UNITED
STATES


SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C.  20549





FORM
10-K





x           ANNUAL
REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
1934


For the fiscal year ended December 31,
2008.





 ̈           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 0-25236





MICREL,   INCORPORATED


(Exact
name of Registrant as specified in its charter)





California
            94-2526744(State
      or other jurisdiction of
            (I.R.S.
      Employer Identification No.)incorporation
      or organization)





2180
Fortune Drive, San Jose,
CA       95131


(Address
of principal executive offices)   (Zip Code)





Registrant's
telephone number, including area code: (408) 944-0800





Securities
registered pursuant to Section 12(b) of the
Act:                None


Securities
registered pursuant to Section 12(g) of the
Act:                Common
Stock, no par value





Indicate
by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes  ̈No x





Indicate
by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes  ̈No x





Indicate
by check mark whether the registrant (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days.  Yes x   No  ̈





Indicate
by check mark if disclosure of delinquent filers pursuant to Item 405 of
Regulation S-K is not contained herein, and will not be contained, to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.   ̈





Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated
filer  ̈  Accelerated
filer x  Non-accelerated
filer  ̈  Smaller
reporting company  ̈





Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). Yes  ̈No x





As of
June 30, 2008, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $352 million based upon
the closing sales price of the Common Stock as reported on the Nasdaq National
Market on such date. Shares of Common Stock held by officers, directors and
holders of more than ten percent of the outstanding Common Stock have been
excluded from this calculation because such persons may be deemed to be
affiliates. The determination of affiliate status is not necessarily a
conclusive determination for other purposes.





As of
February 20, 2009, the Registrant had outstanding 65,372,543 shares of Common
Stock.





DOCUMENTS
INCORPORATED BY REFERENCE:





Portions
of the Registrant’s Proxy Statement for its Annual Meeting of Shareholders to be
held on May 21, 2009 are incorporated by reference in Part II and Part III of
this Report.


This Report on Form 10-K includes 84
pages with the Index to Exhibits located on page 79.


MICREL, INCORPORATED





INDEX
TO





ANNUAL
REPORT ON FORM 10-K





FOR
YEAR ENDED DECEMBER 31, 2008





PagePART
      IItem 1.
            Business
            3Item 1A.
            Risk
      Factors
            14Item 1B.
            Unresolved
      Staff
      Comments
            22Item 2.
            Properties
            22Item 3.
            Legal
      Proceedings
            22Item 4.
            Submission
      of Matters to a Vote of Security
      Holders
            22





PART
      IIItem 5.
            Market
      for the Registrant's Common Equity, Related Shareholder Matters and Issuer
      Purchases of Equity Securities
            24Item 6.
            Selected
      Financial Data
            26Item 7.
            Management's
      Discussion and Analysis of Financial Condition and Results of
      Operations
            27Item 7A.
            Quantitative
      and Qualitative Disclosures About Market Risk
            41Item 8.
            Financial
      Statements and Supplementary
      Data
            41Item 9.
            Changes
      in and Disagreements with Accountants on Accounting and Financial
      Disclosure
            41Item 9A.
            Controls
      and Procedures
            41Item 9B.
            Other
      Information
            42





PART
      IIIItem 10.
            Directors,
      Executive Officers and Corporate Governance
            43Item 11.
            Executive
      Compensation
            43Item 12.
            Security
      Ownership of Certain Beneficial Owners and Management and Related
      Shareholder Matters
            44Item 13.
            Certain
      Relationships and Related Transactions, and Directors
      Independence
            44Item 14.
            Principal
      Accounting Fees and Services
            44PART
      IVItem 15.
            Exhibits
      and Financial Statement Schedules
            45Signatures
            78Exhibit Index
            79Certifications
            82





Page
2
 Table of Contents


PART
I





ITEM 1.
            BUSINESS





The
statements contained in this Report on Form 10-K that are not purely historical
are forward-looking statements within the meaning of Section 27A of the
Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934,
as amended,  including statements regarding the Company’s
expectations, hopes, intentions or strategies regarding the
future.  Forward-looking statements include, but are not limited to
statements regarding: future revenues and dependence on standard products sales
and international sales; the levels of international sales; the effect of global
market conditions on revenue levels, profitability and results of operations:
future products or product development; statements regarding fluctuations in the
Company’s results of operations; future returns and price adjustments and
allowance; future uncollectible amounts and doubtful accounts allowance; future
products or product development; future research and development spending and
the Company’s product development strategy; the Company’s markets, product
features and performance; product demand and inventory to service such demand;
competitive threats and pricing pressure; the effect of dependence on third
parties; the Company’s future use and protection of its intellectual property;
future expansion or utilization of manufacturing capacity; future expenditures;
current or future acquisitions; the ability to meet anticipated short term and
long term cash requirements; effect of changes in market interest rates on
investments; the Company’s need and ability to attract and retain certain
personnel; the cost and outcome of litigation and its effect on the Company; the
future realization of tax benefits; and share based incentive awards and
expectations regarding future stock based compensation expense and estimates
made under SFAS No. 123R. In some cases, forward-looking statements can be
identified by the use of forward-looking terminology such as "believe,"
"estimate," "may," "can," "will," "could," "would," "intend," "objective,"
"plan," "expect," "likely," "potential," "possible" or "anticipate" or the
negative of these terms or other comparable terminology. All forward-looking
statements included in this document are based on information available to the
Company on the date of this report, and the Company assumes no obligation to
update any such forward-looking statements ,including those risks discussed
under” Risks Factors” and elsewhere in this document. These statements are
subject to risks and uncertainties that could cause actual results and events to
differ materially from those expressed or implied by such forward-looking
statements. Some of the factors that could cause actual results to differ
materially are set forth in Item 1 ("Business"), Item 1A ("Risk Factors"), Item
3 ("Legal Proceedings") and Item 7 ("Management's Discussion and Analysis of
Financial Condition and Results of Operations".








General





The Company was incorporated in
California in July 1978. References to the ''Company'' and ''Micrel'' refer to
Micrel, Incorporated and subsidiaries, which also does business as Micrel
Semiconductor. The Company's principal executive offices are located at 2180
Fortune Drive, San Jose, California 95131. The Company's telephone number is
(408) 944-0800. The Company maintains a corporate website located at
www.micrel.com. The Company's annual reports on Form 10-K, quarterly reports on
Form 10-Q, current reports on Form 8-K, and amendments to those reports are made
available, free of charge, on the website noted above as soon as reasonably
practicable after filing with or being furnished to the Securities and Exchange
Commission.





Page
3
 Table of Contents


Micrel designs, develops, manufactures
and markets a range of high-performance analog power integrated circuits
("ICs"), mixed-signal and digital ICs. The Company currently ships over 3000
standard products and has derived the majority of its product revenue for the
year ended December 31, 2008 from sales of standard analog and high speed
communications ICs. These products address a wide range of end markets including
cellular handsets, portable computing, enterprise and home networking, wide area
and metropolitan area networks, digital televisions and industrial equipment.
For the years ended December 31, 2008, 2007, and 2006, the Company's
standard products accounted for 95%, 92%, and 93%, respectively, of the
Company's net revenues. The Company also manufactures custom analog and
mixed-signal circuits and provides wafer foundry services for customers who
produce electronic systems for communications, consumer and military
applications.





Micrel’s high performance power
management analog products are characterized by high speed, low noise and
maximum efficiency in the smallest package.  Continuing trends to
lower voltages and higher currents in the communications, networking and
computing markets have created demand for high performance analog products to
accurately control, regulate, convert and route voltage and current in
electronic systems. The demand for high performance power management circuits
has been further fueled by the growth of portable communications and computing
devices (e.g. cellular handsets, portable media players and notebook computers).
The Company also has an extensive power management offering for the networking
and communications infrastructure markets including single-board and enterprise
servers, network switches and routers, storage area networks and wireless base
stations. In addition, the Company offers standard analog products that address
other markets, including industrial, defense and automotive
electronics.





In addition to power and thermal
management products, Micrel also offers two families of highly integrated radio
frequency ("RF") products. Micrel's QwikRadio® devices enable customers to
develop wireless control systems significantly improving the consumer experience
of their products. Applications for the QwikRadio® products include remote
keyless entry for automobiles, garage door openers and remote controls. Micrel's
RadioWire® transceivers provide a higher level of performance for more demanding
applications such as remote metering, security systems and factory
automation.





