You should read the following discussion and analysis in conjunction with the Condensed Consolidated Financial Statements and related Notes thereto contained elsewhere in this Quarterly Report on Form 10-Q. 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 review and consider carefully the various disclosures made by us in this Quarterly Report on Form 10-Q and in our other reports filed with the SEC, including our Annual Report on Form 10-K for the year ended December 31, 2011. Atmel's Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to such reports are available, free of charge, through the "Investors" section of www.atmel.com. We make these reports available as soon as reasonably practicable after we electronically file them with, or furnish them to, the SEC. The SEC also maintains a website located at www.sec.gov that contains Atmel's reports filed with, or furnished to, the SEC. The information disclosed on our website is not incorporated herein and does not form a part of this Quarterly Report on Form 10-Q.

This discussion contains forward-looking statements within the meaning of
Section 21E of the Securities Exchange Act of 1934, particularly statements regarding our outlook for fiscal 2012 and beyond, the expansion of the market for microcontrollers, revenue for our maXTouch™ products, expectations for our new XSense™ products, our gross margin, anticipated revenue by geographic area, operating expenses and capital expenditures, cash flow and liquidity measures, factory utilization, new product introductions, access to independent foundry capacity and the quality issues associated with the use of third party foundries, the effects of our strategic transactions and restructuring efforts, estimates related to the amount and/or timing of expensing unearned stock-based compensation expense and similar estimates related to our performance-based restricted stock units, our expectations regarding tax matters, the outcome of litigation (including intellectual property litigation in which we may be involved or in which our customers may be involved, especially in the mobile device sector) and the effects of exchange rates and our ongoing efforts to manage exposure to exchange rate fluctuation. Our actual results could differ materially from those projected in any 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 Part II Item 1A - Risk Factors, and elsewhere in this Quarterly Report on Form 10-Q. Generally, the words "may," "will," "could," "should," "would," "anticipate," "expect," "intend," "believe," "seek," "estimate," "plan," "view," "continue," the plural of such terms, the negatives of such terms, or other comparable terminology and similar expressions identify forward-looking statements. The information included in this Quarterly Report on Form 10-Q is provided as of the filing date with the Securities and Exchange Commission and future events or circumstances could differ significantly from the forward-looking statements included herein. Accordingly, we caution readers not to place undue reliance on such statements. We undertake no obligation to update any forward-looking statements in this Quarterly Report on Form 10-Q.

OVERVIEW

We are one of the world's leading designers, developers and suppliers of microcontrollers, which are self-contained computers-on-a-chip. Microcontrollers are generally less expensive, consume less power and offer enhanced programming capabilities compared to traditional microprocessors. Our microcontrollers and related products are used in many of the world's leading smart phones, tablet devices, e-readers and other consumer and industrial electronics to provide core functionality for touch sensing, sensor management, security, wireless and communication applications and battery management. We offer an extensive portfolio of capacitive touch products that integrate our microcontrollers with fundamental touch-focused intellectual property ("IP") we have developed and we continue to leverage our market and technology advantages to expand our product portfolio within the touch-related eco-system. Toward that end, and as a natural extension of our touch controller business, earlier this year we announced our XSense products, a new type of touch sensor based on proprietary metal mesh technologies. We also design and sell products that are complementary to our microcontroller business, including nonvolatile memory and flash memory products, radio frequency and mixed-signal components and application specific integrated circuits. Our semiconductors also enable applications in many other fields, such as smart-metering for utility monitoring and billing, LED based lighting systems, buttons, sliders and wheels found on the touch panels of appliances, various aerospace, industrial, and military products and systems, and electronic-based automotive components, such as keyless ignition, access, engine control, lighting and entertainment systems, for standard and hybrid vehicles. Over the past several years, we transitioned our business to a "fab-lite" model, lowering our fixed costs and capital investment requirements, and we currently own and operate one wafer manufacturing facility in Colorado Springs, Colorado.

Net revenue was lower in the three and nine months ended September 30, 2012, compared to net revenue in the three and nine months ended September 30, 2011, as we were adversely affected by a slowdown in the global economy and excess inventories held by our distributors, particularly in Asia. Lower sales resulted in lower utilization rates for our Colorado Springs wafer facility, which increased our wafer costs and, as a consequence, adversely affected our gross margin. In response to lower sales, we implemented cost reductions throughout our business in the second quarter of 2012, including labor cost reductions. We expect to continue to monitor our cost structure to ensure that it is properly aligned with global economic conditions.

