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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q (Mark One) [X]
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934.
 For the Quarterly Period Ended March 28, 2004 OR [   ]
    
    TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
 For the transition period from       to Commission File Number 0-24758 Micro Linear Corporation (Exact name of Registrant as specified in its charter)
 Delaware
    
    94-2910085(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification Number)
 2050 Concourse Drive
    
    95131San Jose, California
    
    (Zip Code)(Address of principal executive offices)
 Registrants telephone number, including area code:
(408) 433-5200 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 [X] No [   ] Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes [   ] No [X] The number of shares of the Registrants Common Stock outstanding as of
May 10, 2004, net of shares held in treasury, was 12,369,340.




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TABLE OF CONTENTS

PAGEPART I
    
    FINANCIAL INFORMATION
    
    
    3Item 1.
    
    Financial Statements (Unaudited)
    
    
    3Consolidated Condensed Balance Sheets at March 31, 2004 and December 31, 2003
    
    
    3Consolidated Condensed Statements of Operations for the three months ended March 31, 2004 and 2003
    
    
    4Consolidated Condensed Statements of Cash Flows for the three months ended March 31, 2004 and 2003
    
    
    5Notes to Consolidated Condensed Financial Statements
    
    
    6Item 2.
    
    Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    11Item 3.
    
    Quantitative and Qualitative Disclosures about Market Risk
    
    
    24Item 4.
    
    Controls and Procedures
    
    
    24PART II
    
    OTHER INFORMATION
    
    
    25Item 6.
    
    Exhibits and Reports on Form 8-K
    
    
    25SIGNATURES
    
    
    
    
    26Index to Exhibits
    
    
    27EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2


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PART I. FINANCIAL INFORMATION 
 Item 1.Financial Statements MICRO LINEAR CORPORATION 
 CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(Unaudited)
 March 31,
    
    December 31,2004
    
    2003AssetsCurrent assets:Cash and cash equivalents
    
    $
    8,486
    
    
    $
    8,703Short-term investments
    
    
    6,743
    
    
    
    8,966Accounts receivable, less allowance for
doubtful accounts of $30 at March 31, 2004 and
December 31, 2003
    
    
    974
    
    
    
    937Inventories
    
    
    3,328
    
    
    
    2,383Other current assets
    
    
    528
    
    
    
    563Total current assets
    
    
    20,059
    
    
    
    21,552Property, plant and equipment, net
    
    
    5,905
    
    
    
    5,860Other assets
    
    
    26
    
    
    
    26Total assets
    
    $
    25,990
    
    
    $
    27,438Liabilities and Stockholders EquityCurrent liabilities:Accounts payable
    
    $
    3,957
    
    
    $
    2,683Accrued compensation and benefits
    
    
    662
    
    
    
    737Deferred revenue
    
    
    543
    
    
    
    681Other accrued liabilities
    
    
    1,061
    
    
    
    1,185Short term
debt
    
    
    1,971
    
    
    
    2,040Total current liabilities
    
    
    8,194
    
    
    
    7,326Stockholders equity:Common stock
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    60,986
    
    
    
    60,583Accumulated deficit
    
    
    (22,975
    )
    
    
    (20,255
    )Accumulated other comprehensive income
    
    
    3
    
    
    
    2Treasury stock
    
    
    (20,233
    )
    
    
    (20,233
    )Total stockholders equity
    
    
    17,796
    
    
    
    20,112Total liabilities and stockholders equity
    
    $
    25,990
    
    
    $
    27,438
 See accompanying notes to unaudited consolidated condensed financial statements. 3




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MICRO LINEAR CORPORATION 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
 THREE MONTHS ENDEDMarch 31,2004
    
    2003Net revenue
    
    $
    3,840
    
    
    $
    4,692Cost of revenue
    
    
    2,093
    
    
    
    2,204Gross margin
    
    
    1,747
    
    
    
    2,488Operating expenses:Research and development
    
    
    2,641
    
    
    
    2,920Selling, general and administrative
    
    
    1,846
    
    
    
    2,224Total operating expenses
    
    
    4,487
    
    
    
    5,144Loss from operations
    
    
    (2,740
    )
    
    
    (2,656
    )Interest and other income
    
    
    62
    
    
    
    95Interest and other expense
    
    
    (38
    )
    
    
    (59
    )Loss before income taxes
    
    
    (2,716
    )
    
    
    (2,620
    )Provision for income taxes
    
    
    4
    
    
    
    27Net loss
    
    $
    (2,720
    )
    
    $
    (2,647
    )Net loss per share, basic and diluted
    
    $
    (0.22
    )
    
    $
    (0.22
    )Weighted average number of shares used in per share
computation
    
    
    12,334
    
    
    
    12,195
 See accompanying notes to unaudited consolidated condensed financial statements. 4




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MICRO LINEAR CORPORATION 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)
 THREE MONTHS ENDEDMarch 31,2004
    
    2003Net cash used in operating activities
    
    $
    (2,508
    )
    
    $
    (3,492
    )Cash flows from investing activities:Purchase of capital equipment
    
    
    (224
    )
    
    
    (115
    )Purchases of short-term investments
    
    
    (2,732
    )
    
    
    (2,847
    )Sales of short-term investments
    
    
    4,956
    
    
    
    4,564Net cash provided by investing activities
    
    
    2,000
    
    
    
    1,602Cash flows from financing activities:Principal payments on debt
    
    
    (69
    )
    
    
    (64
    )Proceeds from issuance of common stock
    
    
    360
    
    
    
    Net cash provided by (used in) financing
activities
    
    
    291
    
    
    
    (64
    )Net decrease in cash and cash equivalents
    
    
    (217
    )
    
    
    (1,954
    )Cash and cash equivalents at beginning of
period
    
    
    8,703
    
    
    
    10,801Cash and cash equivalents at end of period
    
    $
    8,486
    
    
    $
    8,847
 See accompanying notes to unaudited consolidated condensed financial statements. 5




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MICRO LINEAR CORPORATION 
 NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 1. Organization and Summary of Significant Accounting Policies Organization Micro Linear is a fabless semiconductor company specializing in high data
rate wireless integrated circuit solutions. These transceivers can 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. Micro Linear is headquartered in San Jose, CA with sales offices and
authorized representatives and distributors worldwide. Fiscal Year We report results of operations on the basis of fifty-two or fifty-three
week periods, ending on the Sunday closest to December 31. Fiscal year 2003
ended on December 28, 2003. The first quarter of 2003 ended on March 30, 2003.
The first quarter of 2004 ended on March 28, 2004. For presentation purposes,
the accompanying financial statements refer to the calendar year end and month
end of each respective period. Principles of Consolidation The consolidated financial statements include the accounts of Micro Linear
Corporation and our subsidiary in the United Kingdom. All significant
inter-company accounts and transactions have been eliminated. The Company has designated the U.S. dollar as the functional currency for
its United Kingdom subsidiary since that subsidiary is dependent on the parent
companys economic environment. The gains and losses resulting from the
translation of the United Kingdom subsidiary are recorded as other income and
expense. For the first quarters of 2004 and 2003, translation gains and losses
were not significant. Basis of Presentation The consolidated financial statements included herein have been prepared
by us in accordance with accounting principles generally accepted in the United
States of America and reflect all adjustments, consisting of normal recurring
adjustments, which in the opinion of management are necessary to state fairly
our financial position, results of operations, and cash flows for the periods
presented. Certain accounts in the condensed financial statements have been
reclassified where necessary to conform to the financial statements for the
quarter ended March 28, 2004. The accompanying unaudited consolidated financial statements have been
prepared in accordance with the instructions to Form 10-Q, and therefore do not
include all information and footnotes necessary for a fair presentation of
financial position, results of operations and cash flows in conformity with
generally accepted accounting principles. The unaudited consolidated condensed
financial statements and notes should be read in conjunction with the
consolidated financial statements and notes in the Annual Report on Form 10-K
for the year ended December 28, 2003, filed with the Securities and Exchange
Commission on March 29, 2004. Use of Estimates The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and the
disclosure of contingent assets and liabilities at the date of the financial
statements as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates, and such
differences may be material to the financial statements. Net Income (Loss) Per Share Basic earnings (loss) per share is computed by dividing net income (loss)
available to common stockholders by the weighted average number of common
shares outstanding during the period. Diluted earnings (loss) per share
excludes potential common stock if the effect is anti-dilutive. Diluted net
earnings (loss) per share includes the effect of all potentially dilutive
common stock 6




