standards No. 123R (Revised 2004), “Share Based Payment” (“SFAS No. 123R”) using the modified prospective transition method. The Company’s Condensed Consolidated Financial Statements as of and for the three months ended March 31, 2006 reflect the impact of SFAS No. 123R. However, in accordance with the modified prospective transition method, the Company’s Condensed Consolidated Financial Statements for prior periods were not restated and do not include the impact of SFAS No. 123R. Prior periods do not include equity compensation amounts comparable to those included in the Condensed Consolidated Financial Statements for the three months ended March 31, 2006.

6

     SFAS No. 123R requires companies to estimate the fair value of share-based payment awards on the date of grant using an option-pricing model. The value of the award that is ultimately expected to vest is recognized as expense over the requisite service periods in the Company’s Condensed Consolidated Statements of Operations. Prior to January 1, 2006, the Company accounted for stock-based awards to employees using the intrinsic value method in accordance with APB No. 25 as allowed under SFAS No. 123 (and further amended by SFAS No. 148). Under the prior intrinsic value method, no stock-based compensation expense had been recognized in the Company’s Consolidated Statements of Operations for stock based awards granted to employees, because the exercise price of these awards equaled the fair market value of the underlying stock at the date of grant.

     Upon adoption of SFAS No. 123R, the Company reassessed its equity compensation valuation method and related assumptions. The Company’s determination of the fair value of share-based payment awards on the date of grant using an option-pricing model is impacted by its common stock price as well as a change in assumptions regarding a number of highly complex and subjective variables. These variables include, but are not limited to expected common stock price volatility over the term of the option awards, as well as the projected employee option exercise behaviors (expected life). Option-pricing models were developed for use in estimating the value of traded options that have no vesting or hedging restrictions and are fully transferable. Because employee stock options have certain characteristics that are significantly different from traded options, and changes in the subjective assumptions can materially affect the estimated fair value, in the Company’s opinion, the existing Black-Scholes option-pricing model may not provide an accurate measure of the fair value of employee stock options. Although the fair value of employee stock options is determined in accordance with SFAS No. 123R using an option-pricing model, that value may not be indicative of the fair value observed in a willing buyer/willing seller market transaction.

     Stock-based compensation expense recognized in the Company’s Condensed Consolidated Statements of Operations for the first quarter of 2006 included a combination of payment awards granted prior to January 1, 2006 and payment awards granted subsequent to January 1, 2006. In conjunction with the adoption of SFAS No. 123R, the Company changed its method of attributing the value of stock-based compensation to expense from the accelerated multiple-option approach to the straight-line single option method. Compensation expense for all share-based payment awards granted subsequent to January 1, 2006 is recognized using the straight-line single-option method. Stock-based compensation expense included in the first quarter of fiscal 2006 includes the impact of estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the periods prior to 2006, the Company accounted for forfeitures as they occurred. Stock options granted in periods prior to 2006 were measured based on SFAS No. 123 criteria, whereas stock options granted subsequent to January 1, 2006 were measured based on SFAS No. 123R criteria.

     Employee stock option valuation assumptions

     The weighted-average grant-date fair value of employee stock options granted was $2.61 per share and $2.34 per share during the three months ended March 31, 2006 and 2005, respectively. The fair value of the employee stock options were determined by using the Black-Scholes option-pricing model with the following assumptions:

7

Three months ended March 31,	2006			2005*
Expected life (years)		5.98 - 7.00			5.17 – 6.94
Risk-free interest		4.83	%		3.88	%
Expected volatility		72	%		93	%
Expected dividend yield		0.0	%		0.0	%

* The weighted average assumptions for the three months ended March 31, 2005 were determined in accordance with SFAS No. 123.

     The Company’s weighted average assumptions during the three months ended March 31, 2006 were determined in accordance with SFAS No. 123R and are further discussed below.

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

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

     The Company’s expected volatility is calculated using historical volatility data which is estimated to be representative of the Company’s future volatility over the expected life of the Company’s employee stock options.

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

     The adoption of SFAS No. 123R did not impact the Company’s methodology to estimate the fair value of share-based payment awards under the Company’s ESPP. The grant-date fair value of each employee stock purchase share was $1.35 per share and $1.18 per share during the three months ended March 31, 2006 and 2005, respectively. The following assumptions were utilized to determine the fair value of the Company’s ESPP shares:

8

Three months ended March 31,	2006			2005
Expected life (years)		0.5			0.5
Risk-free interest		4.69	%		3.17	%
Expected volatility		44	%		77	%
Expected dividend yield		0.0	%		0.0	%

     Impact of adoption of SFAS No. 123R

     The components of the Company’s actual and pro forma stock-based compensation expense and the impact to earnings (loss) per share are summarized below:

	Actual			Pro Forma
Three months ended March 31,	2006			2005 (1)
Employee stock options	$	2,420		$	3,308
Employee stock purchase		616			1,043
Other (2)		318			—
Less: amounts capitalized in inventory (3)		(396	)		N/A
	$	2,958		$	4,351
Impact to basic net income (loss) per share	$	0.01		$	0.01
Impact to diluted net income (loss) per share	$	0.01		$	0.01

(1)	Stock-based compensation for the three months ended March 31, 2005 was calculated based on the pro forma application of SFAS No. 123, and was not included in the Condensed Consolidated Statements of Operations.
(2)	During the three months ended March 31, 2006, the Company recognized additional stock-based compensation expense due to modifications to two employees’ stock options resulting from change in employment status (primarily termination of employment).
(3)	Approximately $396 of stock-based compensation was capitalized in inventory at March 31, 2006.

     SFAS No. 123R requires the benefits of tax deductions in excess of recognized compensation cost to be reported as a financing cash flow, rather than as an operating cash flow. The future realizability of tax benefits related to stock compensation is dependent upon the timing of employee exercises and future taxable income, among other factors. The Company did not realize any tax benefit from the stock compensation charge incurred during the three months ended March 31, 2006 as the Company believes it is more likely than not that it will not realize the benefit from tax deductions related to equity compensation.

9

     The following table summarizes the distribution of stock-based compensation expense related to employee stock options and employee stock purchases under SFAS No. 123R for the three months ended March 31, 2006 which was recorded as follows:

Three months ended March 31,	2006
Cost of revenues	$	259
Research and development		1,095
Selling, general and administrative		1,604
Total stock-based compensation expense related to employee stock options and employee stock purchases, pre-tax		2,958
Tax benefit		—
Stock-based compensation expense related to employee stock options and employee stock purchases, net of tax	$	2,958

     The table below reflects pro forma net loss and net loss per share for the three months ended March 31, 2005:

Three months ended March 31,	2005
Net loss excluding stock based compensation(1)	$	(43,021	)
Stock-based compensation expense related to employee stock options and employee stock purchases based on fair value, net of tax effects(2)		(4,351	)
Net loss, including the effect of stock-based compensation expense(3)	$	(47,372	)
Basic and diluted net loss per share as reported	$	(0.09	)
Basic and diluted net loss per share as reported for the prior period — pro forma(3)	$	(0.10	)

(1)	Net loss and net loss per share for the period ended March 31, 2005 did not include stock-based compensation for employee stock options and employee stock purchases under SFAS No. 123 because the Company did not adopt the recognition provisions of SFAS No. 123.
(2)	Stock-based compensation for the period ended March 31, 2005 is calculated based on the pro forma application of SFAS No. 123.
(3)	Net loss and net loss per share for the period ended March 31, 2005 represents the pro forma information based on SFAS No. 123.

10

     As of March 31, 2006, total compensation cost related to unvested stock options not yet recognized was $13,333 and is expected to be recognized over approximately the next 24 months.

     Recent Accounting Pronouncements

SFAS No. 154

     In June 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections: a Replacement of Accounting Principles Board (“APB”) Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 requires retrospective application for voluntary changes in accounting principle unless it is impracticable to do so. Retrospective application refers to the application of a different accounting principle to previously issued financial statements as if that principle had always been used. SFAS No. 154’s retrospective application requirement replaces APB No 20’s (“Accounting Changes”) requirement to recognize most voluntary changes in accounting principle by including in net income (loss) of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. SFAS No. 154 also redefines “restatement” as the revising of previously issued financial statements to reflect the correction of an error. The Company adopted this standard in the quarter ended March 31, 2006 and the adoption will only impact the Consolidated Financial Statements in periods in which a change in accounting principle is made.

SFAS No. 151

     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. SFAS No. 151 is effective for inventory costs incurred beginning in 2006. Earlier application is permitted. The provisions of SFAS No. 151 should be applied prospectively. The adoption of this statement in the quarter ended March 31, 2006 did not have a material impact on the Company’s Condensed Consolidated Financial Statements.

2. Short-Term Investments

     Short-term investments as of March 31, 2006 and December 31, 2005 are primarily comprised of United States of America (“U.S.”) and foreign corporate debt securities, U.S. government and municipal agency debt securities and commercial paper.

