##### Table of Contents



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 June 27, 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 No.)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
August 1, 2004, net of shares held in treasury, was 12,409,620.




---



TABLE OF CONTENTS PAGEPART I FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (Unaudited)
    
    
    3Consolidated Condensed Balance Sheets at June 30, 2004 and December 31, 2003
    
    
    3Consolidated Condensed Statements of Operations for the three months and six months ended June 30, 2004 and 2003
    
    
    4Consolidated Condensed Statements of Cash Flows for the six months ended June 30, 2004 and 2003
    
    
    5Notes to Unaudited 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
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II OTHER INFORMATION
    
    
    27Item 6. Exhibits and Reports on Form 8-K
    
    
    27SIGNATURES
    
    
    28Index to Exhibits
    
    
    29EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




---



##### Table of Contents



PART I. FINANCIAL INFORMATION 
 Item 1.Financial Statements MICRO LINEAR CORPORATION 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 (IN THOUSANDS)
 (Unaudited)
 June 30,
    
    December 31,2004
    
    2003AssetsCash and cash equivalents
    
    $
    8,689
    
    
    $
    8,703Short-term investments
    
    
    4,672
    
    
    
    8,966Accounts receivable, net of allowance for
doubtful accounts of $38 at June 30, 2004 and
$30 at December 31, 2003
    
    
    1,808
    
    
    
    937Inventories
    
    
    2,461
    
    
    
    2,383Other current assets
    
    
    489
    
    
    
    563Total current assets
    
    
    18,119
    
    
    
    21,552Property, plant and equipment, net
    
    
    5,881
    
    
    
    5,860Other assets
    
    
    26
    
    
    
    26Total assets
    
    $
    24,026
    
    
    $
    27,438Liabilities and Stockholders EquityAccounts payable
    
    $
    2,524
    
    
    $
    2,683Accrued compensation and benefits
    
    
    899
    
    
    
    737Deferred revenue
    
    
    310
    
    
    
    681Other accrued liabilities
    
    
    1,282
    
    
    
    1,185Short term debt
    
    
    1,901
    
    
    
    2,040Total current liabilities
    
    
    6,916
    
    
    
    7,326Stockholders equity:Common stock
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    61,130
    
    
    
    60,583Accumulated deficit
    
    
    (23,791
    )
    
    
    (20,255
    )Accumulated other comprehensive income (loss)
    
    
    (11
    )
    
    
    2Treasury stock
    
    
    (20,233
    )
    
    
    (20,233
    )Total stockholders equity
    
    
    17,110
    
    
    
    20,112Total liabilities and stockholders equity
    
    $
    24,026
    
    
    $
    27,438
 See accompanying notes to unaudited consolidated condensed financial statements. 3




---



##### Table of Contents



MICRO LINEAR CORPORATION 
 CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 (UNAUDITED)
 THREE MONTHS ENDED
    
    SIX MONTHS ENDEDJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net revenue
    
    $
    6,508
    
    
    $
    6,342
    
    
    $
    10,348
    
    
    $
    11,034Cost of revenue
    
    
    2,683
    
    
    
    3,804
    
    
    
    4,776
    
    
    
    6,008Gross margin
    
    
    3,825
    
    
    
    2,538
    
    
    
    5,572
    
    
    
    5,026Operating expenses:Research and development
    
    
    2,612
    
    
    
    2,845
    
    
    
    5,253
    
    
    
    5,765Selling, general and administrative
    
    
    1,856
    
    
    
    2,046
    
    
    
    3,702
    
    
    
    4,270Restructuring charges
    
    
    166
    
    
    
    954
    
    
    
    166
    
    
    
    954Total operating expenses
    
    
    4,634
    
    
    
    5,845
    
    
    
    9,121
    
    
    
    10,989Loss from operations
    
    
    (809
    )
    
    
    (3,307
    )
    
    
    (3,549
    )
    
    
    (5,963
    )Interest and other income
    
    
    47
    
    
    
    63
    
    
    
    109
    
    
    
    158Interest and other expense
    
    
    (49
    )
    
    
    (35
    )
    
    
    (86
    )
    
    
    (94
    )Loss before income taxes
    
    
    (811
    )
    
    
    (3,279
    )
    
    
    (3,526
    )
    
    
    (5,899
    )Provision for income taxes
    
    
    6
    
    
    
    23
    
    
    
    10
    
    
    
    50Net loss
    
    $
    (817
    )
    
    $
    (3,302
    )
    
    $
    (3,536
    )
    