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outstanding during the period. We compute diluted earnings (loss) per
share using the treasury stock method for stock options outstanding. A total of 3,901,470 and 3,905,540 shares of potential common stock were
not included in the dilutive net loss per share calculations for the periods
ending March 31, 2004 and 2003, because to include them would be anti-dilutive. Following is a reconciliation of the basic and diluted loss per share
computations (in thousands, except per share amounts): Three Months EndedMarch 31,2004
    
    2003Basic:Net loss
    
    $
    (2,720
    )
    
    $
    (2,647
    )Weighted average common shares
outstanding
    
    
    12,334
    
    
    
    12,195Basic loss per share
    
    $
    (0.22
    )
    
    $
    (0.22
    )Diluted:Net loss
    
    $
    (2,720
    )
    
    $
    (2,647
    )Weighted average common shares
outstanding
    
    
    12,334
    
    
    
    12,195Dilutive stock options
    
    
    
    
    
    
    Weighted average common shares
outstanding
    
    
    12,334
    
    
    
    12,195Diluted loss per share
    
    $
    (0.22
    )
    
    $
    (0.22
    )
 Stock-Based Compensation We account for our employee stock option plans in accordance with
Accounting Principles Board No. (APB) 25, Accounting for Stock Issued to
Employees. Under APB No. 25, compensation cost is measured as the excess, if
any, of the quoted market price of our stock at the date of grant over the
exercise price of the option granted. Compensation cost for stock options, if
any, is recognized ratably over the vesting period. We provide pro forma
disclosures as required under Statement of Financial Accounting Standards
(SFAS) No. 123, Accounting for Stock-Based Compensation and SFAS No. 148,
Accounting for Stock-Based Compensation, Transition and Disclosure. We account for stock issued to non-employees in accordance with the
provisions of SFAS No. 123. Stock option awards issued to non-employees are
accounted for at fair value using the Black-Scholes option pricing model. The
fair value of each non-employee stock award is re-measured at each period end
until a commitment date is reached, which is generally the vesting date. Pro Forma Net Income (Loss) Per Share As required by SFAS No. 123, we disclose our pro forma net income (loss)
as if we had accounted for our employee stock purchase plan, employee stock
options and director stock options under the fair value method as prescribed in
SFAS No. 123. We estimate the fair value for these options at the date of grant
using the Black-Scholes option pricing model and the multiple option approach
with the following weighted-average assumptions: Employee StockPurchase Plan
    
    Stock Option PlansThree Months Ended
    
    Three Months EndedMarch 31
    
    March 31,2004
    
    2003
    
    2004
    
    2003Expected life (in years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    2.78
    
    
    
    2.6Risk-free interest rate
    
    
    1.03
    %
    
    
    1.19
    %
    
    
    1.83
    %
    
    
    2.05
    %Volatility
    
    
    49
    %
    
    
    74
    %
    
    
    46
    %
    
    
    85
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 7




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The Black-Scholes option valuation model was intended for use in
estimating the fair value of publicly traded options that have no vesting
restrictions and are fully transferable, which differs significantly from the
terms of our stock option awards. In addition, option valuation models require
the input of highly subjective assumptions, including the expected stock price
volatility and the expected life of the options before exercise, which greatly
affect the calculated grant date fair value. The weighted average estimated
fair values of shares at the date of grant that were issued under the Employee
Stock Purchase Plan during the three months ended March 31, 2004 and 2003 were
$1.52 and $1.10, respectively. The weighted average fair values at the date of
grant of options which were granted under the employee and directors stock
option plans during the three months ended March 31, 2004 and 2003 were $2.09
and $1.81 respectively. SFAS No. 148 amended SFAS No. 123 in December 2002 to require that
disclosures of the pro forma effect of using the fair value method of
accounting for stock-based employee compensation be displayed more prominently
and in a tabular format. The following table illustrates the effect on our net
loss and net loss per share if we had recorded compensation costs based on the
estimated grant date fair value as defined by SFAS No. 123 for all granted
stock-based awards. Three Months EndedMarch 312004
    
    2003Net loss, as reported
    
    $
    (2,720
    )
    
    $
    (2,647
    )Add: Stock-based employee compensation
expense included in reported net loss
    
    
    
    
    
    
    1Deduct: Stock-based compensation
expense determined under fair value
based method for employee awards
    
    
    (306
    )
    
    
    (373
    )Pro forma net loss
    
    $
    (3,026
    )
    
    $
    (3,019
    )Pro forma net loss per share:Basic and diluted
    
    $
    (0.25
    )
    
    $
    (0.25
    )Reported net loss per share:Basic and diluted
    
    $
    (0.22
    )
    
    $
    (0.22
    )
 2. Financial Statement Details Inventories consist of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Work-in-process
    
    $
    1,795
    
    
    $
    1,024Finished goods
    
    
    1,284
    
    
    
    739Inventory held by distributors
    
    
    249
    
    
    
    620Total inventories
    
    $
    3,328
    
    
    $
    2,383
 Property, plant and equipment consist of the following (in thousands): March 31,
    
    December 31,2004
    
    2003Land
    
    $
    2,250
    
    
    $
    2,250Buildings and improvements
    
    
    7,990
    
    
    
    7,990Machinery and equipment
    
    
    11,927
    
    
    
    11,703Property, plant and equipment
    
    
    22,167
    
    
    
    21,943Accumulated depreciation and amortization
    
    
    (16,262
    )
    
    
    (16,083
    )Net property, plant and equipment
    
    $
    5,905
    
    
    $
    5,860
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Provision for Income Taxes The provision for income taxes for the three months ended March 31, 2004
consists mainly of state taxes. The provision for the three months ended March
31, 2003 consists mainly of taxes incurred by our subsidiary in the United
Kingdom. We did not record a benefit for income taxes related to our net losses
in the U.S., as we believe that the available objective evidence creates
sufficient uncertainty regarding the realization of the deferred tax assets
such that we have recorded a full valuation allowance. The effective tax rate
for the first quarter of 2004 was .1%, compared to 1% in the first quarter of
2003. Comprehensive Income For the three months ended March 31, 2004 and 2003, comprehensive loss,
which consists of the net loss for the periods and unrealized gain or loss on
short-term marketable securities, is as follows (in thousands): Three Months EndedMarch 31,2004
    
    2003Net loss
    
    $
    (2,720
    )
    
    $
    (2,647
    )Accumulated other comprehensive loss:Unrealized gain (loss) on marketable
securities, net
    
    
    1
    
    
    
    (12
    )Comprehensive loss
    
    $
    (2,719
    )
    