11

     All marketable securities are deemed by management to be available-for-sale and are reported at fair value. Net unrealized gains or losses that are not deemed to be other than temporary are reported within stockholders’ equity on the Company’s Condensed Consolidated Balance Sheets and as a component of other comprehensive income (loss). Realized gains and losses are recorded based on the specific identification method. For the three months ended March 31, 2006 and 2005, there were no net realized gains or losses on short-term investments. The carrying amount of the Company’s investments is shown in the table below:

	March 31, 2006					December 31, 2005
	Book			Market		Book			Market
	Value			Value		Value			Value
U.S. Government obligations	$	2,887		$	2,880	$	884		$	880
State and municipal securities		4,950			4,950		4,950			4,950
Corporate equity securities		60			1,193		—			—
Corporate debt securities and other obligations		44,956			45,751		41,256			42,102
		52,853			54,774		47,090			47,932
Unrealized gains		2,044			—		871			—
Unrealized losses		(123	)		—		(29	)		—
Net unrealized gains		1,921			—		842			—
Total	$	54,774		$	54,774	$	47,932		$	47,932

     Contractual maturities (at book value) of available-for-sale debt securities as of March 31, 2006, were as follows:

Due within one year	$	11,115
Due in 1-5 years		9,000
Due in 5-10 years		3,594
Due after 10 years		29,084
Total	$	52,793

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

     The following table shows the gross unrealized losses and fair value of the Company’s investments that have been in a continuous unrealized loss position for less than and greater than 12 months, aggregated by investment category as of March 31, 2006:

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	Less than 12 months					Greater than 12 months
	Fair		Unrealized			Fair		Unrealized
	Value		losses			Value		losses
U.S. government and agency securities	$	1,885	$	(2	)	$	—	$	—
Corporate debt securities		9,100		(33	)		3,506		(88	)
Total	$	10,985	$	(35	)	$	3,506	$	(88	)

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

3. Intangible Assets

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

	Gross					Net
	Intangible		Accumulated			Intangible
	Assets		Amortization			Assets
Core / Licensed Technology	$	88,259	$	(78,152	)	$	10,107
Non-Compete Agreement		306		(306	)		—
Patents		1,377		(1,083	)		294
Total Intangible Assets	$	89,942	$	(79,541	)	$	10,401

     Intangible assets as of December 31, 2005, consisted of the following:

	Gross					Net
	Intangible		Accumulated			Intangible
	Assets		Amortization			Assets
Core / Licensed Technology	$	87,679	$	(76,318	)	$	11,361
Non-Compete Agreement		306		(306	)		—
Patents		1,377		(968	)		409
Total Intangible Assets	$	89,362	$	(77,592	)	$	11,770

     Intangible amortization expense for the three months ended March 31, 2006, and March 31, 2005, totaled $1,578 and $2,667, respectively. The following table presents the estimated future amortization of net intangible assets:

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	Amount
2006 (April 1 through December 31)	$	4,607
2007		4,647
2008		1,038
2009		88
2010		21
Total estimated future amortization	$	10,401

4. Borrowing Arrangements

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

	March 31, 2006			December 31, 2005
Various interest-bearing notes	$	87,847		$	97,070
Bank lines of credit		40,000			40,000
Convertible notes		144,384			142,696
Capital lease obligations		93,809			108,221
		366,040			387,987
Less amount due within one year		(248,868	)		(254,508	)
Long-term debt due after one year	$	117,172		$	133,479

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

	Convertible
	Notes			Other			Total
2006 (April 1 through December 31)	$	145,208		$	91,157		$	236,365
2007		—			99,967			99,967
2008		335			25,321			25,656
2009		—			5,697			5,697
2010		—			4,613			4,613
Thereafter		—			6,589			6,589
		145,543			233,344			378,887
Less amount representing interest		(1,159	)		(11,688	)		(12,847	)
Total	$	144,384		$	221,656		$	366,040

     On March 15, 2006, the Company entered into a five-year asset-backed facility for up to $165,000 (“Facility”) with certain European lenders. This Facility is secured by the Company’s non-U.S. trade receivables. On March 31, 2006, the amount available to the Company under this Facility was approximately $130,000, based on eligible non-U.S. trade receivables. All non-U.S. accounts receivable balances secure amounts borrowed. Borrowings under the Facility bear interest at the London Interbank Offered Rate (“LIBOR”) plus 2% per annum or at the facility agent’s reference rate, while the undrawn portion is subject to a commitment fee of 0.375% per annum. The terms of the Facility subject the Company to certain financial and other covenants and cross-

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default provisions. As of March 31, 2006, there were no amounts outstanding under this Facility and the Company was in compliance with the Facility’s covenants.

     In June 2005, the Company entered into a euro 43,156 ($52,237) term loan agreement with a domestic bank. The interest rate is fixed at 4.10%. The Company has pledged certain manufacturing equipment as collateral. The loan is required to be repaid in equal installments of euro 3,841($4,649) per calendar quarter commencing on September 30, 2005, with the final payment due on June 28, 2008. As of March 31, 2006, $39,817 of the loan was outstanding and was classified as an interest-bearing note.

     In February 2005, the Company entered into an equipment financing arrangement in the amount of euro 40,685 ($54,005) which is repayable in quarterly installments over three years. The stated interest rate is based on 90-day euro Interbank Offered Rate (“EURIBOR”) plus 2.25%. This equipment financing is collateralized by the financed assets. As of March 31, 2006, the balance outstanding under the arrangement was $33,584 and was classified as a capital lease.

     In September 2005, the Company obtained a $15,000 term loan with a domestic bank. This term loan matures in September 2008. The interest rate on this term loan is based on LIBOR plus 2.25%. In December 2004, the Company had obtained a term loan with the same domestic bank in the amount of $20,000. Concurrent to this, the Company established a $25,000 revolving line of credit with this domestic bank. Both the term loan and the revolving line of credit mature in December 2007. The interest rate on the revolving line of credit is determined by the Company and must be either the domestic bank’s prime rate or LIBOR plus 2%. The interest rate on the term loan is EURIBOR plus 2.0%. All U.S. domestic account receivable balances secure amounts borrowed. The revolving line of credit and both term loans require the Company to meet certain financial ratios and to comply with other covenants on a periodic basis. The Company was in compliance with these covenants as of March 31, 2006. As of March 31, 2006, the full amount of the revolving line of credit was outstanding and $23,153 of the term loans was outstanding.

     In September 2004, the Company entered into a euro 32,421 ($40,274) loan agreement with a European bank. The loan is to be repaid in equal principal installments of euro 970 ($1,205) per month plus interest on the unpaid balance, with the final payment due on October 1, 2007. The interest rate is fixed at 4.85%. The Company has pledged certain manufacturing equipment as collateral. This note requires Atmel to meet certain financial ratios and to comply with other covenants on a periodic basis. As of March 31, 2006, $21,445 of the loan was outstanding and was classified as an interest-bearing note. The Company was in compliance with the covenants as of March 31, 2006.

     In June 2003, the Company entered into a $15,000 revolving line of credit with a domestic bank. The full amount of the line of credit is currently outstanding, the final maturity date of which is June 25, 2006. The amount is due upon demand and is classified within the current portion of long term debt on the Condensed Consolidated Balance Sheets. The interest rate is 3.05% and is based on the LIBOR plus a spread of 1.25%. The spread is based on the level of borrowings under the revolving line of credit and can range from 1.25% to 5%. The Company has pledged certain marketable securities as collateral. At March 31, 2006, the fair market value of these marketable securities was $54,774.

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     Approximately $112,916 of the Company’s total debt obligations have cross-default provisions. As of March 31, 2006, the Company was in compliance with the provisions associated with the terms of the cross default.

     In April 1998, the Company completed a sale of zero coupon subordinated convertible notes, due 2018, which raised $115,004. On April 21, 2003, the Company paid $134,640 in cash to those note-holders of the 2018 convertible notes that submitted these notes for redemption. Notes with an accreted value of $299 as of March 31, 2006 were not submitted for redemption and remain outstanding. The 2018 convertible notes are convertible at any time, at the option of the holder, into the Company’s common stock at the rate of 55.932 shares per $1 (one thousand dollars) principal amount. The effective interest rate of the notes is 5.5% per annum. At any time, the Company has the option to redeem these notes for cash, in whole at any time or in part from time to time at redemption prices equal to the issue price plus accrued interest. At the option of the holders on April 21, 2008, and 2013, the Company may be required to repurchase the notes at prices equal to the issue price plus accrued original issue discount through date of repurchase. The Company may elect to pay the repurchase price in cash, in shares of common stock or in any combination of the two.

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

     In December 2005, the Company repurchased a portion of these notes for an aggregate purchase price of $81,250 (including commissions) in privately negotiated transactions. At the time of purchase, the notes had an accreted value of $80,994. As of March 31, 2006, the accreted value of the outstanding portion was $144,085.

     In May 2006, the balance of the 2021 convertible notes is expected to be redeemed by bond holders for approximately $145,000. The Company has notified the holders of its 2021 convertible notes of their right to require the Company to redeem such notes.

     The Company’s remaining $63,657 in outstanding debt obligations are comprised of $60,225 in capital leases and $3,432 of various other interest bearing notes. Included within the outstanding debt obligations are $30,659 of variable rate debt obligations where the interest rates are based on either the LIBOR plus a spread ranging from 1.75% to 2.38% or the short-term EURIBOR plus a spread ranging from 0.90% to 1.23%; the remaining $32,998 are fixed borrowing arrangements where the interest rates range from 0.34% to 9.08%.

     The Company believes that its 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 its liquidity and capital requirements over the next twelve months.

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5. Retirement Plans

     The Company sponsors defined benefit pension plans that cover substantially all 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. The plans are non-funded. Pension liabilities and charges to expense are based upon various assumptions, updated quarterly, including discount rates, future salary increases, employee turnover, and mortality rates. Retirement Plans consist of two types of plans. The first plan type provides for termination benefits paid to employees only at retirement, and consists of approximately one to five months of salary. This structure covers primarily the Company’s French employees. The second plan type provides for defined benefit payouts for the employee’s remaining post-retirement life, and covers primarily the Company’s German employees. The components of the aggregate net pension cost relating to the two plan types are as follows:

	Three Months Ended March 31,
	2006		2005
Service cost-benefits earned during the period	$	727	$	619
Interest cost on projected benefit obligation		574		554
Amortization of net actuarial loss		134		31
Net pension cost	$	1,435	$	1,204

     The Company made $933 in benefit payments during the three months ended March 31, 2006.

     With respect to the Company’s unfunded plans in Germany, an increase in the discount rate led to an overall decrease in the pension liability of $1,404 which is included as a component of the Company’s stockholders equity in the Condensed Consolidated Balance Sheets as of March 31, 2006.

6. Restructuring Charges and Loss on Sale

     2005 Restructuring Charges

     Beginning in the third quarter of 2005, the Company began to implement cost reduction initiatives to further align its cost structure to industry conditions, targeting high labor costs and excess capacity. Pursuant to this, during 2005, the Company recorded a restructuring charge and loss on the sale of its Nantes fabrication facility of $18,209. These charges consisted of the following:

     • $5,010 in one-time involuntary termination severance benefits costs related to the termination of 196 employees primarily in manufacturing, research and development and administration

     • $2,614 of building and improvements were removed from operations and written down to zero following relocation of certain manufacturing activities to Asia

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     • $10,585 associated with the loss on the sale of the Company’s Nantes fabrication facility, including the cost of transferring 319 employees to the buyer

     2006 Restructuring Charges

     During the quarter ended March 31, 2006, the Company incurred $202 in additional restructuring charges primarily comprised of severance and one-time termination benefits. The Company may incur additional restructuring costs, such as employee termination costs, losses on the sale of assets, costs for relocating manufacturing, and other restructuring related costs.

