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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
 Form 10-Q (Mark One) þ
    
    QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934.
 For the Quarterly Period Ended April 3, 2005 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
    
    94-2910085(State or other jurisdiction of
    
    (I.R.S. Employerincorporation or organization)
    
    Identification No.)2050 Concourse Drive
    
    95131San Jose, California
    
    (Zip Code)(Address of principal executive offices)
 Registrants telephone number, including area code:
(408) 433-5200 Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ 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 þ The
number of shares of the Registrants Common Stock outstanding as of May 17, 2005, net
of shares held in treasury, was 12,529,553.




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TABLE OF CONTENTS PAGEPART I FINANCIAL INFORMATION
    
    
    3Item 1. Financial Statements (Unaudited except for Condensed Consolidated Balance Sheet at December 31, 2004)
    
    
    3Condensed Consolidated Balance Sheets at March 31, 2005 and December 31, 2004
    
    
    3Condensed Consolidated Statements of Operations for the three months ended March 31, 2005 and 2004
    
    
    4Condensed Consolidated Statements of Cash Flows for the three months ended March 31, 2005 and 2004
    
    
    5Notes to Unaudited Condensed Consolidated Financial Statements
    
    
    6Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    9Item 3. Quantitative and Qualitative Disclosures about Market Risk
    
    
    25Item 4. Controls and Procedures
    
    
    25PART II OTHER INFORMATION
    
    
    26Item 6. Exhibits
    
    
    26SIGNATURES
    
    
    27Index to Exhibits
    
    
    28EXHIBIT 31.1EXHIBIT 31.2EXHIBIT 32.1EXHIBIT 32.2
  2




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PART I. FINANCIAL INFORMATION 
 Item 1.Financial Statements MICRO LINEAR CORPORATION 
 CONDENSED CONSOLIDATED BALANCE SHEETS
 (IN THOUSANDS)
 March 31,
    
    
    December 31,2005
    
    
    2004(Unaudited)AssetsCash and cash equivalents
    
    $
    10,275
    
    
    $
    10,920Short-term investments
    
    
    4,930
    
    
    
    4,660Accounts receivable, net of allowance for
doubtful accounts of $112 at March 31, 2005
and $203 at December 31, 2004
    
    
    2,693
    
    
    
    2,878Inventories
    
    
    1,869
    
    
    
    1,770Other current assets
    
    
    362
    
    
    
    210Total current assets
    
    
    20,129
    
    
    
    20,438Property and equipment, net
    
    
    560
    
    
    
    459Other assets
    
    
    27
    
    
    
    28Total assets
    
    $
    20,716
    
    
    $
    20,925Liabilities and Stockholders EquityAccounts payable
    
    $
    2,150
    
    
    $
    1,500Accrued compensation and benefits
    
    
    1,363
    
    
    
    988Deferred revenue
    
    
    689
    
    
    
    494Other accrued liabilities
    
    
    1,156
    
    
    
    1,121Total current liabilities
    
    
    5,358
    
    
    
    4,103Stockholders equity:Common stock
    
    
    15
    
    
    
    15Additional paid-in capital
    
    
    61,415
    
    
    
    61,368Accumulated deficit
    
    
    (25,832
    )
    
    
    (24,320
    )Accumulated other comprehensive loss
    
    
    (7
    )
    
    
    (8
    )Treasury stock
    
    
    (20,233
    )
    
    
    (20,233
    )Total stockholders equity
    
    
    15,358
    
    
    
    16,822Total liabilities and stockholders equity
    
    $
    20,716
    
    
    $
    20,925
 See accompanying notes to unaudited condensed consolidated financial statements. 3




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MICRO LINEAR CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
 (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (UNAUDITED)
 THREE MONTHS ENDEDMarch 31,2005
    
    
    2004Net revenue
    
    $
    4,247
    
    
    $
    3,840Cost of goods sold
    
    
    2,044
    
    
    
    2,093Gross margin
    
    
    2,203
    
    
    
    1,747Operating expenses:Research and development
    
    
    2,197
    
    
    
    2,641Selling, general and administrative
    
    
    1,606
    
    
    
    1,846Total operating expenses
    
    
    3,803
    
    
    
    4,487Loss from operations
    
    
    (1,600
    )
    
    
    (2,740
    )Interest and other income
    
    
    93
    
    
    
    62Interest and other expense
    
    
    (4
    )
    
    
    (38
    )Loss before income taxes
    
    
    (1,511
    )
    
    
    (2,716
    )Provision for income taxes
    
    
    1
    
    
    
    4Net loss
    
    $
    (1,512
    )
    
    $
    (2,720
    )Net loss per share (basic and diluted):Net loss per share
    
    $
    (0.12
    )
    
    $
    (0.22
    )Weighted average number of
shares used in per share
computation
    
    
    12,459
    
    
    
    12,334
 See accompanying notes to unaudited condensed consolidated financial statements. 4




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MICRO LINEAR CORPORATION 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
 (IN THOUSANDS)
 (UNAUDITED)
 THREE MONTHS ENDEDMarch 31,2005
    
    
    2004Net cash used in operating activities
    
    $
    (224
    )
    
    $
    (2,508
    )Cash flows from investing activities:Purchase of capital equipment
    
    
    (173
    )
    
    
    (224
    )Purchases of short-term investments
    
    
    (2,656
    )
    
    
    (2,732
    )Proceeds from
sale and maturity of short-term investments
    
    
    2,387
    
    
    
    4,956Net cash (used in) provided by investing activities
    
    
    (442
    )
    
    
    2,000Cash flows from financing activities:Principal payments on debt
    
    
    
    
    
    
    (69
    )Proceeds from issuance of common stock
    
    
    21
    
    
    
    360Net cash provided by financing activities
    
    
    21
    
    
    
    291Net decrease in cash and cash equivalents
    
    
    (645
    )
    
    
    (217
    )Cash and cash equivalents at beginning of period
    
    
    10,920
    
    
    