    $
    (2,659
    )
 3. Recent Accounting Pronouncements In May 2003, FASB issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, or SFAS No. 150. SFAS No. 150 establishes standards
for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first fiscal period beginning after June 15, 2003. SFAS No.
150 is to be implemented by reporting the cumulative effect of a change in an
accounting principle for financial instruments created before the issuance date
of SFAS No. 150 and still existing at the beginning of the interim period of
adoption. Restatement is not permitted. The adoption of SFAS No. 150 to date
did not have a material impact on our financial position and results of
operations. In December 2003, the SEC issued Staff Accounting Bulletin No. 104,
Revenue Recognition (SAB 104), which codifies, revises and rescinds certain
sections of SAB No. 101, Revenue Recognition, in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB 104
did not have a material impact on our financial position and results of
operations. In March 2004, the FASB approved EITF Issue 03-6 Participating Securities
and the Two-Class Method under FAS 128. EITF Issue 03-6 supersedes the
guidance in Topic No. D-95, Effect of Participating Convertible Securities on
the Computation of Basic Earnings per Share, and requires the use of the
two-class method of participating securities. The two-class method is an
earnings allocation formula that determines earnings per share for each class
of common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. In addition,
EITF Issue 03-6 addresses other forms of participating securities, including
options, warrants, forwards and other contracts to issue an entitys common
stock, with the exception of stock-based compensation (unvested options and
restricted stock) subject to the provisions of Opinion 25 and FAS 123. EITF
Issue 03-6 is effective for reporting periods beginning after March 31, 2004
and should be applied by restating previously reported EPS. We are currently in
the process of evaluating the impact that the adoption of EITF Issue 03-6 will
have on our financial position and results of operations. 9




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4. Operations by Geographic Regions The following is a summary of operations by geographical regions (in
thousands): Three Months EndedMarch 31,2004
    
    2003Net revenue:United States
    
    $
    252
    
    
    $
    400Hong Kong
    
    
    727
    
    
    
    496Japan
    
    
    1,846
    
    
    
    2,588Asia
    
    
    251
    
    
    
    216Italy
    
    
    
    
    
    
    574Europe
    
    
    764
    
    
    
    406Other
    
    
    
    
    
    
    12Consolidated
    
    $
    3,840
    
    
    $
    4,692
 Three Months EndedMarch 31,2004
    
    2003Capital expenditures:United States
    
    $
    224
    
    
    $
    115Depreciation and amortization:United States
    
    $
    179
    
    
    $
    253Europe
    
    
    
    
    
    
    14Consolidated
    
    $
    179
    
    
    $
    267
 Identifiable assets by geographic region are as follows (in thousands): March 31,
    
    December 31,2004
    
    2003Identifiable assets:United States
    
    $
    25,929
    
    
    
    27,364Asia
    
    
    36
    
    
    
    35Europe
    
    
    25
    
    
    
    39Consolidated
    
    $
    25,990
    
    
    $
    27,438
 5. Restructuring Charges In the second quarter of 2003, we announced a restructuring plan to better
align our organizational structure with current business conditions. This
realignment process included workforce reductions across all functions of the
Companys operations and a consolidation of our design centers into our San
Jose facility. The remaining balance in the restructuring reserve
pertains to employee relocation expenses. Severance
    
    Excessand Benefits
    
    Facilities
    
    Total(In thousands)Balance, December 31, 2003
    
    $
    26
    
    
    $
    
    
    
    $
    26Additions (utilization)
    
    
    
    
    
    
    
    
    
    
    Balance, March 31, 2004
    
    $
    26
    
    
    
    
    
    
    $
    26
 10




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Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations 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: our expectation that there will be an increase in unit
volume shipments for our wireless products in the second and third quarters of
2004 and an increase in average selling prices as shipments of our new 5.86Hz
products begin to represent a more significant portion of our total wireless
products shipments, our expectations to achieve improvements in our gross
margin as we anticipate the volumes of our 5.86Hz wireless products increase
over the next two quarters, anticipated revenue from our wireless and
networking products, our intentions to continue to focus significant resources
on development of new products and technologies and may increase spending as
necessary, our beliefs regarding deferred tax assets, including our beliefs
that the available objective evidence creates sufficient uncertainty regarding
the realization of the deferred tax assets such that we have recorded a full
valuation allowance against our deferred tax assets, our expectation that
international revenue will account for a significant percentage of our revenue
for the foreseeable future, our belief that existing cash resources are
sufficient to fund any anticipated operating losses and purchases of capital
equipment, provide adequate working capital for the next 12 months. 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. These results 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. They include those
regarding (1) revenue recognition, (2) estimating accrued liabilities and
allowance for doubtful accounts, (3) inventory and related allowance for
obsolete and excess inventory, (4) accounting for income taxes, and (5)
valuation of long-lived and intangible assets. The critical accounting policies are described in Item 7, Management
Discussion and Analysis of Financial Condition and Results of Operations, of
our Annual Report on Form 10-K for the year ended December 28, 2003. 11




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Overview Micro Linear is a fabless semiconductor company specializing in wireless
integrated circuit solutions. These transceivers can 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. 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 revenue represented 56% of net
revenue for the first quarter of 2004 compared to 55% of net revenue for the
first quarter of 2003. Results of Operations Three Months Ended March 31, 2004 Compared with Three Months Ended March 31,
2003 The following table presents certain consolidated statements of operations
data for the periods indicated: For the Three Months Ended March 312004
    
    2003(In Thousands)Percentage of
    
    
    
    
    
    Percentage ofNet Revenue
    
    
    
    
    
    Net RevenueNet revenuesWireless
    
    $
    2,149
    
    
    
    56.0
    %
    
    $
    2,595
    
    
    
    55.3
    %Networking
    
    
    1,691
    
    
    
    44.0
    
    
    
    2,097
    
    
    
    44.7Total net revenues
    
    
    3,840
    
    
    
    100.0
    
    
    
    4,692
    
    
    
    100.0Cost of revenues
    
    
    2,093
    
    
    
    54.5
    
    
    
    2,204
    
    
    
    47.0Gross margin
    
    
    1,747
    
    
    
    45.5
    
    
    
    2,488
    
    
    
    53.0Operating expenses:Research and development
    
    
    2,641
    
    
    
    68.8
    
    
    
    2,920
    
    
    
    62.2Selling, general and administrative
    
    
    1,846
    
    
    
    48.1
    
    
    
    2,224
    
    
    
    47.4Total operating expenses
    
    
    4,487
    
    
    
    116.8
    
    
    
    5,144
    
    
    
    109.6Loss from operations
    
    
    (2,740
    )
    
    
    (71.4
    )
    
    
    (2,656
    )
    
    
    (56.6
    )Interest income and other, net
    
    
    24
    
    
    
    0.6
    
    
    
    36
    
    
    
    0.8Loss before provision for taxes
    
    
    (2,716
    )
    
    
    (70.7
    )
    
    
    (2,620
    )
    
    
    (55.8
    )Provision for taxes
    
    
    4
    
    
    
    0.1
    
    
    
    27
    
    
    
    0.6Net loss
    
    $
    (2,720
    )
    
    
    (70.8
    )%
    
    $
    (2,647
    )
    
    
    (56.4
    )%
 Net Revenue Quarter ended
    
    % Change
    
    Quarter endedMarch 31, 2004
    
    2003 to 2004
    
    March 31, 2003(In thousands)Wireless
    
    $
    2,149
    
    
    
    (17.2
    )%
    
    $
    2,595Networking
    
    
    1,691
    
    
    
    (19.4
    )%
    
    
    2,097Total
    
    $
    3,840
    
    
    
    (18.2
    )%
    
    $
    4,692
 12




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Revenues
during the first quarter of 2004 decreased $0.9 million from the
comparable first quarter of 2003. A 26% decrease in unit demand for our older
networking products, combined with an 8% drop in average selling prices for
these products, due to a shift in product mix, accounted for $0.6 million of
the revenue decline. This was offset by a $0.2 million increase in shipments
of our current networking media converter products. Our wireless product
revenues decreased by $0.4 million due to a 10% decline in average selling
prices of our mature wireless products and an 8% drop in unit shipment volumes
resulting from our largest customers (Unidens) transition from our 2.4 GHz
products to our new 5.8GHz product, which began shipping late in the first
quarter of 2004. The majority of our wireless products are used in consumer applications
and our first quarter results reflect the seasonality we experience selling
into those markets. We expect to see an increase in unit volume shipments for
these products in the second and third quarters of 2004 and an increase in
average selling prices as shipments of our new 5.8 GHz products (which
generally have a higher average selling price) begin to represent a more
significant portion of our total wireless product shipments. In
the first quarter of 2004 and 2003, sales to Uniden Corporation
accounted for more than 10% of our net revenue. International revenue for the first quarter of 2004 totaled $3.6 million,
or 93% of net revenue compared to $4.3 million, or 92% of net revenue for the
first quarter of 2003. Domestic revenue was approximately 7% of net revenue for
the first quarter of 2004 compared to 8% for the first quarter of 2003. Gross Margin Quarter ended
    
