Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-24758

Micro Linear Corporation

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:

          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 Exchange Act).     Yes o          No þ

     The aggregate market value of the Common Stock held by non-affiliates of the Company, as of June 27, 2003 (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 $27,185,991. 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 1, 2004, net of shares held in treasury, was 12,361,986.

TABLE OF CONTENTS

1

Table of Contents

PART I

      When used in this Report, the words “expects”, “anticipates”, “estimates”, “believes”, “plans”, “designed to,” “allows,” “can,” “intend,” “will,” 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 apply our digital wireless expertise to markets and applications other than digital cordless telephones and our ability to increase the number of customer and design wins based on our expertise, the benefits of our reference designs, including the ability of such designs to reduce engineering costs, the ability of our high volume manufacturing and testing expertise to enhance our competitive strength, 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 that the market for wireless consumer electronics, communications and industrial products is one of the most promising potential growth segments of the wireless semiconductor industry, 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, including the ability to address overlapping market segments, maximize sales volume, return on investment and market awareness, 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, and the amount and timing of new product shipments, our intention to develop application specific reference designs based on our RF transceivers and other new products to accelerate design wins, support our customers’ engineering teams and address otherwise unreachable market segments and customers, 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 anticipation that the trend of falling average selling prices for our wireless products will reverse in 2004, our ability to introduce new generations of wireless products throughout 2004 and our expectations that these new products will command higher average selling prices, our expectations that our maturing product shipments will not decline as much in 2004 as in 2003, our expectation that our gross margin will rise in 2004 and that increases in manufacturing yields of certain products will have a positive effect on gross margin in 2004, our anticipation that the ratio of costs to net revenue will remain flat or decrease in 2004, 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 expectations regarding 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”.

2

Table of Contents

      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 subsidiary, except where it is made clear that the term means only the parent company.

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

      Consumer applications that incorporate our integrated circuits include digital cordless phones, wireless headsets and audio headphones, home theatre speakers, digital baby monitors, video game controllers and computer peripherals. Industrial applications that incorporate our products include lighting controls, home automation products, heating and cooling controls, vending machine controls, automatic meter reading devices, environmental monitoring devices and mesh networking nodes.

      Our products are intended to replace designs that require wires to transfer information. We believe wireless connectivity offers freedom of mobility, flexibility of configuration, and significant infrastructure installation cost savings. We believe that the benefits of these digital wireless solutions, combined with the cost-effectiveness of our proprietary devices, will result in significant market growth for our products 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 utilize analog radio links, but the deficiencies of analog transmission are becoming apparent, leading to a migration to digital solutions. We believe the deficiencies of analog transmission include lack of security, high power consumption, limited range, interference, and restricted feature sets. Digital wireless links, such as those offered by us, are designed to overcome many of the shortfalls found in analog links.

      An increasing number of products that were traditionally wired are now becoming wireless, such as cell phone headsets, video game controllers, audio headphones and speakers, and computer peripherals. As this wireless connectivity becomes commonplace, we believe the market for digital wireless integrated circuits such as those developed and manufactured by us will grow.

      Our objective is to become a leading provider of digital 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 wireless semiconductors in all three major ISM bands, including 900 MHz, 2.4 GHz, and 5.8 GHz. These transceivers can be used in many streaming wireless applications such as wireless speakers and headphones, security cameras, game controllers, cordless headsets and cordless telephones.
	•	We plan on developing new products that draw heavily on existing intellectual property (IP), which reduces technical risk and development cycle time. These products are specifically defined, where possible, to address overlapping market segments to maximize sales volume, return on investment and market awareness.
	•	We plan on developing customer partnerships and major strategic relationships with industry-leading companies in our target market segments. We believe engaging with committed customers early in product development results in competitive product definitions, accelerated production ramps, and higher probability of commercial success.
	•	By applying our digital wireless expertise to markets and applications other than digital cordless telephones, we believe we are increasing the number of potential customers and potential design wins for both current and future Micro Linear products.

3

Table of Contents

	•	We have developed user-friendly evaluation tools and numerous production-ready reference designs that we believe will enable companies with limited radio frequency design expertise to quickly and efficiently implement wireless connectivity in their products using our wireless integrated circuits. We believe these reference designs can also reduce the engineering costs associated with designing a wireless product that will meet the requirements of various international regulatory bodies.
	•	We intend to use our high volume manufacturing and testing expertise to enhance our competitive strength in delivering cost effective products with rapid time to market in the appropriate process technology.