The Company's high bandwidth
communications circuits are used primarily for enterprise networks, storage area
networks, access networks, and metropolitan area networks. With form factor,
size reductions, and ease of use critical for system designs, Micrel utilizes
innovative packaging and proprietary process technology to address these
challenges.





The Company's family of Ethernet
products targets the digital home and industrial/embedded networking markets.
This product portfolio consists of physical layer transceivers (“PHY”), Media
Access Controllers ("MAC"), switches, and System-On-Chip ("SoC") devices that
support various Ethernet protocols supporting communication transmission speeds
from 10 Megabits per second to 100 Megabits per second.





In addition to standard analog and
mixed signal products, Micrel offers customers various combinations of design,
process and foundry services.





Page
4
 Table of Contents





Industry
Background





Analog Circuit, Mixed-Signal and
Digital ICs Markets





ICs may be divided into three general
categories — digital, analog (also known as ''linear'') and mixed-signal.
Digital circuits, such as memories and microprocessors, process information in
the form of on-off electronic signals and are capable of implementing only two
values, "1" or "0." Analog circuits, such as regulators, converters and
amplifiers, process information in the form of continuously varying voltages and
currents that have an infinite number of values or states. Analog circuits
condition, process, and measure or control real world variables such as current,
sound, temperature, pressure or speed. Mixed-signal ICs combine analog and
digital functions on one chip.





Analog circuits are used in virtually
every electronic system, and the largest markets for such circuits are
computers, telecommunications and data communications, industrial equipment,
military, consumer and automotive electronics. Because of their numerous
applications, analog circuits have a wide range of operating specifications and
functions. For each application, different users may have unique requirements
for circuits with specific resolution, linearity, speed, power and signal
amplitude capability.





Mixed-signal and digital ICs may be
divided into six general categories, LSI/MSI logic, data processing, signal
processing, memory, FPGA and application specific.





Mixed-signal and digital ICs are used
in computer and communication systems and in industrial products. The primary
markets for such circuits are consumer, communications, personal and enterprise
computer systems, networking and industrial.





As compared with the digital integrated
circuit industry, the analog integrated circuit industry has the following
important characteristics:





·
            Dependence on Individual
      Design Teams. The design of analog circuits involves the complex
      and critical placement of various circuits. Analog circuit design has
      traditionally been highly dependent on the skills and experience of
      individual design engineers.





·
            Interdependence of Design and
      Process. Analog designers, especially at companies having their own
      wafer fabrication facility, are able to select from several wafer
      fabrication processes in order to achieve higher performance and greater
      functionality from their designs.





·
            Longer Product Cycles and More
      Stable Pricing. Analog circuits generally have longer product
      cycles and greater price stability as compared to digital
      circuits.





Analog, mixed-signal and digital ICs
are sold to customers as either standard products or custom
products.


Page
5
 Table of Contents


Recent Trends in Analog Power
Management, Mixed-Signal and Digital ICs





Most electronic systems utilize analog
circuits to perform power management functions (''power analog circuits'') such
as the control, regulation, conversion and routing of voltages and current. The
computer and communications markets have emerged as two of the largest markets
for power analog circuits. In particular, the recent growth and proliferation of
portable, battery-powered devices, such as cellular telephones, digital cameras,
portable media players and notebook computers, continue to increase demand and
create new technological challenges for power analog circuits.





Cellular telephones, as an example, are
composed of components and subsystems that utilize several different voltage
levels, require multiple power analog circuits to precisely regulate and control
voltage. Manufacturers continue to pack more processing power and functionality
into smaller form factors placing severe demands on the battery. To maintain or
extend talk times, high performance power management products are
required.





The rapid adoption of the Internet for
information exchange, in business and consumer markets, has led to a significant
increase in the need for broadband communications technology. In recent years,
there has been a significant expansion in the number of broadband subscribers
for both DSL, cable modem and fiber to the home technologies. The increased
bandwidth demand of these users will continue to consume the installed capacity
and drive infrastructure upgrades in metropolitan and wide area networks. The
additional demand of new wireless services utilizing the transmission of video
will further accelerate this trend.





In the networking market, Ethernet has
been widely adopted as a communication standard. Ethernet ports are now being
provided on equipment ranging from PCs and PC peripherals to other consumer
products such as Network Printers, Internet Protocol Set-Top Boxes ("IP-STB"),
High-definition (“HD”) TV, Blue-Ray DVD players, Personal Video Recorders (PVR),
Multimedia Servers, Internet Protocol Phones ("IP-phone"), Analog Telephone
Adaptors ("ATA"), Internet Protocol Camera ("IP-camera"), Femto-cell base
stations, game consoles, media converters, used to convert signals transmitted
optically over fiber to standard cable (copper) and vice versa, and industrial
equipment. This is driving rapid growth in both the digital home market to
connect multiple PCs and peripherals and the industrial market to connect
machinery to central control and monitoring equipment.








Micrel’s
Strategy





Micrel seeks to capitalize on the
growth opportunities within the high-performance analog, mixed-signal and
digital semiconductor markets. The Company's core competencies are its analog
design and process technology, its large, in-house wafer fabrication capability
and manufacturing expertise. The Company also seeks to capitalize on growth
opportunities within the communications and networking markets and has
successfully acquired companies serving these market segments. The Company
intends to build a leadership position in its targeted markets by pursuing the
following strategies:





·
            Focus on Standard Products for
      High Growth Markets. Currently, Micrel ships over 3000 standard
      products, with net revenues from standard products generating 95% of the
      Company's total net revenues for the year ended December 31, 2008. The
      Company, however, will pursue additional custom and foundry business as
      opportunities arise.





·
            Target Power Analog,
      High-Speed Mixed-signal and Digital Markets. Micrel has leveraged
      its expertise in power analog circuits by addressing market opportunities
      in cellular telephones and other portable electronics, set-top boxes,
      enterprise computing, desktop and notebook computers as well as telecom
      and networking.


Page
6
 Table of Contents





·
            Maintain Technological
      Leadership. The Company seeks to utilize its design strengths and
      its process expertise to enhance what the Company believes are its
      competitive advantages in linear and switching regulators, MOSFET drivers,
      USB power switches, hot-swap-power controllers, high-speed interface, and
      communications devices.





·
            Develop/Acquire New
      Complementary Businesses. The Company seeks to identify
      complementary business opportunities building on its core strengths in the
      analog and mixed signal area.





·
            Capitalize on In-house Wafer
      Fabrication Facility. The Company believes that its in-house
      six-inch wafer fabrication facility provides a significant competitive
      advantage because it facilitates close collaboration between design and
      process engineers in the development of the Company's
      products.





·
            Maintain a Strategic Level of
      Custom and Foundry Products Revenue. Micrel believes that its
      custom and foundry products business complements its standard products
      business by generating a broader revenue base and lowering overall per
      unit manufacturing costs through greater utilization of its manufacturing
      facilities.





·
            Protect Proprietary
      Technology.The Company seeks
      to identify and protect its proprietary technology through the acquisition
      of patents, trademarks and
copyrights.








Products
and Markets





Overview





The following table sets forth the net
revenues attributable to the Company's two segments, standard products and other
products, consisting primarily of custom and foundry products revenues and
revenues from the license of patents, expressed in dollars and as a percentage
of total net revenues.








Net
      Revenues by Segment(Dollars
      in thousands)
            
            Years
      Ended December 31,2008
            
            
            2007
            
            
            2006Net
      Revenues:Standard
      Products
            
            $
            246,644
            
            
            $
            237,356
            
            
            $
            258,214Other
      Products
            
            
            12,716
            
            
            
            20,618
            
            
            
            18,093Total net
      revenues
            
            $
            259,360
            
            
            $
            257,974
            
            
            $
            276,307As
      a Percentage of Total Net Revenues:Standard
      Products
            
            
            95
            %
            
            
            92
            %
            
            
            93
            %Other
      Products
            
            
            5
            
            
            
            8
            
            
            
            7Total net
      revenues
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %





Page
7
 Table of Contents





The Company's products address a wide
range of end markets. The following table presents the Company's revenues by end
market as a percentage of total net revenues.