    8,703Cash and cash equivalents at end of period
    
    $
    10,275
    
    
    $
    8,486
 See accompanying notes to unaudited condensed consolidated financial statements. 5




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MICRO LINEAR CORPORATION 
 NOTES TO UNAUDITED CONDENSED CONSOLIDATED 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. Headquartered in San Jose, California, Micro Linears
products are available through its 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 2004 ended on January 2, 2005. The first quarter
of 2005 ended on April 3, 2005 and the first quarter of 2004 ended on March 28, 2004. For
presentation purposes, the accompanying financial statements refer to the calendar year end and
month end of each respective period. Principles of Consolidation The consolidated financial statements include the accounts of Micro Linear Corporation and our
wholly-owned 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 first quarters of 2005 and 2004, 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 condensed
consolidated 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 January 2,
2005, filed with the Securities and Exchange Commission on April 4, 2005. Use of Estimates The preparation of financial statements in conformity with generally accepted accounting
principles requires management to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and liabilities at the date of
the financial statements as well as the reported amounts of revenue and expenses during the
reporting period. Actual results could differ from those estimates, and such differences may be
material to the financial statements. Net Loss Per Share Basic loss per share is computed by dividing net loss available to common stockholders by the
weighted average number of common shares outstanding during the period. Diluted net loss per share
includes the effect of all potentially dilutive common stock outstanding during the period. Diluted
net loss per share excludes potential common stock if the effect is anti-dilutive. We compute
diluted loss per share using the treasury stock method for stock options outstanding. 6




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A
total of 4,166,703 and 3,901,470 shares of potential common stock
related to stock options were not included in the
dilutive net loss per share calculations for the three months ending March 31, 2005 and 2004,
respectively, because their effect would be anti-dilutive. Stock-Based Compensation We account for our employee stock option plans in accordance with Accounting Principles Board
No. 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 additional pro forma disclosures as required under SFAS
No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based
Compensation, Transition and Disclosure. We account for stock issued to non-employees in accordance with the provisions of SFAS 123.
Stock option awards issued to non-employees are accounted for at fair value using the Black-Scholes
option-pricing model. The fair value of each non-employee stock award is remeasured at each period
end until a commitment date is reached, which is generally the vesting date. Pro Forma Net Loss As required by SFAS No. 123 and SFAS No. 148, we disclose our pro forma net loss as if we had
accounted for our employee stock purchase plan, employee stock options and director stock options
subsequent to December 31, 1994 under the fair value method of SFAS No. 123. We estimate the fair
value for these options at the date of grant using the Black-Scholes option pricing model and the
multiple option approach with the following weighted-average assumptions: Employee StockPurchase Plan
    
    
    Stock Option PlansThree Months Ended
    
    
    Three Months EndedMarch 31
    
    
    March 312005
    
    
    2004
    
    
    2005
    
    
    2004Expected life (in years)
    
    
    0.5
    
    
    
    0.5
    
    
    
    2.49
    
    
    
    2.78Risk-free interest rate
    
    
    2.88
    %
    
    
    1.03
    %
    
    
    3.59
    %
    
    
    1.83
    %Volatility
    
    
    51
    %
    
    
    49
    %
    
    
    47
    %
    
    
    46
    %Dividend yield
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
 The Black-Scholes option valuation model is 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 issued under the Employee
Stock Purchase Plan granted during the three months ended March 31, 2005 and 2004 were $1.44 and
$1.52 respectively. The weighted average fair values at the date of grant of options granted under
the employee and directors stock option plans during the three months ended March 31, 2005 and
2004 were $1.52 and $2.09 respectively. The following table illustrates the effect on our net loss and net loss per share if we had
recorded compensation costs based on the estimated grant date fair value as defined by SFAS No. 123
for all granted stock-based awards. Three Months EndedMarch 31,2005
    
    
    2004(In thousands, exceptper share amounts)Net loss, as reported
    
    $
    (1,512
    )
    
    $
    (2,720
    )Add: Stock-based employee compensation
expense included in reported net loss, net
of related tax effects
    
    
    
    
    
    
    Deduct: Stock-based compensation expense
determined under fair value based method
for employee awards, net of related tax
effects
    
    
    (226
    )
    
    
    (306
    )Pro forma net loss
    
    $
    (1,738
    )
    
    $
    (3,026
    )Pro forma net loss per share:Basic and diluted
    
    $
    (0.14
    )
    
    $
    (0.25
    )Reported net loss per share:Basic and diluted
    
    $
    (0.12
    )
    
    $
    (0.22
    )
 7




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2. Financial Statement Details Inventories consist of the following (in thousands): March 31,
    
    
    December 31,2005
    
    
    2004Work-in-process
    
    $
    1,005
    
    
    $
    677Finished goods
    
    
    673
    
    
    
    954Inventory held by distributors
    
    
    191
    
    
    
    139Total inventories
    
    $
    1,869
    
    
    $
    1,770
 Provision for Income Taxes The provision for income taxes for the three months ended March 31, 2005 consists mainly of
minor taxes incurred by our branch office in Japan. The provision for the three months ended March
31, 2004 consists mainly of minimum state tax obligations and minor taxes incurred by our branch
office in Japan. 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 March 31, 2005 was 0.07%. The effective tax rate for
the three months ended March 31, 2004 was 0.1%. Comprehensive Loss For the three months March 31, 2005 and 2004, comprehensive loss, which consists of the net
loss for the periods and unrealized gain or loss on short-term marketable securities, was as
follows (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Net loss:
    
    $
    (1,512
    )
    
    $
    (2,720
    )Unrealized gain on available for sale marketable securities, net
    
    
    1
    
    
    
    1Comprehensive loss
    
    $
    (1,511
    )
    