Markets and Products

      We believe the market for wireless cable replacement in consumer electronics, communications, and industrial products is one of the most promising potential growth segments of the wireless semiconductor industry. The desirability of untethered communications in consumer products is high. Consumer awareness and interest in wireless connectivity has been stimulated by the market expectations created by wireless standards such as Bluetooth^TM. However, market penetration of wireless solutions in the consumer space remains low due to relatively higher cost and complex design implementation associated with wireless links.

      Bluetooth’s stated goal of providing a complete radio solution which delivers one megabit per second (raw data rate) of wireless connectivity in the unlicensed 2.4 GHz band for less than five dollars per node has generated significant interest across a broad market segment. Bluetooth devices are expected to offer interoperability between Bluetooth-compatible devices in an ad-hoc wireless networking environment, and while this initiative has yet to deliver on these ambitious goals, it has opened a large segment of the market to the potential advantages of incorporating low-cost wireless connectivity into previously wired products.

      Digital wireless connectivity requires a radio frequency (RF) physical interface and a baseband controller, the complexity of which depends on the specific application. The RF interface typically consists of an RF front end (power amplifier, low noise amplifier and switch), RF transceiver, and modem. The baseband controller provides an interface to the digital data source, control of the radio operation, and application support. We currently provide the RF transceiver and in some cases, portions of the RF front end, with the balance of the solution provided by other vendors, which in many cases have formed strategic marketing relationships with us. We believe our transceivers provide significant benefits to our customers, including lower cost, smaller form factor, higher data rates, enhanced range of operation, and lower bill of material and external component costs.

      During 2003, our wireless RF transceiver products represented approximately 64% of our net revenues, compared to 62% in 2002 and 47% in 2001. We have delivered almost twenty million RF transceivers that can now be found in digital cordless telephones, cordless headsets, video game controllers, and other digital wireless products.

      During 2003, we expanded our customer base for RF transceivers to include digital cordless telephone vendors other than Uniden (our largest customer), video game controller suppliers, wireless headset manufacturers, and computer peripherals vendors. Products intended for the U.S. market use the unlicensed 900MHz frequency band, while wireless products designed for worldwide use operate at 2.4GHz. Newer cordless telephones and other products are currently using the 5.8GHz unlicensed spectrum available in the U.S.

      As more applications request wireless connectivity, a growing number of manufacturers have emerged who do not have the capability, or the desire, to design a wireless link starting at the component level. To achieve design wins with these emerging manufacturers, we have significantly increased our customer support tools through the creation of production-ready reference designs. Currently, we offer four distinct reference designs that customers can copy or modify to allow them to easily integrate digital wireless connectivity into their products. Two designs operate at 900MHz: a less expensive low power (0dBm output power) radio, and a higher power (18dBm) version. The other two operate at 2.4GHz, again with one design intended for shorter

4

Table of Contents

      Our efforts in designing and testing these reference designs have afforded our engineers a good insight into the design issues confronted by our prospective customers, which we believe should assist us in making our new products more convenient and valuable to our customers. We believe a significant percentage of our future design wins will be facilitated by the availability of these pre-engineered solutions. We intend to continue to develop application-specific reference designs based on our RF transceivers and other new products to support our customers’ engineering teams and address otherwise unreachable market segments and customers.

      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 the required signal conversion at each point where the 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 our product family is one of only a few 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 small footprint package, low power dissipation, and low component cost.

Sales and Distribution

      Our focus is on engaging large customers who incorporate wireless 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.

      In 2003, our domestic sales represented approximately 9% of net revenue, compared to 11% and 19% in 2002 and 2001, 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 91%, 89% and 81% of our net revenue in 2003, 2002 and 2001, respectively. We expect international sales to continue to represent a significant portion of product sales for the foreseeable future, 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 standard 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 2003, sales to original equipment manufacturers (OEMs) represented 80% of our net revenue, and sales through our distribution channel represented 20% of net revenue. While sales to our largest customer pass through an international distributor, we classify these sales 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 revenue in each of the past several years. During 2003, 2002 and 2001, our top ten customers, excluding domestic

5

Table of Contents

      During 2003, all of our net revenue was derived from sales of products for the wireless communications market and the computer networking market. During 2003, 2002 and 2001 wireless shipments accounted for 64%, 62% and 47% of net revenue. Sales of our products to network equipment manufacturers accounted for approximately 36%, 38% and 53% of our net revenue in 2003, 2002 and 2001, respectively.