    $
    (5,949
    )Net loss per share, basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.27
    )
    
    $
    (0.29
    )
    
    $
    (0.49
    )Weighted average number of shares used in per share computation
    
    
    12,377
    
    
    
    12,213
    
    
    
    12,356
    
    
    
    12,204
 See accompanying notes to unaudited consolidated condensed financial statements. 4




---



##### Table of Contents



MICRO LINEAR CORPORATION 
 CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 SIX MONTHS ENDEDJune 30,2004
    
    2003Net cash used in operating activities
    
    $
    (4,267
    )
    
    $
    (6,011
    )Cash flows from investing activities:Purchase of capital equipment
    
    
    (354
    )
    
    
    (471
    )Purchases of short-term investments
    
    
    (4,917
    )
    
    
    (6,973
    )Sales of short-term investments
    
    
    9,198
    
    
    
    9,058Net cash provided by investing activities
    
    
    3,927
    
    
    
    1,614Cash flows from financing activities:Principal payments on debt
    
    
    (139
    )
    
    
    (129
    )Proceeds from issuance of common stock
    
    
    465
    
    
    
    114Net cash provided by (used in) financing activities
    
    
    326
    
    
    
    (15
    )Net decrease in cash and cash equivalents
    
    
    (14
    )
    
    
    (4,412
    )Cash and cash equivalents at beginning of period
    
    
    8,703
    
    
    
    10,801Cash and cash equivalents at end of period
    
    $
    8,689
    
    
    $
    6,389
 See accompanying notes to unaudited consolidated condensed financial statements. 5




---



##### Table of Contents



MICRO LINEAR CORPORATION 
 NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 1. Organization and Summary of Significant Accounting Policies Organization Micro Linear Corporation is a fabless semiconductor company specializing
in wireless integrated circuit solutions, which enable a variety of wireless
products serving a global market. These transceivers can be used in many
streaming wireless applications such as cordless phones, PHS handsets, 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 second quarter of 2003 ended on June 29, 2003.
The second quarter of 2004 ended on June 27, 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 second 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. The accompanying unaudited consolidated condensed 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. 6




---



##### Table of Contents



Earnings (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
includes the effect of all potentially dilutive common stock outstanding during
the period. Diluted earnings (loss) per share excludes potential common stock
if the effect is anti-dilutive. We compute diluted earnings (loss) per share
using the treasury stock method for stock options outstanding. A total of 3,893,420 and 3,271,103 shares of potential common stock were
not included in the dilutive net loss per share calculations for the periods
ending June 30, 2004 and 2003, respectively, because there effect is
anti-dilutive. Following is a reconciliation of the basic and diluted loss per share
computations (in thousands, except per share amounts): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Basic:Net loss
    
    $
    (817
    )
    
    $
    (3,302
    )
    
    $
    (3,536
    )
    
    $
    (5,949
    )Weighted average common shares outstanding

    
    
    12,377
    
    
    
    12,213
    
    
    
    12,356
    
    
    
    12,204Basic loss per share
    
    $
    (0.07
    )
    
    $
    (0.27
    )
    
    $
    (0.29
    )
    
    $
    (0.49
    )Diluted:Net loss
    
    $
    (817
    )
    
    $
    (3,302
    )
    
    $
    (3,536
    )
    
    $
    5,949
    )Weighted average common shares outstanding
    
    
    12,377
    
    
    
    12,213
    
    
    
    12,356
    
    
    
    12,204Dilutive stock options
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding
    
    
    12,377
    
    
    
    12,213
    
    
    
    12,356
    
    
    
    12,204Diluted loss per share
    
    $
    (0.07
    )
    
    $
    (0.27
    )
    
    $
    (0.29
    )
    
    $
    (0.49
    )
 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
    
    Six Months Ended
    
    Three Months Ended
    
    Six Months EndedJune 30
    
    June 30
    
    June 30
    
    June 302004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Expected life (in years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    2.7
    
    
    
    2.5
    
    
    
    2.7
    
    
    
    2.5Risk-free interest rate
    
    
    1.03
    %
    
    
    1.19
    %
    
    
    1.03
    %
    
    
    1.19
    %
    
    
    2.23
    %
    
    
    2.68
    %
    
    
    2.08
    %
    
    
    2.61
    %Volatility
    
    
    49
    %
    
    
    74
    %
    
    
    49
    %
    
    
    74
    %
    
    
    66
    %
    
    
    79
    %
    
    
    59
    %
    
    
    79
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 7




---



##### Table of Contents



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 June 27, 2004 and 2003 were
$1.52 and $1.09, 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 June 27, 2004 and 2003 were $2.74
and $1.75 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 Ended
    