     The following table summarizes the activity related to the restructuring accrual during the year ended December 31, 2005 and the three months ended March 31, 2006:

	January 1, 2005				Non-cash									December 31, 2005
	accrual		Charges		charges			Reversals			Payments			accrual
Third quarter of 2002
Termination of contract with supplier		10,919		—		—						(1,086	)		9,833
Third quarter of 2005															—
Employee termination costs		—		2,785		—			(189	)		(1,067	)		1,529
Fourth quarter of 2005															—
Nantes manufacturing facility sale		—		10,585		(1,454	)		—			(7,821	)		1,310
Employee termination costs		—		2,225		—			—			(1,082	)		1,143
Asset disposals		—		2,614		(2,614	)		—			—			—
Total	$	10,919	$	18,209	$	(4,068	)	$	(189	)	$	(11,056	)	$	13,815

	January 1, 2006				Non-cash							March 31, 2006
	accrual		Charges		charges		Reversals		Payments			accrual
Third quarter of 2002
Termination of contract with supplier		9,833		—		—		—		(217	)		9,616
Third quarter of 2005
Employee termination costs		1,529		—		—		—		(303	)		1,226
Fourth quarter of 2005
Nantes manufacturing facility sale		1,310		—		—		—		(873	)		437
Employee termination costs		1,143				—		—		(1,090	)		53
First quarter of 2006
Employee termination costs		—		202		—		—		(5	)		197
Total	$	13,815	$	202	$	—	$	—	$	(2,488	)	$	11,529

     In conjunction with the Company’s restructuring efforts in the third quarter of 2002, the Company incurred a $12,437 charge related to the termination of a contract with a supplier. The charge was estimated using the present value of the future payments which totaled approximately $18,112 at the time. At March 31, 2006, the remaining restructuring accrual was $9,616 and will be paid over the next 8 years. The current balance is recorded with current liabilities in accrued and other liabilities on the Condensed Consolidated Balance Sheets. The long-term balance is recorded in other long-term liabilities on the Condensed Consolidated Balance Sheets.

     The remaining unpaid restructuring costs as of March 31, 2006, other than those related to the charge incurred during the third quarter of 2002, are expected to be paid by

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March 31, 2007 and are recorded in current liabilities within accrued and other liabilities on the Condensed Consolidated Balance Sheets.

7. Accumulated Other Comprehensive Income (Loss)

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

     The components of accumulated other comprehensive income at March 31, 2006, and December 31, 2005, are as follows:

	March 31,			December 31,
	2006			2005
Foreign currency translation	$	159,604		$	140,217
Minimum pension liability adjustments		(1,243	)		(2,647	)
Unrealized gains on investments		1,921			842
Accumulated other comprehensive income	$	160,282		$	138,412

     The components of comprehensive income (loss) for the three months ended March 31, 2006 and 2005, are as follows:

	Three Months ended
	March 31,
	2006		2005
Net income (loss)	$	9,634	$	(43,021	)
Other comprehensive income (loss):
Foreign currency translation adjustments		19,387		(49,155	)
Minimum pension liability adjustment		1,404		—
Unrealized loss on derivative instruments		—		(7,835	)
Unrealized gain on investments		1,079		42
Other comprehensive income (loss)		21,870		(56,948	)
Comprehensive income (loss)	$	31,504	$	(99,969	)

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8. Net Income (Loss) Per Share

     Basic net income (loss) per share is computed by using the weighted average number of common shares outstanding during that period. Diluted net loss per share is computed giving effect to all dilutive potential common shares that were outstanding during the period. Dilutive potential common shares consist of incremental common shares issuable upon exercise of stock options, warrants and convertible securities for all periods.

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

Three Months Ended March 31,	2006		2005
Basic and diluted net income (loss)	$	9,634	$	(43,021	)
Shares used in basic net income (loss) per share calculations		485,575		479,609
Incremental common shares attributable to exercise of outstanding options		5,244		—
Shares used in diluted net income (loss) per share calculations		490,819		479,609
Basic net income (loss) per share	$	0.02	$	(0.09	)
Diluted net income (loss) per share	$	0.02	$	(0.09	)

     The following table summarizes antidilutive securities which were not included in the “Weighted-average shares – diluted” calculation for the three months ended March 31, 2006 and 2005:

Three Months Ended March 31,	2006			2005
Total employee stock options outstanding		29,258			31,333
Incremental common shares attributable to exercise of outstanding options included in diluted calculation		(5,244	)		—
Employee stock options excluded from per share calculation		24,014			31,333
Common Stock equivalent shares associated with:
Convertible notes due 2018		5			5
Convertible notes due 2021		6,245			9,357
Total shares excluded from diluted per share calculation		30,264			40,695

     The calculation of dilutive or potentially dilutive common shares related to the Company’s convertible securities considers the conversion features associated with these securities, as at the option of the holders, the 2018 and 2021 convertible notes are convertible at any time, into the Company’s common stock at the rate of 55.932 shares per $1 (one thousand dollars) principal amount and 22.983 shares per $1 (one thousand dollars) principal amount, respectively (further discussed in Note 4). In this scenario, the “if converted” calculations are based upon the average outstanding convertible note balance for the last 3 months and the respective conversion ratios.

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     As disclosed in Note 4, the convertible bond holders have the right to put the convertible notes back to the Company at specific future dates, in which case the Company may elect to settle the convertible notes into common stock or cash. In accordance with EITF Topic D-72, “Effect of Contracts That May Be Settled in Stock or Cash on the Computation of Diluted Earnings per Share”, the calculation of the number of common stock equivalent shares associated with the convertible notes would assume that the notes will be settled in common stock at the then fair value. As a result, the number of common stock equivalent shares associated with convertible notes would be computed by dividing the total outstanding balance (principal plus interest) of the convertible notes by the closing sales price of the Company’s common stock for the applicable period.

     Assuming the Company would repurchase the convertible notes on March 31, 2006 and 2005 using only common stock valued at the weighted-average closing sales price of the Company’s common stock for the related periods and no cash, this would result in 30,590 and 73,280 in antidilutive shares, for the periods ended March 31, 2006 and 2005, respectively. In the event the Company elects to settle the convertible notes in common stock, the actual conversion price will depend on future market conditions.

9. Interest and Other Expenses, Net

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

	Three months ended
	March 31,
	2006			2005
Interest and other income	$	5,427		$	1,701
Interest expense		(6,199	)		(6,068	)
Foreign exchange transaction gains (losses)		(5,603	)		444
Total	$	(6,375	)	$	(3,923	)

10. Income Taxes

     For the three months ended March 31, 2006, the Company recorded an income tax expense of $7,606, compared to an income tax expense of $5,063 for the three months ended March 31, 2005.

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

11. Operating and Geographical Segments

     The Company designs, develops, manufactures and sells a wide range of semiconductor integrated circuit products. The Company has four product families, each of which is a reportable segment. The segments represent management’s view of the Company’s

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businesses and how it allocates Company resources and measures performance of its major components. In addition, each segment comprises product families with similar requirements for design, development and marketing. Each segment requires different design, development and marketing resources to produce and sell semiconductor integrated circuits. Atmel’s four reportable segments are as follows:

     Application specific integrated circuit (“ASIC”)segment includes custom application specific integrated circuits designed to meet specialized single-customer requirements for their high performance devices in a broad variety of applications. In addition, this segment includes smart card applications, imaging sensors and processors, audio processors, field programmable gate arrays (“FPGAs”) and programmable logic devices (“PLDs”), multimedia, and network storage products.

     Microcontrollerssegment includes a variety of proprietary and standard microcontrollers, the majority of which contain embedded nonvolatile memory, and military and aerospace application specific products.

     Nonvolatile Memoriessegment 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 Automotivesegment includes radio frequency and analog circuits for the telecommunications, automotive and industrial markets as well as application specific products for the automotive industry.

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

     The Company’s wafer manufacturing facilities fabricate integrated circuits for segments as necessary and their operating costs are reflected in the segments’ cost of revenues on the basis of product costs. Because segments are defined by the products they design and sell, they do not make sales to each other. The Company does not allocate assets by segment, as management does not use the information to measure or evaluate a segment’s performance based on assets.

Information about Reportable Segments

				Micro-		Nonvolatile			RF and
	ASIC			controllers		Memories			Automotive			Total
Three months ended March 31, 2006:
Net revenues from external customers	$	153,786		$	97,268	$	95,630		$	90,100		$	436,784
Segment income (loss) from operations		(9,459	)		15,535		9,252			8,489			23,817
Three months ended March 31, 2005:
Net revenues from external customers	$	150,151			77,625		99,686			92,315		$	419,777
Segment income (loss) from operations		(35,328	)		11,577		(7,753	)		(2,531	)		(34,035	)

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Reconciliation of segment information to Condensed Consolidated Statements of Operations

Three months ended March 31,	2006			2005
Total segment income (loss) from operations	$	23,817		$	(34,035	)
Unallocated amounts:
Restructuring charges		(202	)		—
Consolidated income (loss) from operations	$	23,615		$	(34,035	)

     Geographic sources of revenues for each of the three months ended March 31, 2006 and 2005 were as follows (revenues are attributed to countries based on delivery locations):

	Three months ended
	March 31,
	2006		2005
United States	$	70,381	$	53,961
Germany		51,239		44,899
France		46,240		40,840
UK		6,274		9,750
Japan		14,806		12,296
China including Hong Kong		85,251		86,472
Singapore		61,990		68,025
Rest of Asia-Pacific		50,050		52,498
Rest of Europe		46,379		44,751
Rest of the World		4,174		6,285
Total net revenues	$	436,784	$	419,777

     Locations of long-lived assets as of March 31, 2006 and December 31, 2005:

	March 31, 2006		December 31, 2005
United States	$	229,046	$	240,131
Germany		23,046		19,736
France		313,465		325,246
UK		286,169		294,381
Japan		189		191
China including Hong Kong		689		709
Singapore		—		—
Rest of Asia-Pacific		11,508		11,708
Rest of Europe		9,774		10,310
Rest of the World		—		—
Total long lived assets	$	873,886	$	902,412
Unallocated intangible and other assets		25,074		26,228
Total long term assets	$	898,960	$	928,640

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12. Commitments and Contingencies

Legal Proceedings:

     From time to time, the Company may be notified of claims that it may be infringing patents issued to other parties and may subsequently engage in license negotiations regarding these claims. Should the Company elect to enter into license agreements with other parties or should the other parties resort to litigation, the Company may be obligated in the future to make payments or to otherwise compensate these third parties which could have an adverse effect on the Company’s financial condition or results of operations or cash flows.