During the three and nine months ended September 30, 2012, we repurchased 3.8 million and 19.4 million shares of our common stock, respectively, in the open market and subsequently retired those shares under our existing stock repurchase program. As of September 30, 2012, $143.4 million remained available for repurchasing common stock under this program.

On September 28, 2012, we completed the sale of our serial flash product lines to Adesto. Under the terms of the sale agreement, we transferred certain assets to Adesto, and Adesto assumed certain liabilities, in return for cash consideration of $25.0 million. We also granted Adesto an exclusive option, exercisable prior to November 15, 2012, to purchase our remaining $7.0 million of serial flash inventory. Revenue for our serial flash product lines was $37.4 million for the nine months ended September 30, 2012 compared to $69.1 million for the nine months ended September 30, 2011.

RESULTS OF OPERATIONS

                                       Three Months Ended                                    Nine Months Ended
                          September 30, 2012        September 30, 2011         September 30, 2012         September 30, 2011
                                                   (in thousands, except percentage of net revenue)
Net revenue             $    360,990     100  %   $    479,375     100  %   $    1,087,027    100  %   $    1,419,444    100  %
Gross profit                 155,526      43  %        240,391      50  %          469,780     43  %          723,576     51  %
Research and                  59,966      17  %         64,160      13  %          192,647     18  %          191,984     14  %
development
Selling, general and          68,036      19  %         68,467      14  %          208,881     19  %          209,593     15  %
administrative
Acquisition-related            1,530       -  %          1,019       -  %            5,442      1  %            3,069      -  %
charges
Restructuring (credit)        (1,404 )     -  %              -       -  %           12,950      1  %           21,210      1  %
charges
Credit from reserved               -       -  %              -       -  %          (10,689 )   (1 )%                -      -  %
grant income
Gain on sale of assets             -       -  %        (33,428 )    (7 )%                -      -  %          (35,310 )   (2 )%
Income from operations  $     27,398       8  %   $    140,173      29  %   $       60,549      6  %   $      333,030     23  %

Net Revenue

Our net revenue totaled $361.0 million for the three months ended September 30, 2012, a decrease of 25%, or $118.4 million, from $479.4 million in net revenue for the three months ended September 30, 2011. Net revenue was $1,087.0 million for the nine months ended September 30, 2012, a decrease of 23%, or $332.4 million, from $1,419.4 million for the nine months ended September 30, 2011. Revenue for the three and nine months ended September 30, 2012 was lower than the comparable periods for 2011 primarily as a result of lower sales throughout our distribution channel, particularly in Asia. We also continued to see softer global demand in the consumer and industrial markets, as the economic slowdown affected our customers and their purchasing requirements.

Net revenue denominated in Euros was 16% and 19% of total net revenue for the three months ended September 30, 2012 and 2011, respectively, and 20% and 21% for the nine months ended September 30, 2012 and 2011, respectively. Average exchange rates utilized to translate foreign currency revenues and expenses in Euros were approximately 1.24 and 1.43 Euro to the dollar for the three months ended September 30, 2012 and 2011, respectively, and 1.29 and 1.38 Euro to the dollar for the nine months ended September 30, 2012 and 2011, respectively. Our net revenue for the three months ended September 30, 2012 would have been approximately $9.2 million higher had the average exchange rate in the current quarter remained the same as the average exchange rate in effect for the three months ended September 30, 2011. Our net revenue for the nine months ended September 30, 2012 would have been approximately $18.4 million higher had the average exchange rate in the current nine-month period remained the same as the rate in effect for the nine months ended September 30, 2011.