    Six Months EndedJune 30
    
    June 302004
    
    2003
    
    2004
    
    2003Net loss, as reported
    
    $
    (817
    )
    
    $
    (3,302
    )
    
    $
    (3,536
    )
    
    $
    (5,949
    )Add: Stock-based employee
compensation expense
included in reported net
loss
    
    
    
    
    
    
    1
    
    
    
    
    
    
    
    2Deduct: Stock-based
compensation expense
determined under fair value
based method for employee
awards
    
    
    (255
    )
    
    
    8
    
    
    
    (561
    )
    
    
    (365
    )Pro forma net loss
    
    $
    (1,072
    )
    
    $
    (3,293
    )
    
    $
    (4,097
    )
    
    $
    (6,312
    )Pro forma net loss per share:Basic and diluted
    
    $
    (0.09
    )
    
    $
    (0.27
    )
    
    $
    (0.33
    )
    
    $
    (0.52
    )Reported net loss per share:Basic and diluted
    
    $
    (0.07
    )
    
    $
    (0.27
    )
    
    $
    (0.29
    )
    
    $
    (0.49
    )
 2. Financial Statement Details Inventories consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Work-in-process
    
    $
    1,306
    
    
    $
    1,024Finished goods
    
    
    1,096
    
    
    
    739Inventory held by distributors
    
    
    59
    
    
    
    620Total inventories
    
    $
    2,461
    
    
    $
    2,383
 Property, plant and equipment consist of the following (in thousands): June 30,
    
    December 31,2004
    
    2003Land
    
    $
    2,250
    
    
    $
    2,250Buildings and improvements
    
    
    7,990
    
    
    
    7,990Machinery and equipment
    
    
    12,057
    
    
    
    11,703Property, plant and equipment
    
    
    22,297
    
    
    
    21,943Accumulated depreciation and amortization
    
    
    (16,416
    )
    
    
    (16,083
    )Net property, plant and equipment
    
    $
    5,881
    
    
    $
    5,860
 Provision for Income Taxes The provision for income taxes for the three months and six months ended
June 30, 2004 consists mainly of state taxes. The provision for the three
months and six months ended June 30, 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 8




---



##### Table of Contents



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 three months ended June 30, 2004 was 0.7% and for
the six months ended June 30, 2004 was 0.3%. The effective tax rate for the
three months and six months ended June 30, 2003 was 0.7% and 0.8%. Comprehensive Income For the three months and six months ended June 30, 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 Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net loss
    
    $
    (817
    )
    
    $
    (3,302
    )
    
    $
    (3,536
    )
    
    $
    (5,949
    )Accumulated other comprehensive loss:Unrealized loss on marketable securities, net
    
    
    (14
    )
    
    
    (2
    )
    
    
    (13
    )
    
    
    (14
    )Comprehensive loss
    
    $
    (831
    )
    
    $
    (3,304
    )
    
    $
    (3,549
    )
    
    $
    (5,963
    )
 3. Recent Accounting Pronouncements In November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 requires that a
liability be recorded at fair value in the guarantors balance sheet upon
issuance of a guarantee. In addition, FIN No. 45 requires disclosures about the
guarantees that an entity has issued, including a reconciliation of changes in
the entitys product warranty liabilities. The initial recognition and initial
measurement provisions of FIN No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantors fiscal year-end. We did not have significant warranty expense for
the three and six months ended June 30, 2004. 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. At its March 2004 meeting, the EITF reached a consensus on recognition and
measurement guidance previously discussed under EITF 03-01. The consensus
clarifies the meaning of other-than-temporary impairment and its application to
investments classified as either available-for-sale or held-to-maturity under
SFAS No. 115 and investments accounted for under the cost method or the equity
method. The recognition and measurement guidance for which the consensus was
reached in the March 2004 meeting is to be applied to other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004. We
do not believe that this consensus on the recognition and measurement guidance
will have an impact on our financial position and results of operations. 9




---



##### Table of Contents



4. Operations by Geographic Regions The following is a summary of operations by geographical regions (in
thousands): Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Net revenue:United States
    
    $
    229
    
    
    $
    561
    
    
    $
    481
    
    
    $
    961Hong Kong
    
    
    1,291
    
    
    
    442
    
    
    
    2,018
    
    
    
    937Japan
    
    
    4,094
    
    
    
    4,261
    
    
    
