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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 0-24758

Micro Linear Corporation

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value per share

(Title of Class)

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

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

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

      The aggregate market value of the Common Stock held by non-affiliates of the Company, as of June 28, 2002 (the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing price on the Nasdaq National Market on such date), was approximately $32,211,049. Shares of Common Stock held by each executive officer and director and shares held by other individuals and entities based on Schedule 13G filings have been excluded, in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

      The number of shares of the Registrant’s Common Stock outstanding as of March 15, 2003, net of shares held in treasury, was 12,195,298.

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PART I

      When used in this Report, the words “expects”, “anticipates”, “estimates”, “believes”, “plans”, and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements regarding the growth of markets for our digital wireless solutions, types of radios and basebands, our ability to become a leading provider of wireless solutions, our ability to become a major provider of 5.8 GHz transceivers and power amplifiers, our ability to offer a complete semiconductor suite or modular solution to our customer base, our ability to establish strategic relationships with industry leading companies and the benefits, if any, of such relationships, our ability to develop RF modules and the benefits and market acceptance of such products, our ability to maintain a competitive market advantage in the delivery of our products, our beliefs regarding the growth of the market for wireless consumer electronics, communications and industrial products, the potential features and benefits of our products, including our transceivers, new wireless products for the industrial segment, pre-engineered radio solutions in modular form and silicon media conversion devices for Ethernet networks, the sources of our future revenue and concentration of customers, the competitive advantages of our core technologies and our dependence on such technology to succeed, the advantages of our use of outside foundries, our ability to provide the highest performance and most cost effective solutions to our customers, expected expenses, including research and development and selling, general and administrative functions, our ability to compete favorably in new product introduction, innovation, quality, reliability and performance, our dependence on our workforce, our potential to meet our customers’ needs, including helping them reduce their time to market, anticipated revenue from our wireless and networking products, our beliefs regarding our accounting policies, our expectation that international revenue will continue to increase and will account for a significant percentage of our revenues for the next 12 months, our expectations regarding trends in our future gross margin, our beliefs that existing cash resources will fund any anticipated operating losses, purchases of capital equipment and provide adequate working capital for the next 12 months, and our patent and intellectual property costs. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed below and our dependence on key products and customers, changes in the demand for our products and seasonal factors affecting certain of our products, our ability to attract and retain customers and distribution partners for existing and new products, our ability to develop and introduce new and enhanced products in a timely manner, our dependence on international sales and risks associated with international operations, our dependence on outside foundries and test subcontractors in the manufacturing process and other outside suppliers, our ability to recruit and retain qualified employees, and the strength of competitive offerings and the prices being charged by those competitors, and the risks set forth below under “Factors that May Affect Future Operating Results”.

      These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

      All references to “Micro Linear”, “we”, “us”, “our” or the “Company” mean Micro Linear Corporation and its subsidiaries, except where it is made clear that the term means only the parent company.

Item 1.     Business

General

      Micro Linear Corporation develops integrated circuits and modules that are designed to enable cost effective, high performance digital wireless communications and connectivity for a broad range of voice and data applications.

      Wireless consumer applications that have designs using our integrated circuits include digital cordless phones, wireless headsets, wireless high fidelity speakers, digital baby monitors, video game controllers and computer peripherals. Wireless industrial applications that have designs using our products include lighting controls, home automation products, heating and cooling controls, vending machine controls, automatic meter

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      Our products are in many cases replacing older designs that required a wired connection to a source of data. Wireless connectivity offers freedom of mobility and significant infrastructure installation cost savings. We believe that the markets for our cost effective, proprietary, digital wireless solutions are growing, as more and more applications adopt digital wireless connections in the unlicensed ISM (Industrial, Scientific and Medical — 900 MHz, 2.4 GHz and 5.8 GHz) frequency bands.

      Many early wireless applications utilized analog radio links, but the deficiencies of analog transmission are becoming apparent, with overcrowding in the ISM spectrums leading to a migration to digital solutions. Digital wireless links correct a number of the shortfalls found in analog links. Notable among these shortfalls are lack of security, high power consumption, limited range, interference, and restricted feature sets.

      We develop, manufacture and sell digital wireless solutions for the ISM bands. As the migration from analog links to digital links continues, we believe the market for the types of radios and basebands that we offer will grow. This market development scenario is not without precedent. All major cellular telephone markets throughout the world have migrated from analog-based systems to digital-based transmission systems, driven primarily by the analog shortfalls listed above.