    % Change
    
    Quarter endedMarch 31, 2004
    
    2003 to 2004
    
    March 31, 2003(In thousands)Gross Margin
    
    $
    1,747
    
    
    
    (29.8
    )%
    
    $
    2,488%
    
    
    45.5
    %
    
    
    
    
    
    
    53.0
    %
 Gross margin is affected by the unit volume of product shipments, selling
prices, product mix, manufacturing subcontract costs, manufacturing
utilization, and product yields. It is also periodically affected by costs
incurred in connection with start-up and installation of new process
technologies at outside manufacturing foundries and test houses. The decrease in our overall average selling prices of 11% in the first
quarter of 2004, compared to the comparable first quarter of 2003, was the
primary reason for the decline in overall gross margin. In addition, we
incurred approximately $0.2 million in increased manufacturing costs, related
to the release and sale of new products, which added to our gross margin
decline. We were successful, however, in reducing the average direct material
costs of our products by approximately 8% in the first quarter of 2004
compared to the first quarter of 2003. We expect to achieve improvements in
our gross margin as we anticipate the volumes of our 5.8GHz wireless products
to increase over the next two quarters. Research and Development Expenses (R&D) Quarter ended
    
    % Change
    
    Quarter endedMarch 31, 2004
    
    2003 to 2004
    
    March 31, 2003(In thousands)R&D
    
    $
    2,641
    
    
    
    (9.6
    )%
    
    $
    2,920
 Research and development expenses include costs associated with the
definition, design and development of new products. In addition, research and
development expenses include test development and prototype costs associated
with new product development. We expense wafers and production mask sets related to new products as
research and development costs until products based on new designs are fully
characterized, support published data sheets and satisfy reliability tests. The decrease in research and development expenses in the first quarter of
2004, as compared to the first quarter of 2003, resulted from the actions we
took to reposition the Company, beginning with the cancellation of our 802.11a
broadband wireless product development effort in October 2002 and continuing
with our restructuring efforts in the second quarter of 2003. We remain
committed 13




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to spend significant
resources on our engineering development efforts, and
in effecting that context, research and development costs increased almost $0.2
million for the first quarter of 2004 from the fourth quarter of 2003, as we
prepared to introduce new products. Selling, General and Administrative Expenses (SG&A) Quarter ended
    
    % Change
    
    Quarter endedMarch 31, 2004
    
    2003 to 2004
    
    March 31, 2003(In thousands)SG&A
    
    $
    1,846
    
    
    
    (17.0
    )%
    
    $
    2,224
 The decrease in SG&A expenses for the first quarter of 2004 compared to
the first quarter of 2003 was primarily due to the workforce reductions and
repositioning that occurred in the second quarter of 2003. Our SG&A expenses in
the first quarter of 2004 included almost $0.2 million in sales and business
development expenses incurred in connection with the introduction of new
products. Interest and Other Income and Interest and Other Expense Quarter ended
    
    % Change
    
    Quarter endedMarch 31, 2004
    
    2003 to 2004
    
    March 31, 2003(In thousands)Interest and other income
    
    $
    62
    
    
    
    (34.7
    )%
    
    $
    95Interest and other expense
    
    $
    (38
    )
    
    
    35.6
    %
    
    $
    (59
    )
 The decrease in interest and other income for the first three months of
2004 as compared to the three months of 2003 was primarily due to the decrease
in cash balances. Interest and other expense is primarily attributable to the
mortgage on our San Jose facility. The decrease in interest and other expenses
in the first three months of 2004 as compared to the first three months of 2003
is mainly due to a decrease in foreign currency translation losses for our
United Kingdom subsidiary. Provision for Income Taxes Quarter ended
    
    % Change
    
    Quarter endedMarch 31, 2004
    
    2003 to 2004
    
    March 31, 2003(In thousands)Provision for
income taxes
    
    
    $4
    
    
    
    (85.2
    )%
    
    $
    27
 The provision for income taxes for the three months ended March 31, 2004
consists of state taxes. The provision for the three months ended March 31,
2003 consists of taxes incurred by our subsidiary in the United Kingdom. We did
not record a benefit for income taxes related to our net losses in the U.S., as
we believe that the available objective evidence creates sufficient uncertainty
regarding the realization of the deferred tax assets such that we have recorded
a full valuation allowance. The effective tax rate for the first quarter of
2004 was 0.1%, compared to 1% in the first quarter of 2003. Liquidity and Capital Resources For the Quarters Ended March 31,2004
    
    2003(In thousands)Net cash used in operating activities
    
    $
    (2,508
    )
    
    $
    (3,492
    )Net cash provided by investing activities
    
    
    2,000
    
    
    
    1,602Net cash provided by (used in) financing activities
    
    
    291
    
    
    
    (64
    )Decrease in cash and cash equivalents
    
    $
    (217
    )
    
    $
    (1,954
    )
 Net cash used in operating activities during the first three months of
2004 was due primarily to a net operating loss of $2.7 million, an increase in
inventory of $0.9 million, and decreases in deferred revenue of $0.1 million
and accrued liabilities of $0.2 million. 14




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These were partially offset by an increase in accounts payable of $1.3
million, and non-cash charges for depreciation and amortization of $0.2
million. Investing activities during these periods consisted primarily of net sales
of short-term investments, which totaled $2.2 million for the first three
months of 2004, and $1.7 million for the first three months of 2003. Capital
expenditures were $0.2 million for the first three months of 2004 and $0.1
million in the comparable period of 2003. Cash used in financing activities consists of principal payments on our
debt and proceeds from the issuance of common stock in connection with the
exercise of employee stock options. Principal mortgage payments on our debt
were $0.1 million for the first three months of 2004 and 2003. The use of
cash for the principal payments on our debt was offset by proceeds from the
issuance of common stock in the amount of $0.4 million during the first three
months of 2004. Working capital was $11.9 million as of March 31, 2004, compared to $14.2
million as of December 31, 2003. Working capital at March 31, 2004 includes
cash and cash equivalents of $8.5 million and short-term investments of $6.7
million. We anticipate that existing cash resources are sufficient to fund any
anticipated operating losses, purchases of capital equipment, and provide
adequate working capital for at least the next 12 months. Our liquidity is
affected by many factors, including, among others, the extent to which we
pursue additional wafer fabrication capacity from existing foundry suppliers or
new suppliers, capital expenditures, the level of our product development
efforts, and other factors related to the uncertainties of the industry and
global economies. Accordingly, there can be no assurance that events in the
future will not require us to seek additional capital sooner or, if so
required, that such capital will be available on terms acceptable to us. Recent Accounting Pronouncements In May 2003, FASB issued Statement of Financial Accounting Standards No. 150,
Accounting for Certain Financial Instruments with Characteristics of both
Liabilities and Equity, or SFAS No. 150. SFAS No. 150 establishes standards
for how an issuer classifies and measures certain financial instruments with
characteristics of both liabilities and equity. It requires that an issuer
classify a financial instrument that is within its scope as a liability (or an
asset in some circumstances). Many of those instruments were previously
classified as equity. SFAS No. 150 is effective for financial instruments
entered into or modified after May 31, 2003, and otherwise is effective at the
beginning of the first fiscal period beginning after June 15, 2003. SFAS No.
150 is to be implemented by reporting the cumulative effect of a change in an
accounting principle for financial instruments created before the issuance date
of SFAS No. 150 and still existing at the beginning of the interim period of
adoption. Restatement is not permitted. The adoption of SFAS No. 150 to date
did not have a material impact on our financial position and results of
operations. In December 2003, the SEC issued Staff Accounting Bulletin No. 104,
Revenue Recognition (SAB 104), which codifies, revises and rescinds certain
sections of SAB No. 101, Revenue Recognition, in order to make this
interpretive guidance consistent with current authoritative accounting and
auditing guidance and SEC rules and regulations. The changes noted in SAB 104
did not have a material impact on our financial position and results of
operations. In March 2004, the FASB approved EITF Issue 03-6 Participating Securities
and the Two-Class Method under FAS 128. EITF Issue 03-6 supersedes the
guidance in Topic No. D-95, Effect of Participating Convertible Securities on
the Computation of Basic Earnings per Share, and requires the use of the
two-class method of participating securities. The two-class method is an
earnings allocation formula that determines earnings per share for each class
of common stock and participating security according to dividends declared (or
accumulated) and participation rights in undistributed earnings. In addition,
EITF Issue 03-6 addresses other forms of participating securities, including
options, warrants, forwards and other contracts to issue an entitys common
stock, with the exception of stock-based compensation (unvested options and
restricted stock) subject to the provisions of Opinion 25 and FAS 123. EITF
Issue 03-6 is effective for reporting periods beginning after March 31, 2004
and should be applied by restating previously reported EPS. We are currently in
the process of evaluating the impact that the adoption of EITF Issue 03-6 will
have on our financial position and results of operations. Factors That May Affect Future Operating Results The risks and uncertainties described below are not the only ones we face.
If any of the following risks actually occurs, our business, financial
condition or results of operations could be materially and adversely affected: Our operating results are difficult to predict and are likely to fluctuate
significantly. They may fail to meet or exceed the 15