    5,940
    
    
    
    6,849Asia
    
    
    269

    
    
    
    174
    
    
    
    521
    
    
    
    391Italy
    
    
    
    
    
    
    564
    
    
    
    1,388
    
    
    
    1,138Europe
    
    
    625
    
    
    
    269
    
    
    
    
    
    
    
    675Other
    
    
    
    
    
    
    71
    
    
    
    
    
    
    
    83Consolidated
    
    $
    6,508
    
    
    $
    6,342
    
    
    $
    10,348
    
    
    $
    11,034
 Three Months Ended
    
    Six Months EndedJune 30,
    
    June 30,2004
    
    2003
    
    2004
    
    2003Capital expenditures:United States
    
    $
    130
    
    
    $
    356
    
    
    $
    354
    
    
    $
    471Depreciation and amortization:United States
    
    $
    154
    
    
    $
    598
    
    
    $
    333
    
    
    $
    829Europe
    
    
    
    
    
    
    10
    
    
    
    
    
    
    
    46Consolidated
    
    $
    154
    
    
    $
    608
    
    
    $
    333
    
    
    $
    875
 Identifiable assets by geographic region are as follows (in thousands): June 30,
    
    December 31,2004
    
    2003Identifiable assets:United States
    
    $
    24,004
    
    
    
    27,364Asia
    
    
    18
    
    
    
    35Europe
    
    
    4
    
    
    
    39Consolidated
    
    $
    24,026
    
    
    $
    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 current quarters net loss includes a $166,000 charge in
connection with the recognition of the remaining lease obligation, net of a
sublease, on a facility vacated during the quarter as part of this
restructuring. As of June 30, 2004 the restructuring has been substantially
completed. Severance
    
    Excessand Benefits
    
    Facilities
    
    Total(in thousands)Balance, March 31, 2004
    
    $
    26
    
    
    $
    
    
    
    $
    26Additional provisions
    
    
    
    
    
    
    166
    
    
    
    166Reclassification
    
    
    
    
    
    
    82
    
    
    
    82Utilizations
    
    
    (16
    )
    
    
    (36
    )
    
    
    (52
    )Balance, June 30, 2004
    
    $
    10
    
    
    
    212
    
    
    $
    222
 10




---



##### Table of Contents



6. Subsequent Event On July 28, 2004 we sold our San Jose facilities for approximately $7.0
million. We will recognize a gain on the sale of approximately $1.0 million in
the third quarter operating results and the sale will generate cash of
approximately $4.6 million, net of a $1.9 million mortgage payoff and $0.5
million of closing costs. During the next year we will lease back a portion of
the current facility as we search for a new headquarters location. This asset
was not classified as held for sale in the accompanying financial statements as
it did not meet the criteria for such classification under SFAS No. 144,
Accounting for the Impairment or Disposal of Long-Lived Assets. 
 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 expectations as to some deterioration in our gross
margin over the next two quarters but that we do not expect gross margin to
fall below historical levels., our intentions to continue to focus significant
resources on development of new products and technologies, 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 intellectual property and 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. 11




---



##### 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 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. Overview Micro Linear Corporation is a fabless semiconductor company specializing
in wireless integrated circuit solutions, which enable a variety of wireless
products serving a global market. These transceivers can be used in many
streaming wireless applications such as cordless phones, PHS handsets, 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 77% of net
revenue for the second quarter of 2004 compared to 72% of net revenue for the
second quarter of 2003. 12




---



##### Table of Contents



Results of Operations Three Months and Six Months Ended June 30, 2004 Compared with Three Months and
Six Months Ended June 30, 2003 The following tables present certain consolidated statements of operations
data for the periods indicated: For the Three Months Ended June 302004
    
    2003($ in thousands)% of Net
    
    
    
    
    
    % of NetRevenue
    
    
    
    
    
    RevenueNet RevenueWireless
    
    $
    5,023
    
    
    
    77.2
    %
    
    $
    4,547
    
    
    
    71.7
    %Networking
    
    
    1,485
    
    
    
    22.8
    
    
    
    1,795
    
    
    
    28.3Total net revenue
    
    
    6,508
    
    
    
    100.0
    
    
    
    6,342
    
    
    
    100.0Cost of revenue
    
    
    2,683
    
    
    
    41.2
    
    
    
    3,804
    
    
    
    60.0Gross margin
    
    
    3,825
    
    
    
    58.8
    
    
    
    2,538
    
    
    
    40.0Operating expenses:Research and development
    
    
    2,612
    
    
    