      Our objective is to become a leading provider of wireless solutions for many large global markets. To meet this objective, we have embarked upon a number of strategic initiatives:

	•	We are focused on becoming a major provider of 5.8 GHz transceivers and power amplifiers. These devices will enable cost effective wireless applications to be realized in the newly opened 5.8 GHz ISM band in both the US and Europe.
	•	We are developing baseband devices for the market segments that we are targeting. By offering base bands as well as transceivers and power amplifiers to our customers, we believe we can offer a complete semiconductor suite or modular solution to our customer base.
	•	We are working on major strategic relationships and partnerships with industry-leading companies in our target market segments. The potential mutual benefits from these relationships include competitive product definitions which will aid in developing commercial success.
	•	We intend to offer not only semiconductor devices, but also will design, characterize and qualify a series of RF modules and complete wireless data link modules. We believe these products will enable companies with limited radio frequency (RF) expertise to cost effectively implement wireless connectivity in their equipment. We believe these modules can also greatly reduce the engineering cost associated with designing a radio link that will meet the requirements of the various international regulatory bodies.
	•	We intend to use our high volume manufacturing and test expertise for broadband RF transceivers to maintain a competitive market advantage in the delivery of cost effective products and plan to work with our foundry partners to achieve the fastest time to market with the most appropriate technology.

Markets and Products

     Wireless Consumer, Communications, and Industrial Products

      We believe the market for wireless consumer electronics, communications, and industrial products is one of the fastest growing segments of the semiconductor industry. The reasons for this growth include user mobility, continued decreases in the cost of wireless components, availability of unlicensed frequency spectrums, and market expectations established by the Bluetooth marketing campaign.

      The Bluetooth industry initiative, led by large companies from the semiconductor, communications, and computer industries, promised a total silicon solution delivering nearly one megabit of connectivity in the unlicensed 2.4 GHz frequency band for less than five dollars. Industry standard communication protocols support interoperability between Bluetooth-compatible devices. While this initiative has yet to deliver on its

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      Digital wireless connectivity requires an RF physical interface and a baseband controller, the complexity of which depends on the specific application. The RF interface typically consists of a power amplifier, low noise amplifier and switch segment, RF transceiver segment, and modem. The controller provides an interface to the digital data source, control of the radio operation, and application support. We currently provide the RF transceiver portion of this solution, while the user selects other vendors for the remaining circuitry. We believe our transceivers provide significant benefits to our customers, including lower cost, smaller form factor, higher data rates, excellent range of operation, and lower bill of material and external component cost.

      During 2002, our wireless RF transceiver products represented approximately 62% of our net revenues, up from 47% in 2001, the first year we sold wireless products. We have delivered over nine million RF transceivers that can now be found in digital cordless telephones sold by Uniden Corporation and other digital cordless phone manufacturers.

      During 2002, many potential customers evaluated our RF transceivers for designs including digital cordless telephones, video game controllers, wireless headsets, and computer peripherals. Many of these products, intended for the US market, use the 900MHz ISM frequency band, available only in North America. Wireless products designed for worldwide distribution and sale are designed for the 2.4GHz unlicensed ISM frequency band. We supply RF transceivers for both frequency bands.

      We are designing new wireless products for the industrial segment, that will automate data collection and improve inventory management. The cost of RF solutions has fallen sufficiently to enable applications in residential gas, water, and power utility meters that provide real time data and eliminate the need for manual meter reading. Vending machines are also being equipped with RF transmitters to provide real time inventory and cash receipt management. Our 900MHz radios have secured design wins in automated utility meter applications and other industrial products.

      As an increasing number of appliances and applications feature wireless connectivity, a growing number of customers have emerged who do not have the capability to design a wireless link starting at the integrated circuit level. To achieve design wins and win new business with these emerging customers, we intend to offer a series of pre-engineered radio solutions in modular form. These modules will be able to interface directly to microprocessors and antennas in the customers’ applications. Some of these solutions will be pre-scanned for compliance to the FCC rules for use in the unlicensed frequency bands.

     Media Conversion Products

      We offer media conversion products that enable implementation of cost effective fiber to the home (FTTH) systems. Two existing industry standards define Ethernet protocols over twisted pair copper media: 10Base-T for 10Mbps and 100Base-TX for 100Mbps. A low-cost silicon solution called a media converter provides required signal conversion at each point where twisted pair copper media interfaces to fiber media.