Revenues
      by End Market
            
            Years
      Ended December 31,2008
            
            
            2007
            
            
            2006As
      a Percentage of Total Net Revenues:High-Speed
      Communications
            
            
            26
            %
            
            
            23
            %
            
            
            26
            %Wireless
      Handsets
            
            
            19
            
            
            
            17
            
            
            
            19Computer
            
            
            15
            
            
            
            18
            
            
            
            19Industrial
            
            
            37
            
            
            
            39
            
            
            
            34Military
      &
      Other
            
            
            3
            
            
            
            3
            
            
            
            2Total net
      revenues
            
            
            100
            %
            
            
            100
            %
            
            
            100
            %





For a discussion of the changes in net
revenues from period to period, see ''Management's Discussion and Analysis of
Financial Condition and Results of Operations.''








Standard
Products





In recent years, the Company has
directed a majority of its development, sales and marketing efforts towards
standard products in an effort to address the larger markets for these products
and to expand its customer base. The Company offers a broad range of high
performance analog, mixed signal, and digital ICs that address high growth
markets including cellular telephones, portable electronics, set-top boxes,
desktop and notebook computers, networking and communications. The majority of
the Company's revenue is derived from power management standard products that,
in addition to the above markets, are also used in the industrial, consumer,
defense, and automotive electronics markets.





Portable Battery-Powered Computer
Market. The Company makes power analog circuits for notebook computers,
tablet PCs, and PDAs. Products in this growing market are differentiated on the
basis of power efficiency, weight, small size and battery life.





Cellular Telephone
Market.  Micrel offers a range of power control and regulating
analog circuits to address the demand for cellular telephones with longer
battery lives. Micrel supplies high performance low dropout (“LDO”) regulators,
high efficiency switching regulators and integrated power management ICs
("PMIC"s) that convert, regulate, switch and control the DC voltages used in
cellular telephones. In addition, Micrel offers LED and EL drivers to illuminate
displays and keypads and to power camera flashes, as well as tiny load switches
to disconnect power rails and regulators to charge batteries.





Universal Serial Bus Market.
USB has become the standard way of connecting computers with computer
peripherals. In addition to implementing data communications between the
connected devices, USB also provides a power source capable of powering the
peripheral. Micrel supplies USB transceivers for data communication and for USB
power; voltage regulators and current limiting power switches.





PCMCIA Card and Socket
Markets. Micrel has been a leader in the design and manufacture of ICs
for power control in PCMCIA and CardBus sockets and is involved in the creation
of next generation PC card standards, including Express Card.  The
Company also has developed IC’s for the new Cable Card standard for digital
televisions and set top boxes.


Page
8
 Table of Contents





Power Supply Market. Most
electronic equipment includes a power supply that converts and regulates the
electrical power source into usable current for the equipment. Micrel has
several families of high voltage switching controllers for the networking,
telecommunications and computing markets. These devices offer high efficiency to
minimize power loss through heat, and high switching frequencies to provide a
minimal solution size. In addition to SMPS controllers and single chip SMPS
regulators, Micrel offers a full line of MOSFET drivers, smart switches, voltage
supervisors and LDOs.





General Purpose Analog.Micrel sells a variety of general purpose analog products including
high-speed operational amplifiers, low-power operational amplifiers, comparators
and intelligent protected power switches. Most of these general purpose devices
focus on low-voltage and low-current applications.





Thermal Management.Micrel's
thermal management products address the need to accurately measure temperature
in several system locations and control cooling fans. Applications for these
products include notebook computers, servers, enterprise storage, printers,
copiers and set-top boxes.





Hot Swap Power Controllers.Micrel's hot swap power controllers support the requirement for 24/7
operation in high-performance enterprise servers, enterprise storage, and
telecommunication infrastructure equipment. These products allow customers to
upgrade or replace system boards without having to power down the system. This
portfolio offers the industry’s most integrated, dual-slot hot swap solutions
for CompactPCITM, PCI-X, and PCI Express applications. The Company also offers
other low-voltage and high-voltage (+/- 48V) controllers for the
telecommunications and networking equipment markets.





Radio Frequency Data
Communications. Micrel's QwikRadio® family of RF receivers and
transmitters are designed for use in any system requiring a cost-effective,
low-data-rate wireless link. Typical examples include garage door openers,
lighting and fan controls, automotive keyless entry and remote controls.
Micrel's RadioWire® transceivers provide a higher level of performance for more
demanding applications such as remote metering, security systems and factory
automation.





Networking and High-Speed
Communications Market.The Company's High Bandwidth division develops and
produces high speed Physical Media Devices (“PMD”) and interface integrated
circuits for communications products targeted at fiber optic modules, active
cables, backplane management, data and clock management
applications.





Micrel's Ethernet division offers a
broad range of PHY, MAC, Switch and SoC products for the 10/100/1000 Megabit
Ethernet standard. The primary applications for the products are Digital Home
Networks, Enterprise, and other Industrial/Embedded Ethernet
systems.





The Company's future success will
depend in part upon the timely completion, introduction, and market acceptance
of new standard products. The standard products business is characterized by
generally shorter product lifecycles, greater pricing pressure, larger
competitors and more rapid technological change as compared to the Company's
custom and foundry products business.





Page
9
 Table of Contents





Other
Products





Micrel offers various combinations of
design, process and foundry services in order to provide customers with the
following alternatives:





Full Service Custom.Based on
a customer's specification, Micrel designs and then manufactures
ICs.





Custom and Semicustom. Based
on a customer's high level or partial circuit design, Micrel uses varying
combinations of its design and process technologies to complete the design and
then manufactures ICs for the customer.





R&D Foundry. Micrel
modifies a process or develops a new process for a customer. Using that process
and mask sets provided by the customer, Micrel manufactures fabricated wafers
for the customer.





Foundry. Micrel duplicates a
customer's process to manufacture fabricated wafers designed by the
customer.





Micrel's full service custom, custom
and semicustom products primarily address solar cell, high bandwidth
communications, consumer, automotive and military applications and use both
analog and digital technologies.








Sales,
Distribution and Marketing





The Company sells its products through
a worldwide network of independent sales representative, independent distributor
and stocking representative firms and through a direct sales staff.





The Company sells its products in
Europe through a direct sales staff in the U.K., Germany, France and Sweden as
well as independent sales representative firms, independent distributors and
independent stocking representative firms. Asian sales are handled through
Micrel sales offices in Korea, Japan, Taiwan, China and Singapore, independent
distributors and independent stocking representative firms. The stocking
representative firms may buy and stock the Company's products for resale or may
act as the Company's sales representative in arranging for direct sales from the
Company to an OEM customer.





In 2008, sales to customers in North
America, Asia and Europe accounted for 30%, 56% and 14% respectively, of the
Company's net revenues. In 2007 North America, Asia and Europe accounted for
33%, 55% and 12% respectively, of the Company's net revenues and in 2006 North
America, Asia and Europe accounted for 30%, 59% and 11% respectively, of the
Company's net revenues.  The Company's standard products are sold
throughout the world, while its custom and foundry products are primarily sold
to North American customers. The Company's net revenues by country, including
the United States, are included in Note 12 of Notes to
Consolidated Financial Statements.





The Company's international sales are
primarily denominated in U.S. dollars. Consequently, changes in exchange rates
that strengthen the U.S. dollar could increase the price in local currencies of
the Company's products in foreign markets and make the Company's products
relatively more expensive than competitors' products that are denominated in
local currencies, leading to a reduction in sales or profitability in those
foreign markets. The Company has not taken any protective measures against
exchange rate fluctuations, such as purchasing hedging instruments with respect
to such fluctuations.





Page
10
 Table of Contents


Customers





For the year ended December 31,
2008 one customer, a worldwide distributor, accounted for 13% of the Company's
net revenues. For the year ended December 31, 2007 two worldwide
distributors accounted for 15% and 13%, respectively, of the Company's net
revenues. For the year ended December 31, 2006 three customers, two
worldwide distributors and a stocking representative accounted for 13%, 12% and
10%, respectively, of the Company's net revenues.








Design
and Process Technology





Micrel's analog proprietary design
technology depends on the skills of its analog design team. The Company has
experienced analog design engineers who utilize an extensive macro library of
analog and mixed-signal circuits and computer simulation models.





Micrel can produce ICs using a variety
of manufacturing processes, some of which are proprietary and provide enhanced
product features. Designers at companies that do not have in-house fabs or have
a limited selection of available processes often have to compromise design
methodology in order to match process parameters.