Net Revenue - By Operating Segment

Our net revenue by operating segment is summarized as follows:

                           Three Months Ended
                    September 30,      September 30,        Change       % Change
                         2012               2011
                               (in thousands, except for percentages)
Microcontroller    $       226,125    $       301,275    $  (75,150 )     (25 )%
Nonvolatile Memory          43,948             65,922       (21,974 )     (33 )%
RF and Automotive           43,289             52,021        (8,732 )     (17 )%
ASIC                        47,628             60,157       (12,529 )     (21 )%
Total net revenue  $       360,990    $       479,375    $ (118,385 )     (25 )%

                            Nine Months Ended
                    September 30,      September 30,       Change      % Change
                         2012               2011
                              (in thousands, except for percentages)
Microcontroller    $       663,993    $       897,293   $ (233,300 )    (26 )%
Nonvolatile Memory         138,871            200,557      (61,686 )    (31 )%
RF and Automotive          134,363            155,445      (21,082 )    (14 )%
ASIC                       149,800            166,149      (16,349 )    (10 )%
Total net revenue  $     1,087,027    $     1,419,444   $ (332,417 )    (23 )%

Microcontroller

Microcontroller segment net revenue decreased 25% to $226.1 million for the three months ended September 30, 2012 from $301.3 million for the three months ended September 30, 2011. Microcontroller segment net revenue decreased 26% to $664.0 million for the nine months ended September 30, 2012 from $897.3 million for the nine months ended September 30, 2011. Revenue decreased primarily due to weaker demand in industrial and consumer markets, with ARM and maXTouch products most affected. Microcontroller net revenue represented 63% and 61% of total net revenue for the three and nine months ended September 30, 2012, respectively, compared to 63% of total net revenue for both the three and nine months ended September 30, 2011. Inventory held by distributors of our microcontroller products decreased significantly for the three and nine months ended September 30, 2012 as compared to the three and nine months ended September 30, 2011.

Nonvolatile Memory

Nonvolatile Memory segment net revenue decreased 33% to $43.9 million for the three months ended September 30, 2012 from $65.9 million for the three months ended September 30, 2011. Nonvolatile Memory segment net revenue decreased 31% to $138.9 million for the nine months ended September 30, 2012 from $200.6 million for the nine months ended September 30, 2011. The decline in our memory business resulted primarily from reduced market demand, a weaker pricing environment and the end of life for several flash products, including Serial EE and Serial Flash products, which saw revenue decrease by 26% and 38%, respectively, for the three months ended September 30, 2012 compared to the same period in 2011. Revenue from Serial EE and Serial Flash products decreased by 22% and 46%, respectively, for the nine months ended September 30, 2012 compared to the same period in 2011. On September 28, 2012 we sold our serial flash product lines to Adesto and discontinued those products. Revenue for our serial flash product lines was $37.4 million for the nine months ended September 30, 2012 compared to $69.1 million for the nine months ended September 30, 2011.

RF and Automotive

RF and Automotive segment net revenue decreased 17% to $43.3 million for the three months ended September 30, 2012 from $52.0 million for the three months ended September 30, 2011. RF and Automotive segment net revenue decreased 14% to $134.4 million for the nine months ended September 30, 2012 from $155.4 million for the nine months ended September 30, 2011. This decrease was primarily related to continued decline in demand for our non-core radio frequency products within this segment during the first nine months of 2012, related generally to adverse macro-economic conditions and seasonality effects within the automotive sector, partially offset by an increase of 7% in net revenue from sales of our high voltage products, which are used primarily in automotive applications.

ASIC

ASIC segment net revenue decreased 21% to $47.6 million for the three months ended September 30, 2012 from $60.2 million for the three months ended September 30, 2011. ASIC segment net revenue decreased 10% to $149.8 million for the nine months ended September 30, 2012 from $166.1 million for the nine months ended September 30, 2011. Our military and aerospace business revenue, which is approximately 21% of overall ASIC revenue, decreased approximately 26% during the nine months ended September 30, 2012 compared to the nine months ended September 30, 2011 primarily from reduced market demand.

Net Revenue by Geographic Area

Our net revenue by geographic area for the three and nine months ended September 30, 2012, compared to the same period in 2011, is summarized in the table below. Revenue is attributed to regions based on the location to which we ship. See Note 9 of Notes to Condensed Consolidated Financial Statements for further discussion.