      We believe we have been successful in providing silicon media conversion devices for Ethernet networks. We believe this is one of only a few product families in the market that provides full auto-negotiation on both the twisted pair and fiber optic sides, to automatically configure the highest speed mode of operation on a link and select either half or full duplex operation. Additional benefits of our devices include providing the user a very small footprint package, low power dissipation, and low component cost.

Sales and Distribution

      Our focus is on engaging large customers to supply key radio technologies into products targeted at high volume markets. To enable us to win business at these large accounts, our direct sales force focuses on key accounts. We address smaller customers via a network of domestic and international representatives and distributors who specialize in RF components.

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      In 2002, our domestic sales represented approximately 11% of net revenues, compared to 19% and 53% in 2001 and 2000, respectively. We offer our domestic distributors product return privileges and, in the event we lower the prices of products sold to distributors, we guarantee price protection on unsold inventory. We defer recognition of revenue and gross margin derived from sales to our distributors until the distributors resell our products to their customers.

      Outside the United States, our products are sold both directly to international customers and through distributors. International sales accounted for approximately 89%, 81% and 47% of our net revenues in 2002, 2001 and 2000, respectively. We expect international sales to continue to represent a significant portion of product sales, as more and more electronics manufacturing is concentrated in the Pacific Rim. On a portion of our sales to international distributors, we offer product return privileges and, if we lower the prices of our products, we guarantee price protection on unsold inventory, which is typical in the semiconductor industry. We defer revenue from this portion of shipments to international distributors until these distributors notify us of product sales to their customers. Some sales to international distributors are below contract pricing and are not guaranteed price protection or return privileges. On these sales, we do not defer revenue.

      During 2002, sales to original equipment manufacturers (OEMs) represented 82% of our total revenues, and sales through our distribution channel represented 18% of net revenues. While sales to our largest customer pass through an international distributor, these sales are classified here as OEM sales since the distributor does not fulfill a traditional distributor stocking role for this customer.

      A relatively small number of customers have accounted for a significant portion of our net revenues in each of the past several years. During 2002, 2001 and 2000, our top ten customers, excluding domestic distributors, accounted for approximately 79%, 75% and 51% of net revenues, respectively. During 2002 one customer, Uniden Corporation, accounted for 56% of our total sales. Seasonal demand characterizes the consumer electronics market, including Uniden’s digital cordless telephones, which incorporate our transceivers. We expect Uniden to continue to account for a significant portion of sales in 2003, subject to the same seasonality of demand and to all of the inherent variability of the consumer electronics market.

      During 2002, all of our revenue was derived from sales of products for the wireless communications market and the computer networking market. In 2002, wireless shipments accounted for 62 % of net sales. In 2001, our initial year of product shipments to the wireless communications market, sales to this market represented 47% of net revenues. Sales of our products to network equipment manufacturers accounted for approximately 38%, 53% and 41% of our net revenues in 2002, 2001 and 2000, respectively. The balance of our revenues in 2000 were in certain product lines that were sold to Fairchild Semiconductor Corporation in September, 2000.

Backlog

      At December 31, 2002, our backlog was approximately $4.3 million, as compared to approximately $5.8 million at December 31, 2001. This decrease in backlog resulted from lower orders, in the fourth quarter of 2002 as compared to the fourth quarter of 2001, for both our wireless communications and networking products, and in part reflects the increasing seasonality of our product sales, as more of our revenue is concentrated in the consumer electronics market.

      Customers who purchase standard products may generally cancel or reschedule orders for delivery outside a thirty-day period, without significant penalty to the customer. As a result, customers frequently revise the quantities of our products to be delivered, and their delivery schedules.

Technology

      We believe our success and sustainable competitive advantages depend on the acceptance and continued development of our core technologies. Technologies that we believe give us a competitive advantage include:

	•	Direct conversion RF transceivers that provide cost effective, high performance, easy-to-use solutions for minimal component count RF systems.

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	•	Self-aligning and auto calibrating circuits that lower the cost and complexity of manufacturing test and result in high yielding products.
	•	Advanced, cost effective, proprietary, wireless, communication systems algorithms and the advanced baseband architectures required to optimize their performance in silicon.
	•	High performance RF, analog mixed signal, and digital circuit designs using standard BiCMOS, silicon germanium (SiGe), and CMOS technologies.
	•	Advanced packaging to reduce the cost and enhance the performance and functionality of our radio solutions.