Backlog

      We define backlog as orders received for products that are scheduled to be shipped within the next six months. At December 31, 2003, our backlog was approximately $6.0 million, as compared to approximately $4.3 million at December 31, 2002. The increase in backlog resulted primarily from orders received for our ML5800 product, our 5.8 GHz radio transceiver. We began taking orders for the ML5800 in the fourth quarter of 2003 and it carries a higher average selling price than our 900MHz and 2.8GHz product lines. These transceivers have been designed to be used in streaming wireless applications such as cordless phones, wireless speakers and headphones, security cameras, game controllers, cordless headsets and other personal electronic appliances.

      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, and there can be no guarantee that all of the backlog will be shipped as scheduled within the first two quarters of 2004, if at all.

      Although we are providing backlog statistics as of December 31, 2003 and 2002, we believe that backlog is not a meaningful indicator of our future business prospects, due to the wide variety of our product offerings, the significant percentage of orders received and shipped within the same quarter and the ability of our customers to cancel or reschedule orders outside a thirty-day period without significant penalty. We do not believe that backlog information is material to an understanding of our overall business.

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:

	•	Design expertise and experience at 5.8GHz frequencies;
	•	Low Intermediate Frequency (IF) radio transceivers, which offer cost-effective, high integration, programmable radio solutions with minimal external components;
	•	Automatically calibrated active circuits that lower manufacturing cost and complexity and result in higher production yields;
	•	High performance RF, analog mixed signal, and digital circuit designs using standard BiCMOS and silicon germanium (SiGe), technologies; and
	•	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; and
	•	0.35 micron SiGe for advanced 5.8 GHz RF transceivers.

6

Table of Contents

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 enables 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 Japan for products currently in production as well as those currently being planned.

Research and Development

      We employ state of the art integrated circuit development software 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 our research and development tool budget. Our product development strategy focuses on highly integrated silicon solutions, employing a modular design to allow for use in a broad range of applications, enabling us to address multiple markets quickly with similar platforms.

      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.

      In May 2003, we undertook a restructuring that consolidated most of our design activities into our San Jose, California headquarters. Our engineering design center in San Jose is involved in the development of advanced communications circuits and systems for wireless markets. Device validation, characterization, reliability testing, and automatic test equipment (ATE) test development activities are also located in San Jose. In addition to our San Jose design group we also have a small design group in Salt Lake City, Utah.

      Research and development expenses were $10.0 million, $16.1 million, and $16.0 million in 2003, 2002, and 2001, respectively. We reduced engineering headcount as part of our overall restructuring efforts in 2003. In planning these reductions, we carefully reviewed and focused our product roadmap. We expect to continue spending significant funds on research and development activities to deliver leading edge products that have a promise of volume shipments within a short time following their introduction.

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.

7

Table of Contents

      In 2003, we developed and announced a product development partnership with Oki Electric Industry Co., Ltd. We believe that this relationship, as well as other less formal development partnerships that we have recently engaged in, will result in more optimized and complete application-specific radio solutions. The availability of such solutions should result in greater acceptance of our digital wireless products as well as shorter development cycle times for our customers.

      The acceptance of future products will depend on their direct applicability to the intended market, their cost-effectiveness, and the availability of easily implemented systems-level solutions based on these products. Larger competitors with larger development staffs, larger research and development budgets, and access to more technologies could deliver competitive products with improved feature sets, more products with differentiated feature sets and/or complete chipsets or system solutions, thus 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 twelve U.S. patents, and have five U.S. patent applications and ten foreign patent applications pending. Through a sale of a portion of our assets, we maintain a royalty-free license to forty-five U.S. patents, three foreign patents, seven U.S. patent applications, and three 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 have not currently licensed any third parties to manufacture 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. 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, 2003, we had 59 full-time employees, eight of whom were engaged in manufacturing (including test development, quality and materials functions), 32 in research and development, 12 in marketing, applications and sales, and seven 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

      Our Web site is http://www.microlinear.com. We make available free of charge, on or through our Web site, our 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 our Web site is not part of this report.

      Our headquarters, located in San Jose, California, consist of two buildings comprising approximately 93,000 square feet. 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 these facilities for sale in June 2002. During the third quarter of 2003, we reviewed our real estate assets and determined that their carrying value exceeded the current estimated fair market value. Accordingly, we recorded an impairment charge of $1.5 million. In January 2004, the property was taken off the market. We lease engineering development office space in Salt Lake City, Utah. We believe our existing facilities are adequate to meet our current and projected space requirements for at least the next 12 months.