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

     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 found Agere’s patents invalid. Subsequently, a retrial on one of the patents was granted. While the March 22, 2005 decision is appealable, there can be no appeal until resolution of the retrial.

Warranty Liability:

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

     The following table summarizes the activity related to the product warranty liability during the three months ended March 31, 2006 and 2005:

	2006			2005
Balance at beginning of period	$	8,736		$	10,495
Accrual for warranties during the period		1,892			1,607
Change in accrual relating to preexisting warranties (including change in estimates)		(410	)		(702	)
Settlements made (in cash or in kind) during the period		(1,757	)		(1,776	)
Balance at end of period	$	8,461		$	9,624

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Indemnifications:

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

Capital Purchase Commitments:

     At March 31, 2006, the Company had outstanding commitments for purchases of capital equipment of $7,760 which are expected to be delivered over the next several quarters.

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

     You should read the following discussion and analysis in conjunction with the Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere in this Report. The information contained in this Quarterly Report on Form 10-Q is not a complete description of our business or the risks associated with an investment in our common stock. We urge you to carefully review and consider the various disclosures made by us in this Report and in our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2005.

Forward Looking Statements

     You should read the following discussion of our financial condition and results of operations in conjunction with our Condensed Consolidated Financial Statements and the related “Notes to Condensed Consolidated Financial Statements” included in this Quarterly Report onForm 10-Q. This discussion contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, particularly statements regarding our outlook for fiscal 2006, the effect of Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) on our consolidated financial results, our anticipated operating expenses and liquidity, the effect of our restructuring efforts and our expectations regarding the effects of exchange rates. Our actual results could differ materially from those projected in the forward-looking statements as a result of a number of factors, risks and uncertainties, including the risk factors set forth in this discussion, and in Item 1A – Risk Factors, and elsewhere in thisForm 10-Q and similar discussions in our other filings with the Securities and Exchange Commission, including our Annual Report onForm 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 thisForm 10-Q is provided as of the filing date

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with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. Atmel undertakes no obligation to update any forward-looking statements in this Form 10-Q.

Overview

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

     We develop process technologies ourselves to ensure they provide the maximum possible performance. We manufacture approximately 96% of our products in our own wafer fabrication facilities.

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

     Net revenues during the three months ended March 31, 2006, increased by 4%, or $17 million, to $437 million as compared to $420 million for the three months ended March 31, 2005, primarily due to growth in our ASIC (2%) and Microcontroller (25%) segments, partially offset by declines in our Nonvolatile Memory (4%) and RF and Automotive segments (2%). The increase in our ASIC segment revenues was due to strong demand for imaging sensor products; while the significant increase in our Microcontroller segment was driven by higher AVR unit shipments. We continued to gain market acceptance for our AVR products and have allocated more of our fabrication capacity to meet increased demand. The decline in both our Nonvolatile Memory and RF and Automotive segments was primarily due to lower shipment volumes, primarily for Flash memory products.

     During the three months ended March 31, 2006, gross margin increased to 32%, compared to 21% for the three months ended March 31, 2005, primarily due to increased AVR product sales, cost reduction actions for Smartcard products, lower depreciation costs, and a favorable impact from costs denominated in foreign currencies due to the strengthening of the U.S. dollar. During the three months ended March 31, 2006, changes in foreign exchange rates had a significant impact on net revenues and operating costs. Had average exchange rates during the three months ended March 31, 2006 remained the same as the average exchange rate in effect during the same period of 2005, our reported revenues would have been $11 million higher, while our operating expenses would have been approximately $25 million higher (relating to cost of revenues of $18 million, research and development expenses of $5 million and sales, general and administrative expenses of $2 million). The net effect resulted in an increase to income from operations of $14 million as a result of more favorable

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exchange rates in effect for the period ended March 31, 2006 compared to the average exchange rates in effect during the same period of 2005.

     During the three month ended March 31, 2006, we had income from operations of $24 million, compared to a loss from operations of $34 million for the three months ended March 31, 2005. The change from the prior period resulted primarily from higher revenues, lower manufacturing costs, and a benefit from more favorable foreign exchange rates. Furthermore, during the quarter, we continued to make progress in optimizing our business operations by reducing costs in our manufacturing plants and continuing efforts to outsource the wafer production of several product lines.

     During the three months ended March 31, 2006, we generated positive cash flow from operations and continued to strengthen our liquidity position. At March 31, 2006, our cash, cash equivalents and short term investments totaled $398 million, up from $348 million at December 31, 2005, while total indebtedness decreased to $366 million at March 31, 2006 from $388 million at December 31, 2005.

RESULTS OF OPERATIONS

Three Months Ended March 31,	2006				2005
	(amounts in millions and as a percent of net revenues)
Net revenues	$	436.8	100.0	%	$	419.8		100.0	%
Gross profit		141.7	32.4	%		87.0		20.7	%
Research and development expenses		70.7	16.2	%		68.7		16.4	%
Selling, general & administrative expenses		47.2	10.8	%		52.3		12.5	%
Restructuring charges		0.2	—			—		—
Income (loss) from operations	$	23.6	5.4	%	$	(34.0	)	(8.1	%)

Net Revenues

     Net revenues during the three months ended March 31 2006, increased 4%, or $17 million, to $437 million as compared to $420 million for the three months ended March 31, 2005, primarily due to a 2% growth in our ASIC segment and a 25% growth in our Microcontrollers segment, partially offset by declines of 4% in our Nonvolatile Memory segment and 2% in our RF and Automotive segment. The increase in our ASIC segment revenues was due to strong demand for imaging sensor products; while the significant increase in our Microcontroller segment was driven by higher AVR unit shipments. We continued to gain market acceptance for our AVR products and have allocated more of our fabrication capacity to meet increased demand. The decline in both our Nonvolatile Memory and RF and Automotive segments was primarily due to lower shipment volumes, primarily for Flash memory products.

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Net Revenues — By Operating Segment

     Our net revenues by segment for the three months ended March 31, 2006 compared to the three months ended March 31, 2005 are summarized as follows(in thousands):

	Three Months Ended		Three Months Ended
Segment	March 31, 2006		March 31, 2005		Change			% Change
ASIC	$	153,786	$	150,151	$	3,635			2	%
Microcontroller		97,268		77,625		19,643			25	%
Nonvolatile Memory		95,630		99,686		(4,056	)		(4	%)
RF and Automotive		90,100		92,315		(2,215	)		(2	%)
Net revenues	$	436,784	$	419,777	$	17,007			4	%

ASIC

     ASIC segment revenues increased by 2% or $4 million to $154 million for the three months ended March 31, 2006, as compared with the three months ended March 31, 2005. The first quarter of 2006 saw higher unit shipments, partially offset by lower average selling prices. The majority of this growth came from a $9 million increase in revenue from Imaging products, offset by a $4 million decrease in Smartcard revenues. Smartcard shipments were impacted by a shift in mix to sales of higher margin products with lower volumes.

Microcontroller

     Microcontroller segment revenues increased by 25% or $19 million to $97 million for the three months ended March 31, 2006 as compared to $78 million for the three months ended March 31, 2005. The increase in segment revenues is primarily attributable to a $23 million increase in revenue from our proprietary AVR products. The microcontroller market is expanding, and we continue to gain market acceptance for our proprietary 8-bit AVR microcontrollers. Orders increased significantly beginning in the second half of 2005 following significant design win activity among our customer base. In order to meet increasing customer demand, we have increased both our fabrication capacity as well as assembly and test capacity.

Nonvolatile Memory

     Nonvolatile Memory segment revenues decreased by 4% or $4 million to $96 million for the period ended March 31, 2006 as compared to $100 million for the period ended March 31, 2005. The decrease during this period is primarily due to reduced unit volumes for Flash memory products. As nonvolatile memory products are commodity oriented, they are also subject to greater declines in average selling prices than products in our other segments. Competitive pressures and rapid obsolescence of products are among several factors causing continued pricing declines. Conditions in this segment are expected to remain challenging for the foreseeable future. In an attempt to mitigate the pricing fluctuations in this market, we have shifted our focus away from parallel Flash products, which tend to experience greater average sales price fluctuations, to other serial-based nonvolatile memory products.

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RF and Automotive

     RF and Automotive segment revenues decreased by 2% or $2 million to $90 million for the three months ended March 31, 2006, as compared to $92 million for the three months ended March 31, 2005. This decrease is primarily due to a $4 million decrease in revenue from RF BiCMOS foundry products, offset by a $1 million increase in revenue from Audio Radio products.

Net Revenues — By Geographic Area

Our net revenues by geographic areas for the three months ended March 31, 2006 compared to the three months ended March 31, 2005 are summarized as follows (revenues are attributed to countries based on delivery locations):

	Three Months Ended		Three Months Ended
Region	March 31, 2006		March 31, 2005		Change			% Change
United States	$	70,381	$	53,961	$	16,420			30	%
Europe		150,132		140,240		9,892			7	%
Asia		212,097		219,291		(7,194	)		(3	%)
Other *		4,174		6,285		(2,111	)		(34	%)
Total Net Revenues	$	436,784	$	419,777	$	17,007			4	%

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

     Sales outside the United States accounted for 84% of our net revenues for the three months ended March 31, 2006, as compared to 87% of our net revenues for the three months ended March 31, 2005.

     Our sales in the United States increased by $16 million, or 30% for the three months ended March 31, 2006, compared to the three months ended March 31, 2005, primarily due to higher volume shipments.

     Our sales to Europe increased $10 million or 7% for the three months ended March 31, 2006, as compared to the three months ended March 31, 2005, due to higher volume shipments partially offset by a decrease in the value of the euro relative to the U.S. dollar.