      We use standard process technologies available from leading semiconductor foundries. Silicon technologies currently used or being implemented in new designs include:

	•	0.6 micron BiCMOS for low cost 900 MHz RF transceivers, 2.4GHz RF transceivers and media converters.
	•	0.18 micron CMOS for advanced wireless baseband controllers.
	•	0.25 and 0.35 micron SiGe for advanced 5.8 GHz RF transceivers.

Manufacturing

      We utilize outside foundries for all of our silicon wafer requirements, outside suppliers for both wafer sort and final product test, and outside assembly services to package our products. After assembly, the packaged units are final tested and final inspected by subcontractors prior to shipment to customers. Extensive electrical testing is individually performed on all circuits, using advanced, automated test equipment capable of high volume production, to ensure that the circuits satisfy specified performance levels.

      We believe that using outside foundries and other manufacturing services enable us to focus on our design strengths, minimize fixed costs and capital expenditures, and access diverse manufacturing technologies. We depend on silicon foundries located in the United States, Singapore, and Taiwan for products currently in production as well as those currently being planned.

Research and Development

      We have engineering design centers involved in the development of advanced communications circuits and systems for wireless and wired networking markets in San Jose, California, Cambridge England, and Salt Lake City, Utah. The San Jose and Cambridge design centers focus on designing RF chips, while the Salt Lake City design center is responsible for device validation testing, evaluation kits, reference designs, module products, and baseband and modem development.

      We employ state of the art integrated circuit development tools in order to shorten development cycles and accurately simulate the performance of our designs before committing to costly and time-consuming silicon fabrication. These tools represent a significant portion of the research and development tool budget. Our product development strategy focuses on highly integrated silicon solutions employing a modular design that allows high levels of reuse to enable us to address multiple markets quickly with common platforms. Often a common base mask set can be used for multiple products, so that base wafers can be staged and product identity determined during final silicon processing. This reduces lead time and inventory levels.

      As silicon technology advances, new processes enable higher levels of performance while existing processes become more cost effective. We watch these trends closely in order to provide the highest performance and most cost effective solutions to our customers.

      Research and development expenses were $15.7 million, $16.0 million, and $13.5 million in 2002, 2001, and 2000, respectively. We expect to continue spending substantial funds on research and development activities.

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Competition

      The semiconductor industry is characterized by price erosion, rapid technological change, short product life cycles, cyclical market patterns and heightened international and domestic competition. The market segments in which we participate are intensely competitive, and many semiconductor companies presently compete, or could compete, in one or more of our target markets. Our principal competitors are National Semiconductor, Infineon, Philips, Texas Instruments, DSP Group, and Atmel. Many of our competitors offer broader product lines and have substantially greater financial, technical, manufacturing, marketing and other resources. In addition, many of our competitors maintain their own wafer fabrication facilities, which provide them with a competitive advantage.

      We believe that product innovation, quality, reliability, performance and the ability to introduce products rapidly are important competitive factors. We believe that, by virtue of our product application knowledge and design expertise coupled with a rigorous design methodology, we can compete favorably in the areas of rapid new product introduction, product innovation, quality, reliability and performance. However, we may be at a disadvantage in comparison to larger companies with broader product lines, greater technical and financial resources, and greater service and support capabilities.

      The acceptance of future products designed in compliance with industry communication standards will depend on competitive advantages our products deliver in addition to meeting the minimum requirements of the standard. Larger competitors with larger development staffs, larger research and development budgets, and access to more technologies could deliver competitive products with improved feature sets or more products with different feature sets, establishing a distinct competitive advantage.

Patents and Licenses

      Our success depends, in part, on our ability to obtain patents and licenses and to preserve other intellectual property rights covering our products, procedures, development tools and testing tools. To that end, we own certain patents and intend to continue to seek patents on our inventions when appropriate. We own 12 U.S. patents, and have 5 U.S. patent applications and 10 foreign patent applications pending. Through a sale of a portion of our assets, we maintain a royalty-free license to 45 U.S. patents, 3 foreign patents, 7 U.S. patent applications, and 3 foreign patent applications. We believe that although the patents described above may have value, given the rapidly changing nature of the semiconductor industry, we depend primarily on the technical competence and creativity of our technical workforce.

      We currently do not have any third parties that have been granted license rights to manufacture and sell any of our products. We have no current plans to grant product licenses with respect to any products; however, we may find it necessary to enter into product licenses in the future in order to secure foundry capacity. We have granted nontransferable, limited process licenses to each of our foundries to utilize our proprietary processes to manufacture and sell wafers to other customers.

