##### 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 September 26, 2004 OR o
    
    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(State or other jurisdiction of
incorporation or organization)
    
    94-2910085(I.R.S. Employer
Identification No.)2050 Concourse Drive
San Jose, California(Address of principal executive offices)
    
    95131(Zip Code)
 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 o Indicate by check mark whether the Registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act). Yes o No x The number of shares of the Registrants Common Stock outstanding as of
November 1, 2004, net of shares held in treasury, was 12,442,970.




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TABLE OF CONTENTS PAGEPART I FINANCIAL INFORMATIONItem 1. Financial Statements (Unaudited)
    
    
    3Consolidated Condensed Balance Sheets at September 30, 2004 and December 31, 2003
    
    
    3Consolidated Condensed Statements of Operations for the three months and nine months ended September 30, 2004 and 2003
    
    
    4Consolidated Condensed Statements of Cash Flows for the nine months ended September 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
    
    
    10Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    26Item 4. Controls and Procedures
    
    
    26PART II OTHER INFORMATIONItem 4. Submission of matters to a vote of Security Holders
    
    
    27Item 6. Exhibits
    
    
    28SIGNATURES
    
    
    29Index to Exhibits
    
    
    30EXHIBTI 31.1EXHIBTI 31.2EXHIBTI 32.1EXHIBTI 32.2
  2




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##### Table of Contents



PART I. FINANCIAL INFORMATIONS 
 Item 1.Financial Statements MICRO LINEAR CORPORATION 
 CONSOLIDATED CONDENSED BALANCE SHEETS
 (IN THOUSANDS)
 
 September 30,
    
    December 31,2004
    
    2003(Unaudited)AssetsCash and cash equivalents
    
    $
    11,705
    
    
    $
    8,703Short-term investments
    
    
    4,776
    
    
    
    8,966Accounts receivable, net of allowance for
doubtful accounts of $203 at September 30,
2004 and $30 at
December 31, 2003
    
    
    3,423
    
    
    
    937Inventories
    
    
    1,850
    
    
    
    2,383Other current assets
    
    
    352
    
    
    
    563Total current assets
    
    
    21,106
    
    
    
    21,552Property, plant and equipment, net
    
    
    420
    
    
    
    5,860Other assets
    
    
    26
    
    
    
    26Total assets
    
    $
    22,552
    
    
    $
    27,438Liabilities and Stockholders EquityAccounts payable
    
    $
    1,999
    
    
    $
    2,683Accrued compensation and benefits
    
    
    870
    
    
    
    737Deferred revenue
    
    
    674
    
    
    
    681Other accrued liabilities
    
    
    1,123
    
    
    
    1,185Short term debt
    
    
    
    
    
    
    2,040Total current liabilities
    
    
    4,666
    
    
    
    7,326Stockholders equity:Common stock
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    61,297
    
    
    
    60,583Accumulated deficit
    
    
    (23,184
    )
    
    
    (20,255
    )Accumulated other comprehensive income (loss)
    
    
    (9
    )
    
    
    2Treasury stock
    
    
    (20,233
    )
    
    
    (20,233
    )Total stockholders equity
    
    
    17,886
    
    
    
    20,112Total liabilities and stockholders equity
    
    $
    22,552
    
    
    $
    27,438
 See accompanying notes to unaudited consolidated condensed financial statements. 3




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MICRO LINEAR CORPORATION 
 CONSOLIDATED CONDENSED
STATEMENTS OF OPERATIONS

(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)
 THREE MONTHS ENDED
    
    NINE MONTHS ENDEDSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net revenue
    
    $
    5,875
    
    
    $
    5,818
    
    
    $
    16,223
    
    
    $
    16,851Cost of goods sold
    
    
    2,465
    
    
    
    3,410
    
    
    
    7,242
    
    
    
    9,418Gross margin
    
    
    3,410
    

    
    
    2,408
    
    
    
    8,981
    
    
    
    7,433Operating expenses:Research and development
    
    
    2,165
    
    
    
    1,712
    
    
    
    7,417
    
    
    
    7,477Selling, general and administrative
    
    
    1,796
    
    
    
    1,567
    
    
    
    5,498
    
    
    
    5,836Fixed assets impairment and restructuring charges
    
    
    
    
    
    
    1,608
    
    
    
    166
    
    
    
    2,562Gain on sale of land and buildings
    
    
    (1,138
    )
    
    
    
    
    
    
    (1,138
    )
    
    
    Total operating expenses
    
    
    2,823
    
    
    
    4,887
    
    
    
    11,943
    
    
    
    15,875Income (loss) from operations
    
    
    587
    
    
    
    (2,479
    )
    
    
    (2,962
    )
    
    
    (8,442
    )Interest and other income
    
    
    57
    
    
    
    80
    
    
    
    166
    
    
    
    237Interest and other expense
    
    
    (23
    )
    
    
    (63
    )
    
    
    (109
    )
    
    
    (156
    )Income (loss) before income taxes
    
    
    621
    
    
    
    (2,462
    )
    
    
    (2,905
    )
    
    
    (8,361
    )Provision for income taxes
    
    
    14
    
    
    
    22
    
    
    
    24
    
    
    
    72Net income (loss)
    
    $
    607
    
    
    $
    (2,484
    )
    
    $
    (2,929
    )
    
    $
    (8,433
    )Net income (loss) per share:BasicNet income (loss) per share
    
    $
    0.05
    
    
    $
    (0.20
    )
    
    $
    (0.24
    )
    
    $
    (0.69
    )Weighted average number of shares used in
per share computation
    
    
    12,424
    
    
    
    12,250
    
    
    
    12,383
    
    
    
    12,220DilutedNet income (loss) per share
    
    $
    0.04
    
    
    $
    (0.20
    )
    