    40.1
    
    
    
    2,845
    
    
    
    44.9Selling, general and
administrative
    
    
    1,856
    
    
    
    28.5
    
    
    
    2,046
    
    
    
    32.3Restructuring charges
    
    
    166
    
    
    
    2.6
    
    
    
    954
    
    
    
    15.0Total operating expenses
    
    
    4,634
    
    
    
    71.2
    
    
    
    5,845
    
    
    
    92.2Loss from operations
    
    
    (809
    )
    
    
    (12.4
    )
    
    
    (3,307
    )
    
    
    (52.1
    )Interest and other income
    
    
    47
    
    
    
    0.7
    
    
    
    63
    
    
    
    1.0Interest and other expense
    
    
    (49
    )
    
    
    (0.8
    )
    
    
    (35
    )
    
    
    (0.6
    )Loss before provision for taxes
    
    
    (811
    )
    
    
    (12.5
    )
    
    
    (3,279
    )
    
    
    (51.7
    )Provision for taxes
    
    
    6
    
    
    
    0.1
    
    
    
    23
    
    
    
    0.4Net loss
    
    $
    (817
    )
    
    
    (12.6
    )%
    
    $
    (3,302
    )
    
    
    (52.1
    )%
 For the Six Months Ended June 302004
    
    2003($ in thousands)% of Net
    
    
    
    
    
    % of NetRevenue
    
    
    
    
    
    RevenueNet revenueWireless
    
    $
    7,172
    
    
    
    69.3
    %
    
    $
    7,142
    
    
    
    64.7
    %Networking
    
    
    3,176
    
    
    
    30.7
    
    
    
    3,892
    
    
    
    35.3Total net revenue
    
    
    10,348
    
    
    
    100.0
    
    
    
    11,034
    
    
    
    100.0Cost of revenue
    
    
    4,776
    
    
    
    46.2
    
    
    
    6,008
    
    
    
    54.4Gross margin
    
    
    5,572
    
    
    
    53.8
    
    
    
    5,026
    
    
    
    45.6Operating expenses:Research and development
    
    
    5,253
    
    
    
    50.8
    
    
    
    5,765
    
    
    
    52.2Selling, general and
administrative
    
    
    3,702
    
    
    
    35.8
    
    
    
    4,270
    
    
    
    38.7
 13




---



##### Table of Contents



For the Six Months Ended June 302004
    
    2003($ in thousands)% of Net
    
    
    
    
    
    % of NetRevenue
    
    
    
    
    
    RevenueRestructuring charges
    
    
    166
    
    
    
    1.6
    
    
    
    954
    
    
    
    8.6Total operating expenses
    
    
    9,121
    
    
    
    88.1
    
    
    
    10,989
    
    
    
    99.6Loss from operations
    
    
    (3,549
    )
    
    
    (34.3
    )
    
    
    (5,963
    )
    
    
    (54.0
    )Interest and other income
    
    
    109
    
    
    
    1.1
    
    
    
    158
    
    
    
    1.4Interest and other expense
    
    
    (86
    )
    
    
    (0.8
    )
    
    
    (94
    )
    
    
    (0.9
    )Loss before provision for taxes
    
    
    (3,526
    )
    
    
    (34.1
    )
    
    
    (5,899
    )
    
    
    (53.5
    )Provision for taxes
    
    
    10
    
    
    
    0.1
    
    
    
    50
    
    
    
    0.5Net loss
    
    $
    (3,536
    )
    
    
    (34.2
    )%
    
    $
    (5,949
    )
    
    
    (53.9
    )%
 Net Revenue Three months ended
    
    % Change
    
    Three months ended
    
    Six months ended
    
    % Change
    
    Six months endedJune 30, 2004
    
    2003 to 2004
    
    June 30, 2003
    
    June 30, 2004
    
    2003 to 2004
    
    June 30, 2003($ in thousands)
    
    
    
    
    
    
    
    
    
    ($ in thousands)Wireless
    
    $
    5,023
    
    
    
    10.5
    %
    
    $
    4,547
    
    
    $
    7,172
    
    
    
    0.4
    %
    
    $
    7,142Networking
    
    
    1,485
    
    
    
    (17.3
    )%
    
    
    1,795
    
    
    
    3,176
    
    
    
    (18.4
    )%
    
    
    3,892Total
    
    $
    6,508
    
    
    
    2.6
    %
    
    $
    6,342
    
    
    $
    10,348
    
    
    