The Company utilizes the following
process technologies:


·
            Bipolar


·
            High Speed
      Bipolar


·
            Superβeta
  PNPTM


·
            CMOS


·
            BiCMOS — Bipolar/CMOS
      (''BiCMOS'')


·
            BCD — Bipolar/CMOS/DMOS
      (''BCD'')


·
            ASSET— All Spacer
      Separated Element Transistor
("ASSET")


·
            Silicon Germanium –
      Silicon Germanium (“SiGe”)





The Company continues to develop
process technologies to improve both the performance and cost of its new
products. Micrel is also developing new process technologies to support its own
product development and the needs of its foundry customers.





The Company utilizes third-party wafer
fabrication foundries for advanced CMOS fabrication processes and other advanced
processes that are not available in-house. For the year ended December 31, 2008,
approximately 10% of Micrel's wafer requirements were fabricated at third-party
foundry suppliers, including all of Micrel's Ethernet networking
products.








Research
and Development





The ability of the Company to compete
will substantially depend on its ability to define, design, develop and
introduce on a timely basis new products offering design or technology
innovations. Research and development in the analog and mixed-signal integrated
circuit industry is characterized primarily by circuit design and product
engineering that enables new functionality or improved performance. The
Company's research and development efforts are also directed at its process
technologies and focus on cost reductions to existing manufacturing processes
and the development of new process capabilities to manufacture new products and
add new features to existing products. With respect to more established
products, the Company's research and development efforts also include product
redesign, shrinkage of device size and the reduction of mask steps in order to
improve die yields per wafer and reduce per device costs.


Page
11
 Table of Contents





The Company's analog, mixed-signal and
digital design engineers principally focus on developing next generation
standard products for the Company’s targeted markets. The Company's new product
development strategy emphasizes a broad line of standard products that are based
on customer input and requests.





In 2008, 2007, and 2006 the Company
spent $54.9 million $54.5 million, and $52.1 million,
respectively, on research and development. The Company expects that it will
continue to spend substantial funds on research and development
activities.








Patents
and Intellectual Property Protection





The Company seeks patent protection for
those inventions and technologies for which such protection is suitable and is
likely to provide a competitive advantage to the Company. The Company currently
holds 254 United States patents on semiconductor devices and methods, with
various expiration dates through 2027. The Company has applications for 109
United States patents pending. The Company holds 53 issued foreign patents and
has applications for 88 foreign patents pending.








Supply
of Materials and Purchased Components





Micrel currently purchases certain
components from a limited group of vendors. The packaging of the Company's
products is performed by, and certain of the raw materials included in such
products are obtained from, a limited group of suppliers. The wafer supply for
the Company’s Ethernet products is primarily dependent upon two large
third-party wafer foundry suppliers.








Manufacturing





The Company produces the majority
of its wafers at the Company’s wafer fabrication facility located in San Jose,
California while a small percentage of wafer fabrication is subcontracted to
outside foundries, including 100% of Micrel's Ethernet product wafer
requirements. The San Jose facility includes a 57,000 square foot office and
manufacturing facility containing a 28,000 square foot clean room facility,
which provides production processes. Approximately 70% of the San Jose
facility's clean room space is classified as a Class 1 facility, which means
that the facility achieves a clean room level of fewer than 1 foreign particle
larger than 0.3 microns in size in each cubic foot of space. The remainder of
the facility's clean room space is classified as Class 10, achieving fewer than
10 foreign particles larger than 0.3 microns in size in each cubic foot of
space. The facility uses six-inch wafer technology. The Company also owns
approximately 63,000 square feet of additional adjacent space in San Jose that
is used as a testing facility and administrative offices.





Generally, each die on the Company's
wafers is electrically tested for performance, and most of the wafers are
subsequently sent to independent assembly and final test contract facilities in
Malaysia and certain other Asian countries. At such facilities, the wafers are
separated into individual circuits and packaged. The Company's reliance on
independent assemblers may subject the Company to longer manufacturing cycle
times. The Company from time to time has experienced competition with respect to
these contractors from other manufacturers seeking assembly of circuits by
independent contractors.





Page
12
 Table of Contents





Competition





The semiconductor industry is highly
competitive and subject to rapid technological change. Significant competitive
factors in the market for standard products include product features,
performance, price, the timing of product introductions, the emergence of new
technological standards, quality and customer support. The Company believes that
it competes favorably in all of these areas.





The standard products market for analog
ICs is diverse and highly fragmented. and the Company encounters different
competitors in its various market areas. The Company's principal analog circuit
competitors include Linear Technology Corporation, Maxim Integrated Products,
Inc., and National Semiconductor Corp. in one or more of its product areas.
Other competitors include Texas Instruments, Freescale Semiconductor (formerly
Motorola), Intersil, Fairchild Semiconductor, Advanced Analogictech, Semtech and
ON Semiconductor. Most of these companies have substantially greater technical,
financial and marketing resources and greater name recognition than the Company.
The Company's principal competitors for products targeted at the high bandwidth
communications market are ON Semiconductor, Analog Devices, Maxim Integrated
Products, Inc., Vitesse Semiconductor Corp., Integrated Device Technology and
Mindspeed. The primary competitors for Micrel's Ethernet products are Broadcom
Corp., Marvell Technology Group Ltd. and a number of Taiwanese
companies.





With respect to the custom and foundry
products business, significant competitive factors include product quality and
reliability, established relationships between customers and suppliers, timely
delivery of products, and price. The Company believes that it competes favorably
in all these areas.








Backlog





At December 31, 2008, the
Company's backlog was approximately $40 million, substantially all of which is
scheduled to be shipped during the first six months of 2009. At December 31,
2007, backlog was approximately $48 million. Orders in backlog are subject
to cancellation or rescheduling by the customer, generally with a cancellation
charge in the case of custom and foundry products. The Company's backlog
consists of distributor and customer released orders requesting shipment within
the next six months. Shipments to United States, Canadian and certain other
international distributors who receive significant return rights and price
adjustments from the Company are not recognized as revenue by the Company until
the product is sold from the distributor stock and through to the end-users.
Because of possible changes in product delivery schedules and cancellation of
product orders and because an increasing percentage of the Company's sales are
shipped in the same quarter that the orders are received, the Company's backlog
at any particular date is not necessarily indicative of actual sales for any
succeeding period.








Environmental
Matters





Federal, state and local regulations
impose various environmental controls on the storage, handling, discharge and
disposal of chemicals and gases used in the Company's manufacturing process. The
Company believes that its activities conform to present environmental
regulations.





Page
13
 Table of Contents





Employees





As of December 31, 2008, the
Company had 852 full-time employees as compared to 923 at December 31, 2007. In
response to the world economic financial crisis, the Company subsequently
reduced its employee base by an additional 49 employees in January 2009 to 803.
The Company's employees are not represented by any collective bargaining
agreements, and the Company has never experienced a work stoppage.








Segment
Information





The Company has two reportable
segments: standard products and other product revenues, which consist primarily
of custom and foundry products revenues and revenues from the license of
patents. Segment financial information is presented in Note
12 in the Consolidated Financial Statements, which is incorporated by
reference here.








ITEM 1A.  RISK FACTORS





Factors
That May Affect Operating Results





If a company's operating results are
below the expectations of public market analysts or investors, then the market
price of its Common Stock could decline. Many factors that can affect a
company's quarterly and annual results are difficult to control or
predict.  Some of the factors which can affect a multinational
semiconductor business such as the Company are described below.





Geopolitical and
Macroeconomic Risks That May Affect Multinational
Enterprises





The current global recession and
unprecedented volatility in global capital markets could have a material adverse
effect on the Company’s business, results of operations, and financial
condition, and the Company does not expect these conditions to improve in the
near future.  The current global economic downturn and
unprecedented volatility in global capital markets has worsened the ongoing
weakness in the semiconductor industry, and the Company expects that the future
economic environment may continue to be considerably less favorable than that of
the recent years. The semiconductor industry has traditionally been highly
cyclical and has often experienced significant downturns in connection with, or
in anticipation of, declines in general economic conditions, and the Company
cannot accurately predict how severe and prolonged this downturn might be. The
global recession and credit crisis in the financial markets has resulted in a
decrease in orders for the Company’s products, which may continue or worsen for
the foreseeable future, and which may negatively affect the Company’s revenues,
results of operations and financial condition. In addition to reduction in
sales, the Company’s profitability may decrease during this economic downturn
because it may not be able to reduce costs at the same rate as its sales
decline.