     Our sales to Asia decreased $7 million, or 3% for the three months ended March 31, 2006 as compared to the three months ended March 31, 2005, primarily due to lower average selling prices.

Stock-Based Compensation Expense

     On January 1, 2006 we adopted SFAS No. 123R which requires the measurement and recognition of compensation expense for all share-based payment awards made to our

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employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (“ESPP”) based on estimated fair values. Stock-based compensation expense recognized under SFAS No.123R for the three months ended March 31, 2006 was $3 million which consisted of stock-based compensation expense related to employee stock options ($2 million) and ESPP and other stock-based compensation ($1 million).

     In conjunction with the adoption of SFAS No. 123R, we changed our method of attributing the value of stock-based compensation to expense from the accelerated multiple-option approach to the straight-line single option method. Compensation expense for all share-based payment awards granted subsequent to January 1, 2006 is recognized using the straight-line single-option method. Stock-based compensation expense included in the first quarter of fiscal 2006 includes the impact of estimated forfeitures. SFAS No. 123R requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. For the periods prior to 2006, we accounted for forfeitures as they occurred.

     The weighted-average grant-date fair value of employee stock options granted was $2.61 per share and $2.34 per share during the three months ended March 31, 2006 and 2005, respectively. The fair value of the employee stock options were determined by using the Black-Scholes option-pricing model with the following assumptions:

Three months ended March 31,	2006			2005*
Expected life (years)		5.98 - 7.00			5.17 – 6.94
Risk-free interest		4.83	%		3.88	%
Expected volatility		72	%		93	%
Expected dividend yield		0.0	%		0.0	%

* The weighted average assumptions for the three months ended March 31, 2005 were determined in accordance with SFAS No. 123.

     Our weighted average Black-Scholes fair value model assumptions during the three months ended March 31, 2006 were determined in accordance with SFAS No. 123R and are further discussed below.

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

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

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     Our expected volatility is calculated using historical volatility data which is estimated to be representative of our future volatility over the expected life of our employee stock options.

     The dividend yield assumption is based on our history and expectation of future dividend payouts.

     The following table summarizes the distribution of stock-based compensation expense related to employee stock options and employee stock purchases under SFAS No. 123R for the three months ended March 31, 2006 which was allocated as follows:

Three months ended March 31,	2006
Cost of revenues	$	259
Research and development		1,095
Selling, general and administrative		1,604
Total stock-based compensation expense related to employee stock options and employee stock purchases, pre-tax		2,958
Tax benefit		—
Stock-based compensation expense related to employee stock options and employee stock purchases, net of tax	$	2,958

     We estimate that income from operations in the year ending December 31, 2006 will be reduced by stock-based compensation expense ranging from $11 million to $13 million due to the adoption of SFAS No. 123R.

     See Note 1 of Notes to Condensed Consolidated Financial Statements for additional information regarding the impact of SFAS No. 123R.

Revenues and Costs – Impact from Changes to Foreign Exchange Rates

     During the three months ended March 31, 2006, approximately 24% of net revenues were denominated in foreign currencies, primarily the euro. During the three months ended March 31, 2005, sales denominated in foreign currencies were approximately 23% of net revenues. Sales in euros amounted to 23% and 22% of net revenues for the three months ended March 31, 2006 and 2005, respectively. Sales in Japanese yen accounted for 1% of net revenues for both the three months ended March 31, 2006, and March 31, 2005.

     During the three months ended March 31, 2006, changes in foreign exchange rates, primarily the strengthening of the U.S. dollar against the euro had a significant impact on net revenues and operating costs. Had average exchange rates during the three months ended March 31, 2006 remained the same as the average exchange rates in effect for the three months ended March 31, 2005, our reported net revenues in the three months ended March 31, 2006 would have been approximately $11 million higher. However, our foreign currency

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expenses exceed foreign currency revenues. During the three months ended March 31, 2006, approximately 55% of our costs were denominated in foreign currencies, primarily the euro. Had average exchange rates during the three months ended March 31, 2006, remained the same as the average exchange rates in effect for the three months ended March 31, 2005, our operating expenses for the three months ended March 31, 2006, would have been approximately $25 million higher (cost of revenues $18 million; research and development, $5 million; sales, general and administrative, $2 million). The net effect resulted in an increase to income from operations of $14 million as a result of more favorable exchange rates in effect for the period ended March 31, 2006 compared to the average exchange rates in effect during the same period of 2005.

Cost of Revenues and Gross Margin

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

     Gross margin increased to 32% for the three months ended March 31, 2006, compared to 21% for the three months ended March 31, 2005. The 11% increase in gross margin is due to improved product mix, lower manufacturing costs, lower depreciation expense and a more favorable euro exchange rate, and was partially offset by the inclusion of $0.3 million in stock-based compensation expense related to employee stock options and employee stock purchases in the first quarter of 2006. Had exchange rates for 2006 remained the same as the average exchange rates in effect for 2005, our reported gross margin would have been reduced to 30%.

     In recent periods, average selling prices for some of our semiconductor products have been below manufacturing costs, which has adversely affected our results of operations, cash flows and financial condition. Because inventory reserves are recorded in advance of when 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 periods relate to all of our product categories, while lower-of-cost market reserves relate primarily to our nonvolatile memory products and Smart Card IC products. There were no significant inventory reserve adjustments during the first quarter of 2006.

     We receive economic assistance grants in some locations as an incentive to achieve certain hiring and investment goals related to manufacturing operations, the benefit for which is recognized as an offset to related costs. We recognized a reduction to cost of revenues for such grants of $2 million and $4 million during the three months ended March 31, 2006 and 2005, respectively.

Research and Development

     Research and Development (“R&D”) expenses during the three months ended March 31, 2006, increased $2 million or 3%, to $71 million from $69 million in the three months ended March 31, 2005. Increased spending of $3 million on advanced process technologies for the production of 0.13 and 0.09 micron-technology, $3 million of lower grant benefits as further discussed below, the inclusion of $1 million in stock-based compensation expense in

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the first quarter of 2006, partially offset by a $5 million favorable impact from exchange rates, resulted in the $2 million increase in R&D expenses during the three months ended March 31, 2006.

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

     We receive R&D grants from various European research organizations, the benefit for which is recognized as an offset to related costs. For the three months ended March 31, 2006, we recognized $4 million in research grant benefits, compared to $7 million recognized for the three months ended March 31, 2005.

Selling, General and Administrative

     Selling, General and Administrative (“SG&A”), expenses decreased 10% or $5 million to $47 million in the three months ended March 31, 2006 from $52 million in the three months ended March 31, 2005. As a percentage of net revenues, SG&A expenses decreased to 11% in the three months ended March 31, 2006 compared to 13% in the three months ended March 31, 2005. The decrease in SG&A expenses in the three months ended March 31, 2006 as compared to the three months ended March 31, 2005 was due to decreased legal expenses of $3 million, decreased employee salaries and benefits of $2 million, a $2 million favorable effect of foreign exchange rate fluctuations offset by stock based compensation of $2 million.

Restructuring Charges and Loss on Sale

     2005 Restructuring Charges

     During 2005, we began implementing cost reduction initiatives, primarily targeting manufacturing labor costs, and recorded restructuring charges and loss on sale of $18 million consisting of:

• one-time involuntary termination severance benefits costs related to the termination of 196 employees primarily in manufacturing, research and development, and administration,

• the write-down of building improvements removed from operations to zero following the relocation of certain manufacturing activities to Asia, and

• a loss incurred as a result of the sale of our Nantes fabrication facility, including the cost of transferring 319 employees to XbyBus SAS, a French corporation (“XbyBus SAS”)

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     2006 Restructuring Charges

     During the period ended March 31, 2006, we incurred $0.2 million in additional restructuring charges primarily comprised of severance and one-time termination benefits.

     Unpaid severance benefits from these cost reduction activities are expected to be settled on or before March 31, 2007 and are included within current liabilities in accrued and other liabilities on the Condensed Consolidated Balance Sheets. Relating to restructuring costs incurred, we anticipate gradual savings to reach a quarterly rate of approximately $6 million by the end of the third quarter of 2006.

     We are continuously reviewing our operations and further pursuing plans to improve our long term operating results and as a result, may incur additional restructuring costs, such as employee termination costs, losses on the sale of assets, costs for relocating manufacturing activities, and other restructuring related costs. The total amount and timing of these charges will depend upon the nature, timing, and extent of these future actions.

Interest and Other Expenses, Net

     Interest and other expenses, net, increased by $2 million to $6 million for the three months ended March 31, 2006, compared to $4 million for the three months ended March 31, 2005. As a percentage of net revenues, interest and other expenses, net was 1% for both the three months ended March 31, 2006 and 2005. The increase in interest and other expenses, net, is primarily due to foreign exchange losses from the remeasurement of assets and liabilities denominated in currencies other than the respective functional currency partially offset by an increase in interest and other income primarily from the sale of a private equity investment and increased interest income from higher average cash balances.

     Interest rates on our outstanding borrowings did not change significantly in the three months ended March 31, 2006, as compared to the three months ended March 31, 2005.

Income Taxes

     For the three months ended March 31, 2006, we recorded an income tax expense of $8 million, compared to an income tax expense of $5 million for the three months ended March 30, 2005.

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

Liquidity and Capital Resources

     At March 31, 2006, we had a total of $398 million of cash and cash equivalents and short-term investments compared to $348 million at December 31, 2005. Our current ratio, calculated as total current assets divided by total current liabilities, was 1.7 at March 31, 2006, an increase of 0.1 from 1.6 at December 31, 2005. We continue to generate positive cash flow

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from operating activities. We have used this cash generated to reduce our net debt obligations by $22 million to $366 million at March 31, 2006 from $388 million at December 31, 2005. Working capital increased by $52 million to $436 million at March 31, 2006, compared to $384 million at December 31, 2005.

     Operating Activities: Net cash provided by operating activities was $83 million in the three months ended March 31, 2006, compared to $44 million in the three months ended March 31, 2005. This increase is a result of improved operating results.

     Accounts payable increased 7% or $9 million primarily due to the timing of payments to our vendors.