                          Three Months Ended
                   September 30,      September 30,        Change       % Change
                        2012               2011
                              (in thousands, except for percentages)
Asia              $       222,642    $       300,629    $  (77,987 )     (26 )%
Europe                     82,218            113,878       (31,660 )     (28 )%
United States              49,757             57,254        (7,497 )     (13 )%
Other*                      6,373              7,614        (1,241 )     (16 )%
Total net revenue $       360,990    $       479,375    $ (118,385 )     (25 )%



                           Nine Months Ended
                   September 30,      September 30,        Change       % Change
                        2012               2011
                              (in thousands, except for percentages)
Asia              $       640,587    $       855,298    $ (214,711 )     (25 )%
Europe                    278,103            351,757       (73,654 )     (21 )%
United States             146,340            192,109       (45,769 )     (24 )%
Other*                     21,997             20,280         1,717         8  %
Total net revenue $     1,087,027    $     1,419,444    $ (332,417 )     (23 )%


_________________________________________

Net revenue outside the United States accounted for 86% and 88% of our net revenue for the three months ended September 30, 2012 and 2011, respectively, and 87% and 86% for the nine months ended September 30, 2012 and 2011, respectively.

Our net revenue in Asia decreased $78.0 million, or 26%, for the three months ended September 30, 2012, compared to the same period in 2011, and decreased $214.7 million, or 25%, for the nine months ended September 30, 2012, compared to the same period in 2011. The decrease in this region for the three months and the six months ended September 30, 2012, compared to the three months and nine months ended September 30, 2011 was primarily due to lower shipments of our microcontroller products as result of weaker demand in industrial and consumer markets, with ARM and maXTouch products most affected. In the three months ended September 30, 2012 our distributors in Asia reduced their inventory of our products by 30% as compared to the three months ended June 30, 2012. Net revenue for the Asia region was 62% and 59% of total net revenue for the three months and nine months ended September 30, 2012, respectively, compared to 63% and 60% of total net revenue for the three months and nine months ended September 30, 2011, respectively.

Our net revenue in Europe decreased $31.7 million, or 28%, for the three months ended September 30, 2012, compared to the three months ended September 30, 2011 and decreased $73.7 million, or 21% for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. The decrease in this region for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011 was primarily a result of the continued decline in industrial markets. Net revenue for the Europe region was 23% and 26% of total net revenue for the three and nine months ended September 30, 2012, respectively, compared to 24% and 25% of total net revenue for the three and nine months ended September 30, 2011, respectively.

Our net revenue in the United States decreased by $7.5 million, or 13%, for the three months ended September 30, 2012, compared to the three months ended September 30, 2011 and decreased by $45.8 million, or 24%, for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. This decrease resulted from a continued decline in industrial markets, primarily in the markets for energy related products. Net revenue for the United States region was 14% and 13% of total net revenue for the three and nine months ended September 30, 2012, respectively, compared to 12% and 14% of total net revenue for the three months and nine months ended September 30, 2011, respectively.

Revenue and Costs - Impact from Changes to Foreign Exchange Rates

Changes in foreign exchange rates have historically had an effect on our net revenue and operating costs. Net revenue denominated in foreign currencies was 16% and 19% of our total net revenue for the three months ended September 30, 2012 and 2011, respectively, and 20% and 21% of our total net revenue for the nine months ended September 30, 2012 and 2011, respectively.

Costs denominated in foreign currencies were 15% and 18% of our total costs for the three months ended September 30, 2012 and 2011, respectively, and 20% and 19% of our total costs for the nine months ended September 30, 2012 and 2011,

respectively.

Average exchange rates utilized to translate foreign currency revenue and expenses in Euros were approximately 1.24 and 1.43 Euros to the dollar for the three months ended September 30, 2012 and 2011, respectively, and 1.29 and 1.38 Euros to the dollar for nine months ended September 30, 2012 and 2011, respectively.

For the three months ended September 30, 2012, changes in foreign exchange rates had an unfavorable overall effect on our operating results. Our net revenue and operating expenses for the three months ended September 30, 2012 would have been approximately $9.2 million higher and $5.7 million higher, respectively, had the average exchange rate in the current year remained the same as the average rate in effect for the three months ended September 30, 2011. Our income from operations would have been approximately $3.5 million higher had the average exchange rate in the three months ended September 30, 2012 remained the same as the average exchange rate in the three months ended September 30, 2011.