    $
    (2,719
    )
 3. Recent Accounting Pronouncements In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (SFAS
No. 123R), Share-Based Payment, an amendment to Statement of Financial Accounting Standards No.
123 (SFAS No. 123), Accounting for Stock-Based Compensation and Statement on Financial
Accounting Standards No. 95, Statement of Cash Flows. The revised standard addresses the
accounting for share-based payment transactions in which a company receives employee services in
exchange for either equity instruments of the company or liabilities that are based on the fair
value of the companys equity instruments or that may be settled by the issuance of such equity
instruments. Under the new standard, companies will no longer be able to account for share-based
compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies
will be required to account for such transactions using a fair-value method and recognize the
expense in the consolidated statement of income. In addition, the adoption of SFAS 123R will
require additional accounting related to the income tax effects and additional disclosure regarding
the cash flow effects resulting from share-based payment arrangements. On March 29, 2005, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 107 (SAB 107). This
Bulletin summarizes the views of the SEC staff regarding the interaction between SFAS 123R,
Share-Based Payment, and certain SEC rules and regulations and provides the SEC staffs views
regarding the valuation of share-based payment arrangements for public companies. In April 2005,
the SEC postponed the implementation date of SFAS 123R to the fiscal year beginning after June 15,
2005. The Company has not yet determined which fair-value method and transitional provision it will
follow. Currently, we disclose the pro forma net income (loss) and related pro forma income (loss)
per share information in accordance with SFAS 123 and Statement on Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation Costs  Transition and Disclosure. We believe
that adoption of the new standard will have an adverse impact on our results of operations. 8




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In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (SFAS
No. 151), Inventory Costs, an amendment of ARB No. 43, Chapter 4. SFAS No. 151 clarifies that
abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and
wasted materials (spoilage) are required to be recognized as current period charges. SFAS No. 151
will be effective in fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is
not expected to have a material effect on our financial position or results of operations. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 (SFAS
No. 153), Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153
addresses the measurement of exchanges of nonmonetary assets and redefines the scope of
transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153
will be effective for nonmonetary transactions in fiscal years beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a material effect on our financial position or
results of operations. 4. Operations by Geographic Regions The following is a summary
of revenue by geographical regions (in thousands): Three Months EndedMarch 31,2005
    
    
    2004Net revenue:United States
    
    $
    265
    
    
    $
    252Japan
    
    
    2,201
    
    
    
    1,846Hong Kong
    
    
    1,294
    
    
    
    727Other Asia
    
    
    58
    
    
    
    251Europe
    
    
    343
    
    
    
    764Other
    
    
    86
    
    
    
    Consolidated
    
    $
    4,247
    
    
    $
    3,840
 5. Restructuring Charges In the second quarter of 2004 we provided $0.2 million for our remaining lease obligations,
net of expected sublease payments, on our Utah facility which we vacated in the first quarter of
2004. As of March 31, 2005, the remaining balance of our restructuring reserve relates to our
continuing charges for rent on certain facilities which we abandoned in 2004 and subleased to
another company and obligations on leased equipment that were used in those facilities (in
thousands). ExcessFacilitiesBalance, December 31, 2004
    
    $
    149Cash payments
    
    
    (11
    )Balance, March 31, 2005
    
    
    138
 
 Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations The statements in this report or incorporated by reference which are not historical are
forward-looking statements and include, without limitation, statements under the caption,
Managements Discussion and Analysis of Financial Condition and Results of Operations. Terms such
as may, will, could, should, project, believe, anticipate, expect, plan,
estimate, forecast, potential, intend, continue and variations of these words or similar
expressions are intended to identify forward-looking statements. These forward-looking statements include, but are not limited to, statements regarding: our
expectation that we will continue to experience erosion in the sales of our legacy products and our
anticipation of fluctuations in the selling prices and margins in such products, 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, our expectation that international revenue will account for
the substantial majority of our total net revenue for the foreseeable future, our expectation 9




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that research and development costs will vary from quarter to quarter depending on the stage
of products in development and our intention to expend significant resources in the development of
new products, our expectation regarding trade variables and accrued liability balances, our
expectation that our capital expenditures will stay near first quarter levels in the coming quarter
and that we will be able to provide for these expenditures without any additional sources of
financing and our belief that existing cash resources are sufficient to fund any anticipated
operating losses and purchases of capital equipment and 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 are
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 January 2, 2005. 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. Headquartered in San Jose, California, Micro Linears
products are available through its authorized representatives and distributors worldwide. We were founded in 1983, and until 2000, we were a supplier of advanced analog and mixed
signal integrated circuits to the computer, communications, telecommunications, consumer and
industrial markets. During 2000, we divested our manufacturing test operation and our
non-communication product lines and focused our marketing, engineering and product development on
new communications products, including some wired networking products, but most notably wireless
integrated circuits. During 2001, we established ourselves as a volume supplier of RF transceivers
to the digital cordless telephone segment of the communications market. Wireless product revenue represented 74% of net revenue for the first quarter of 2005 compared
to 56% of net revenue for the first quarter of 2004. 10




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Results of Operations Three Months Ended March 31, 2005 Compared with Three Months Ended March 31, 2004 The following tables present certain consolidated statements of operations data for the
periods indicated (unaudited): For the Three Months Ended March 312005
    
    
    2004($ in thousands)% of Net
    
    
    
    
    
    
    % of NetRevenue
    
    
    
    
    
    
    RevenueNet revenueWireless
    
    $
    3,145
    
    
    
    74.1
    %
    
    $
    2,149
    
    
    
    56.0
    %Networking
    
    
    1,102
    
    
    
    25.9
    
    
    
    1,691
    
    
    
    44.0Total net revenue
    
    
    4,247
    
    
    
    100.0
    
    
    
    3,840
    
    
    
    100.0Cost of goods sold
    
    
    2,044
    
    
    
    48.1
    
    
    
    2,093
    
    
    
    54.5Gross margin
    
    
    2,203
    
    
    
    51.9
    
    
    
    1,747
    
    
    