     Accounts receivable increased 8% or $18 million to $253 million at March 31, 2006 from $235 million at December 31, 2005. The average days of accounts receivable outstanding (“DSO”) was 52 days at the end of the first quarter of 2006 as compared to 50 days at the end of the fourth quarter of 2005. Our accounts receivable and DSO are primarily impacted by shipment linearity, payment terms offered, and collection performance. Should we need to offer longer payment terms in the future due to competitive pressures, this could negatively affect our DSO.

     Inventories increased by $7 million or 2% to $317 million at March 31, 2006 from $310 million at December 31, 2005. Average days of sales in inventory decreased to 97 days at March 31, 2006 as compared to 98 days at December 31, 2005. Inventories consist of raw wafers, purchased specialty wafers, work in process, and finished units. 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 decreased by $11 million to $94 million at March 31, 2006 from $105 million at December 31, 2005. This decrease primarily relates to lower receivable balances for VAT.

     Investing Activities: Net cash used for investing activities was $19 million at March 31, 2006 compared to $79 million used at March 31, 2005. During the three months ended March 31, 2006, we continued to make investments in advanced manufacturing processes, and related equipment.

     Financing Activities: Net cash used by financing activities was $22 million at March 31, 2006 compared to net cash provided by financing activities of $23 million at March 31, 2005. We continued to pay down debt, with repayments of principal balances on capital leases and other debt totaling $28 million for the three months ended March 31, 2006, compared to $37 million for the three months ended March 31, 2005.

     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 for the three months ended March 31, 2006 and 2005 included a increase (decrease) of $2 million and ($12) million, respectively, due to the effect of exchange rate changes on cash balances denominated in

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foreign currencies. These cash balances were primarily held in certain subsidiaries in euro denominated accounts and decreased in value due to the weakening of the euro compared to the U.S. dollar during these periods.

     During 2006, we expect our operations to generate positive cash flow; however, a significant portion of cash will be used to repay debt and make capital investments. In May 2006, the balance of the 2021 convertible notes is expected to be redeemed by bond holders for $145 million (see Note 4 of Notes to Condensed Consolidated Financial Statements for further details). We have notified the holders of our 2021 convertible notes of their right to require us to redeem such notes. Also in June 2006, $15 million of an existing line of credit will come due. We expect that we will have sufficient cash from operations and financing sources to meet all required redemptions and other debt obligations coming due. Currently, we expect our 2006 cash payments for capital expenditures to be approximately $70 million. In 2006 and future years, our capacity to make significant capital investments will depend on our ability to continue to generate substantial cash flow from operations and on our ability to obtain adequate financing.

     On March 15, 2006, we entered into a five-year asset-backed credit facility for up to $165 million (“Facility”) with certain European lenders. This Facility is secured by our non-U.S. trade receivables. On March 31, 2006, the amount available to us under this Facility was $130 million, based on eligible non-U.S. trade receivables. We may borrow under the Facility at an interest rate equal to LIBOR plus 2% per annum or at the facility agent’s reference rate, while the undrawn portion is subject to a commitment fee of 0.375% per annum. The terms of the Facility subject us to certain financial and other covenants and cross-default provisions. As of March 31, 2006, there were no amounts outstanding under this Facility.

Critical Accounting Policies and Estimates

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

     An accounting policy is deemed to be critical if it requires an accounting estimate to be made based on assumptions about matters that are highly uncertain at the time the estimate is made, if different estimates reasonably could have been used, or if changes in the estimate that are reasonably likely to occur could materially impact the financial statements. Management believes that other than the adoption of SFAS No. 123R, there have been no significant changes during the three months ended March 31, 2006 to the items that we had disclosed as our critical accounting policies and estimates in Management’s Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal year ended December 31, 2005.

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     Stock-Based Compensation:

          Effective January 1, 2006, we adopted the fair value recognition provisions of SFAS No. 123R, using the modified prospective application transition method, and therefore have not restated prior periods’ results. Under the fair value recognition provisions of SFAS No. 123R, we recognize stock-based compensation net of an estimated forfeiture rate and only recognize compensation cost for those shares expected to vest over the requisite service period of the award. Prior to the adoption of SFAS No. 123R, we accounted for share-based payments under Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” and accordingly, generally recognized compensation expense only when we granted options to non-employees or modified the original terms of options issued to employees.

     Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions that are uncertain at the time of the estimate, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future. In addition, we are required to estimate the expected forfeiture rate and only recognize expense for those shares expected to vest. If our actual forfeiture rate is materially different from our estimate, the stock-based compensation expense could be significantly different from what we have recorded in the current period. See Note 1 of Notes to Condensed Consolidated Financial Statements for a further discussion on stock-based compensation.

Recent Accounting Pronouncements

SFAS No. 154

     In June 2005, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 154, “Accounting Changes and Error Corrections: a Replacement of Accounting Principles Board (“APB”) Opinion No. 20 and FASB Statement No. 3” (“SFAS No. 154”). SFAS No. 154 requires retrospective application for voluntary changes in accounting principle unless it is impracticable to do so. Retrospective application refers to the application of a different accounting principle to previously issued financial statements as if that principle had always been used. SFAS No. 154’s retrospective application requirement replaces APB No 20’s (“Accounting Changes”) requirement to recognize most voluntary changes in accounting principle by including in net income (loss) of the period of the change the cumulative effect of changing to the new accounting principle. SFAS No. 154 defines retrospective application as the application of a different accounting principle to prior accounting periods as if that principle had always been used or as the adjustment of previously issued financial statements to reflect a change in the reporting entity. SFAS No. 154 also redefines “restatement” as the revising of previously issued financial statements to reflect the correction of an error. The Company adopted this standard in the quarter ended March 31, 2006 and the adoption will only impact the Consolidated Financial Statements in periods in which a change in accounting principle is made.

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SFAS No. 151

     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. SFAS No. 151 is effective for inventory costs incurred beginning in 2006. Earlier application is permitted. The provisions of SFAS No. 151 should be applied prospectively. The adoption of this statement in the quarter ended March 31, 2006 did not have a material impact on our Condensed Consolidated Financial Statements.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

     We maintain investment portfolio holdings of various issuers, types and maturities whose values are dependent upon short-term interest rates. We generally classify these securities as available-for-sale, and consequently record them on the balance sheet at fair value with unrealized gains and losses being recorded as a separate part of stockholders’ equity. We do not currently hedge these interest rate exposures. Given our current profile of interest rate exposures and the maturities of our investment holdings, we believe that an unfavorable change in interest rates would not have a significant negative impact on our investment portfolio or Statements of Operations through December 31, 2006. 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 $366 million at March 31, 2006. Approximately $232 million of these borrowings have fixed interest rates. We have approximately $134 million of floating interest rate debt, of which $68 million is euro denominated. We do not hedge against the risk of interest rate changes for our floating rate debt and could be negatively affected should these rates increase significantly. While there can be no assurance that these rates will remain at current levels, we believe that any rate increase will not cause a significant adverse impact to our results of operations, cash flows or to our financial position.

     The following table summarizes our variable-rate debt exposed to interest rate risk as of March 31, 2006. All fair market values are shown net of applicable premium or discount, if any (dollars in thousands):

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													Total
													Variable-rate
													Debt
													Outstanding at
	Payments due by year												March 31,
	2006*		2007		2008		2009		2010		Thereafter		2006
30 day USD LIBOR weighted average interest rate basis (1) Capital Leases	$	3,200	$	3,056	$	—	$	—	$	—	$	—	$	6,256
Total of 30 day USD LIBOR rate debt	$	3,200	$	3,056	$	—	$	—	$	—	$	—	$	6,256
60 day USD LIBOR weighted average interest rate basis (1) Revolving Line of Credit Due 2008	$	—	$	—	$	25,000	$	—	$	—	$	—	$	25,000
Total of 60 day USD LIBOR rate debt	$	—	$	—	$	25,000	$	—	$	—	$	—	$	25,000
90 day USD LIBOR weighted average interest rate basis (1) Capital Leases	$	249	$	—	$	—	$	—	$	—	$	—	$	249
Total of 90 day USD LIBOR rate debt	$	249	$	—	$	—	$	—	$	—	$	—	$	249
360 day USD LIBOR weighted average interest rate basis (1) Senior Secured Term Loan Due 2008	$	3,749	$	5,000	$	3,750	$	—	$	—	$	—	$	12,499
Total of 360 day USD LIBOR rate debt	$	3,749	$	5,000	$	3,750	$	—	$	—	$	—	$	12,499
90 day EURIBOR weighted average interest rate basis (1) Capital Leases	$	15,876	$	20,884	$	8,271	$	3,910	$	—	$	8,797	$	57,738
Total 90 day EURIBOR weighted rate debt	$	15,876	$	20,884	$	8,271	$	3,910	$	—	$	8,797	$	57,738
30/60/90 day EURIBOR interest rate basis (1) Senior Secured Term Loan Due 2007	$	4,566	$	6,088	$	—	$	—	$	—	$	—	$	10,654
Total of 30/60/90 day EURIBOR debt rate	$	4,566	$	6,088	$	—	$	—	$	—	$	—	$	10,654
2-year USD LIBOR interest rate basis (1) (2) Senior Secured Term Loan Due 2007	$	9,954	$	11,492	$	—	$	—	$	—	$	—	$	21,446
Total of 2-year USD LIBOR rate debt	$	9,954	$	11,492	$	—	$	—	$	—	$	—	$	21,446
Total variable-rate debt	$	37,594	$	46,520	$	37,021	$	3,910	$	—	$	8,797	$	133,842

*	Nine months remaining in 2006
(1)	Actual interest rates include a spread over the basis amount.
(2)	Rate is fixed over a three-year term

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     The following table presents the hypothetical changes in interest expense, related to our outstanding borrowings, for the three months ended March 31, 2006, 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).