    $
    (0.24
    )
    
    $
    (0.69
    )Weighted average number of shares used in
per share computation
    
    
    13,698
    
    
    
    12,250
    
    
    
    12,383
    
    
    
    12,220
 See accompanying notes to unaudited consolidated condensed financial statements. 4




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MICRO LINEAR CORPORATION 
 CONSOLIDATED CONDENSED
STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
(UNAUDITED)
 NINE MONTHS ENDEDSeptember 30,2004
    
    2003Net cash used in operating activities
    
    $
    (5,867
    )
    
    $
    (6,329
    )Cash flows from investing activities:Purchase of capital equipment
    
    
    (401
    )
    
    
    (481
    )Purchases of short-term investments
    
    
    (6,306
    )
    
    
    (9,203
    )Sale of short-term investments
    
    
    10,485
    
    
    
    14,020Proceeds from sale of land and building
    
    
    6,530
    
    
    
    Net cash provided by investing activities
    
    
    10,308
    
    
    
    4,336Cash flows from financing activities:Principal payments on debt
    
    
    (2,040
    )
    
    
    (195
    )Proceeds from issuance of common stock
    
    
    601
    
    
    
    144Net cash used in financing activities
    
    
    (1,439
    )
    
    
    (51
    )Net increase (decrease) in cash and cash equivalents
    
    
    3,002
    
    
    
    (2,044
    )Cash and cash equivalents at beginning of period
    
    
    8,703
    
    
    
    10,801Cash and cash equivalents at end of period
    
    $
    11,705
    
    
    $
    8,757
 See accompanying notes to unaudited consolidated condensed financial statements. 5




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MICRO LINEAR CORPORATION 
 NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
 1. Organization and Summary of Significant Accounting Policies Organization Micro Linear 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, California 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 third quarter of 2003 ended on September 28,
2003. The third quarter of 2004 ended on September 26, 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
transactions of the United Kingdom subsidiary are recorded as other income and
expense. For the third quarters of 2004 and 2003, transaction 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. 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. 6




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A total of 2,606,081 and 3,810,595 shares of potential common stock were
not included in the dilutive net loss per share calculations for the three
months ending September 30, 2004 and 2003, respectively, because their effect
would be anti-dilutive. A total of 3,880,236 and 3,810,595 shares of potential
common stock were not included in the dilutive net loss per share calculations
for the nine months ended September 30, 2004 and 2003, respectively, because
their effect would be anti-dilutive. Following is a reconciliation of the basic and diluted income (loss) per
share computations (in thousands, except per share amounts): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Basic:Net income (loss)
    
    $
    607
    
    
    $
    (2,484
    )
    
    $
    (2,929
    )
    
    $
    (8,433
    )Weighted average common shares outstanding
    
    
    12,424
    
    
    
    12,250
    
    
    
    12,383
    
    
    
    12,220Basic income (loss) per share
    
    $
    0.05
    
    
    $
    (0.20
    )
    
    $
    (0.24
    )
    
    $
    (0.69
    )Diluted:Net income (loss)
    
    $
    607
    
    
    $
    (2,484
    )
    
    $
    (2,929
    )
    
    $
    (8,433
    )Weighted average common shares outstanding
    
    
    12,424
    
    
    
    12,250
    
    
    
    12,383
    
    
    
    12,220Dilutive stock options
    
    
    1,274
    
    
    
    
    
    
    
    
    
    
    
    Weighted average common shares outstanding, diluted
    
    
    13,698
    
    
    
    12,250
    
    
    
    12,383
    
    
    
    12,220Diluted income (loss) per share
    
    $
    0.04
    
    
    $
    (0.20
    )
    
    $
    (0.24
    )
    
    $
    (0.69
    )
 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 equity instruments issued to non-employees in accordance
with the provisions of SFAS No. 123 and Emerging Task Force Issue No. 96-18,
Accounting for Equity Instruments That Are Issued to Other Than Employees for
Acquiring, or in Conjunction with Selling, Good or Services (EITF 96-18). Pro Forma Net Income (Loss) 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
    
    Nine Months Ended
    
    Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 30
    
    September 30
    
    September 302004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Expected life (in
years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    0.5
    
    
    
    2.78
    
    
    
    2.60
    
    
    
    2.73
    
    
    
    2.64Risk-free interest
rate
    
    
    1.77
    %
    
    
    0.98
    %
    
    
    1.40
    %
    
    
    1.19
    %
    
    
    2.73
    %
    
    
    2.98
    %
    
    
    2.19
    %
    
    
    2.78
    %Volatility
    
    
    59
    %
    
    
    52
    %
    
    
    54
    %
    
    
    74
    %
    
    
    55
    %
    
    
    52
    %
    
    
    58
    %
    
    
    61
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 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 September 30, 2004 and 2003
were $1.77 and $0.86 respectively. The weighted average estimated fair values
of shares at the date of grant that were issued under the Employee Stock
Purchase Plan during the nine months ended September 30, 2004 and 2003 were
$1.65 and $1.10 7




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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 September 30, 2004 and 2003 were $2.27 and $1.04
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 nine months ended September 30, 2004 and 2003 were $2.46 and $1.24
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 (in thousands except per share amounts). Three Months Ended
    
    Nine Months EndedSeptember 30
    
    September 302004
    
    2003
    
    2004
    
    2003Net income (loss), as reported
    
    $
    607
    
    
    $
    (2,484
    )
    
    $
    (2,929
    )
    
    $
    (8,433
    )Add: Stock-based employee
compensation expense included in
reported net income (loss)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2Deduct: Stock-based compensation
expense determined under fair value
based method for employee awards
    
    
    (251
    )
    
    
    (267
    )
    
    
    (812
    )
    