Recent macroeconomic turmoil in the
world financial markets is affecting commercial and consumer
markets.  Financial markets in the United States, Europe and
Asia have been experiencing extreme disruption in recent months, causing
customers and consumers to cut back on spending in order to conserve
cash.  Additionally, many of the Company’s customers procure its
products on credit. If credit is not available to them, it may be difficult or
impossible for customers to purchase the Company’s products. The Company’s
operating results in one or more segments may be materially adversely affected
by the current economic conditions, and if such conditions remain uncertain,
persist, or deteriorate further, the Company may experience material impacts on
its business, operating results, and financial condition.


Page
14
 Table of Contents


Demand for semiconductor components
is increasingly dependent upon the rate of growth of theglobaleconomy.  The
current global economic downturn and any worsening in the global economy could
cause demand for the Company’s products to be adversely affected, which in turn
could negatively affect revenues, results of operations and financial
condition.  Many factors could adversely affect regional or global
economic growth.  Some of the factors that could further slow global
economic growth include: continued volatility in the United States and global
credit markets, increased price inflation for goods, services or materials, a
slowdown in the rate of growth of the Chinese economy, a significant act of
terrorism which disrupts global trade or consumer confidence, and geopolitical
tensions including war and civil unrest.  Reduced levels of economic
activity, or disruptions of international transportation, could adversely affect
sales on either a global basis or in specific geographic regions.





Market conditions may lead the
Company to initiate additional cost reduction plans, which may negatively affect
near term operating results.  Weaker customer demand,
competitive pricing pressures, excess capacity, weak economic conditions or
other factors, may cause the Company to initiate additional actions to reduce
the Company’s cost structure and improve the Company’s future operating results.
The cost reduction actions may require incremental costs to implement, which
could negatively affect the Company’s operating results in periods when the
incremental costs or liabilities are incurred.





The current tightening of the credit
markets may adversely affect the Company’s business in a number of ways.The unprecedented contraction and extreme disruption in recent months in
the credit and financial markets in the United States, Europe, and Asia has led
to, among other things, extreme volatility in security prices, severely
diminished liquidity and credit availability, rating downgrades of certain
investments and declining valuation of others. While the Company does not
currently require access to credit markets to finance its operations, these
economic developments may adversely affect the Company’s business in a number of
ways. The current tightening of credit in financial markets may limit the
ability of the Company’s customers and suppliers to obtain financing for capital
purchases and operations. This could result in a decrease in or cancellation of
orders for the Company’s products or reduced ability to finance operations to
supply products to the Company. The Company cannot predict the likely duration
and severity of the current disruption in financial markets and adverse economic
conditions in the U.S. and other countries. Further, the worldwide economic
slowdown makes it is extremely difficult for the Company to forecast future
sales levels based on historical information and trends. Visibility into
customer demand continues to be limited due to short order lead times. Portions
of the Company’s expenses are fixed and other expenses are tied to expected
levels of sales activities. To the extent the Company does not achieve its
anticipated levels of sales, its gross profit and net income could be adversely
affected until such expenses are reduced to an appropriate level.





The Company has generated a
substantial portion of its net revenues from export sales.The Company
believes that a substantial portion of its future net revenues will depend on
export sales to customers in international markets, including
Asia.  International markets are subject to a variety of risks,
including changes in policy by the U.S. or foreign governments, acts of
terrorism, foreign government instability, social conditions such as civil
unrest, economic conditions including high levels of inflation, fluctuation in
the value of foreign currencies and currency exchange rates and trade
restrictions or prohibitions. Changes in exchange rates that strengthen the U.S.
dollar could increase the price of the Company's products in the local
currencies of the foreign markets it serves. This would result in making the
Company's products relatively more expensive than its competitors' products that
are denominated in local currencies, leading to a reduction in sales or
profitability in those foreign markets. The Company has not taken any protective
measures against exchange rate fluctuations, such as purchasing hedging
instruments. In addition, the Company sells to domestic customers that do
business worldwide and cannot predict how the businesses of these customers may
be affected by economic or political conditions elsewhere in the world. Such
factors could adversely affect the Company's future revenues, financial
condition, results of operations or cash flows.


Page
15
 Table of Contents





Semiconductor Industry
Specific Risks





The volatility of customer demand in
the semiconductor industry limits a company's ability to predict future levels
of sales and profitability. Semiconductor suppliers can rapidly increase
production output, leading to a sudden oversupply situation and a subsequent
reduction in order rates and revenues as customers adjust their inventories to
true demand rates. A rapid and sudden decline in customer demand for products
can result in excess quantities of certain products relative to
demand.  Should this occur the Company’s operating results may be
adversely affected as a result of charges to reduce the carrying value of the
Company’s inventory to the estimated demand level or market
price.  The Company's quarterly revenues are highly dependent upon
turns fill orders (orders booked and shipped in the same
quarter).  The short-term and volatile nature of customer demand makes
it extremely difficult to accurately predict near term revenues and
profits.





The semiconductor industry is highly
competitive and subject to rapid technological change, price-erosion and
increased international competition.  Significant competitive
factors include product features, performance and price; timing of product
introductions; emergence of new computer and communications standards; quality
and customer support. If the Company is unable to compete favorably in these
areas, revenues and profits could be negatively affected.





The short lead time environment in
the semiconductor industry has allowed many end consumers to rely on
semiconductor suppliers, stocking representatives and distributors to carry
inventory to meet short term requirements and minimize their investment in
on-hand inventory.Over the past several years, customers have
worked to minimize the amount of inventory of semiconductors they
hold.  As a consequence customers are generally providing less order
backlog to the Company and other semiconductor suppliers, resulting in short
order lead times and reduced visibility into customer demand.  As a
consequence of the short lead time environment and corresponding
unpredictability of customer demand, the Company has increased its inventories
approximately 20% over the past five to six years to maintain reliable service
levels.  If actual customer demand for the Company’s products is
different from the Company’s estimated demand, product inventory may have to be
scrapped, or the carrying value reduced, which could adversely affect the
Company's business, financial condition, results of operations, or cash flows.
In addition, the Company maintains a network of stocking representatives and
distributors that carry inventory to service the volatile short-term demand of
the end customer.  Should the relationship with a distributor or
stocking representative be terminated, the future level of product returns could
be higher than the returns allowance established, which could negatively affect
the Company’s revenues and results of operations.





During periods when economic growth
and customer demand have been less certain, both the semiconductor industry and
the Company have experienced significant price erosion.  If
price erosion occurs, it will have the effect of reducing revenue levels and
gross margins in future periods.  Furthermore, the trend for the
Company’s customers to move their electronics manufacturing to Asian countries
has brought increased pricing pressure for Micrel and the semiconductor
industry.  Asian based manufacturers are typically more concerned
about cost and less concerned about the capability of the integrated circuits
they purchase.  The increased concentration of electronics procurement
and manufacturing in the Asia Pacific region may lead to continued price
pressure and additional product advertising costs for the Company’s products in
the future.


Page
16
 Table of Contents


Many semiconductor companies face
risks associated with a dependence upon third parties that manufacture, assemble
or package certain of its products.  These risks include
reduced control over delivery schedules and quality; inadequate manufacturing
yields and excessive costs; the potential lack of adequate capacity during
periods of excess demand; difficulties selecting and integrating new
subcontractors; potential increases in prices; disruption in supply due to civil
unrest, terrorism, natural disasters or other events which may occur in the
countries in which the subcontractors operate; and potential misappropriation of
the Company's intellectual property.  The occurrence of any of these
events may lead to increased costs or delay delivery of the Company's products,
which would harm its profitability and customer relationships. The Company does
not have long-term supply contracts with any of its third-party vendors.
Therefore, the vendors are not obligated to perform services or supply products
to the Company for any specific period, in any specific quantities, or at any
specific price, except as may be provided in a particular accepted purchase
order Additionally, the Company's wafer and product requirements typically
represent a relatively small portion of the total production of the third-party
foundries and outside assembly, testing and packaging contractors.  As
a result, Micrel is subject to the risk that a third-party supplier will provide
delivery or capacity priority to other larger customers at the expense of
Micrel, resulting in an inadequate supply to meet customer demand or higher
costs to obtain the necessary product supply.





The markets that the Company serves
frequently undergo transitions in which products rapidly incorporate new
features and performance standards on an industry-wide
basis.  If the Company's products are unable to support the new
features or performance levels required by OEMs in these markets, it would
likely lose business from existing or potential customers and would not have the
opportunity to compete for new design wins until the next product transition. If
the Company fails to develop products with required features or performance
standards, or experiences even a short delay in bringing a new product to
market, or if its customers fail to achieve market acceptance of their products,
its revenues could be significantly reduced for a substantial period of
time.