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expectations of securities analysts or investors, causing our stock price to
decline. Our operating results are difficult to predict and have fluctuated
significantly in the past. They are likely to continue to fluctuate in the
future as a result of many factors, some of which are outside of our control.
Some of the factors that may cause these fluctuations include:  
    
    the level and timing of spending by our customers, both in the U.S.
and in foreign markets;
    
    changes in market demand, including seasonal and cyclical
fluctuations;
    
    timing, amount, cancellation or rescheduling of customer orders;
    
    fluctuations in manufacturing yields;
    
    timing of revenue recognition from contracts, which may span several
quarters;
    
    competitive market conditions;
    
    the announcement or introduction of new or enhanced products by us,
or competitors, or both;
    
    any delay in the introduction of new or enhanced products by us;
    
    market acceptance of our new products and continuing demand for our
existing products;
    
    cost and availability of wafers, other components and testing
services;
    
    mix of products sold;
    
    fluctuations in end user demand for wireless products manufactured by
our customers which incorporate our technology;
    
    economic conditions specific to the networking and wireless
industries and markets, as well as general economic conditions;
    
    ability to hire and retain qualified technical and other personnel;
    
    development of new industry standard communication protocols; and
    
    availability and performance of advanced silicon process technologies
from foundry sources. We believe that period-to-period comparisons of our operating results will
not necessarily be meaningful. You should not rely on these comparisons as an
indication of our future performance. If our operating results in one or more
future periods fail to meet or exceed the expectations of securities analysts
or investors, the trading price of our common stock may fluctuate, possibly by
a significant amount. The markets in which we operate are intensely competitive, and many competitors
are larger and more established. If we do not compete successfully, our
business could be harmed. Intense international and domestic competition, decreasing selling prices,
rapid technological change, short product life cycles and cyclical patterns
characterize the markets for our products. Competitors include significantly
larger corporations. New entrants in these markets could provide additional
competition. Most of our competitors are substantially larger and have greater
financial, technical, marketing and other resources than we do. Many of these
large organizations are in a better position to withstand any significant
reduction in spending by customers in these markets. They often have broader
product lines and market focus, and will therefore not be as susceptible to
downturns in a particular market. In addition, many competitors have focused on
the wireless market for longer than we have, and therefore have more
long-standing and established relationships with domestic and foreign
customers. The computer networking equipment and wireless markets have undergone a
period of rapid growth and consolidation in recent years. We expect our
dependence on sales to digital cordless phone and network equipment
manufacturers to continue. Our business 16




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and results of operations would be harmed in the event of a significant
slowdown in the digital cordless phone or computer networking equipment market.
In addition, as a result of competitive pricing pressures, we have experienced
lower margins on some of our products. Such pricing pressures will continue to
have an adverse effect on our results of operations, and our business could
suffer unless they can be offset by higher margins on other products or lower
operating expenses. We do not currently manufacture our own semiconductor wafers. As a result,
we are vulnerable to process technology advances competitors use to manufacture
products offering higher performance and lower cost. Larger companies with
wafer manufacturing facilities, broader product lines, greater technical and
financial resources and greater service and support capabilities have an
advantage in this market. In addition, our products are generally sole-sourced to our customers. If
our customers were to develop other sources for our products, our operating
results would be harmed. The market for wireless applications is characterized by rapid technological
change. Our future success depends on our ability to respond to these changes. Rapidly changing technology, frequent product introductions and evolving
industry standards make it difficult to accurately predict the wireless product
markets future growth rate, size or technological direction. In view of the
evolving nature of this market, suppliers of wireless products may decide to
adopt alternative standards or technologies that are incompatible with our
products. If we are unable to design, develop, manufacture and sell products
that are compatible with these new standards or technologies, our business and
operating results would be harmed. We need to develop and introduce new and enhanced products in a timely manner
to successfully compete in our industry. Continuing technological advancement, changes in customer requirements and
evolving industry standards characterize the wireless and computer equipment
networking markets. To compete successfully, we must design, develop,
manufacture and sell new or enhanced products that:  
    
    provide increasingly higher levels of performance and reliability;
    
    meet performance or other objective specified parameters;
    
    are cost effective;
    
    are brought to market in a timely manner;
    
    are in accordance with existing or evolving industry standards; and
    
    achieve market acceptance. The development of these new circuits is highly complex. We have sometimes
experienced delays in completing the development of new products. Successful
product development and introduction depends on many factors, including:  
    
    proper new product definition;
    
    timely completion and introduction of new product designs;
    
    availability of foundry capacity;
    
    acceptable manufacturing yields; and
    
    market acceptance of our products and our customers products. We must be able to adjust to changing market conditions quickly and
cost-effectively to compete successfully. Furthermore, we must introduce new
products in a timely manner, and achieve market acceptance for these products.
In addition, our customers products which incorporate our products must be
introduced in a timely manner and achieve market acceptance. If we, or our 17