    
    (632
    )Pro forma net income (loss)
    
    $
    356
    
    
    $
    (2,751
    )
    
    $
    (3,741
    )
    
    $
    (9,063
    )Pro forma net income (loss) per share:Basic
    
    $
    0.03
    
    
    $
    (0.22
    )
    
    $
    (0.30
    )
    
    $
    (0.74
    )Diluted
    
    $
    0.03
    
    
    $
    (0.22
    )
    
    $
    (0.30
    )
    
    $
    (0.74
    )Reported net income (loss) per share:Basic
    
    $
    0.05
    
    
    $
    (0.20
    )
    
    $
    (0.24
    )
    
    $
    (0.69
    )Diluted
    
    $
    0.04
    
    
    $
    (0.20
    )
    
    $
    (0.24
    )
    
    $
    (0.69
    )
 2. Financial Statement Details Inventories consist of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Work-in-process
    
    $
    662
    
    
    $
    1,024Finished goods
    
    
    986
    
    
    
    739Inventory held by distributors
    
    
    202
    
    
    
    620Total inventories
    
    $
    1,850
    
    
    $
    2,383
 Property, plant and equipment consist of the following (in thousands): September 30,
    
    December 31,2004
    
    2003Land *
    
    $
    
    
    
    $
    2,250Buildings and improvements *
    
    
    
    
    
    
    7,990Machinery and equipment
    
    
    5,569
    
    
    
    11,703Property, plant and equipment
    
    
    5,569
    
    
    
    21,943Accumulated depreciation and amortization
    
    
    (5,149
    )
    
    
    (16,083
    )Net property, plant and equipment
    
    $
    420
    
    
    $
    5,860
 * The sale of our San Jose facilities was completed on July 28, 2004. Provision for Income Taxes The provision for income taxes for the three months and nine months ended
September 30, 2004 consists mainly of state taxes. The provision for the three
months and nine months ended September 30, 2003 consists mainly of taxes
incurred by our subsidiary in the United Kingdom and minimum state tax
obligations. 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 September 30, 2004 was 2.3% and for the nine months
ended September 30, 2004 was 0.8%. The effective tax rate for both the three
months and nine months ended September 30, 2003 was 0.9%. 8




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Comprehensive Income For the three months and nine months ended September 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
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net income (loss)
    
    $
    607
    
    
    $
    (2,484
    )
    
    $
    (2,929
    )
    
    $
    (8,433
    )Accumulated other comprehensive income (loss):Unrealized gain (loss) on marketable securities, net
    
    
    2
    
    
    
    (8
    )
    
    
    (11
    )
    
    
    (22
    )Comprehensive income (loss)
    
    $
    609
    
    
    $
    (2,492
    )
    
    $
    (2,940
    )
    
    $
    (8,455
    )
 3. Recent Accounting Pronouncements 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. 4. Operations by Geographic Regions The following is a summary of operations by geographical regions (in
thousands): Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Net revenue:United States
    
    $
    256
    
    
    $
    408
    
    
    $
    737
    
    
    $
    1,369Hong Kong
    
    
    1,467
    
    
    
    1,009
    
    
    
    3,485
    
    
    
    1,947Japan
    
    
    3,602
    
    
    
    3,668
    
    
    
    9,542
    
    
    
    10,517Other Asia
    
    
    141
    
    
    
    173
    
    
    
    662
    
    
    
    564Italy
    
    
    
    
    
    
    180
    
    
    
    
    
    
    
    1,318Other Europe
    
    
    409
    
    
    
    323
    
    
    
    1,797
    
    
    
    997Other
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    139Consolidated
    
    $
    5,875
    
    
    $
    5,818
    
    
    $
    16,223
    
    
    $
    16,851
 9




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Three Months Ended
    
    Nine Months EndedSeptember 30,
    
    September 30,2004
    
    2003
    
    2004
    
    2003Capital expenditures:United States
    
    $
    47
    
    
    $
    10
    
    
    $
    401
    
    
    $
    481Depreciation and amortization:United States
    
    $
    116
    
    
    $
    203
    
    
    $
    449
    
    
    $
    1,032Europe
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    46Consolidated
    
    $
    116
    
    
    $
    203
    
    
    $
    449
    
    
    $
    1,078
 Identifiable assets by geographic region are as follows (in thousands): September 30,
    
    December 31,2004
    
    2003Identifiable assets:United States
    
    $
    22,504
    
    
    
    27,364Asia
    
    
    16
    
    
    
    35Europe
    
    
    32
    
    
    
    39Consolidated
    
    $
    22,552
    
    
    $
    27,438
 5. Fixed Assets Impairment and Restructuring Charges In the third quarter of 2003, we reviewed our real estate assets due to
the continuing deterioration in the commercial real estate market and
determined that our carrying value exceeded the current estimated fair market
value. Accordingly, we recorded an impairment charge of $1.5 million during
the third quarter of 2003 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 year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 second quarter as part of this
restructuring. As of September 30, 2004 the restructuring had been
substantially completed. The restructuring charges recorded in the
first nine months of 2003 were approximately $1.1 million, consisting primarily of
employee severance and related termination costs of $0.7 million and a fixed
asset impairment charge of $0.4 million for assets idled due to headcount
reductions and the vacating of facilities. Severance
    
    Excessand Benefits
    
    Facilities
    
    Total(in thousands)Balance, June 30, 2004
    
    $
    10
    
    
    $
    212
    
    
    $
    222Utilizations
    
    
    (10
    )
    
    
    (41
    )
    
    
    (51
    )Balance, September 30, 2004
    
    $
    0
    
    
    