Because the standard products market
for ICs is diverse and highly fragmented, the Company encounters different
competitors in various market areas.  Many of these competitors
have substantially greater technical, financial and marketing resources and
greater name recognition than the Company.  The Company may not be
able to compete successfully in either the standard products or custom and
foundry products business in the future and competitive pressures may adversely
affect the Company's financial condition, results of operations, or cash
flows.





The success of companies in the
semiconductor industry depends in part upon intellectual property, including
patents, trade secrets, know-how and continuing technology innovation.
The success of companies like Micrel may depend on their ability to obtain
necessary intellectual property rights and protect such rights. There can be no
assurance that the steps taken by the Company to protect its intellectual
property will be adequate to prevent misappropriation or that others will not
develop competitive technologies or products. There can be no assurance that any
patent owned by the Company will not be invalidated, circumvented or challenged,
that the rights granted thereunder will provide competitive advantages or that
any of its pending or future patent applications will be issued with the scope
of the claims sought, if at all. Furthermore, others may develop technologies
that are similar or superior to the Company's technology, duplicate technology
or design around the patents owned by the Company. Additionally, the
semiconductor industry is characterized by frequent litigation regarding patent
and other intellectual property rights. Claims alleging infringement of
intellectual property rights have been asserted against the Company in the past
and could be asserted against the Company in the future. These claims could
result in the Company having to discontinue the use of certain processes; cease
the manufacture, use and sale of infringing products; incur significant
litigation costs and damages; attempt to obtain a license to the relevant
intellectual property and develop non-infringing technology. The Company may not
be able to obtain or renew such licenses on acceptable terms or to develop
non-infringing technology. In addition, the Company relies on third parties for
certain technology that is integrated into some of its products. If the Company
was unable to continue to use or license on reasonable terms third-party
technologies used in some of its products or the technology fails to operate,
the Company may not be able to secure alternatives in a timely manner and its
business would be harmed. Existing claims or other assertions or claims for
indemnity resulting from infringement claims, or the failure to obtain a key
license or renew or renegotiate existing licenses on favorable terms could
adversely affect the Company's business, financial condition, results of
operations, or cash flows.


Page
17
 Table of Contents








The significant investment in
semiconductor manufacturing capacity and the rapid growth of circuit design
centers in China may present a competitive threat to established semiconductor
companies due to the current low cost of labor and capital in China.The
emergence of low cost competitors in China could reduce the revenues and
profitability of established semiconductor manufacturers.





There is intense competition for
qualified personnel in the semiconductor industry, in particular design
engineers.  The Company may not be able to continue to attract
and train engineers or other qualified personnel necessary for the development
of its business or to replace engineers or other qualified personnel who may
leave its employ in the future. Loss of the services of, or failure to recruit,
key design engineers or other technical and management personnel could be
significantly detrimental to the Company's product and process development
programs.





In
addition, equity awards generally comprise a significant portion of the
Company’s compensation packages for key employees. As a result of the recent
decline in the Company’s stock price, many of its key employees hold options
with exercise prices in excess of the current stock price, and therefore
retention of these key employees may be difficult in a highly competitive
market. SFAS 123R requires the Company to expense the fair value of equity
awards to its employees Any modifications of existing equity awards or grants of
new equity awards may increase the Company’s operating expenses.





Companies in the semiconductor
industry are subject to a variety of federal, state and local governmental
regulations related to the use, storage, discharge and disposal of toxic,
volatile or otherwise hazardous chemicals used in its manufacturing
process.  Any failure to comply with present or future
regulations could result in the imposition of fines, the suspension of
production, alteration of manufacturing processes or a cessation of
operations.  In addition, these regulations could restrict the
Company's ability to expand its facilities at their present locations or
construct or operate a new wafer fabrication facility or could require the
Company to acquire costly equipment or incur other significant expenses to
comply with environmental regulations or clean up prior discharges. The
Company's failure to appropriately control the use of, disposal or storage of,
or adequately restrict the discharge of, hazardous substances could subject it
to future liabilities and could have a material adverse effect on its
business.








Company-Specific
Risks





In addition to the risks that affect
multinational semiconductor companies listed above, there are additional risks
which are more specific to the Company such as:





An important part of the Company's
strategy is to continue to focus on the market for high-speed communications
IC’s.  Should demand from the Company’s customers in this end
market decrease, or if lower customer demand for the Company’s high bandwidth
products materializes, the Company's future revenue growth and profitability
could be adversely affected.


Page
18
 Table of Contents





The cellular telephone (wireless
handset) market comprises a significant portion of the Company’s standard
product revenues.  The Company derives a significant portion of
its net revenues from customers serving the cellular telephone market. Due to
the highly competitive and fast changing environment in which the Company’s
cellular telephone customers operate, demand for the product the Company sells
into this end market can change rapidly and unexpectedly.  If the
Company’s cellular telephone customers acceptance of Micrel’s products
decreases, or if these customers lose market share, or accumulate too much
inventory of completed handsets, the demand for the Company’s products can
decline sharply which could adversely affect the Company’s revenues and results
of operations.





The Company’s gross margin,
operating margin and net income are highly dependent on the level of revenue and
capacity utilization that the Company
experiences.  Semiconductor manufacturing is a
capital-intensive business resulting in high fixed costs. If the Company is
unable to utilize its installed wafer fabrication or test capacity at a high
level, the costs associated with these facilities and equipment would not be
fully absorbed, resulting in higher average unit costs and lower profit
margins.





The Company has invested in certain
auction rate securities that may not be accessible for in excess of 12 months
and these auction rate securities may experience an other than temporary decline
in value, which would adversely affect the Company’s income.At December
31, 2008, the Company held $16.2 million in principal of senior auction rate
notes secured by student loans. As of December 31, 2008, all of these auction
rate securities have failed to auction successfully due to sell orders exceeding
buy orders. During 2008, the Company has recorded a $3.5 million pre-tax
temporary impairment of these securities to other comprehensive income, a
component of shareholders’ equity.  If it is determined that the fair
value of these securities is other than temporarily impaired, the Company would
record a loss, which could be material, in its statement of operations in the
period such other than temporary decline in fair value is determined. For
additional information regarding the Company's investments, see Note 1 of Notes to Consolidated Financial
Statements.





The Company faces various risks
associated with the trend in increased shareholder
activism.  In 2008, the Company became engaged in a proxy
contest with a large shareholder. This dispute led to a significant increase in
operating expenses which appreciably reduced the Company’s operating profit and
net income.  The Company prevailed in the contest and has subsequently
engaged in discussions with the activist shareholder. To-date, this has resolved
the dispute.  However, if the Company should become engaged in another
proxy battle with either this same shareholder, or another large shareholder, a
new proxy contest would require significant additional management time and
increased operating expenses which could adversely affect the Company’s
profitability and cash flows.





Ownership of the Company’s stock is
highly concentrated.  As of February 20, 2009, affiliates of
the Company, which includes directors, officers, an institutional holder of more
than ten percent and an individual holder of more than 10% of the Common Stock,
held in aggregate approximately 42% of the Company’s outstanding common stock.
As a result, a limited number of shareholders may have the ability to
substantially influence the outcome of corporate actions requiring stockholder
approval and significant sales or purchases of the Company’s Common Stock may
cause the price of the Company’s Common Stock to fluctuate.





The semiconductor industry is
characterized by frequent litigation regarding patent and other intellectual
property rights.  To the extent that the Company becomes
involved in such intellectual property litigation, it could result in
substantial costs and diversion of resources to the Company and could have a
material adverse effect on the Company's financial condition, results of
operation or cash flows.


Page
19
 Table of Contents





In the event of an adverse ruling in
any intellectual property litigation that might arise in the future, the Company
might be required to discontinue the use of certain processes, cease the
manufacture, use and sale of infringing products, expend significant resources
to develop non-infringing technology or obtain licenses to the infringing
technology.  There can be no assurance, however, that under such
circumstances, a license would be available under reasonable terms or at
all.  In the event of a successful claim against the Company and the
Company's failure to develop or license substitute technology on commercially
reasonable terms, the Company's financial condition, results of operations, or
cash flows could be adversely affected.  The Company does not believe
that any material and specific risk currently exists related to the loss of use
of patents, products or processes.