    (6.2
    )%
    
    $
    11,034
 Net revenue during the second quarter of 2004 increased $0.2 million from
the comparable second quarter of 2003. Net revenue from our wireless products
increased $0.5 million, an 11% increase from the second quarter of 2003, while
net revenue from our networking products decreased $0.3 million, a 17% decrease
from the second quarter of 2003. The increase in wireless product net revenue
was due primarily to the higher average selling prices resulting mainly from
the shipment of our 5.8GHz product, the ML5800, which began shipping in volume
to our largest customer, Uniden, during the second quarter of 2004. However,
wireless product unit volume shipments decreased 31% as Uniden transitioned
from the ML2724 our 2.4 GHz product to the ML5800. Although, unit volumes
shipments for our networking products in the second quarter of 2004 were
relatively flat as compared to the second quarter of 2003, the average selling
prices for our networking products decreased 19% due primarily to a shift in
product mix. Net revenue for the first six months of 2004 decreased 6% from the first
six months of 2003. Our wireless product net revenue was essentially flat with
the prior year as the unit volume shipment decrease of 23% was more than offset
by the increase in our average selling prices, due to the volume shipments of
the ML5800 in the second quarter of 2004. The decrease in unit volume demand
for our wireless products was again due to Unidens transition to our ML5800
product from our 2.4 GHz product that was shipping in volume in 2003.
Networking product net revenue decreased 18% in the first six months of 2004 as
compared to the first six months of 2003 due to a decrease of 14% in average
selling prices and a 6% decrease in unit volume shipments. In the first quarter of 2004 sales to Uniden Corporation and Giant
Electronics, Ltd., a subcontract manufacturer for Plantronics Inc., each
accounted for more than 10% of our net revenue. In the second quarter of
2003, sales to Uniden Corporation accounted for more than 10% of our net
revenue International revenue for the second quarter of 2004 totaled $6.3 million,
or 97% of net revenue compared to $5.8 million, or 92% of net revenue for the
second quarter of 2003. International revenue for the first six months of 2004
totaled $9.9 million, or 95% of net revenue compared to $10.1 million , or 92%
of net revenue for the first six months of 2003. Domestic revenue was
approximately 3% of net revenue for the second quarter of 2004 compared to 8%
for the second quarter of 2003. Domestic revenue was approximately 5% of net
revenue for the first six months of 2004 compared to 8% for the first six
months of 2003. We expect that international revenue will account for the
substantial majority of our total net revenue for the foreseeable future. 14




---



##### Table of Contents



Gross Margin Three months ended
    
    % Change
    
    Three months ended
    
    Six months ended
    
    % Change
    
    Six months endedJune 30, 2004
    
    2003 to 2004
    
    June 30, 2003
    
    June 30, 2004
    
    2003 to 2004
    
    June 30, 2003($ in thousands)
    
    
    
    
    
    
    
    
    
    ($ in thousands)Gross Margin
    
    $
    3,825
    
    
    
    50.7
    %
    
    $
    2,538
    
    
    $
    5,572
    
    
    
    10.9
    %
    
    $
    5,026%
    
    
    59
    %
    
    
    
    
    
    
    40
    %
    
    
    54
    %
    
    
    
    
    
    
    46
    %
 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 subcontractors. Gross margin increased significantly to 59% in the second quarter of 2004,
as compared to 40% in the second quarter of 2003. This increase was primarily
due to a 43% increase in average selling prices and an 11% decrease in unit
product costs. The growth in our average selling prices was driven primarily
by sales of our ML5800, which began shipping in volume during the second
quarter, partially offset by a decrease in average selling prices of our
networking products, resulting from a shift in product mix. The decrease in our
unit product costs in the second quarter of 2004 was primarily due to our
ability to maintain high yields in the manufacture of our ML5800 product during
that quarter. Also, during the second quarter of 2003, unit costs and the
resulting gross margin was impacted by low yields of the ML2724, our 2.4 GHz
wireless product that was then shipping in high volumes. Gross margin for the first six months of 2004 increased to 54% from 46% in
the first six months of 2003. This increase was due to the increase in gross
margin during the second quarter of 2004, which in turn was due to higher
average selling prices of our wireless products, particularly of our ML5800 and
high manufacturing yields on this product. In addition, the 2003 margin was
also negatively impacted by the low yields experienced in the manufacture of
the ML2724, our 2.4 GHz wireless product that was then shipping in high
volumes. We expect some deterioration in gross margin over the next two quarters as
our ML5800 product matures and the selling price for this product declines,
however, we do not expect gross margin to fall below historical levels. Research and Development Expenses (R&D) Three months ended
    