    171
    
    
    $
    171
 6. Sale of Land and Buildings On July 28, 2004, we sold our San Jose facilities for approximately $7.0
million. During the third quarter of 2004, we recognized a gain on the sale of
approximately $1.1 million and the sale generated cash of approximately $4.6
million, net of a $1.9 million mortgage payoff and $0.5 million of closing
costs. We will lease back a portion of the current facility for the next
several months as we search for a new location for our headquarters. 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. 10




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##### Table of Contents



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 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 expectation that our
capital expenditures for the foreseeable future will be in line with historical
expenditures, 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. 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. 11




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##### Table of Contents



Wireless product revenue represented 82% of net revenue for the third
quarter of 2004 compared to 72% of net revenue for the third quarter of 2003. On July 28, 2004, we sold our San Jose facilities for approximately $7.0
million. During the third quarter of 2004 we recognized a gain on the sale of
approximately $1.1 million and the sale generated cash of approximately $4.6
million, net of a $1.9 million mortgage payoff and $0.5 million of closing
costs. We will lease back a portion of the current facility for the next
several months as we search for a new location for our headquarters. 12




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##### Table of Contents



Results of Operations Three Months and Nine Months Ended September 30, 2004 Compared with Three
Months and Nine Months Ended September 30, 2003 The following tables present certain consolidated statements of operations
data for the periods indicated (unaudited): For the Three Months Ended September 302004
    
    2003($ in thousands)% of Net
    
    
    
    
    
    % of NetRevenue
    
    
    
    
    
    RevenueNet revenueWireless
    
    $
    4,804
    
    
    
    81.8
    %
    
    $
    4,213
    
    
    
    72.4
    %Networking
    
    
    1,071
    
    
    
    18.2
    
    
    
    1,605
    
    
    
    27.6Total net revenue
    
    
    5,875
    
    
    
    100.0
    
    
    
    5,818
    
    
    
    100.0Cost of goods sold
    
    
    2,465
    
    
    
    42.0
    
    
    
    3,410
    
    
    
    58.6Gross margin
    
    
    3,410
    
    
    
    58.0
    
    
    
    2,408
    
    
    
    41.4Operating expenses:Research and development
    
    
    2,165
    
    
    
    36.9
    
    
    
    1,712
    
    
    
    29.4Selling, general and administrative
    
    
    1,796
    
    
    
    30.6
    
    
    
    1,567
    
    
    
    26.9Impairment in carrying value of
land and buildings
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    25.8Restructuring charges
    
    
    
    
    
    
    
    
    
    
    108
    
    
    
    1.9Gain on sale of land and buildings
    
    
    (1,138
    )
    
    
    (19.4
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    2,823
    
    
    
    48.1
    
    
    
    4,887
    
    
    
    84.0Income (loss) from operations
    
    
    587
    
    
    
    10.0
    
    
    
    (2,479
    )
    
    
    (42.6
    )Interest and other income
    
    
    57
    
    
    
    1.0
    
    
    
    80
    
    
    
    1.4Interest and other expense
    
    
    (23
    )
    
    
    (0.4
    )
    
    
    (63
    )
    
    
    (1.1
    )Income (loss) before income taxes
    
    
    621
    
    
    
    10.6
    
    
    
    (2,462
    )
    
    
    (42.3
    )Provision for taxes
    
    
    14
    
    
    
    0.2
    
    
    
    22
    
    
    
    0.4Net income (loss)
    
    $
    607
    
    
    
    10.4
    %
    
    $
    (2,484
    )
    
    
    (42.7
    )%
 For the Nine Months Ended September 302004
    
    2003($ in thousands)% of Net
    
    
    
    
    
    % of NetRevenue
    
    
    
    
    
    RevenueNet revenueWireless
    
    $
    11,976
    
    
    
    73.8
    %
    
    $
    11,354
    
    
    
    67.4
    %Networking
    
    
    4,247
    
    
    
    26.2
    
    
    
    5,497
    
    
    
    32.6Total net revenue
    
    
    16,223
    
    
    
    100.0
    
    
    
    16,851
    
    
    
    100.0Cost of goods sold
    
    
    7,242
    
    
    
    44.6
    
    
    
    9,418
    
    
    
    55.9Gross margin
    
    
    8,981
    
    
    
    55.4
    
    
    
    7,433
    
    
    
    44.1Operating expenses:Research and development
    
    
    7,417
    
    
    
    45.7
    
    
    
    7,477
    
    
    
    44.4Selling, general and administrative
    
    
    5,498
    
    
    
    33.9
    
    
    
    5,836
    
    
    
    34.6Impairment in carrying value of
land and buildings
    
    
    
    
    
    
    
    
    
    
    1,500
    
    
    
    8.9Restructuring charges
    
    
    166
    
    
    
    1.0
    
    
    
    1,062
    
    
    
    6.3Gain on sale of land and buildings
    
    
    (1,138
    )
    
    
    (7.0
    )
    
    
    
    
    
    
    Total operating expenses
    
    
    11,943
    
    
    
    73.6
    
    
    
    15,875
    
    
    
    94.2Loss from operations
    
    
    (2,962
    )
    
    
    (18.3
    )
    
    
    (8,442
    )
    
    
    (50.1
    )Interest and other income
    
    
    166
    
    
    
    1.0
    
    
    
    237
    
    
    
    1.4Interest and other expense
    
    
    (109
    )
    
    
    (0.7
    )
    
    
    (156
    )
    
    
    (0.9
    )Loss before income taxes
    
    
    (2,905
    )
    
    
    (17.9
    )
    
    
    (8,361
    )
    
    
    (49.6
    )Provision for taxes
    
    
    24
    
    
    
    0.1
    
    
    
    72
    
    
    
    0.4Net loss
    
    $
    (2,929
    )
    
    
    (18.1
    )%
    
    $
    (8,433
    )
    