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customers, fail to develop and introduce new products successfully, our
business and operating results would suffer. To successfully develop and market certain of our planned products, we may
need to enter into technology development or licensing agreements with third
parties. If we cannot enter into such agreements on acceptable terms, our
ability to develop and market new products could suffer, and our business and
operating results would be adversely affected. Customers typically take a long time to evaluate our new products. It
takes three to six months or more for customers to test new products, and at
least an additional three to 12 months until customers begin significant
production of products incorporating our products. We may therefore experience
a lengthy delay between product development and the generation of revenues from
new products. Delays inherent in such a long sales cycle raise additional risks
that customers may decide to cancel or change their product plans. Such changes
could result in the loss of anticipated sales. Our business, financial
condition, and results of operations would suffer if customers reduce or delay
orders, or choose not to release products incorporating our products. We have a history of losses and, because of continued investment in product
development, expect to incur losses in the future. We may not become
profitable. We have incurred quarterly net losses from June 2000 through March 2004,
except for a profit in the third quarter of 2002 which was attributable to an
income tax refund. Because of those losses, we had an accumulated deficit of
$22,975,000 as of March 31, 2004. Successful engineering development and market penetration in the product
areas we have chosen to compete in require high levels of engineering and
product development expense. We intend to continue to spend significant amounts
on new product and technology development. Our networking products are reaching
maturity, and revenue from this product line has declined and is expected to
decline further over the next twelve months. We anticipate that our existing
cash will fund any anticipated operating losses, purchases of capital
equipment, and provide adequate working capital for at least the next 12
months. We expect to incur losses in the future and may not achieve our goals
of positive net income and cash flow. To the extent that our existing resources and cash generated from operations
are insufficient to fund our future activities, we may need to raise additional
capital. If funds are not available on acceptable terms, we may not be able to
hire or retain employees, fund our operations or compete effectively. We believe that our existing capital resources and cash generated from
operations will enable us to maintain our operations for at least the next 12
months. However, if our capital requirements or results of operations vary
materially from those currently planned, we may require additional financing
sooner than anticipated. If additional funds are raised through the issuance of
debt securities, these securities could have rights, preferences and privileges
senior to our common stock, and the terms of this debt could impose
restrictions on our operations. The sale of additional equity or convertible
debt securities could result in additional dilution to our stockholders. We
cannot be certain that additional financing will be available in amounts or on
terms acceptable to us, if at all. If adequate funds are not available to us on
acceptable terms, our ability to hire, train or retain employees, to fund our
operations and sales and marketing efforts, take advantage of unanticipated
opportunities, develop or enhance services or products, or respond to
competitive pressures would be significantly limited, which could harm our
business, financial condition and operating results. We depend on networking, wireless, and telecommunications spending for our
revenue. Any decrease or delay in spending in these industries would negatively
impact future operating results and financial condition. Demand for our products in the future will depend on the amount and timing
of spending by network providers, manufacturers of wireless consumer products,
and telecommunications equipment suppliers. Spending in these areas depends
upon a variety of factors, including competitive pressures, discretionary
consumer spending patterns, and general economic conditions. During certain periods, new orders slowed, customers cancelled or placed
holds on existing orders, and new order levels fluctuated, due to developments
in the general economy and capital markets. This situation could recur in the
future. Because the majority of our revenue comes from sales to a few
customers, a delay in orders from one customer could have a significant
negative effect on future revenues. Relatively short product life cycles characterize the computer network
equipment and digital cordless telephone markets. If one or more of our
significant customers were to select circuits manufactured by a competitor for
future products, our business would suffer. The loss of one or more of our
current customers, failure to attract new customers, or disruption of our sales
and distribution channels 18




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could harm our business and operating results. Our customer base is concentrated. The loss of one or more key customers or
distributors would harm our business. A significant majority of our revenue comes from sales to relatively few
customers. Sales to the ten largest customers, excluding domestic distributors,
accounted for approximately 82% of net revenue for the three months ended March
31, 2004 and 78% of net revenue for the same period in 2003. Sales to domestic
distributors accounted for approximately 6% of net revenue for both the three months
ended March 31, 2004 and 2003, respectively. We anticipate that a limited
number of key customers and distributors will continue to provide a significant
portion of our net revenue for the foreseeable future. Our future success
depends on our ability to retain our current customers and attract new
customers. A reduction, delay or cancellation of orders from one or more
significant customers could materially harm our operating results. In addition,
our operating results could be adversely affected if one or more of our major
customers were to develop other sources for the products we now supply them. Generally, customers may cancel or reschedule orders to purchase standard
products without significant penalty until 30 days prior to requested shipment.
Customers frequently revise delivery schedules, and the quantities of products
to be delivered, to reflect changes in their needs. Since backlog can be
canceled or rescheduled, our backlog at any time is not necessarily indicative
of future revenue. We depend on international sales and are subject to the risks associated with
international operations, which may negatively affect our business. Sales to customers outside of the United States represented 93% of net
revenue for the three months ended March 31, 2004 and 91% of net revenue in
2003. We expect that international sales will continue to generate a
substantial proportion of net revenue for the foreseeable future. Our
international operations are subject to a number of risks, including:  
    
    changes in regulations and laws of foreign governments and
telecommunications standards;
    
    import and export legislation and license requirements, tariffs,
taxes, quotas and other trade barriers;
    
    compliance with foreign laws, treaties and technical standards;
    
    delays resulting from difficulty in obtaining export licenses for
certain technology;
    
    fluctuations in currency exchange rates;
    
    difficulty in collecting accounts receivable;
    
    difficulty in managing foreign operations;
    
    loss of one or more international distributors;
    
    geopolitical risks, changes in diplomatic and trade relationships and
economic instability; and
    
    the effects of the terrorist attacks on the United States, the war in
Iraq, the United States war on international terrorism, a recurrence of
SARS and any related conflicts or similar events worldwide. Substantially all of our international sales must be licensed by the
Office of Export Administration of the U.S. Department of Commerce. To date, we
have not experienced any material difficulties in obtaining export licenses. Our international sales are typically denominated in U.S. dollars.
Fluctuations in currency exchange rates could cause our products to become
relatively more expensive to customers in a particular country, while
competitors products denominated in local currencies become less expensive.
This may lead to a reduction in sales or profitability in that country, which
could adversely affect our business. Gains and losses on the conversion to U.S. dollars of accounts receivable,
accounts payable and other international assets and liabilities may contribute
to fluctuations in operating results. In addition, international customers
typically take longer to pay for purchases than customers in the United States.
If foreign markets do not continue to develop, or foreign sales cycles prove 19




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unpredictable, our revenue and business would be adversely affected. Selling prices for wireless products typically decrease, which could lead to
lower operating results. Average selling prices for products in the wireless markets have rapidly
declined due to many factors, including:  
    
    rapidly changing technologies;
    
    price-performance enhancements;
    
    product introductions by competitors;
    
    price pressure from significant customers; and
    
    product maturity and obsolescence. The decline in the average selling prices of our products may cause
substantial fluctuations in our operating results. We continue to develop and
market new products that incorporate valued new features and sell at higher
prices. Failure to deliver new products offering increased value would result
in a decline in both revenue and margins, harming our business, financial
condition, and results of operations. Defects in our products, product returns and product liability could result in
a decrease in customers and revenue, unexpected expenses and loss of market
share. Complex products such as ours frequently contain errors, defects, and bugs
upon release. Despite thorough testing by Micro Linear, our test houses and
customers, these errors, defects and bugs are sometimes discovered after we
begin to ship products. We expend significant resources to remedy these
problems, but occasionally have faced legal claims by customers and others.
Product defects can also cause interruptions, delays or cancellations of sales
to customers, in addition to claims against us, all of which could adversely
affect our operating results. We depend on the health of the semiconductor industry, which is highly
cyclical. The decline in demand in the semiconductor industry could affect our
financial condition and results of operations. The semiconductor industry experiences significant downturns and wide
fluctuations in supply and demand. The industry also experiences significant
fluctuations in anticipation of changes in general economic conditions. This
causes significant variances in product demand and production capacity, and
aggravates both our manufacturing costs and product selling prices. These
cyclical patterns, which we expect to continue, may substantially harm our
business, financial condition, and results of operations. If we fail to adequately forecast demand for our products, we may incur product
shortages or excess product inventory. We regularly request indications from customers as to their future plans
and requirements, to ensure that we will be prepared to meet production demand
for our products. However, we may not receive anticipated purchase orders for
our products. We must be able to effectively manage the expenses and inventory
risks associated with meeting potential demand. If we fail to meet customers
supply expectations, we may lose business from such customers. If we expend
resources and purchase materials, or enter into commitments to acquire
materials and manufacture products, and customers do not purchase these
products, our business and operating results would suffer. Design wins, which require significant expenditures, often precede the
generation of volume sales by a year or more. The value of any design win will
largely depend upon the commercial success of the customers product, and on
the extent to which the design of the customers product accommodates
components manufactured by our competitors. We cannot assure that we will
achieve design wins, or that any design win will result in significant future
revenue. We depend on a limited number of outside foundries and test subcontractors in
the manufacturing process, and any failure to obtain sufficient foundry or
testing capacity could significantly delay our ability to ship our products,
damage our customer relationships, and result in reduced revenue. 20