    % Change
    
    Three months ended
    
    Six months ended
    
    % Change
    
    Six months endedJune 30, 2004
    
    2003 to 2004
    
    June 30, 2003
    
    June 30, 2004
    
    2003 to 2004
    
    June 30, 2003($ in thousands)
    
    
    
    
    
    
    
    
    
    ($ in thousands)R&D
    
    $
    2,612
    
    
    
    (8.2
    )%
    
    $
    2,845
    
    
    $
    5,253
    
    
    
    (8.9
    )%
    
    $
    5,765
 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 second quarter
and first half of 2004, as compared to the second quarter and first half 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. Selling, General and Administrative Expenses (SG&A) Three months ended
    
    % Change
    
    Three months ended
    
    Six months ended
    
    % Change
    
    Six months endedJune 30, 2004
    
    2003 to 2004
    
    June 30, 2003
    
    June 30, 2004
    
    2003 to 2004
    
    June 30, 2003($ in thousands)
    
    
    
    
    
    
    
    
    
    ($ in thousands)SG&A
    
    $
    1,856
    
    
    
    (9.3
    )%
    
    $
    2,046
    
    
    $
    3,702
    
    
    
    (13.3
    %)
    
    $
    4,270
 The decrease in selling, general and administrative expenses for the
second quarter and first half of 2004 compared to the second quarter and first
half of 2003 was primarily due to the workforce reductions and repositioning
that occurred in the second quarter of 2003. 15




---



##### Table of Contents



Interest and Other Income and Interest and Other Expense Three months ended
    
    % Change
    
    Three months ended
    
    Six months ended
    
    % Change
    
    Six months endedJune 30, 2004
    
    2003 to 2004
    
    June 30, 2003
    
    June 30, 2004
    
    2003 to 2004
    
    June 30, 2003($ in thousands)
    
    
    
    
    
    
    
    
    
    ($ in thousands)Interest and other
income
    
    $
    47
    
    
    
    (25.4
    )%
    
    $
    63
    
    
    $
    109
    
    
    
    (31.1
    )%
    
    $
    158Interest and other
expense
    
    $
    (49
    )
    
    
    (40.0
    )%
    
    $
    (35
    )
    
    $
    (86
    )
    
    
    8.5
    %
    
    $
    (94
    )
 The decrease in interest and other income for the first six months of 2004
as compared to the six 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 six months of 2004 as compared to the first six months of 2003 is
mainly due to a decrease in foreign currency translation activity for our
United Kingdom subsidiary and a non-recurring fixed asset write-off
approximately $22,000 in 2003. Provision for Income Taxes Three months ended
    
    % Change
    
    Three months ended
    
    Six months ended
    
    % Change
    
    Six months endedJune 30, 2004
    
    2003 to 2004
    
    June 30, 2003
    
    June 30, 2004
    
    2003 to 2004
    
    June 30, 2003($ in thousands)
    
    
    
    
    
    
    
    
    
    ($ in thousands)Provision for
income taxes
    
    $
    6
    
    
    
    (73.9
    )%
    
    $
    23
    
    
    $
    10
    
    
    
    (80.0
    )%
    
    $
    50
 The provision for income taxes for the three months and six months ended
June 30, 2004 consists mainly of state taxes. The provision for the three
months and six months ended June 30, 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 three months ended June 30, 2004 was 0.7% and
for the six months ended June 30, 2004 was 0.3%. The effective tax rate for
the three months and six months ended June 30, 2003 was 0.7% and 0.8%,
respectively. Liquidity and Capital Resources For the Six Months Ended June 30,2004
    
    2003(in thousands)Net cash used in operating activities
    
    $
    (4,267
    )
    
    $
    (6,011
    )Net cash provided by investing activities
    
    
    3,927
    
    
    
    1,614Net cash provided by (used in) financing activities
    
    
    326
    
    
    
    (15
    )Decrease in cash and cash equivalents
    
    $
    (14
    )
    
    $
    (4,412
    )
 Net cash used in operating activities during the first six months of 2004
was due primarily to a net operating loss of $3.5 million, an increase in
accounts receivable of $0.9 million, and decreases in deferred revenue of $0.4
million and accounts payable of $0.2 million. These were partially offset by an
increase in accrued liabilities of $0.3 million, and non-cash charges for
depreciation and amortization of $0.3 million. Investing activities during these periods consisted primarily of net sales
of short-term investments, which totaled $4.3 million for the first six months
of 2004, and $2.1 million for the first six months of 2003. Capital
expenditures were $0.4 million for the first six months of 2004 and $0.5
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 six months of 2004 and 2003. The use of cash
for the principal payments on our debt was offset by proceeds from the issuance
of 16