    
    (50.0
    )%
 13




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##### Table of Contents



Net Revenue Three months ended
    
    % Change
    
    Three months ended
    
    Nine months ended
    
    % Change
    
    Nine months endedSeptember 30, 2004
    
    2003 to 2004
    
    September 30, 2003
    
    September 30, 2004
    
    2003 to 2004
    
    September 30, 2003($ in thousands)
    
    
    
    
    
    
    
    
    
    ($ in thousands)Wireless
    
    $
    4,804
    
    
    
    14.0
    %
    
    $
    4,213
    
    
    $
    11,976
    
    
    
    5.5
    %
    
    $
    11,354Networking
    
    
    1,071
    
    
    
    (33.3
    )%
    
    
    1,605
    
    
    
    4,247
    
    
    
    (22.7
    %)
    
    
    5,497Total
    
    $
    5,875
    
    
    
    1.0
    %
    
    $
    5,818
    
    
    $
    16,223
    
    
    
    (3.7
    )%
    
    $
    16,851
 Net revenue during the third quarter of 2004 increased $0.1 million from
the comparable third quarter of 2003. Our wireless net revenue grew $0.6
million, 14%, in the third quarter of 2004 compared to the third quarter of
2003. The increase in wireless product revenue was mainly due to the 52%
increase in our average selling prices compared to the year ago period, driven
mainly by the higher average selling price of our 5.8GHz product, the ML5800,
as compared to the average selling price of our ML2724, our 2.4GHz product that
was shipping in volume during the third quarter of 2003. Also, during the third
quarter of 2004, we began shipping our transverter, the ML5824, in volume. Net revenue from our networking products decreased $0.5
million in the third quarter of 2004, a 33% decrease from the third quarter of
2003. The decrease in networking product revenues is due mainly to the
continuing erosion in the demand for our legacy networking products as they
approach end-of-life. Net revenue for the first nine months of 2004 decreased 4% from the first
nine months of 2003. Our wireless product net revenue increased 6% from the
prior year, primarily due to a 38% increase in average selling prices, which
was driven by an increase in sales of our ML5800. Networking product net
revenue decreased 23% in the first nine months of 2004 as compared to the first
nine months of 2003, primarily due to the decrease in demand for our legacy
networking products as they approach end-of-life. In the third quarter of 2004, sales to Uniden Corporation and Vtech each
accounted for more than 10% of our net revenue. In the third quarter of 2003,
sales to Uniden Corporation accounted for more than 10% of our net
revenue. International revenue for the third quarter of 2004 totaled $5.6 million,
or 96% of net revenue compared to $5.4 million, or 93% of net revenue for the
third quarter of 2003. International revenue for the first nine months of 2004
totaled $15.5 million, or 95% of net revenue compared to $15.5 million or 92%
of net revenue for the first nine months of 2003. Domestic revenue was
approximately 4% of net revenue for the third quarter of 2004 compared to 7%
for the third quarter of 2003. Domestic revenue was approximately 5% of net
revenue for the first nine months of 2004 compared to 8% for the first nine
months of 2003. We expect that international revenue will account for the
substantial majority of our total net revenue for the foreseeable future. Gross Margin Three months ended
    
    % Change
    
    Three months ended
    
    Nine months ended
    
    % Change
    
    Nine months endedSeptember 30, 2004
    
    2003 to 2004
    
    September 30, 2003
    
    September 30, 2004
    
    2003 to 2004
    
    September 30, 2003($ in thousands)
    
    
    
    
    
    
    
    
    
    ($ in thousands)Gross Margin
    
    $
    3,410
    
    
    
    41.6
    %
    
    $
    2,408
    
    
    $
    8,981
    
    
    
    20.8
    %
    
    $
    7,433%
    
    
    58
    %
    
    
    
    
    
    
    41
    %
    
    
    55
    %
    
    
    
    
    
    
    44
    %
 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 during the third quarter of 2004 was 58%, as compared to 41%
in the third quarter of 2003. Wireless product gross margin was 54% during the
third quarter of 2004 as compared to 29% in the third quarter of 2003 and
networking product gross margin was 75% during the third quarter of 2004
compared to 73% in the third quarter of 2003. Gross margin was negatively
impacted in the third quarter of 2004 due to a $0.2 million charge for a
write-down in inventories related to excess quantities of certain of our legacy
networking products and certain wireless products. The increase in wireless product gross margin was primarily due to the 52%
increase in average selling prices and a 16% decrease in direct 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 of
2004. The decrease in our direct unit product costs in the third quarter of
2004 was primarily due to our ability to maintain high yields in the
manufacture of our ML5800 product and to achieve high yields on our ML5824,
which we began producing in volume during the third quarter of 2004.
Comparatively, during the third quarter of 2003, 14