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We utilize outside foundries for all wafer production. We believe that
utilizing outside foundries enable us to focus on our design strengths,
minimize fixed costs and capital expenditures and access diverse manufacturing
technologies. We currently intend to continue to rely exclusively upon our
outside foundries for our wafer fabrication requirements. However, there are
significant risks associated with the reliance on outside foundries, including
the lack of assured wafer supply and control over delivery schedules, delays in
obtaining access to key process technologies, and limited control over
manufacturing yields and production costs. The manufacture of integrated circuits is a highly complex and technically
demanding process. We have diversified our sources of wafer supply and have
worked closely with our foundries to minimize the likelihood of reduced
manufacturing yields. However, our foundries have sometimes experienced lower
than anticipated manufacturing yields, particularly in connection with the
introduction of new products and the installation and start-up of new
processes. Reduced yields have, at times, negatively affected our operating
results, a situation which may recur in the future. Dependence on foundries located outside of the United States subjects us
to numerous risks, including exchange rate fluctuations, export and import
restrictions, trade sanctions, political instability and tariff increases. One
of our main foundries is located in Singapore, which presents specific risks
due to political instability in that region. We purchase wafers from outside foundries pursuant to customers purchase
orders. We generally do not have a guaranteed level of wafer capacity or wafer
costs at our foundries. Our wafer suppliers could prioritize capacity for other
uses, or reduce or eliminate deliveries to us on short notice. In addition, we
depend upon a limited number of foundries for our wafer requirements. Any
sudden demand for an increased amount of wafers, or sudden reduction or
elimination of any source of wafers, could result in a material delay in the
shipment of products. Disruptions in supply, which have occurred in the past,
may occur in the future. If such a disruption occurred, and we were unable to
qualify alternative manufacturing sources for our products in a timely manner,
or if such sources were unable to produce wafers with acceptable manufacturing
yields, our business and operating results would be materially and adversely
affected. We rely on four outside test service subcontractors to test our products.
The same risks described in the paragraphs above, concerning guaranteed
capacity, dependence upon a limited number of test service subcontractors, and
disruptions in service, also apply to our test and assembly subcontractors. Rapid technological change and frequent new product introductions
characterize the markets for our products. To remain competitive, we must
develop or obtain access to new semiconductor process technologies in order to
reduce die size, increase die performance and functional complexity, and
improve manufacturing yields. If we are unable to obtain access to advanced
wafer processing technologies, limiting our ability to introduce competitive
products on a timely basis, our future operating results would be harmed. Minute levels of contaminants in the semiconductor manufacturing
environment, defects in the masks used to print circuits on a wafer,
difficulties in the fabrication process and other factors can cause a
substantial percentage of wafers to be rejected or a significant number of die
on each wafer to be nonfunctional. Many of these manufacturing problems are
difficult to diagnose and time consuming and expensive to remedy. Our foundries
have, at times, experienced lower than anticipated yields, which have adversely
affected production and operating results. The manufacturing processes utilized by our foundries are continuously
being improved in order to increase yield and product performance. Process
changes can, however, result in interruptions in production or significantly
reduced yields. New process technologies and new products are especially
susceptible to wide variations in manufacturing yields and efficiency.
Irregularities, adverse yield fluctuations or other manufacturing problems at
our foundries could result in production interruption or delivery delays, which
would harm our business and results of operations. We have granted nontransferable, limited process licenses to some of our
foundries to utilize our processes to manufacture and sell wafers to other
customers. We protect our proprietary technology, particularly our design
methodology, but may not be able to prevent its misappropriation by our
foundries or others. We and the independent foundries and subcontractors we use to manufacture and
test our products are subject to environmental laws. Failure to comply with
these laws could delay manufacturing of our products and result in unexpected
expenses. Our wafer suppliers and test and assembly subcontractors are subject to a
variety of U.S. and foreign government regulations related to the discharge or
disposal of toxic, volatile or otherwise hazardous chemicals used in their
manufacturing processes. Failure 21




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by our suppliers or subcontractors to comply with environmental
regulations could result in fines, suspension of production or cessation of
operations. Environmental regulations could also require our suppliers or
subcontractors to acquire equipment or incur other expenses to comply with
environmental regulations. If our suppliers or subcontractors incur substantial
additional expenses, product costs could significantly increase, adversely
affecting our results of operations. We are also subject to a variety of environmental regulations relating to
our operations. If we fail to comply with present and future regulations, the
government could impose fines on us, or compel us to suspend or cease
operations. If we or our suppliers or subcontractors fail to control the use or
discharge of hazardous substances, we could be subject to civil or criminal
liabilities, which could harm our business and operating results. Because the availability of qualified personnel experienced in the technologies
we utilize is limited and competition for these experienced technologists is
intense, we may not be successful in attracting and retaining personnel, which
could have an impact upon the development or sales of our products. Our future success will depend to a significant extent on our ability to
attract, retain and motivate qualified personnel, especially those with
engineering design experience and expertise. We may not be successful in
attracting and retaining such qualified personnel. Competitors may attempt to recruit our employees. While employees are
required to sign standard agreements concerning confidentiality and ownership
of inventions, we do not have employment contracts or non-competition
agreements with most of our personnel. The loss of the services of key
employees, the inability to attract or retain qualified personnel, or delays in
hiring personnel, particularly engineers and other technical personnel could
negatively affect our business and prevent us from achieving our business
goals. Our success depends on our ability to protect our intellectual property and
proprietary rights. 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 attempt to protect our intellectual property rights through patents,
trademarks, copyrights, licensing arrangements, maintaining certain technology
as trade secrets and other measures. However, any patent, trademark, copyright
or other intellectual property rights we own may be invalidated, circumvented
or challenged. We cannot be certain that our intellectual property rights will
provide competitive advantages, or that any pending or future patent
applications will be issued with the scope of the claims sought by us.
Competitors may develop technologies that are similar or superior to our
technology, duplicate our technology or design around the patents that we own.
In addition, effective patent, copyright and trade secret protection may be
unavailable or limited in certain foreign countries in which we do business. We believe that the future success of our business will depend on our
ability to translate technological expertise and innovation into new and
enhanced products. We enter into confidentiality or license agreements with our
employees, consultants, vendors and customers, and limit access to and
distribution of our proprietary information. Nevertheless, we may not be able
to prevent the misappropriation of our technology. In addition, we have taken legal action to enforce our patents and other
intellectual property rights, protect our trade secrets, determine the validity
and scope of the proprietary rights of others, and defend against claims of
infringement or invalidity. If a third party makes a valid claim, and we cannot
obtain a license to the technology on reasonable terms, our operations could be
harmed. We may be subject to legal proceedings and claims from time to time in the
ordinary course of our business, including claims of alleged infringement of
the proprietary rights and other intellectual property rights of third parties.
Intellectual property litigation is expensive and time-consuming, and could
divert our managements attention away from running our business. We have in the past, and may in the future, be parties to legal proceedings
that could have a negative financial impact on us. From time to time we have received 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 22