For the nine months ended September 30, 2012, changes in foreign exchange rates had an unfavorable overall effect on our operating results. Our net revenue and operating expenses for the nine months ended September 30, 2012 would have been approximately $18.4 million higher and $13.1 million higher, respectively, had the average exchange rate in the current year remained the same as the average rate in effect for the nine months ended September 30, 2011. Our income from operations would have been approximately $5.3 million higher had the average exchange rate in the nine months ended September 30, 2012 remained the same as the average exchange rate in the nine months ended September 30, 2011.

There remains ongoing uncertainty regarding the future of the Euro as a common currency and the Eurozone. While we continue to monitor the situation, the elimination of the Euro as a common currency, the withdrawal of member states from the Eurozone or other events affecting the liquidity, volatility or use of the Euro could have a significant effect on our revenue and operations.

Gross Margin

Gross margin declined to 43.1% and 43.2% for the three and nine months ended September 30, 2012, respectively, compared to 50.1% and 51.0% for the three and nine months ended September 30, 2011, respectively. Gross margin in the three and nine months ended September 30, 2012 was adversely affected by lower sales, which resulted in lower utilization rates at our Colorado Springs wafer facility, and a weaker pricing environment.

Inventory decreased to $335.8 million at September 30, 2012 from $377.4 million at December 31, 2011 primarily related to the sale of our serial flash product lines to Adesto. Our inventory levels, and related write-downs, may require further adjustments during the remainder of 2012 to reflect revised demand forecasts or product lifecycles. Inventory adjustments, if undertaken, may affect our results of operations, including gross margin, depending on the nature of those adjustments. If the demand for certain semiconductor products declines or does not materialize as we expect, we could be required to record additional write-downs, which would adversely affect our gross margin.

For the nine months ended September 30, 2012, we manufactured approximately 57% of our products in our own wafer fabrication facility compared to 51% for the nine months ended September 30, 2011.

Our cost of revenue includes the costs of wafer fabrication, assembly and test operations, inventory write-downs, royalty expense, freight costs and stock compensation expense. Our gross margin as a percentage of net revenue fluctuates depending on product mix, manufacturing yields, utilization of manufacturing capacity, reserves for our excess and obsolete inventory, and average selling prices, among other factors.

Research and Development

Research and development ("R&D") expenses decreased 7%, or $4.2 million, to $60.0 million for the three months ended September 30, 2012 from $64.2 million for the three months ended September 30, 2011. Research and development ("R&D") expenses remained relatively flat at $192.6 million for the nine months ended September 30, 2012 compared to $192.0 million for the nine months ended September 30, 2011.

R&D expenses for the three months ended September 30, 2012 decreased compared to the three months ended September 30, 2011 primarily due to reduced stock-based compensation expense as well as lower product development staffing related costs. In addition, R&D expenses for the three months ended September 30, 2012, were favorably affected by approximately $3.1 million due to foreign exchange rate fluctuations, compared to rates in effect and the related expenses for the three months ended September 30, 2011.

R&D expenses for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011 increased slightly, primarily due to higher employee related expenses related to product development staffing and increased stock-based compensation expense, offset by an increase in R&D grants. In addition, R&D expenses for the nine months ended September 30, 2012, were favorably affected by approximately $8.2 million due to foreign exchange rate fluctuations, compared to rates in effect and the related expenses incurred for the nine months ended September 30, 2011.

As a percentage of net revenue, R&D expenses totaled 17% and 18% for the three and nine months ended September 30, 2012, respectively, compared to 13% and 14% for the three and nine months ended September 30, 2011, respectively.

Our internally developed process technologies are an important part of new product development. We continue to invest in developing process technologies emphasizing wireless, high voltage, analog, digital, and embedded memory manufacturing processes. Our technology development groups, in partnership with certain external foundries, are developing new and enhanced fabrication processes, including architectures utilizing advanced processes at the 65 nanometer line width node. We believe this investment allows us to bring new products to market faster, add innovative features and achieve performance improvements. We believe that continued strategic investments in process technology and product development are essential for us to remain competitive in the markets we serve.

Selling, General and Administrative

Selling, general and administrative ("SG&A") expenses remained relatively flat for the three and nine months ended September 30, 2012, compared to the three and nine months ended September 30, 2011. . . .