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##### Table of Contents



wireless product gross margin was negatively impacted by continued
significant erosions in average selling prices and higher unit product costs
due to the low yields on the ML2724, our 2.4 GHz wireless product that was
shipping in high volumes. While networking product gross margin during the third quarter of 2004
was relatively flat with the third quarter of 2003, average selling prices
decreased 15% during the third quarter of 2004 as compared to the third quarter
of 2003 and average direct unit product costs decreased 48%. The decrease in
average selling prices and in average direct product unit costs was mainly due
to a shift in product mix. Gross margin for the first nine months of 2004 increased to 55% from 44%
in the first nine months of 2003. The comparative increase was due to a
combination of a 24% increase in average selling prices and a 33% decrease in
direct unit product costs. Wireless product average selling prices increases
38% during the first nine months of 2004 compared to the first nine months of
2003 while networking product average selling prices decreased 14% during this
period. The higher wireless product average selling prices during the first
nine months of 2004 was due mainly to the higher selling prices of our ML5800
as compared to the ML2724 that was shipping in volume during the first nine
months of 2003. For the first nine months of 2004 compared to the first nine
months of 2003, wireless gross margins were also positively impacted by a 16%
decrease in the average direct unit product costs, due mainly to the high
yields obtained on our ML5800 and ML5824 products shipping the first nine
months of 2004 as compared to the average direct unit product costs of wireless
products shipping during the first nine months of 2003, which was negatively
impacted by low yields on our ML2724. Networking average selling prices
decreased 14% in the first nine months of 2004 compared to the first nine
months of 2003 due mainly to changes in the product mix. Average direct unit
product cost of our networking products decreased 5% in the first nine months of
2004 as compared to the first nine months of 2003. The cost decrease in 2004
was also due mainly to changes in product mix. Sales of product that we had previously written down, due to
inventory on-hand in excess of foreseeable demand and inventory
obsolescence, were not significant during the three and nine months
ended September 30, 2004 and 2003. These sales did not have a significant impact on
gross margin in any of these periods. Research and Development Expenses (R&D) Three months ended
    
    % Change
    
    Three months ended
    
    Nine months ended
    
    % Change
    
    Nine months endedSeptember 30, 2004
    
    2003 to 2004
    
    September 30, 2003
    
    September 30, 2004
    
    2003 to 2004
    
    September 30, 2003($ in thousands)
    
    
    
    
    
    
    
    
    
    ($ in thousands)R&D
    
    $
    2,165
    
    
    
    26.5
    %
    
    $
    1,712
    
    
    $
    7,417
    
    
    
    (0.8
    )%
    
    $
    7,477
 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. Research and development costs will vary from quarter to quarter depending
on the stage of products in development. Research and development expenses
increased $0.5 million from the third quarter of 2003. The increase in costs
during the third quarter of 2004 is due to a combination of $0.1 million in
increased costs related to outside engineering and other consulting services
related to the development of new products, the absence of a one time refund of
$0.2 million received in the third quarter of 2003 related to sales tax paid
on engineering development tools in prior quarters and an increase of $0.1 million in
employee related costs. Research and development costs decreased slightly in the first nine months
of 2004 compared to the first nine months of 2003. A decrease of $0.2 million
in employee costs relating to the Companys restructuring undertaken in the
second quarter of 2003 and a $0.2 million decrease in the cost of our
engineering development tools were offset by an increase of $0.4 million in
material costs and outside services related to the development of new products. 15




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##### Table of Contents



Selling, General and Administrative Expenses (SG&A) Three months ended
    
    % Change
    
    Three months ended
    
    Nine months ended
    
    % Change
    
    Nine months endedSeptember 30, 2004
    
    2003 to 2004
    
    September 30, 2003
    
    September 30, 2004
    
    2003 to 2004
    
    September 30, 2003($ in thousands)
    
    
    
    
    
    
    
    
    
    ($ in thousands)SG&A
    
    $
    1,796
    
    
    
    14.6
    %
    
    $
    1,567
    
    
    $
    5,498
    
    
    
    (5.8
    )%
    
    $
    5,836
 The increase in selling, general and administrative expenses for the third
quarter of 2004 compared to the third quarter of 2003 was mainly due to a
$165,000 increase in our bad debt reserve. We record changes to our
required bad debt reserve as an SG&A expense. The reserve is intended to provide for specific
receivables which have become over sixty days past due as well as a
provision based on the remaining balances in accounts receivable. During the
third quarter of 2004 we increased the reserve to provide for a large customer
receivable outstanding for over 90 days and the overall increase in our
accounts receivable balance. The decrease in selling general and administrative expenses for the first
nine months of 2004 compared to the first nine months of 2003 was due mainly to
a $0.5 million reduction in employee related expenses resulting from the
restructuring that the Company undertook in the second quarter of 2003. The
reduction in these expenses was partially offset by the increase in our bad
debt reserves of $173,000 during the first nine months of 2004. Interest and Other Income and Interest and Other Expense Three months ended
    
    % Change
    
    Three months ended
    
    Nine months ended
    
    % Change
    
    Nine months endedSeptember 30, 2004
    
    2003 to 2004
    
    September 30, 2003
    
    September 30, 2004
    
    2003 to 2004
    
    September 30, 2003($ in thousands)
    
    
    
    
    
    
    
    
    
    ($ in thousands)Interest and other
income
    
    $
    57
    
    
    
    (28.8
    )%

    
    $
    80
    
    
    $
    166
    
    
    
    (30
    )%
    

    $
    237Interest and other
expense
    
    $
    (23
    )
    
    
    (63.5
    )%
    
    $
    (63
    )
    
    $
    (109
    )
    
    
    (30.1
    )%
    
    $
    (156
    )
 The decrease in interest and other income for the nine months of 2004 as
compared to the nine 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 nine months of 2004 as compared to the first nine months of 2003 is
mainly due to the repayment of the mortgage on our San Jose facility, which was repaid
in July 2004 when the property was sold. Provision for Income Taxes Three months ended
    
    % Change
    
    Three months ended
    
    Nine months ended
    
    % Change
    
    Nine months endedSeptember 30, 2004
    
    2003 to 2004
    
    September 30, 2003
    
    September 30, 2004
    
    2003 to 2004
    
    September 30, 2003($ in thousands)
    
    
    
    
    
    
    
    
    
    ($ in thousands)Provision for
income taxes
    
    
    14
    
    
    
    (36.4
    )%
    
    $
    22
    
    
    $
    24
    
    
    