    45.5Operating expenses:Research and development
    
    
    2,197
    
    
    
    51.7
    
    
    
    2,641
    
    
    
    68.8Selling, general and administrative
    
    
    1,606
    
    
    
    37.8
    
    
    
    1,846
    
    
    
    48.1Total operating expenses
    
    
    3,803
    
    
    
    89.5
    
    
    
    4,487
    
    
    
    116.8Loss from operations
    
    
    (1,600
    )
    
    
    (37.7
    )
    
    
    (2,740
    )
    
    
    (71.4
    )Interest and other income
    
    
    93
    
    
    
    2.2
    
    
    
    62
    
    
    
    1.6Interest and other expense
    
    
    (4
    )
    
    
    (0.9
    )
    
    
    (38
    )
    
    
    (1.0
    )Loss before income taxes
    
    
    (1,511
    )
    
    
    (35.6
    )
    
    
    (2,716
    )
    
    
    (70.7
    )Provision for taxes
    
    
    1
    
    
    
    0.2
    
    
    
    4
    
    
    
    0.1Net loss
    
    $
    (1,512
    )
    
    
    (35.6
    )%
    
    $
    (2,720
    )
    
    
    (70.8
    )%
 11




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##### Table of Contents



Net Revenue Three months ended
    
    
    % Change
    
    
    Three months endedMarch 31, 2005
    
    
    2004 to 2005
    
    
    March 31, 2004($ in thousands)Wireless
    
    $
    3,145
    
    
    
    46.3
    %
    
    $
    2,149Networking
    
    
    1,102
    
    
    
    (34.8
    )%
    
    
    1,691Total
    
    $
    4,247
    
    
    
    10.6
    %
    
    $
    3,840
 Net revenue during the first quarter of 2005 increased $0.4 million from the comparable first
quarter of 2004. Our wireless product net revenue increased $1.0 million during the first quarter
of 2005, a 46% increase from the first quarter of 2004, while our networking products net revenue
decreased $0.6 million during the first quarter of 2005, a 35% decrease from the comparable first
quarter of 2004. The increase in wireless product revenue was primarily due to a combination of a 23% increase
in unit shipment volumes, in the first quarter of 2005 over the comparable first quarter of 2004,
and a 16% increase in the average selling prices of these products. The unit shipment volume
increase was primarily due to the addition of a second major digital cordless telephone customer.
The increase in our average selling prices compared to the year ago period was driven mainly by the
higher average selling price of our 5.8GHz product, the ML5800, as compared to the average selling
price of the ML2722, our 900MHz product that was shipping in volume during the first quarter of
2004. The decrease in networking product revenue was primarily due to a combination of a 24% decline
in unit volume shipments of our legacy networking products and a 14% decrease in average selling
prices of these products due to a shift in product mix. We expect continuing erosion in the sales
of these legacy products and anticipate that the average selling prices and margins will continue
to fluctuate from period to period due to changes in customer demand as well as product
availability for those products that have been declared to be end-of-life. In the first quarter of 2005, sales to Uniden Corporation and Giant Electronics Ltd. (a
subcontractor for Plantronics Corporation), each accounted for more than 10% of our net revenue. In
the first quarter of 2004, sales to Uniden Corporation accounted for more than 10% of our net
revenue. International revenue for the first quarter of 2005 totaled $4.0 million, or 94% of net
revenue compared to $3.6 million or 93% of net revenue for the first quarter of 2004. Domestic
revenue was approximately 6% of net revenue for the first quarter of 2005 compared to 7% for the
first quarter of 2004. 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 endedMarch 31, 2005
    
    
    2004 to 2005
    
    
    March 31, 2004($ in thousands)Gross margin
    
    $
    2,203
    
    
    
    26.1
    %
    
    $
    1,747% of Net
revenue
    
    
    51.9
    %
    
    
    
    
    
    
    45.5
    %
 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 first quarter of 2005 was 52%, as compared to 46% in the first quarter
of 2004. Wireless product gross margin was 45% during the first quarter of 2005 as compared to 32%
in the first quarter of 2004 and networking product gross margin was 70% during the first quarter
of 2005 compared to 63% in the first quarter of 2004. During the first quarter of 2005, we sold
approximately $41,000 of excess networking product inventory that was previously written off and
recognized charges for approximately $46,000 to provide reserves for additional excess wireless
products. Sales of previously reserved products and additions to the provisions for excess
inventories were not significant in the first quarter of 2004. 12




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##### Table of Contents



The increase in wireless product gross margin in the first quarter of 2005 as compared to the
same period in 2004 was primarily due to a 16% increase in average selling prices and a 7% decrease
in direct unit product costs. The increase in our average selling prices was driven primarily by
sales of our ML5800 product, which was shipping in volume during the first quarter of 2005 and
which had a significantly higher average selling price than the average selling price of our ML2722
product, which was the highest volume wireless product that was shipping during the first quarter
of 2004. Networking product gross margin increased to 70% in the first quarter of 2005 from 63% for the
comparable first quarter of 2004. The increase in gross margin is mainly due to a shift in product
mix in sales of our legacy networking products. We expect that the margin realized from these
legacy products will continue to fluctuate from period to period due to changes in product mix
resulting from changes in customer demand as well as product availability for those products that
have been declared to be end-of-life. Research and Development Expenses (R&D) Three months ended
    
    
    % Change
    
    
    Three months endedMarch 31, 2005
    
    
    2004 to 2005
    
    
    March 31, 2004($ in thousands)R&D
    
    $
    2,197
    
    
    
    (16.8
    )%
    
    $
    2,641
 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 decreased $0.4 million, during the
first quarter of 2005 from the comparable first quarter of 2004, mainly due to decreases in outside
services, prototype and equipment costs and other costs associated with the development and
introduction of new products. We intend to expend significant resources in the development of new
products during the foreseeable future. Selling, General and Administrative Expenses (SG&A) Three months ended
    