Employees

      As of December 31, 2002, we had 85 full-time employees, 9 of whom were engaged in manufacturing (including test development, quality and materials functions), 48 in research and development, 18 in marketing, applications and sales, and 10 in finance and administration. Our employees are not represented by any collective bargaining agreements and we have never experienced a work stoppage. We believe that our employee relations are good.

Available Information

      Micro Linear’s Web site is http://www.microlinear.com. Micro Linear makes available free of charge, on or through its Web site, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission (SEC). Information contained on Micro Linear’s Web site is not part of this report.

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Item 2.     Properties

      Our headquarters, located in San Jose, California, consist of two buildings comprising approximately 93,000 square feet, 16,000 square feet of which was leased to a tenant through February 2002. We acquired this property in October 1990 at a cost of $7.5 million. It is used for product design and development, manufacturing, marketing, sales and administration. We refinanced the note on the buildings in September 1999 with a $3.0 million note payable over five years with principal amortized on a ten-year basis. The note has a balloon payment of approximately $1.8 million due November 1, 2004. We listed our headquarter facility for sale in June 2002. As of January 2003, the property had an appraised value of $8.2 million. We lease engineering development center offices in Salt Lake City, Utah and Cambridge, England. We believe our existing facilities are adequate to meet our current and projected space requirements for at least the next 24 months.

Item 3.     Legal Proceedings

      In December 1995, Pioneer Magnetics, Inc. (“Pioneer”) filed a complaint in the Federal District Court for the Central District of California alleging that certain of our integrated circuits violate a Pioneer patent. Pioneer sought monetary damages and an injunction against the alleged patent violation. The District Court concluded that Micro Linear did not infringe on Pioneer’s patent. Pioneer then appealed the District Court’s decision to the Court of Appeals for the Federal Circuit, which affirmed the District Court judgment. In May 2001, Pioneer filed a petition for appeal with the Supreme Court. On June 3, 2002, the Supreme Court granted the petition, vacated the judgment, and remanded the case to the Court of Appeals for further consideration, in light of the recently decided case of Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki. The Court of Appeals has not yet determined what further action to take with respect to this case. Although we believe that this claim is unwarranted and without merit, we cannot provide any assurance as to the outcome of this proceeding. We cannot estimate the possible loss or range of loss, if any, that may result from this claim and therefore have not recorded any related accruals, other than accruals for legal fees expected to be incurred in defense of this claim.

      On December 16, 1998, Accton Technology Corporation (“Accton”) filed a complaint relating to Micro Linear’s sale of part ML6692 to Accton, in the Superior Court of California, County of Santa Clara, alleging causes of action for: (1) breach of contract, (2) breach of express warranty, (3) breach of implied warranty of merchantability, (4) breach of implied warranty of fitness for particular purpose, (5) fraud and deceit-concealment, (6) negligent misrepresentation, (7) negligent interference with economic advantage, and (8) declaratory relief to establish the right to implied contractual indemnity. An out of court settlement of this action was reached in June 2000. The terms of this settlement are confidential; however, we took a $7.0 million charge in 2000 related to this settlement and the action has been dismissed.

      From time to time we receive correspondence from vendors, distributors, customers or end-users of our products regarding disputes with respect to contract rights, product performance or other matters that occur in the ordinary course of business. Some of these disputes may involve us in costly litigation or other actions, the outcome of which cannot be determined in advance and may adversely affect our business. The defense of lawsuits or other actions could divert our management’s attention away from running our business. In addition, negative developments with respect to litigation could cause the price of our common stock to decline significantly.

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      None.

Executive Officers of the Registrant

      The executive officers of the Company, and their ages as of December 31, 2002 are as follows:

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PART II

      The following table sets forth the highest and lowest sale prices of our Common Stock over the last eight quarters, as reported in the Nasdaq National Market. Our Common Stock is listed on the Nasdaq National Market under the symbol “MLIN.”

Common Stock Prices

(1)	The number of stockholders of record treats all of the beneficial holders of shares held in one “nominee” or “street name” as a unit.

     Dividend Policy

      We have not paid or declared cash dividends on our Common Stock within the past five years and do not anticipate paying any cash dividends in the foreseeable future.

Item 6.     Selected Consolidated Financial Data

      The following selected consolidated financial data for the five-year period ended December 31, 2002, should be read together with our Consolidated Financial Statements and notes thereto included in Item 8 of

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      The statements in this report or incorporated by reference which are not historical are forward-looking statements and include, without limitation, statements under the caption, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Terms such as “may,” “will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and variations of these words or similar expressions are intended to identify forward-looking statements.