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business. In addition, negative developments with respect to litigation
could cause the price of our common stock to decline significantly. Our stock price has been and will likely continue to be volatile because of
stock market fluctuations that affect the price of technology stocks. A decline
in our stock price could result in securities class action litigation against
us, which could divert managements attention and harm our business. Our stock price has been and is likely to continue to be highly volatile.
Between January 1, 2004 and March 31, 2004, our stock price has closed as high
as $7.95 on January 28, 2004, and as low as $5.50 on January 2, 2004. Our stock
price could fluctuate significantly due to a number of factors, including:  
    
    variations in our actual or anticipated operating results;
    
    sales of substantial amounts of our stock;
    
    announcements about us or about our competitors, including
technological innovation or new products;
    
    litigation and other developments relating to our patents or other
proprietary rights or those of our competitors;
    
    conditions in the computer networking equipment and wireless markets;
    
    governmental regulation and legislation; and
    
    changes in securities analysts estimates of our performance, or our
failure to meet analysts expectations. Many of these factors are beyond our control. In addition, the stock
markets in general, and the NASDAQ National Market and the market for
technology companies in particular, have experienced extreme price and volume
fluctuations recently. These fluctuations often have been unrelated or
disproportionate to the operating performance of these companies. These broad
market and industry factors may decrease the market price of our common stock,
regardless of our actual operating performance. In the past, companies that
have experienced volatility in the market prices of their stock have been the
objects of securities class action litigation. If we were the objects of
securities class action litigation, it could result in substantial costs and a
diversion of managements attention and resources, which could harm our
business. Our Certificate of Incorporation and Bylaws, Stockholder Rights Plan and
Delaware law contain provisions that could discourage a change in control, even
if the change in control would be beneficial to our stockholders. Provisions of our Amended and Restated Certificate of Incorporation,
Bylaws, the 1998 Shareholder Rights Plan, our stock option plans and Delaware
law could make it more difficult for a third party to acquire us, even if doing
so would be beneficial to our stockholders. These provisions could limit the
price that investors might be willing to pay in the future for shares of our
common stock. Under the Shareholder Rights Plan, adopted in August 1998, each share of
our outstanding common stock carries one Right to purchase 1/1000 of a share of
Series A Participating Preferred Stock at an exercise price of $30.00 per
Right. If someone acquires 15% or more of our common stock, each Right not
owned by a holder of 15% or more of our common stock entitles the holder, upon
payment of the $30.00 exercise price, to receive common stock having a current
market value of $60.00. This issuance of additional common stock would
significantly reduce the percentage of common stock held by a potential
acquirer. The Rights expire in August 2008. In addition, Section 203 of the Delaware General Corporation Law and the
terms of our stock option plans may discourage, delay or prevent a change in
control of Micro Linear. Specifically, Section 203 prohibits a Delaware
corporation from engaging in any business combination with an interested
stockholder for three years after the date the stockholder became an interested
stockholder unless specific conditions are met. Also, in the event outstanding
options granted pursuant to certain of our stock option plans are not assumed
by an acquiring corporation, the unvested portion of such options may be
accelerated upon a change of control. In addition, some individual stock option
grants provide for the partial or complete acceleration of vesting upon a
change of control. Recently enacted regulatory changes may cause us to incur increased costs. 23




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Recently enacted and proposed changes in the laws and regulations
affecting public companies, including the provisions of the Sarbanes-Oxley Act
of 2002 and rules adopted by the SEC and NASDAQ, could cause us to incur
increased costs as we evaluate the implications of new rules and respond to new
requirements. The new rules could make it more difficult for us to obtain
certain types of insurance, including director and officer liability insurance,
and we may be forced to accept reduced policy limits and coverage or incur
substantially higher costs to obtain the same or similar coverage. The impact
of these events could also make it more difficult for us to attract and retain
qualified persons to serve on our board of directors, or as executive officers.
We are presently evaluating and monitoring developments with respect to these
new and proposed rules, and we cannot predict or estimate the amount of
additional costs we may incur or the timing of such costs. 
 Item 3.Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk As of March 31, 2004, our investment portfolio consisted of U.S.
government obligations, commercial paper and money market funds, typically with
maturities of less than 12 months. Some of these securities are subject to
interest rate risk, and will decline in value if market interest rates
increase. We intend to hold our fixed income investments until maturity and,
therefore, do not expect to recognize an adverse impact from interest rate
changes on income or cash flows. If market interest rates were to increase
immediately and uniformly by 10% as of March 31, 2004 and March 31, 2003, the
decline in the fair value of the portfolio would not be material. Foreign Currency Exchange Risk We have international facilities and are, therefore, subject to foreign
currency rate exposure. We limit our foreign currency risks principally by
maintaining minimal foreign currency balances. Since our exposure related to
exchange rate volatility has not been significant, we do not currently hedge
this exposure. 
 Item 4.Controls and Procedures (a) Evaluation of disclosure controls and procedures.We maintain
disclosure controls and procedures, as such term is defined in Rule 13a-15(e)
under the Securities Exchange Act of 1934 (the Exchange Act), that are
designed to ensure that information required to be disclosed by us in reports
that we file or submit under the Exchange Act is recorded, processed,
summarized, and reported within the time periods specified in Securities and
Exchange Commission rules and forms, and that such information is accumulated
and communicated to our management, including our Chief Executive Officer and
Chief Financial Officer, as appropriate, to allow timely decisions regarding
required disclosure. In designing and evaluating our disclosure controls and
procedures, management recognized that disclosure controls and procedures, no
matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the disclosure controls and
procedures are met. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Based on their evaluation as of the end of the period covered by this
Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial
Officer have concluded that, subject to the limitations noted above, our
disclosure controls and procedures were effective to ensure that material
information relating to us, including our consolidated subsidiaries, is made
known to them by others within those entities, particularly during the period
in which this Quarterly Report on Form 10-Q was being prepared. (b) Changes in internal control over financial reporting.There was no
change in our internal control over financial reporting (as defined in Rule
13a-15(f) under the Exchange Act) identified in connection with the evaluation
described in Item 4(a) above that occurred during our last fiscal quarter that
has materially affected, or is reasonably likely to materially affect, our
internal control over financial reporting. 24




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PART II. OTHER INFORMATION 
 Item 6.Exhibits and Reports on Form 8-K (a) Exhibits: ExhibitNumber
    
    Description of Document31.1
    
    Rule 13a-14(a) Certification by the Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification by the Chief Financial Officer32.1*
    
    Section 1350 Certification by the Chief Executive Officer32.2*
    
    Section 1350 Certification by the Chief Financial Officer.
 * In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release
Nos. 33-8238 and 34-47986, Final Rule: Managements Reports on Internal Control
Over Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, the certifications furnished in Exhibit 32.1 and Exhibit 32.2
are deemed to accompany this Form 10-Q and will not be deemed filed for
purpose of Section 18 of the Exchange Act. Such certifications will not be
deemed to be incorporated by reference into any filing under the Securities Act
or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference. (b) Reports on Form 8-K On
January 22, 2004, the Company furnished a Current Report on Form 8-K
furnishing under item 12 the Companys press release relating to its financial
results for its fiscal year ended December 31, 2003. 25




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SIGNATURES Pursuant to the requirements of the Securities Exchange Act, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. MICRO LINEAR CORPORATIONDate: May 12, 2004
    By
    /s/ TIMOTHY A. RICHARDSONTimothy A. RichardsonPresident and Chief Executive Officer
(Principal Executive Officer) Date: May 12, 2004
    By
    /s/ MICHAEL W. SCHRADLEMichael W. SchradleChief Financial Officer
(Principal Financial and Accounting Officer) 26




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INDEX TO EXHIBITS ExhibitNumber
    
    Description of Document31.1
    
    Rule 13a-14(a) Certification by the Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification by the Chief Financial Officer32.1*
    
    Section 1350 Certification by the Chief Executive Officer32.2*
    
    Section 1350 Certification by the Chief Financial Officer.
 * In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release
Nos. 33-8238 and 34-47986, Final Rule: Managements Reports on Internal Control
Over Financial Reporting and Certification of Disclosure in Exchange Act
Periodic Reports, the certifications furnished in Exhibit 32.1 and Exhibit 32.2
are deemed to accompany this Form 10-Q and will not be deemed filed for
purpose of Section 18 of the Exchange Act. Such certifications will not be
deemed to be incorporated by reference into any filing under the Securities Act
or the Exchange Act, except to the extent that the registrant specifically
incorporates it by reference. 27