    
    % Change
    
    
    Three months endedMarch 31, 2005
    
    
    2004 to 2005
    
    
    March 31, 2004($ in thousands)SG&A
    
    $
    1,606
    
    
    
    (13.0
    )%
    
    $
    1,846
 The decrease in selling, general and administrative expenses for the first quarter of 2005, as
compared to the first quarter of 2004, was primarily due to headcount
reductions in our sales and marketing functions which was achieved
from a realignment of our sales and marketing efforts. Interest and Other Income and Interest and Other Expense Three months ended
    
    
    % Change
    
    
    Three months endedMarch 31, 2005
    
    
    2004 to 2005
    
    
    March 31, 2004($ in thousands)Interest and
other income
    
    $
    93
    
    
    
    50.0
    %
    
    $
    62Interest and other
expense
    
    $
    (4
    )
    
    
    89.5
    %
    
    $
    (38
    )
 The increase in interest and other income for the first three months of 2005 as compared to
the first three months of 2004 was primarily due to higher short-term interest rates in 2005.
Interest and other expense are primarily attributable to the mortgage on our San Jose facility. The
decrease in interest and other expenses for the first three months of 2005 as compared to the first
three months of 2004 was mainly due to the repayment of the mortgage on our San Jose facility,
which was repaid in July 2004 when the property was sold. 13




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##### Table of Contents



Provision for Income Taxes Three months ended
    
    
    % Change
    
    
    Three months endedMarch 31, 2005
    
    
    2004 to 2005
    
    
    March 31, 2004($ in thousands)Provision for
income taxes
    
    $
    1
    
    
    
    (75.0
    )%
    
    $
    4
 The provision for income taxes for the three months ended March 31, 2005 consists mainly of
minor taxes incurred by our branch office in Japan. The provision for the three months ended March
31, 2004 consists mainly of minimum state tax obligations and minor taxes incurred by our branch
office in Japan. 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 March 31, 2005 was 0.07%. The effective tax rate for
the three months ended March 31, 2004 was 0.1%. Liquidity and Capital Resources For the Three Months EndedMarch 31,2005
    
    
    2004(in thousands)Net cash used in operating activities
    
    $
    (224
    )
    
    $
    (2,508
    )Net cash (used in) provided by investing activities
    
    
    (442
    )
    
    
    2,000Net cash provided by financing activities
    
    
    21
    
    
    
    291Net decrease in cash and cash equivalents
    
    $
    (645
    )
    
    $
    (217
    )
 Net cash used by operating activities during the first three months of 2005 was mainly due to
our net operating loss of $1.5 million. Our major uses of cash during the quarter were
operating expenses and cost of product manufactured. During the first quarter of 2005 other
sources of cash provided were due to an increase of $0.7 million in our accounts payable balances
and an increase in our accrued liabilities of $0.4 million. We expect trade payables and our
accrued liability balances to continue to fluctuate from period to period due to variations in our
production cycle and timing of other operating expenses. In addition, non-cash depreciation and
amortization charges were $0.1 million for the first three
months of 2005, versus $0.2 million for the three months of
2004. The higher depreciation in 2004 was due to the depreciation
associated with our property that was sold in July 2004. Net cash
used by operating activities during the first three months of 2004
was mainly due to our net operating loss of $2.7 million. Net cash used in investing activities during the first three months of 2005 was primarily due
to net purchases of short-term investments of $0.3 million and purchases of capital equipment of
$0.2 million. The capital equipment purchased consists mainly of engineering equipment and software
design tools used in research development projects. Capital expenditures for this type of equipment
are expected to stay near the first quarter levels in the coming quarter and we anticipate that we
will be able to provide for these expenditures without any additional sources of financing. Net
cash provided by investing activities during the first three months of 2004 was primarily due to
net sales of short-term investments and maturities of $2.2 million. This was partially offset by capital
expenditures of $0.2 million. Net cash provided by financing activities consists mainly of proceeds from the issuance of
common stock in connection with the exercise of employee stock options. Proceeds from common stock
issuances were $21,000 for the first three months of 2005 and $0.4 million for the comparable
period of 2004. Principal mortgage payments on our debt were $0.1 million during the first three
months of 2004. The mortgage on our San Jose facilities was paid off when the buildings were sold
during the third quarter of 2004. Working capital was $14.8 million as of March 31, 2005, compared to $16.3 million as of
December 31, 2004. Working capital at March 31, 2005 includes cash and cash equivalents of $10.3
million and short-term investments of $4.9 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. 14