    (66.7
    )%
    
    $
    72
 The provision for income taxes for the three months and nine months ended
September 30, 2004 consists mainly of state taxes. The provision for the three
months and nine months ended September 30, 2003 consists mainly of taxes
incurred by our subsidiary in the United Kingdom and minimum state tax
obligations. 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 September 30, 2004 was 2.3% and for the nine months
ended September 30, 2004 was 0.8%. The effective tax rate for both the three
months and nine months ended September 30, 2003 was 0.9%. Liquidity and Capital Resources For the Nine Months EndedSeptember 30,2004
    
    2003(in thousands)Net cash used in operating activities
    
    $
    (5,867
    )
    
    $
    (6,329
    )Net cash provided by investing activities
    
    
    10,308
    
    
    
    4,336Net cash used in financing activities
    
    
    (1,439
    )
    
    
    (51
    )Net increase (decrease) in cash and cash equivalents
    
    $
    3,002
    
    
    $
    (2,044
    )
 16




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Net cash used in operating activities during the first nine months of 2004
was $5.9 million. During the quarter we collected $13.7 million from the sale
of goods. Our accounts receivable increased by $2.5 million from December 31,
2003. We did not have any significant change in our credit policies; however,
we sold $2.9 million of products in September 2004, and the resulting accounts
receivable was not due as of the end of the quarter. Our major uses of cash are
operating expenses and cost of product manufactured. Our operating expenses
during the first nine months of 2004 were $13.1 million before the gain on sale
of our land and buildings of $1.1 million and our cost to manufacture products
was $6.1 million, after a decrease in our inventory balance excluding changes in
our inventory valuation reserves, of $1.1 million. Our costs to manufacture
products consist primarily of purchases of materials and subcontractor
services. They also included $0.6 million in operating overhead; consisting
mainly of employee expenses, cost of outside services, and materials and
expenses related to the transitioning of new products from development to
volume manufacturing. Our use of cash for operating expenses and cost of
product manufactured was partially offset by an increase in our accounts
payable of $0.7 million during the first nine months of 2004. Net cash provided by investing activities was due primarily to the sale of
our San Jose facilities for approximately $7.0 million during the third
quarter. We recognized a net gain on the sale of approximately $1.1 million
and the sale generated net cash of approximately $4.6 million, after a $1.9
million mortgage payoff and $0.5 million of closing costs. Other investing
activities during these periods consisted primarily of net sales of short-term
investments, which totaled $4.2 million for the first nine months of 2004, and
$4.8 million for the first nine months of 2003. Capital expenditures consist
mainly of the purchase of engineering laboratory equipment and were $0.4
million for the first nine months of 2004, and $0.5 million in the comparable
period of 2003. We do not have any major capital projects planned and expect
that we will be able to fund our capital needs through the use of our existing
cash balances. Net cash used in financing activities consists of principal payments on
our debt, offset partially by proceeds from the issuance of common stock in
connection with the exercise of employee stock options. The mortgage on our San
Jose facilities was paid off when the buildings were sold during the third
quarter of 2004. Principal mortgage payments on our debt were $2.0 million for
the first nine months of 2004 and $0.2 million for the same period of 2003. The use of
cash for the principal payments on our debt was partially offset by proceeds from the
issuance of common stock in the amount of $0.6 million during the first nine
months of 2004 and $0.1 million for the first nine months of 2003. Working capital was $16.4 million as of September 30, 2004, compared to
$14.2 million as of December 31, 2003. Working capital at September 30, 2004
includes cash and cash equivalents of $11.7 million and short-term investments
of $4.8 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 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: 17




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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;
    
    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 18




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products. Such pricing pressures will continue to have an adverse effect
on our results of operations, and our business could suffer unless they can be
offset by higher margins on other products or lower operating expenses. We do not currently manufacture our own semiconductor wafers. As a result,
we are vulnerable to process technology advances competitors use to manufacture
products offering higher performance and lower cost. Larger companies with
wafer manufacturing facilities, broader product lines, greater technical and
financial resources and greater service and support capabilities have an
advantage in this market. In addition, our products are generally sole-sourced to our customers. If
our customers were to develop other sources for our products, our operating
results would be harmed. The market for wireless applications is characterized by rapid technological
change. Our future success depends on our ability to respond to these changes. Rapidly changing technology, frequent product introductions and evolving
industry standards make it difficult to accurately predict the wireless product
markets future growth rate, size or technological direction. In view of the
evolving nature of this market, suppliers of wireless products may decide to
adopt alternative standards or technologies that are incompatible with our
products. If we are unable to design, develop, manufacture and sell products
that are compatible with these new standards or technologies, our business and
operating results would be harmed. We need to develop and introduce new and enhanced products in a timely manner
to successfully compete in our industry. Continuing technological advancement, changes in customer requirements and
evolving industry standards characterize the wireless and computer equipment
networking markets. To compete successfully, we must design, develop,
manufacture and sell new or enhanced products that:  
    
    provide increasingly higher levels of performance and reliability;
    
    meet performance or other objective specified parameters;
    
    are cost effective;
    
    are brought to market in a timely manner;
    
    are in accordance with existing or evolving industry standards; and
    
    achieve market acceptance. The development of these new circuits is highly complex. We have sometimes
experienced delays in completing the development of new products. Successful
product development and introduction depends on many factors, including:  
    
    proper new product definition;
    
    timely completion and introduction of new product designs;
    
    availability of foundry capacity;
    
    acceptable manufacturing yields; and
    
    market acceptance of our products and our customers products. We must be able to adjust to changing market conditions quickly and
cost-effectively to compete successfully. Furthermore, we must introduce new
products in a timely manner, and achieve market acceptance for these products.
In addition, our customers products which incorporate our products must be
introduced in a timely manner and achieve market acceptance. If we, or our
customers, fail to develop and introduce new products successfully, our
business and operating results would suffer. 19