---



##### Table of Contents



common stock in the amount of $0.5 million during the first six months of
2004 and $0.1 million for the first six months of 2003. Working capital was $11.2 million as of June 30, 2004, compared to $14.2
million as of December 31, 2003. Working capital at June 30, 2004 includes cash
and cash equivalents of $8.7 million and short-term investments of $4.7
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 November 2002, the FASB issued FASB Interpretation (FIN) No. 45,
Guarantors Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others. FIN No. 45 requires that a
liability be recorded at fair value in the guarantors balance sheet upon
issuance of a guarantee. In addition, FIN No. 45 requires disclosures about the
guarantees that an entity has issued, including a reconciliation of changes in
the entitys product warranty liabilities. The initial recognition and initial
measurement provisions of FIN No. 45 are applicable on a prospective basis to
guarantees issued or modified after December 31, 2002, irrespective of the
guarantors fiscal year-end. We did not have significant warranty expense for
the three and six months ended June 30,2004. 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. At its March 2004 meeting, the EITF reached a consensus on recognition and
measurement guidance previously discussed under EITF 03-01. The consensus
clarifies the meaning of other-than-temporary impairment and its application to
investments classified as either available-for-sale or held-to-maturity under
SFAS No. 115 and investments accounted for under the cost method or the equity
method. The recognition and measurement guidance for which the consensus was
reached in the March 2004 meeting is to be applied to other-than-temporary
impairment evaluations in reporting periods beginning after June 15, 2004. We
do not believe that this consensus on the recognition and measurement guidance
will have an impact 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 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; 17




---



##### Table of Contents




    
    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 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. 18




---



##### Table of Contents



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
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 revenue from
new products. Delays inherent in such a long sales cycle raise additional risks
that customers may decide to cancel or change their product 19




---



##### Table of Contents



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 June 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
$23.8 million as of June 30, 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 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 revenue. 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 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 net revenue comes from sales to relatively
few customers. Sales to our ten largest customers, excluding domestic
distributors, accounted for approximately 91% and 87% of net revenue for the
three months and six months ended June 30, 2004, respectively, and
approximately 89% and 83% of net revenue for the comparable periods in 2003.
Two customers, Uniden Corporation and Giant Electronics, Ltd. (a subcontract
manufacturer for Plantronics, Inc), together accounted for 73% of our net
revenue for the second quarter of 2004. Sales to domestic distributors
accounted for approximately 3% and 4% of net revenue for the three months and
six months ended June 30, 2004, respectively, and approximately 8% for both of
the comparable periods in 2003. 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 20




---



##### Table of Contents



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 97% and 95% of
net revenue for the three months and six months ended June 30, 2004,
respectively, and 92% of net revenue for the comparable periods 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 the Office of Export Administration of the U.S. Department
of Commerce must license all of our international sales. 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
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; 21




---



##### Table of Contents




    
    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 subcontractors
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 be assured of additional
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. 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 22




---



##### Table of Contents



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,
which exposes us to the risks described above, including risks associated with
capacity, dependence upon a limited number of test service subcontractors and
disruptions in service. 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 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. 23




---



##### Table of Contents



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 have 12 issued U.S. patents, five U.S. patent applications pending and
ten foreign patent applications pending. Through a sale of a portion of our
assets, we maintain a royalty-free license to 45 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
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 June 27, 2004, our stock price has traded as high
as $7.95 on January 28, 2004, and as low as $4.65 on May 11, 2004. Our stock
price could fluctuate 24




---



##### Table of Contents



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. 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. 25




---



##### Table of Contents



Item 3.Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk As of June 30, 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 June 30, 2004 and June 30, 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. 26




---



##### Table of Contents



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 April 24, 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 quarter ended March 31, 2004. 27




---



##### Table of Contents



SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned, thereunto duly authorized. MICRO LINEAR CORPORATIONDate: August 11, 2004
    
    By
    
    /s/ TIMOTHY A. RICHARDSONTimothy A. RichardsonPresident and Chief Executive Officer(Principal Executive Officer)Date: August 11, 2004
    
    By
    
    /s/ MICHAEL W. SCHRADLEMichael W. SchradleChief Financial Officer(Principal Financial and Accounting Officer)
 28




---



##### Table of Contents



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. 29