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##### Table of Contents



Recent Accounting Pronouncements In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (SFAS
No. 123R), Share-Based Payment, an amendment to Statement of Financial Accounting Standards No.
123 (SFAS No. 123), Accounting for Stock-Based Compensation and Statement on Financial
Accounting Standards No. 95, Statement of Cash Flows. The revised standard addresses the
accounting for share-based payment transactions in which a company receives employee services in
exchange for either equity instruments of the company or liabilities that are based on the fair
value of the companys equity instruments or that may be settled by the issuance of such equity
instruments. Under the new standard, companies will no longer be able to account for share-based
compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies
will be required to account for such transactions using a fair-value method and recognize the
expense in the consolidated statement of income. In addition, the adoption of SFAS 123R will
require additional accounting related to the income tax effects and additional disclosure regarding
the cash flow effects resulting from share-based payment arrangements. On March 29, 2005, the
Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 107 (SAB 107). This
Bulletin summarizes the views of the SEC staff regarding the interaction between SFAS 123R,
Share-Based Payment, and certain SEC rules and regulations and provides the SEC staffs views
regarding the valuation of share-based payment arrangements for public companies. In April 2005,
the SEC postponed the implementation date of SFAS 123R to the fiscal year beginning after June 15,
2005. The Company has not yet determined which fair-value method and transitional provision it will
follow. Currently, we disclose the pro forma net income (loss) and related pro forma income (loss)
per share information in accordance with SFAS 123 and Statement on Financial Accounting Standards
No. 148, Accounting for Stock-Based Compensation Costs  Transition and Disclosure. We believe
that adoption of the new standard will have an adverse impact on our results of operations. In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (SFAS
No. 151), Inventory Costs, an amendment of ARB No. 43, Chapter 4, SFAS No. 151 clarifies that
abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and
wasted materials (spoilage) are required to be recognized as current period charges. SFAS No. 151
will be effective in fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is
not expected to have a material effect on our financial position or results of operations. In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 (SFAS
No. 153), Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29. SFAS No. 153
addresses the measurement of exchanges of nonmonetary assets and redefines the scope of
transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153
will be effective for nonmonetary transactions in fiscal years beginning after June 15, 2005. The
adoption of SFAS No. 153 is not expected to have a material effect on our financial position or
results of operations. Factors That May Affect Future Operating Results The risks and uncertainties described below are not the only ones we face. If any of the
following risks actually occurs, our business, financial condition or results of operations could
be materially and adversely affected: Our operating results are difficult to predict and are likely to fluctuate significantly. They may
fail to meet or exceed the expectations of securities analysts or investors, causing our stock
price to decline. Our operating results are difficult to predict and have fluctuated significantly in the past.
They are likely to continue to fluctuate in the future as a result of many factors, some of which
are outside of our control. Some of the factors that may cause these fluctuations include:  
    the level and timing of spending by our customers, both in the U.S. and in foreign markets;
    changes in market demand, including seasonal and cyclical fluctuations;
    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; 15




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##### Table of Contents




    the announcement or introduction of new or enhanced products by us, or competitors, or both;
    any delay in the introduction of new or enhanced products by us;
    market acceptance of our new products and continuing demand for our existing products;
    cost and availability of wafers, other components and testing services;
    mix of products sold;
    fluctuations in end user demand for wireless products manufactured by our customers which incorporate our technology;
    economic conditions specific to the networking and wireless industries and markets, as
well as general economic conditions;
    ability to hire and retain qualified technical and other personnel;
    development of new industry standard communication protocols; and
    availability and performance of advanced silicon process technologies from foundry sources. We believe that period-to-period comparisons of our operating results will not necessarily be
meaningful. You should not rely on these comparisons as an indication of our future performance. If
our operating results in one or more future periods fail to meet or exceed the expectations of
securities analysts or investors, the trading price of our common stock may fluctuate, possibly by
a significant amount. The markets in which we operate are intensely competitive, and many competitors are larger and more
established. If we do not compete successfully, our business could be harmed. Intense international and domestic competition, decreasing selling prices, rapid technological
change, short product life cycles and cyclical patterns characterize the markets for our products.
Competitors include significantly larger corporations. New entrants in these markets could provide
additional competition. Most of our competitors are substantially larger and have greater
financial, technical, marketing and other resources than we do. Many of these large organizations
are in a better position to withstand any significant reduction in spending by customers in these
markets. They often have broader product lines and market focus, and will therefore not be as
susceptible to downturns in a particular market. In addition, many competitors have focused on the
wireless market for longer than we have, and therefore have more long-standing and established
relationships with domestic and foreign customers. The computer networking equipment and wireless markets have undergone a period of rapid growth
and consolidation in recent years. We expect our dependence on sales to digital cordless phone and
network equipment manufacturers to continue. Our business and results of operations would be harmed
in the event of a significant slowdown in the digital cordless phone or computer networking
equipment market. In addition, as a result of competitive pricing pressures, we have experienced
lower margins on some of our products. Such pricing pressures will continue to have an adverse
effect on our results of operations, and our business could suffer unless they can be offset by
higher margins on other products or lower operating expenses. We do not currently manufacture our own semiconductor wafers. As a result, we are vulnerable
to process technology advances competitors use to manufacture products offering higher performance
and lower cost. Larger companies with wafer manufacturing facilities, broader product lines,
greater technical and financial resources and greater service and support capabilities have an
advantage in this market. 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. 16




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##### Table of Contents



Rapidly changing technology, frequent product introductions and evolving industry standards
make it difficult to accurately predict the markets future growth rate, size or technological
direction. In view of the evolving nature of this market, suppliers of wireless products may decide
to adopt alternative standards or technologies that are incompatible with our products. If we are
unable to design, develop, manufacture and sell products that are compatible with these new
standards or technologies, our business and operating results would be harmed. We need to develop and introduce new and enhanced products in a timely manner to successfully
compete in our industry. Continuing technological advancement, changes in customer requirements and evolving industry
standards characterize the wireless and computer equipment networking markets. To compete
successfully, we must design, develop, manufacture and sell new or enhanced products that:  
    provide increasingly higher levels of performance and reliability;
    meet performance or other objective specified parameters;
    are cost effective;
    are brought to market in a timely manner;
    are in accordance with existing or evolving industry standards; and
    achieve market acceptance. The development of these new circuits is highly complex. We have sometimes experienced delays
in completing the development of new products. Successful product development and introduction
depends on many factors, including:  
    proper new product definition;
    timely completion and introduction of new product designs;
    availability of foundry capacity;
    acceptable manufacturing yields; and
    market acceptance of our products and our customers products. We must be able to adjust to changing market conditions quickly and cost-effectively to
compete successfully. Furthermore, we must introduce new products in a timely manner, and achieve
market acceptance for these products. In addition, our customers products which incorporate our
products must be introduced in a timely manner and achieve market acceptance. If we, or our
customers, fail to develop and introduce new products successfully, our business and operating
results would suffer. To successfully develop and market certain of our planned products, we may need to enter into
technology development or licensing agreements with third parties. If we cannot enter into such
agreements on acceptable terms, our ability to develop and market new products could suffer, and
our business and operating results would be adversely affected. Customers typically take a long time to evaluate our new products. It takes three to six
months or more for customers to test new products, and at least an additional three to 12 months
until customers begin significant production of products incorporating our products. We may
therefore experience a lengthy delay between product development and the generation of revenue from
new products. Delays inherent in such a long sales cycle raise additional risks that customers may
decide to cancel or change their product 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. 17