	Interest expense given an interest								Interest expense given an interest
	ratedecreaseby X basis points						Interest expense with no change in		rateincreaseby X basis points
	150 BPS		100 BPS		50 BPS		interest rate		50 BPS		100 BPS		150 BPS
Interest Expense	$	4,191	$	4,861	$	5,530	$	6,199	$	6,868	$	7,537	$	8,207

     The following table presents the hypothetical changes in fair value in our outstanding convertible notes at March 31, 2006 that are sensitive to the changes in interest rates. The modeling technique used measures the change in fair values arising from hypothetical parallel shifts in the yield curve of plus or minus 50 basis points (“BPS”), 100 BPS and 150 BPS over a twelve-month time horizon. The base value represents the fair market value of the notes (in thousands):

	Valuation of borrowing given an								Valuation of borrowing given an
	interest ratedecreaseby X basis						Valuation with no		interest rateincreaseby X basis
	points						change in interest		points
	150 BPS		100 BPS		50 BPS		rate		50 BPS		100 BPS		150 BPS
Convertible notes	$	146,160	$	145,440	$	144,720	$	144,000	$	143,280	$	142,560	$	141,840

Foreign Currency Risk

     When we take an order denominated in a foreign currency we will receive fewer dollars than we initially anticipated if that local currency weakens against the dollar before we ship our product, which will reduce revenue. Conversely, revenues will be positively impacted if the local currency strengthens against the dollar. In Europe, where our significant operations have costs denominated in European currencies, costs will decrease if the local currency weakens. Conversely, costs will increase if the local currency strengthens against the dollar. The net effect of favorable exchange rates for the three months ended March 31, 2006 compared to the average exchange rates for the three months ended March 31, 2005 resulted in an increase in to income from operations of $14 million (as discussed in this report in the overview section of Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations). This impact is determined assuming that all foreign currency denominated transactions that occurred in the first quarter of 2006 were recorded using the average foreign currency exchange rates for the three months ended March 31, 2005. Sales denominated in foreign currencies were 24% and 23% for the three months ended March 31, 2006 and 2005, respectively. Sales denominated in euros were 23% and 22% for the three months ended March 31, 2006 and 2005, respectively. Sales denominated in yen were 1% for

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both the three months ended March 31, 2006 and 2005, respectively. Costs denominated in foreign currencies, primarily the euro, were approximately 55% and 61% for the three months ended March 31, 2006 and 2005, respectively.

     We also face the risk that our accounts receivables denominated in foreign currencies will be devalued if such foreign currencies weaken quickly and significantly against the dollar. Approximately 22% and 23% of our accounts receivable are denominated in foreign currency as of March 31, 2006 and December 31, 2005, 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 41% and 46% of our accounts payable were denominated in foreign currency as of March 31, 2006 and December 31, 2005, respectively. Approximately 60% of our debt obligations were denominated in foreign currency as of both March 31, 2006 and December 31, 2005.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures.

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

(b) Changes in internal control over financial reporting.

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

PART II OTHER INFORMATION

Item 1. Legal Proceedings

     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. Should we elect to enter into license agreements with other parties or should the other parties resort to litigation, we may be obligated in the future to make payments or to otherwise compensate these third parties which could have an adverse effect on our financial condition or results of operations or cash flows.

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     We currently are 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 our results of operations and financial position. The estimate of the potential impact on our financial position or overall results of operations or cash flow for the legal proceedings described below could change in the future. We have accrued for all losses related to litigation that we consider probable and the loss can be reasonably estimated.

     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 found Agere’s patents invalid. Subsequently, a retrial on one of the patents was granted. While the March 22, 2005 decision is appealable, there can be no appeal until resolution of the retrial.

Item 1A. Risk Factors

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

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

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

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

• fluctuations in currency exchange rates

• the extent of utilization of manufacturing capacity

• fluctuations in manufacturing yields

• the highly competitive nature of our markets

• ability to meet our debt obligations

• availability of additional financing

• the pace of technological change

• natural disasters or terrorist acts

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• political and economic risks

• our ability to maintain good relationships with our customers

• lack of long-term contracts 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

• increased dependence on outside foundries and their ability to meet our volume, quality, and delivery objectives

• assessment of internal controls over financial reporting

• environmental regulations

• personnel changes

• business interruptions

• system integration disruptions

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

• unfunded foreign pension plans.

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

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

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

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requires. Our ability to sustain the successful return to profitability, which began in the fourth quarter of 2005, 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 by 32% from 2000 to approximately $139 billion in 2001. The semiconductor industry began to turn around 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. In 2005, global semiconductor sales increased 7% to $228 billion. Global semiconductor sales in 2006 are expected to increase 8% to $245 billion.

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

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

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

     We have in the past entered into foreign exchange forward contracts to minimize the short-term impact of foreign currency fluctuations on certain foreign currency assets and liabilities. In addition, we have periodically hedged certain anticipated foreign currency cash flows. During 2005, we incurred a realized loss of $30 million as a result of anticipated and hedged balance sheet exposures that were larger than those that materialized. We do not have plans to hedge against either of these risks in the foreseeable future, but if we should, our attempts to hedge against these risks may not be successful, resulting in an adverse impact on our net income. In addition, our net income may be subject to greater foreign currency gains and losses on certain foreign currency assets and liabilities during times in which we have not entered into foreign exchange forward contracts.

     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.

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     We currently manufacture our products at our facilities in Colorado Springs, Colorado; Heilbronn, Germany; Rousset, France; Grenoble, 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. In light of losses incurred from 2001 through 2005, 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 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.

     During economic downturns in our industry, expensive manufacturing machinery may be underutilized or may need to be sold off, possibly at significantly discounted prices, in order to reduce costs, although we may continue to be liable to make payments on debt incurred to finance the purchase of such equipment. At the same time, employee and other manufacturing costs may need to be reduced.

     Also, during economic downturns in our industry we may have to reduce our wafer fabrication capacity in order to reduce costs. However, 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. In December 2005, we sold our Nantes, France fabrication facility, and the related foundry activities, to XbyBus SAS. The facility was owned by us since 1998 and was comprised of five buildings totaling 131,000 square feet, manufacturing BiCMOS, CMOS and non-volatile technologies.

     In January 2000, we acquired the Irving, Texas wafer fabrication intending to commence commercial production in the second half of 2002. However, given the market conditions, we reassessed our overall manufacturing capacity against potential anticipated demand and decided to close the facility in 2002. The facility was placed on the market in August 2002. While this facility was classified as held for sale, nearly all of the fabrication equipment was either re-deployed to other manufacturing facilities owned by us or sold. We have recorded asset impairment charges in the years ended December 31, 2003 and 2005 to write down asset values to the lower of their then fair value or original net book value. Such writedowns for impairment were based on management’s estimates which considered an independent appraisal, among other factors, in determining fair market value.

     We continue to evaluate the existing restructuring and asset impairment reserves related to previously implemented restructuring plans. As a result, there may be additional restructuring charges or reversals of previously established reserves. However, we may incur additional restructuring and asset impairment charges in connection with any restructuring

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plans adopted in the future. Any such restructuring or asset impairment charges recorded in the future could significantly harm our business and operating results.

     IF WE ARE UNABLE TO 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 0.065-microns.

     Fabrication of our integrated circuits is a highly complex and precise process, requiring production in a tightly controlled, clean environment. Minute impurities, difficulties in the fabrication process, defects in the masks used to print circuits on a wafer or other factors can cause a substantial percentage of wafers to be rejected or numerous die on each wafer to be nonfunctional. 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, Philips, Samsung, Sharp, Spansion, STMicroelectronics, Texas Instruments and Toshiba. Some of these competitors have substantially greater financial, technical, marketing and management resources than we do. As we have introduced new products we are increasingly competing directly with these companies, and we may not be able to compete effectively. We also compete with emerging companies that are attempting to sell products in specialized markets that our products address. We compete principally on the basis of the technical innovation and performance of our products, including their speed, density, power usage, reliability and specialty packaging alternatives, as well as on price and product availability. During the last several years, we have experienced significant price competition in several business segments, especially in our nonvolatile memory segment for EPROM, Serial EEPROM, and Flash memory products, as well as in our commodity microcontrollers and smart cards. We expect continuing competitive pressures in our markets from existing competitors and new entrants, new technology and

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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.

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

     As of March 31, 2006, our long term convertible notes and long term debt less current portion was $117 million compared to $133 million at December 31, 2005. Our long-term debt (less current portion) to equity ratio was 0.1 at March 31, 2006 and December 31, 2005. 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 ability to raise additional financing in the future and on our future performance and ability to generate substantial cash flow from operations, which will be subject to financial, business and other factors affecting our operations, many of which are beyond our control. If we are unable to meet debt obligations or otherwise are obliged to repay any debt prior to its due date, our available cash would be depleted, perhaps seriously, and our ability to fund operations harmed. In addition, our ability to service long-term debt in the U.S. or to obtain cash for other needs from our foreign subsidiaries may be structurally impeded, as a substantial portion of our operations are conducted through our foreign subsidiaries. Our cash flow and ability to service debt are partially dependent upon the liquidity and earnings of our subsidiaries as well as the distribution of those earnings, or repayment of loans or other payments of funds by those subsidiaries, to the U.S. parent corporation. These foreign subsidiaries are separate and distinct legal entities and may have limited or no obligation, contingent or otherwise, to pay any amounts to us, whether by dividends, distributions, loans or any other form. However, the

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U.S. parent corporation owes much of our consolidated long-term debt, including our outstanding issue of convertible notes.

     At the option of the holders of our zero coupon convertible notes, due 2021 (“2021 Notes”) on May 23, 2006, May 23, 2011, and May 23, 2016, we may be required to repurchase the 2021 Notes at prices equal to the issue price plus accrued original issue discount through the date of repurchase. As a result of this repurchase feature these notes are included within current liabilities on our Condensed Consolidated Balance Sheets. The accreted value on the 2021 Notes on May 23, 2006 is expected to be $145 million. We may elect to pay the repurchase price in cash, in shares of common stock or in any combination of the two. While we recently entered into a five-year asset backed facility for up to $165 million, the terms of financing available to us in the future may not be attractive and the timing of the availability of capital is uncertain and is dependent, in part, on market conditions that are difficult to predict and are outside of our control.

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

     Semiconductor companies like us, that maintain their own fabrication facilities have substantial capital requirements. We intend to continue to make capital investments to support new products and manufacturing processes that achieve manufacturing cost reductions and improved yields. Currently, we expect our total 2006 capital expenditures to be approximately $70 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.