8

Table of Contents

      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 we 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. On June 2, 2003, the Court of Appeals for the Federal Circuit affirmed the District Court’s judgment. Pioneer’s only right of appeal was to the Supreme Court through a Writ of Certiorari. Pioneer did not exercise their right of appeal within the statutory time limit and therefore, this case has now been concluded in our favor.

      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.

      None.

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

9

Table of Contents

(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.

      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. Any determination with respect to the payment of dividends will be at the discretion of our board of directors.

      The following selected consolidated financial data for the five-year period ended December 31, 2003 should be read together with our Consolidated Financial Statements and notes thereto included in Item 8 of this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this report.

      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.” When used in this Report, the words “expects”, “anticipates”, “estimates”, “believes”, “plans”, “designed to,” “allows,” “can,” “intend,” “will,” and similar

10

Table of Contents

      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.

11

Table of Contents

Overview

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

      We were founded in 1983, and until 2000 we were a supplier of advanced analog and mixed signal integrated circuits to the computer, communications, telecommunications, consumer and industrial markets. During 2000, we divested our manufacturing test operation and our non-communication product lines and focused our marketing, engineering and product development on new communications products, including some wired networking products, but most notably wireless integrated circuits. During 2001, we established ourselves as a volume supplier of RF transceivers to the digital cordless telephone segment of the communications market. Wireless product revenues represented 64% of net revenues for 2003 compared to 62% of net revenues for 2002. We expect the revenue contribution from wireless products to continue to increase as a percentage of total revenues.

      On October 8, 2002 we announced that in order to better align our product development activities with our revenue-producing markets, we would stop development of 802.11a broadband wireless products. The realignment process included redirecting certain engineering activities, and reorganizing sales, marketing and applications to strengthen major account support. As part of the realignment, we reduced our workforce by 39 employees. Expenses related to the discontinuance of the 802.11a development efforts were $0.7 million, consisting of severance costs and asset impairment charges. On May 19, 2003 we undertook a restructuring effort that eliminated approximately 37 additional positions in all operational segments of the Company, and consolidated some functions at our San Jose headquarters.

Opportunities and Challenges

      Our operating results are likely to continue to fluctuate as a result of many factors, including, but not limited to: the level, timing, cancellation or rescheduling of customer orders, changes in market demand, fluctuations in manufacturing yields and cost, market acceptance of our products, economic conditions specific to the networking and wireless industries and markets, and general economic conditions.

      As a result of competitive pricing pressures we have experienced lower margins in our wireless products, and we expect these pricing pressures to continue. In addition, the wireless and computer networking markets have undergone a period of rapid growth and consolidation in recent years. We expect our dependence on sales to computer network equipment manufacturers to continue. As a result, our business would suffer in the event of a significant slowdown in the networking equipment market. We intend to try to offset these pricing pressures by continuing to introduce new wireless products commanding higher average selling prices. In addition, we operate in a turnkey manufacturing environment. Consequently our manufacturing infrastructure is scalable, and we would expect some margin improvement by driving higher shipment volumes.

      The wireless and computer equipment networking markets in which we compete are characterized by continuing technological advancement, changes in customer requirements, and evolving industry standards. To address these challenges, we must design, develop, manufacture and sell new or enhanced products that provide increasingly higher levels of performance and reliability, are cost effective, and brought to market in a timely manner.

      Successful engineering development and market penetration in the product areas we have chosen require high levels of engineering and product development expense. We have sometimes experienced delays in completing the development of new products. As we do not currently manufacture our own semiconductor wafers, we are vulnerable to process technology advances competitors use to manufacture products offering higher performance and lower cost.

      To address these challenges, we intend to pursue various opportunities. For example, we intend to continue to spend significant amounts of resources on new product and technology development, including wireless semiconductors in the three major ISM bands, including 900 MHz, 2.4 GHz, and 5.8 GHz. We intend to broaden our markets into many streaming wireless applications such as wireless speakers and headphones, security cameras, game controllers, cordless headsets and cordless telephones. We also intend to

12

Table of Contents

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 of 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 our 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 our 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.

      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, 2003.

      The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of accrued 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 $0.9 million, net of allowance for doubtful accounts of $30,000, as of December 31, 2003. 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.

13

Table of Contents

      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 for our products or significant technological development 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 full valuation allowance of $14.3 million as of December 31, 2003, due to uncertainties related to the ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which we operate and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance or release existing allowances, which could materially impact our financial position and results of operations.

      We evaluate the carrying value of long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 retained the fundamental provisions of SFAS 121, which required that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. In the third quarter of 2003, we completed an impairment review of our land and buildings. The review was undertaken due to an unsolici