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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 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. We had a net profit for the third quarter of 2004,
including a $1.1 million gain from the sale of our San Jose
facilities. Because of those losses, we had an accumulated deficit of $23.2 million as of September
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. 20




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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 89% and 83% of net revenue for the
three months and nine months ended September 30, 2004, respectively, and
approximately 88% and 81% of net revenue for the comparable periods in 2003.
Two customers, Uniden Corporation and VTech, together accounted for 69% of our
net revenue for the third quarter of 2004. Sales to domestic distributors
accounted for approximately 4% of net revenue for the three months and nine
months ended September 30, 2004, respectively, and approximately 5% 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 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 96% and 95% of
net revenue for the three months and nine months ended September 30, 2004,
respectively, and 93% 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
global health scares 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 21




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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;
    
    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. 22




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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 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 23




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by our suppliers or subcontractors to comply with environmental
regulations could result in fines, suspension of production or cessation of
operations. Environmental regulations could also require our suppliers or
subcontractors to acquire equipment or incur other expenses to comply with
environmental regulations. If our suppliers or subcontractors incur substantial
additional expenses, product costs could significantly increase, adversely
affecting our results of operations. We are also subject to a variety of environmental regulations relating to
our operations. If we fail to comply with present and future regulations, the
government could impose fines on us, or compel us to suspend or cease
operations. If we or our suppliers or subcontractors fail to control the use or
discharge of hazardous substances, we could be subject to civil or criminal
liabilities, which could harm our business and operating results. Because the availability of qualified personnel experienced in the technologies
we utilize is limited and competition for these experienced technologists is
intense, we may not be successful in attracting and retaining personnel, which
could have an impact upon the development or sales of our products. Our future success will depend to a significant extent on our ability to
attract, retain and motivate qualified personnel, especially those with
engineering design experience and expertise. We may not be successful in
attracting and retaining such qualified personnel. Competitors may attempt to recruit our employees. While employees are
required to sign standard agreements concerning confidentiality and ownership
of inventions, we do not have employment contracts or non-competition
agreements with most of our personnel. The loss of the services of key
employees, the inability to attract or retain qualified personnel, or delays in
hiring personnel, particularly engineers and other technical personnel could
negatively affect our business and prevent us from achieving our business
goals. Our success depends on our ability to protect our intellectual property and
proprietary rights. We 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. 24




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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 September 26, 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 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 including new rules on equity based compensation; 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 25




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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. Changes to financial accounting standards may affect our results of operations
and cause us to change our business practices We prepare our financial statements to conform with generally accepted
accounting principles, or GAAP, in the United States. These accounting
principles are subject to interpretation by the American Institute of Certified
Public Accountants, the Securities and Exchange Commission and various bodies
formed to interpret and create appropriate accounting policies. A change in
those policies can have a significant effect on our reported results and may
affect our reporting of transactions completed before a change is announced.
Changes to those rules or the questioning of current practices may adversely
affect our reported financial results or the way we conduct our business. For
example, accounting policies affecting many aspects of our business, including
rules relating to employee stock option grants, have recently been revised or
are under review. There has been ongoing public debate whether employee stock
option and employee stock purchase plans shares should be treated as a
compensation expense and, if so, how to properly value these charges. If we
elected or were required to record an expense for our stock-based compensation
plans using the fair value method, we could have significant accounting
charges. Although standards have not been finalized, and the timing of a final
statement has not been established, the Financial Accounting Standards Board
has announced its support for recording expense for the fair value of stock
options granted. 
 Item 3.Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk As of September 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 September 30, 2004 and September 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. We
are in the process of documenting and evaluating our internals controls
as required by Section 404 of the Sarbanes-Oxley Act of 2002. We are
not required to be in compliance with Section 404  until December
2005. 26




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PART II. OTHER INFORMATION 
 Item 4.Submission of Matters to a Vote of Security Holders The registrants Annual Meeting of Stockholders was held on August 4,
2004. The following actions were taken at the annual meeting: 1. The following Directors were elected For
    
    WithheldTimothy Richardson
    
    
    11,572,147
    
    
    
    265,990David Gellatly
    
    
    11,572,287
    
    
    
    265,850Laura Perrone
    
    
    11,572,147
    
    
    
    265,990William Pohlman
    
    
    10,448,787
    
    
    
    1,389,350Joseph Rizzi
    
    
    11,572,287
    
    
    
    265,850A. Thampy Thomas
    
    
    11,572,147
    
    
    
    265,990
 2. The ratification of the appointment of PricewaterhouseCoopers LLP as
our independent auditors for the year ending December 31, 2004 was approved. For
    
    Against
    
    Abstain11,629,334
    
    
    205,650
    
    
    
    3,153
 27




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##### Table of Contents



Item 6.Exhibits Exhibits: ExhibitNumber
    
    Description of Document2.1
    
    Purchase and Sale Agreement dated April 15, 2004 by and between the Registrant and Willow Glen
Investments, LLC as amended (incorporated by reference to Exhibit 2.1 to the Registrants Form
8-K filed on August 11, 2004)31.1
    
    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. 28




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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: November 10, 2004
    
    By
    
    /s/ TIMOTHY A. RICHARDSONTimothy A. RichardsonPresident and Chief Executive Office(Principal Executive Officer)Date: November 10, 2004
    
    By
    
    /s/ MICHAEL W. SCHRADLEMichael W. SchradleChief Financial Officer(Principal Financial and Accounting Officer)
 29




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INDEX TO EXHIBITS ExhibitNumber
    
    Description of Document2.1
    
    Purchase and Sale Agreement dated April 15, 2004 by and between the Registrant and Willow Glen
Investments, LLC as amended (incorporated by reference to Exhibit 2.1 to the Registrants Form
8-K filed on August 11, 2004)31.1
    
    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. 30