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##### Table of Contents



We have incurred quarterly net losses from June 2000 through March 2005, except for a profit
in the third quarter of 2002, which was attributable to an income tax refund, and a net profit for
the third quarter of 2004 which occurred from the sale of our land and buildings. Because of those
losses, we had an accumulated deficit of $25.8 million as of March 31, 2005. Successful engineering development and market penetration in the product areas we have chosen
to compete in require high levels of engineering and product development expense. We intend to
continue to spend significant amounts on new product and technology development. Our networking
products are reaching maturity, and revenue from this product line has declined and is expected to
decline further over the next 12 months. We expect to incur losses in the future and may not
achieve our goals of positive net income and cash flow. To the extent that our existing resources and cash generated from operations are insufficient to
fund our future activities, we may need to raise additional capital. If funds are not available on
acceptable terms, we may not be able to hire or retain employees, fund our operations or compete
effectively. We believe that our existing capital resources and cash generated from operations will enable
us to maintain our operations for at least the next 12 months. However, if our capital requirements
or results of operations vary materially from those currently planned, we may require additional
financing sooner than anticipated. If additional funds are raised through the issuance of debt
securities, these securities could have rights, preferences and privileges senior to our common

stock, and the terms of this debt could impose restrictions on our operations. The sale of
additional equity or convertible debt securities could result in additional dilution to our
stockholders. We cannot be certain that additional financing will be available in amounts or on
terms acceptable to us, if at all. If adequate funds are not available to us on acceptable terms,
our ability to hire, train or retain employees, to fund our operations and sales and marketing
efforts, take advantage of unanticipated opportunities, develop or enhance services or products, or
respond to competitive pressures would be significantly limited, which could harm our business,
financial condition and operating results. We depend on networking, wireless, and telecommunications spending for our revenue. Any decrease or
delay in spending in these industries would negatively impact future operating results and
financial condition. Demand for our products in the future will depend on the amount and timing of spending by
network providers, manufacturers of wireless consumer products, and telecommunications equipment
suppliers. Spending in these areas depends upon a variety of factors, including competitive
pressures, discretionary consumer spending patterns, and general economic conditions. During certain periods, new orders slowed, customers cancelled or placed holds on existing
orders, and new order levels fluctuated, due to developments in the general economy and capital
markets. This situation could recur in the future. Because the majority of our revenue comes from
sales to a few customers, a delay in orders from one customer could have a significant negative
effect on future revenue. Relatively short product life cycles characterize the computer network equipment and digital
cordless telephone markets. If one or more of our significant customers were to select circuits
manufactured by a competitor for future products, our business would suffer. The loss of one or
more of our current customers, failure to attract new customers, or disruption of our sales and
distribution channels could harm our business and operating results. Our customer base is concentrated. The loss of one or more key customers or distributors would harm
our business. A significant majority of our net revenue comes from sales to relatively few customers. Sales
to our ten largest customers, excluding domestic distributors, accounted for approximately 88% of
net revenue for the three months ended March 31, 2005 and 82% of net revenue for the same period in
2004. Two customers, Uniden Corporation and Giant Electronics Ltd. (a subcontractor for
Plantronics), together accounted for 61% of our net revenue for the first quarter of 2005. Sales to
domestic distributors accounted for approximately 3% of net revenue for the three months ended
March 31, 2005, and approximately 6% for the same period in 2004. 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 18




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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 94% of net revenue for the three
months ended March 31, 2005, and 93% of net revenue for the comparable period in 2004. 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
    political and economic instability, including wars, acts of terrorism, political unrest,
boycotts and any related conflicts or similar events worldwide. Substantially all of our international sales must be licensed by the Office of Export
Administration of the U.S. Department of Commerce. To date, we have not experienced any material
difficulties in obtaining export licenses. Our international sales are typically denominated in U.S. dollars. Fluctuations in currency
exchange rates could cause our products to become relatively more expensive to customers in a
particular country, while competitors products denominated in local currencies become less
expensive. This may lead to a reduction in sales or profitability in that country, which could
adversely affect our business. Gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable
and other international assets and liabilities may contribute to fluctuations in operating results.
In addition, international customers typically take longer to pay for purchases than customers in
the United States. If foreign markets do not continue to develop, or foreign sales cycles prove
unpredictable, our revenue and business would be adversely affected. 19




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##### Table of Contents



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




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




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by our suppliers or subcontractors to comply with environmental regulations could result in
fines, suspension of production or cessation of operations. Environmental regulations could also
require our suppliers or subcontractors to acquire equipment or incur other expenses to comply with
environmental regulations. If our suppliers or subcontractors incur substantial additional
expenses, product costs could significantly increase, adversely affecting our results of
operations. We are also subject to a variety of environmental regulations relating to our operations. If
we fail to comply with present and future regulations, the government could impose fines on us, or
compel us to suspend or cease operations. If we or our suppliers or subcontractors fail to control
the use or discharge of hazardous substances, we could be subject to civil or criminal liabilities,
which could harm our business and operating results. Because competition for qualified personnel 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. 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. 22