      These forward-looking statements include, but are not limited to, statements regarding: the growth of markets for our digital wireless solutions, types of radios and basebands, our ability to become a leading provider of wireless solutions, our ability to become a major provider of 5.8 GHz transceivers and power amplifiers, our ability to offer a complete semiconductor suite or modular solution to our customer base, our ability to establish strategic relationships with industry leading companies and the benefits, if any, of such relationships, our ability to develop RF modules and the benefits and market acceptance of such products, our ability to maintain a competitive market advantage in the delivery of our products, our beliefs regarding the growth of the market for wireless consumer electronics, communications and industrial products, the potential features and benefits of our products, including our transceivers, new wireless products for the industrial segment, pre-engineered radio solutions in modular form and silicon media conversion devices for Ethernet networks, the sources of our future revenue and concentration of customers, the competitive advantages of our core technologies and our dependence on such technology to succeed, the advantages of our use of outside foundries, our ability to provide the highest performance and most cost effective solutions to our customers, expected expenses, including those related to research and development and selling, general and administrative, our ability to compete favorably in new product introduction, innovation, quality, reliability and performance, our dependence on our workforce, our potential to meet our customers’ needs, including helping

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      Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited, to our dependence on key products and customers, changes in the demand for our products and seasonal factors affecting certain of our products, our ability to attract and retain customers and distribution partners for existing and new products, our ability to develop and introduce new and enhanced products in a timely manner, our dependence on international sales and risks associated with international operations, our dependence on outside foundries and test subcontractors in the manufacturing process and other outside suppliers, our ability to recruit and retain qualified employees, and the strength of competitive offerings and the prices being charged by those competitors, and the risks set forth below under “Factors that May Affect Future Operating Results”.

      These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. We caution you not to give undue weight to any of the forward-looking statements. You should not regard the inclusion of forward-looking information as a representation by us or any other person that we will achieve our objectives or plans.

Critical Accounting Policies

      Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. 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 other assumptions that are believed to be reasonable under the circumstances, the results which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of Micro Linear’s Board of Directors. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of its consolidated financial statements.

      Our critical accounting policies are as follows:

	•	Revenue recognition;
	•	Estimating accrued liabilities and allowance for doubtful accounts;
	•	Inventory and related allowance for obsolete and excess inventory;
	•	Accounting for income taxes; and
	•	Valuation of long-lived and intangible assets

      We recognize revenue of product shipped directly to OEM customers at the time of shipment, provided that we have received a signed purchase order, the price is fixed, title has transferred, and collection of the resulting receivable is reasonably assured. We defer recognition of revenue from sales of our products to distributors under agreements which allow certain rights of return and price adjustments on unsold inventory. The associated cost of product on these sales to distributors is also deferred and included in our inventory balances. Revenue and cost of product is recognized when the distributor resells the product to its customers.

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      We record estimated reductions to revenue for expected product returns. In determining the amount of the allowance, we analyze historical returns, current economic trends and changes in customer demand and acceptance of our products. There were no allowances for returns recorded at December 31, 2002.

      The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period.

      We perform ongoing credit evaluations of our customers based on a number of factors, including past transaction history and the creditworthiness of the customer, as determined by an evaluation of the customer’s financial statements, credit rating, bank and credit references. We do not generally require collateral from the customer. For certain international customers, we obtain letters of credit or cash payments in advance of shipment. Allowances for potential credit losses are established based on management’s review of individual accounts. The accounts receivable balance was $1.0 million, net of allowance for doubtful accounts of $58,000, as of December 31, 2002. An unexpected change in a major customer’s ability to meet its obligation could have an adverse material effect on our financial position and results of operations.

      We value inventories at the lower of standard cost or market. Standard costs are periodically adjusted to approximate actual costs on a first-in, first-out basis. The value of inventories is reduced by an estimated allowance for excess and obsolete inventories. This allowance for excess and obsolete inventories is based upon our review of demand for our products in light of projected sales, current market conditions, and market trends. If a significant, unanticipated decrease in demand of our products or technological developments occurs, we may deem it necessary to provide for additional inventory reserves, which may have a material adverse impact on our gross margin.

      As part of the process of preparing the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income or tax planning strategies and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, it is reflected as an expense within the tax provision in the statement of operations.

      Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. We have recorded a valuation allowance of $