     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

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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 terrorist attacks on the World Trade Center and the Pentagon in 2001, certain insurance coverage has either been reduced or made subject to additional conditions by our insurance carriers, and we have not been able to maintain all necessary insurance coverage at reasonable cost. Instead, we have relied to a greater degree on self-insurance. For example, we now self-insure property losses up to $10 million per event. Our headquarters, some 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 manufacture and 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 the U.S. accounted for approximately 86%, 83% and 82% of net revenues in 2005, 2004 and 2003. Sales to customers outside the U.S. accounted for approximately 84% and 87% of our net revenues for the three months ended March 31, 2006 and 2005, respectively. We expect that revenues derived from international sales will continue to represent a significant portion of net revenues. International sales and operations are subject to a variety of risks, including:

• greater difficulty in protecting intellectual property

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

• longer collection cycles

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

• general economic and political conditions in these foreign markets.

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     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 78%, 73% and 72% of our net revenues in 2005, 2004 and 2003 were denominated in U.S. dollars. During the three months ended March 31, 2006 and 2005, approximately 76% and 77%, respectively, of our net revenues 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 53%, 48% and 49% of net revenues were generated in Asia in 2005, 2004 and 2003. During the three months ended March 31, 2006 and 2005, approximately 49% and 52%, respectively, of our net revenues were generated in Asia.

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

     When we take an order denominated in a foreign currency we may receive fewer dollars than initially anticipated if that local currency weakens against the dollar before we collect our funds. Conversely, when we incur a cost denominated in a foreign currency we may pay more dollars than initially anticipated if that local currency strengthens against the dollar before we pay the costs. In addition to reducing revenues or increasing our costs, this risk can negatively affect our operating results. In Europe, where our significant operations have costs denominated in European currencies, a negative impact on expenses can be partially offset by a positive impact on revenues. Sales denominated in European currencies and yen as a percentage of net revenues were 21% and 1% in 2005, 25% and 1% in 2004 and 26% and 2% in 2003, respectively. Sales denominated in European currencies and yen as a percentage of net revenues were 23% and 1%, respectively, during the three months ended March 31, 2006 and 22% and 1%, respectively, during the three months ended March 31, 2005. Operating expenses denominated in foreign currencies as a percentage of total operating expenses, primarily the euro, were approximately 58% in 2005, 59% in 2004 and 53% in 2003. During the three months ended March 31, 2006 and 2005, operating expenses denominated in foreign currencies as a percentage of total operating expenses, primarily the euro, were approximately 55% and 61%, respectively. We also face the risk that our accounts receivable denominated in foreign currencies could be devalued if such foreign currencies weaken quickly and significantly against the dollar. Conversely we face the risk that our accounts payable denominated in foreign currencies could increase in value if such foreign currencies strengthen against the dollar.

     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

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customers may not continue to place orders with us in the future at the same levels as in prior periods.

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

     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

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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.

     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.

     WE EXPECT TO INCREASE DEPENDENCE ON OUTSIDE FOUNDRIES WHICH MAY NOT HAVE ADEQUATE CAPACITY TO FULFILL OUR NEEDS AND WHICH MAY NOT MEET OUR QUALITY AND DELIVERY OBJECTIVES OR WHICH MAY ABANDON NEEDED FABRICATION PROCESSES.

     We expect to increase our utilization of outside foundries to expand our capacity in the future, especially for high volume commodity type products and certain aggressive technology ASIC products. Reliance on outside foundries to fabricate wafers involves significant risks, including reduced control over quality and delivery schedules, a potential lack of capacity, and a risk the subcontractor may abandon the fabrication processes we need, even if the process is not economically viable. We hope to mitigate these risks with a strategy of qualifying multiple

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subcontractors. However, there can be no guarantee that any strategy will eliminate these risks. Additionally, since most of such outside foundries are located in foreign countries, we are subject to certain risks generally associated with contracting with foreign manufacturers, including currency exchange fluctuations, political and economic instability, trade restrictions and changes in tariff and freight rates. Accordingly, we may experience problems in timelines and the adequacy or quality of product deliveries, any of which could have a material adverse effect on our results of operations.

     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 constituted material weaknesses. Although these control deficiencies were remediated as of December 31, 2005 (as more fully described in Item 9A of our Annual Report on Form 10-K), evaluations of the effectiveness of our internal controls in the future may lead our management to determine that internal control over financial reporting is no longer effective. Such conclusions may result from our failure to implement controls for changes in our business, or a deterioration in the degree of compliance with our policies or procedures. For example, rules and regulations affecting our financial reporting that are adopted by regulatory agencies may require a greater degree of testing than may originally be planned. Failure to properly and sufficiently test our internal controls for such newly adopted rules or regulations may result in the reporting of incorrect financial results.

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

     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

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

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

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

     We also have a preferred shares rights agreement with Equiserve Trust Company, N.A., as rights agent, dated as of September 4, 1996, amended and restated on October 18,

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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 HAS A SIGNIFICANT IMPACT ON OUR NET INCOME.

     On January 1, 2006 we adopted Statement of Financial Accounting Standards No. 123 (revised 2004), “Share-Based Payment,” (“SFAS No. 123R”) which requires the measurement and recognition of compensation expense for all share-based payment awards made to our employees and directors including employee stock options and employee stock purchases related to the Employee Stock Purchase Plan (“ESPP”) based on estimated fair values. Stock-based compensation expense recognized under SFAS No.123R for the three months ended March 31, 2006 was $3 million which consisted of stock-based compensation expense related to employee stock options ($2 million) and ESPP and other stock-based compensation ($1 million).

     We estimate that income from operations in 2006 will be reduced by stock-based compensation expense ranging from $11 million to $13 million due to the adoption of SFAS No. 123R. However, the actual impact of adopting SFAS No. 123R in 2006 could differ from this estimate depending upon the number and timing of options granted during 2006, as well as their vesting period, vesting criteria and other assumptions that impact the Black-Scholes option pricing model. As such, actual stock-based compensation expense may differ materially from this estimate.

     Determining the appropriate fair value model and calculating the fair value of share-based payment awards require the input of highly subjective assumptions that are uncertain at the time of the estimate, including the expected life of the share-based payment awards and stock price volatility. The assumptions used in calculating the fair value of share-based payment awards represent management’s best estimates, but these estimates involve inherent uncertainties and the application of management judgment. As a result, if factors change and we use different assumptions, our stock-based compensation expense could be materially different in the future.

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     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 $45 million at March 31, 2006 and $44 million at December 31, 2005. 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 2006 is expected to be approximately $1 million. Should legislative regulations require complete or partial funding of these plans in the future, it could negatively impact our cash position and operating capital.

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

     None.

Item 3. Defaults Upon Senior Securities

     None.

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

     None.

Item 5. Other Information

     As previously reported in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on May 10, 2006, filed with the Securities and Exchange Commission on April 7, 2006, our Board of Directors approved the following on April 6, 2006:

     During 2006, each non-employee Director will receive a cash retainer of $40,000 per year (pro rated for Directors that do not serve the entire year), paid in installments, for service on the Board of Directors and its Committees. In addition, during 2006 each non-employee Director will receive $1,500 for each Board meeting attended, and $1,000 for each committee meeting attended for each committee on which the non-employee Director serves. Also, non-employee Directors who serve as committee chairs receive an annual retainer for such service in the amount of $15,000 for the Chair of the Audit Committee and $10,000 for the chair of other Board committees. Non-employee Directors are reimbursed for their expenses in connection with their attendance at Board and Committee meetings and their out-of-pocket business expenses associated with service on the Board of Directors and its Committees.

     Beginning in 2006, upon joining the Board of Directors, non-employee Directors will receive a nonstatutory stock option for the purchase of 50,000 shares of our common stock at an exercise price per share equal to the fair market value per share on that date. Such options will vest and become exercisable over four years. Beginning in 2006, annually at the April

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Board meeting, non-employee Directors will also be granted a nonstatutory stock option for the purchase of 15,000 shares of our common stock at an exercise price per share equal to the fair market value per share on that date. Such options will vest and become exercisable monthly at 1/12 per month until fully vested one year after grant.

SFAS No. 123R Adjustment to Previously Released Financial Information

     Our press release dated April 25, 2006 announcing financial results for the three-months ended March 31, 2006 incorrectly stated the effect of stock-based compensation expense recognized in our Condensed Consolidated Financial Statements for such period. Total stock-based compensation expense as previously stated in such press release was $3.4 million. This amount was subsequently reduced by $0.4 million and capitalized into inventory, as it was determined that this portion of our stock-based compensation as recorded under SFAS No. 123R was excluded from inventory. As a result, net income as previously stated at $9.2 million increased to $9.6 million. See Note 1 of Notes to Condensed Consolidated Financial Statements for additional information regarding the impact of SFAS No. 123R.

Item 6. Exhibits

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

10.1	Facility Agreement, dated as of March 15, 2006, by and among the Registrant, Atmel Sarl, Atmel Switzerland Sarl, the financial institutions listed therein, and Bank of America, N.A., as facility agent and security agent (which is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on March 21, 2006).
10.2	Description of Fiscal 2005 Bonuses (which is incorporated herein by reference to Item 1.01 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on April 6, 2006).
10.3	Description of Director Compensation (which is incorporated herein by reference to Part II Item 5 of this Quarterly Report on Form 10-Q).
31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).
31.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

ATMEL CORPORATION(Registrant)

May 10, 2006	/s/ GEORGE PERLEGOS     George Perlegos
	President & Chief Executive Officer
	(Principal Executive Officer)

May 10, 2006	/s/ ROBERT AVERY     Robert Avery
	Vice President Finance &
	Chief Financial Officer
	(Principal Financial and Accounting Officer)

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EXHIBIT INDEX

10.1	Facility Agreement, dated as of March 15, 2006, by and among the Registrant, Atmel Sarl, Atmel Switzerland Sarl, the financial institutions listed therein, and Bank of America, N.A., as facility agent and security agent (which is incorporated herein by reference to Exhibit 10.1 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on March 21, 2006).
10.2	Description of Fiscal 2005 Bonuses (which is incorporated herein by reference to Item 1.01 to the Registrant’s Current Report on Form 8-K (Commission File No. 0-19032) filed on April 6, 2006).
10.3	Description of Director Compensation (which is incorporated herein by reference to Part II Item 5 of this Quarterly Report on Form10-Q).
31.1	Certification of Chief Executive Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).
31.2	Certification of Chief Financial Officer pursuant to Securities Exchange Act Rules 13a-14(a) and 15d-14(a).
32.1	Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.