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Our stock price has been and is likely to continue to be highly volatile. Between January 1,
2005 and March 31, 2005 our stock price has traded as high as $5.43 on March 31, 2005 and as low as
$4.33 on January 25, 2005. Our stock price could fluctuate significantly due to a number of
factors, including:  
    variations in our actual or anticipated operating results;
    sales of substantial amounts of our stock;
    announcements about us or about our competitors, including technological innovation or new products;
    litigation and other developments relating to our patents or other proprietary rights or those of our competitors;
    conditions in the computer networking equipment and wireless markets;
    governmental regulation and legislation; and
    changes in securities analysts estimates of our performance, or our failure to meet analysts expectations. Many of these factors are beyond our control. In addition, the stock markets in general, and
the NASDAQ National Market and the market for technology companies in particular, have experienced
extreme price and volume fluctuations recently. These fluctuations often have been unrelated or
disproportionate to the operating performance of these companies. These broad market and industry
factors may decrease the market price of our common stock, regardless of our actual operating
performance. In the past, companies that have experienced volatility in the market prices of their
stock have been the objects of securities class action litigation. If we were the objects of
securities class action litigation, it could result in substantial costs and a diversion of
managements attention and resources, which could harm our business. Our Certificate of Incorporation and Bylaws, Stockholder Rights Plan and Delaware law contain
provisions that could discourage a change in control, even if the change in control would be
beneficial to our stockholders. Provisions of our Amended and Restated Certificate of Incorporation, Bylaws, the 1998
Shareholder Rights Plan, our stock option plans and Delaware law could make it more difficult for a
third party to acquire us, even if doing so would be beneficial to our stockholders. These
provisions could limit the price that investors might be willing to pay in the future for shares of
our common stock. Under the Shareholder Rights Plan, adopted in August 1998, each share of our outstanding
common stock carries one Right to purchase 1/1000 of a share of Series A Participating Preferred
Stock at an exercise price of $30.00 per Right. If someone acquires 15% or more of our common
stock, each Right not owned by a holder of 15% or more of our common stock entitles the holder,
upon payment of the $30.00 exercise price, to receive common stock having a current market value of
$60.00. This issuance of additional common stock would significantly reduce the percentage of
common stock held by a potential acquirer. The Rights expire in August 2008. In addition, Section 203 of the Delaware General Corporation Law and the terms of our stock
option plans may discourage, delay or prevent a change in control of Micro Linear. Specifically,
Section 203 prohibits a Delaware corporation from engaging in any business combination with an
interested stockholder for three years after the date the stockholder became an interested
stockholder unless specific conditions are met. Also, in the event outstanding options granted
pursuant to certain of our stock option plans are not assumed by an acquiring corporation, the
unvested portion of such options may be accelerated upon a change of control. In addition, some
individual stock option grants provide for the partial or complete acceleration of vesting upon a
change of control. 23




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Recently enacted regulatory changes may cause us to incur increased costs. Recently enacted and proposed changes in the laws and regulations affecting public companies,
including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC and NASDAQ,
could cause us to incur increased costs as we evaluate the implications of new rules and respond to
new requirements. The new rules could make it more difficult for us to obtain certain types of
insurance, including director and officer liability insurance, and we may be forced to accept
reduced policy limits and coverage or incur substantially higher costs to obtain the same or
similar coverage. The impact of these events could also make it more difficult for us to attract
and retain qualified persons to serve on our board of directors, or as executive officers. We are
presently evaluating and monitoring developments with respect to these new and proposed rules, and
we cannot predict or estimate the amount of additional costs we may incur or the timing of such
costs. 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. The
Financial Accounting Standards Board and other agencies have finalized changes to U.S. generally
accepted accounting principles that will require us, starting in our first quarter of 2006, to
record a charge to earnings for employee stock option grants and other equity incentives. We may
have significant and ongoing accounting charges resulting from option grant and other equity
incentive expensing that could reduce our overall net income. In addition, since we historically
have used equity-related compensation as a component of our total employee compensation program,
the accounting change could make the use of equity-related compensation less attractive to us and
therefore make it more difficult to attract and retain employees. While we believe that we currently have adequate internal control procedures in place, we are
still exposed to potential risks from recent legislation requiring companies to evaluate controls
under Section 404 of the Sarbanes-Oxley Act of 2002. We are evaluating our internal controls systems in order to allow management to report on, and
our independent public accountants to attest to, our internal controls, as required by Section 404
of the Sarbanes-Oxley Act. We are performing the system and process evaluation and testing required
in an effort to comply with the management certification and auditor attestation requirements of
Section 404. As a result, we are incurring additional expenses and a diversion of managements
time. While we believe that our internal control procedures are adequate and we anticipate being
able to fully implement the requirements relating to internal controls and all other aspects of
Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our
evaluation, testing and remediation actions or the impact of the same on our operations since there
is no precedent available by which to measure compliance adequacy. If we are not able to implement
the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject
to sanctions or investigation by regulatory authorities, such as the SEC or The Nasdaq National
Market. Any such action could adversely affect our financial results and the market price of our
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Item 3.Quantitative and Qualitative Disclosures about Market Risk Interest Rate Risk As of March 31, 2005, 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. If market interest rates were to increase immediately and uniformly by 10% as of
March 31, 2005, 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. Our disclosure controls are designed to meet, and management believes that they
meet, reasonable assurance standards. 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. 25




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PART II. OTHER INFORMATION 
 Item 6.Exhibits ExhibitNumber
    
    Description of Document31.1
    
    Rule 13a-14(a) Certification by the Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification by the Chief Financial Officer32.1*
    
    Section 1350 Certification by the Chief Executive Officer32.2*
    
    Section 1350 Certification by the Chief Financial Officer.
    26




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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: May 18, 2005
    By
    /s/ TIMOTHY A. RICHARDSONTimothy A. RichardsonPresident and Chief Executive
Officer
(Principal Executive Officer)Date: May 18, 2005
    By
    /s/ MICHAEL W. SCHRADLEMichael W. SchradleChief Financial Officer
(Principal Financial and Accounting Officer) 27




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INDEX TO EXHIBITS ExhibitNumber
    
    Description of Document31.1
    
    Rule 13a-14(a) Certification by the Chief Executive Officer31.2
    
    Rule 13a-14(a) Certification by the Chief Financial Officer32.1*
    
    Section 1350 Certification by the Chief Executive Officer32.2*
    
    Section 1350 Certification by the Chief Financial Officer.
    28