The complexity of the Company’s
products may lead to errors or defects, which could subject the Company to
significant costs or damages and adversely affect market acceptance of its
products. Although the Company’s customers and suppliers rigorously test
its products, these products may contain undetected errors, weaknesses or
defects. If any of the Company’s products contain production defects,
reliability, quality or compatibility problems that are significant, the
Company’s reputation may be damaged and customers may be reluctant to continue
to buy its products. This could adversely affect the Company’s ability to retain
and attract new customers. In addition, these defects could interrupt or delay
sales of affected products, which could adversely affect the Company’s results
of operations.





If defects are discovered after
commencement of commercial production, the Company may be required to incur
significant costs to resolve the problems. This could result in significant
additional development costs and the diversion of technical and other resources
from other development efforts. The Company could also incur significant costs
to repair or replace defective products or may agree to be liable for certain
damages incurred. These costs or damages could have a material adverse effect on
The Company’s financial condition and results of operations.





The Company will continue to expend
substantial resources developing new products, applications or markets and may
never achieve the sales volume that it anticipates for these products, which may
limit the Company’s future growth and harm its results of operations.The
Company’s future success will depend in part upon the success of new products.
The Company has in the past, and will likely in the future, expend substantial
resources in developing new and additional products for new applications and
markets. The Company may experience unforeseen difficulties and delays in
developing these products and experience defects upon volume production and
broad deployment. The markets the Company enters will likely be highly
competitive and competitors may have substantially more experience in these
markets. The Company’s success will depend on the growth of the markets it
enters, the competitiveness of its products and its ability to increase market
share in these markets. If the Company enters markets that do not achieve or
sustain the growth it anticipates, or if the Company’s products are not
competitive, it may not achieve volume sales, which may limit the Company’s
future growth and would harm its results of operations.





If the Company is unable to convert
a significant portion of its design wins into revenue, the Company’s business,
financial condition and results of operations could be materially and adversely
impacted.The Company has secured a significant number of design wins for
new and existing products. Such design wins are necessary for revenue growth.
However, many of the Company’s design wins may never generate revenues if
end-customer projects are unsuccessful in the market place or the end-customer
terminates the project, which may occur for a variety of reasons. Mergers and
consolidations among customers may lead to termination of certain projects
before the associated design win generates revenue. If design wins do generate
revenue, the time lag between the design win and meaningful revenue is typically
between six months to greater than eighteen months. If the Company fails to
convert a significant portion of its design wins into substantial revenue, the
Company’s business, financial condition and results of operations could be
materially and adversely impacted.


Page
20
 Table of Contents





If the Company’s distributors or
sales representatives stop selling or fail to successfully promote its products,
the Company’s business, financial condition and results of operations could be
adversely impacted.Micrel sells many of its products through sales
representatives and distributors. The Company’s non-exclusive distributors and
sales representatives may carry its competitors’ products, which could adversely
impact or limit sales of the Company’s products. Additionally, they could reduce
or discontinue sales of the Company’s products or may not devote the resources
necessary to adequately sell the Company’s products. The Company’s agreements
with distributors contain limited provisions for return of products, including
stock rotations whereby distributors may return a percentage of their purchases
based upon a percentage of their most recent three months of shipments. In
addition, in certain circumstances upon termination of the distributor
relationship, distributors may return some portion of their prior purchases. The
loss of business from any of the Company’s significant distributors or the delay
of significant orders from any of them, could materially and adversely harm the
Company’s business, financial conditions and results of operations.





In addition, the Company depends on the
continued viability and financial resources of these distributors and sales
representatives, some of which are small organizations with limited working
capital. In turn, these distributors and sales representatives are subject to
general economic and semiconductor industry conditions. Management believes that
the Company’s success depends on these distributors and sales representatives.
If some or all of the Company’s distributors and sales representatives
experience financial difficulties, or otherwise become unable or unwilling to
promote and sell the Company’s products, its business, financial condition and
results of operations could be adversely impacted.





The Company manufactures most of its
semiconductors at its San Jose, California fabrication
facilities.  The Company's existing wafer fabrication facility,
located in Northern California, may be subject to natural disasters such as
earthquakes.  A significant natural disaster, such as an earthquake or
prolonged drought, could have a material adverse impact on the Company's
business, financial condition and operating results.  Furthermore,
manufacturing semiconductors requires manufacturing tools that are unique to
each product being produced.  If one of these unique manufacturing
tools was damaged or destroyed, the Company's ability to manufacture the related
product would be impaired and its business would suffer until the tool was
repaired or replaced.  Additionally, the fabrication of ICs is a
highly complex and precise process.  Small impurities, contaminants in
the manufacturing environment, difficulties in the fabrication process, defects
in the masks used to print circuits on a wafer, manufacturing equipment
failures, and wafer breakage or other factors can cause a substantial percentage
of wafers to be rejected or numerous die on each wafer to be
nonfunctional.  The Company maintains approximately two to three
months of inventory that has completed the wafer fabrication manufacturing
process.  This inventory is generally located offshore at third party
subcontractors and can act to buffer some of the adverse impact from a
disruption to the Company’s San Jose wafer fabrication activity arising from a
natural disaster such as an earthquake.





The Company’s results of operations
could vary as a result of the methods, estimations and judgments used in
applying its accounting policies.The methods, estimates and judgments
used by the Company in applying its accounting policies have a significant
impact on its results of operations. Such methods, estimates and judgments are,
by their nature, subject to substantial risks, uncertainties, assumptions and
changes in rulemaking by the regulatory bodies; and factors may arise over time
that lead the Company to change its methods, estimates, and judgments. Changes
in those methods, estimates and judgments could significantly impact the
Company’s results of operations.


Page
21
 Table of Contents











ITEM 1B.
            UNRESOLVED
      STAFF COMMENTS





None








ITEM 2.
            PROPERTIES





The majority of the Company's
manufacturing operations are located in San Jose, California in a 57,000 square
foot facility and an adjacent 63,000 square foot facility which are owned by the
Company. The Company fabricates the majority of its wafers at this location in a
28,000 square foot clean room facility, which provides all production processes.
In addition to wafer fabrication, the Company also uses this location as a
testing facility. The Company's main executive, administrative, and technical
offices are located in another 57,000 square foot facility in San Jose,
California under a lease agreement that expires in April 2011.





Associated with the acquisition of
Electronic Technology Corporation in 2000, the Company owns a 12,175 square foot
design facility in Huxley, Iowa. In January 2009, the Company closed the design
facility in conjunction with a Company wide reduction in force.  The
Company is currently offering the facility for sale.





The Company also leases small sales and
technical facilities located in, Richardson, TX; Irvine, CA; Bundang, Korea;
Taipei, Taiwan; Shenzhen, P.R. China; Singapore; Yokohama, Japan; Newbury, U.K.;
Livingston, and Villebon, France.





The Company believes that its existing
facilities are adequate for its current manufacturing needs. The Company
believes that if it should need additional space, such space would be available
at commercially reasonable terms.








ITEM 3.
            LEGAL
      PROCEEDINGS





The information included in Note 11 of Notes to Consolidated Financial Statements under
the caption “Litigation” in Item 15 of Part IV is incorporated herein by
reference.








ITEM 4.
            SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS





The Company's
Annual Meeting of Shareholders (the "Annual Meeting") was held on October 1,
2008.  At the Annual Meeting, shareholders voted on four matters: (a)
to amend the Company’s bylaws to provide for a range of four to seven members of
the Board of Directors, (b) to elect the following five nominees to serve as
members of the Board of Directors of the Company until the 2009 Annual Meeting
and until their successors are duly elected and qualified: Raymond D. Zinn,
Daniel A. Artusi, Michael J. Callahan, Neil J. Miotto and Frank W. Schneider,
(c) to amend Micrel’s 2003 Incentive Award Plan to increase the number of shares
available for issuance under the plan by 3,500,000 shares and to make certain
other modifications, and (d) to ratify the selection of PricewaterhouseCoopers
LLP as the independent registered public accounting firm of the Company for its
fiscal year ending December 31, 2008. The proposals were voted upon and approved
in the manner set forth below:


Page
22
 Table of Contents








Proposal
No. 1 – To approve an amendment to the Amended and Restated Bylaws of the
Company to provide for a range of four to seven members of the Board of
Directors:





FOR
            AGAINST65,810,122
            103,495





Proposal
No. 2 - Election of members of the Board of Directors. The following persons
were duly elected to the Board of Directors by the shareholders for a one year
term and until their successors are elected and qualified:





NOMINATION
            FOR
            WITHHELDRaymond
      D. Zinn
            64,796,843
            1,126,517Daniel
      A. Artusi
            65,576,693
            346,667Michael
      J. Callahan
            61,936,696
            3,986,664Neil J.
      Miotto
            65,577,241
            346,119Frank
      W. Schneider
            65,340,904
            582,456





Proposal
No. 3 – To approve an amendment to the 2003 Incentive Award Plan to increase the
number of shares available for issuance under the plan by 3,500,000 shares and
to make certain other modifications:





FOR
            AGAINST
            ABSTAIN57,490,717
            3,549,477
            54,210





Proposal
No. 4 – To ratify the appointment PricewaterhouseCoopers LLP as the Company’s
independent registered public accounting firm for the fiscal year ending
December 31, 2008:





FOR
            AGAINST
            ABSTAIN65,876,271
            25,419
            21,671








2009
Annual Meeting of Shareholders





The Annual
Meeting of Shareholders of Micrel, Incorporated, or the Company, is to be held
on May 21, 2009.  Shareholder proposals or nominations submitted
pursuant to Rule 14a-8 under the Securities Exchange Act of 1934, as amended, or
the Exchange Act, must be received by the Company within a reasonable time
before the Company begins to print and send its proxy materials for the 2009
Annual Meeting of Shareholders and must comply with all applicable Securities
and Exchange Commission rules, in order to be considered for inclusion in the
Company’s proxy materials for the 2009 Annual Meeting of
Shareholders.  Shareholder proposals or nominations that are not
submitted pursuant to Rule 14a-8 under the Exchange Act must be delivered to or
mailed and received by the Secretary of the Company at the principal executive
offices of the Company no later than the close of business on March 9,
2009. A shareholder’s notice must also satisfy the other requirements set forth
in Section 2.4 of the Company’s bylaws.
   Page
23
 Table of Contents





PART
II





ITEM 5.
            MARKET
      FOR THE REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
      MATTERS





The Company did not sell any
unregistered securities during the period covered by this Annual Report on Form
10-K.





The Company’s Common Stock is listed
on the Nasdaq Stock Market LLC under the Symbol “MCRL.” The range of daily
closing sales prices per share for the Company’s Common Stock from
January 1, 2007 to December 31, 2008 was:





Year
      Ended December 31, 2008:
            
            High
            
            
            LowFourth quarter
            
            $
            8.72
            
            
            $
            5.82Third quarter
            
            $
            9.85
            
            
            $
            8.31Second quarter
            
            $
            10.36
            
            
            $
            8.85First quarter
            
            $
            9.39
            
            
            $
            5.60Year
      Ended December 31, 2007:
            
            High
            
            
            LowFourth quarter
            
            $
            11.13
            
            
            $
            7.96Third quarter
            
            $
            13.91
            
            
            $
            9.85Second quarter
            
            $
            13.24
            
            
            $
            11.09First quarter
            
            $
            12.05
            
            
            $
            9.78





The reported last sale price of the
Company’s Common Stock on the NASDAQ Global Market on December 31, 2008 was
$7.31. The approximate number of holders of record of the shares of the
Company’s Common Stock was 473 as of February 20, 2009. This number does not
include shareholders whose shares are held in trust by other entities. The
actual number of shareholders is greater than this number of holders of record.
The Company estimates that the number of beneficial shareholders of the shares
of the Company’s Common Stock as of February 20, 2009 was approximately
7,000.





The Company has authorized Common
Stock, no par value and Preferred Stock, no par value. The Company has not
issued any Preferred Stock.





The information required by this item
regarding securities authorized for issuance under equity compensation plans is
included under the caption "Equity Compensation Plan Information" in the
Company’s Proxy Statement to be filed in connection with the Company’s 2009
Annual Meeting of Shareholders and is incorporated herein by
reference.








Dividend
Policy





On January 29, 2009, the Company's
Board of Directors declared a $0.035 per common share cash dividend, payable
February 25, 2009 to shareholders of record on February 11, 2009. During the
year ended December 31, 2008 the Company paid cash dividends of $9.5
million.





Page
24
 Table of Contents





Issuer
Purchases of Equity Securities





Repurchases of the Company's common
stock during 2008 were as follows:





Period
            
            Total
      Number of Shares
              Purchased
            
            
            Average
      Price Paid Per Share
            
            
            Total
      Number of Shares Purchased as Part of Publicly Announced Plans or Programs
            
            
            Maximum
      Dollar Value of Shares that May Yet be Repurchased Under the Plans or
      Programs ($000)January 2008
            
            
            1,623,470
            
            
            $
            6.27
            
            
            
            1,623,470
            
            
            $
            39,814February 2008
            
            
            732,000
            
            
            $
            6.32
            
            
            
            732,000
            
            
            $
            35,191March 2008
            
            
            267,400
            
            
            $
            8.15
            
            
            
            267,400
            
            
            $
            33,012Total Q1 2008
            
            
            2,622,870
            
            
            $
            6.48
            
            
            
            2,622,870April 2008
            
            
            247,300
            
            
            $
            9.36
            
            
            
            247,300
            
            
            $
            30,696May 2008
            
            
            443,299
            
            
            $
            9.71
            
            
            
            443,299
            
            
            $
            26,393June 2008
            
            
            310,300
            
            
            $
            9.56
            
            
            
            310,300
            
            
            $
            23,428Total Q2 2008
            
            
            1,000,899
            
            
            $
            9.57
            
            
            
            1,000,899July 2008
            
            
            349,880
            
            
            $
            9.21
            
            
            
            349,880
            
            
            $
            20,206August 2008
            
            
            312,300
            
            
            $
            9.44
            
            
            
            312,300
            
            
            $
            17,257September 2008
            
            
            487,660
            
            
            $
            8.91
            
            
            
            487,660
            
            
            $
            12,914Total Q3 2008
            
            
            1,149,840
            
            
            $
            9.14
            
            
            
            1,149,840October 2008
            
            
            1,042,557
            
            
            $
            7.21
            
            
            
            1,042,557
            
            
            $
            15,402November 2008
            
            
            1,030,421
            
            
            $
            6.73
            
            
            
            1,030,421
            
            
            $
            8,471December 2008
            
            
            394,600
            
            
            $
            7.09
            
            
            
            394,600
            
            
            $
            -Total
      Q4 2008
            
            
            2,467,578
            
            
            $
            6.99
            
            
            
            2,467,578Total 2008
            
            
            7,241,187
            
            
            $
            7.50
            
            
            
            7,241,187





The information included in Note 7 of Notes to Consolidated Financial Statements under the
caption “Stock Repurchase Plan” in Item 15 of Part IV is incorporated herein by
reference. In December 2008, the Board authorized an additional $50 million of
stock repurchases during 2009 as part of the Company’s ongoing stock repurchase
program.





Subsequent
Event





On February 11, 2009, the Company
and certain of the Company’s directors and executive officers entered into a
Stock Purchase Agreement with Obrem Capital Offshore Master, LP and Obrem
Capital (QP), LP (the “Obrem Entities”) to purchase 1,883,000 shares of the
Company’s common stock owned by the Obrem Entities in a privately negotiated
transaction. The information included in Note 18 of Notes
to Consolidated Financial Statements under the caption “Subsequent Events” in
Item 15 of Part IV is incorporated herein by reference.











Page
25
 Table of Contents


ITEM 6.
            SELECTED
      FINANCIAL DATA





The selected consolidated financial
data below is not necessarily indicative of future operations and should be read
in conjunction with "Management's Discussion and Analysis of Financial Condition
and Results of Operations" and the Company's Consolidated Financial Statements
and related notes thereto which are incorporated herein by
reference.


Income
      Statement Data(1):
            
            Years Ended
    December 31,(in
      thousands, except per share amounts)
            
            2008
            
            
            2007(2)
            
            
            2006(3)
            
            
            2005(4)
            
            
            2004(5)Net
      revenues
            
            $
            259,360
            
            
            $
            257,974
            
            
            $
            276,307
            
            
            $
            250,356
            
            
            $
            257,551Cost
      of revenues*
            
            
            116,351
            
            
            
            111,068
            
            
            
            117,164
            
            
            
            115,559
            
            
            
            134,701Gross
      profit
            
            
            143,009
            
            
            
            149,906
            
            
            
            159,143
            
            
            
            134,797
            
            
            
            122,850Operating
      expenses:Research
      and development*
            
            
            54,947
            
            
            
            54,523
            
            
            
            52,074
            
            
            
            45,231
            
            
            
            42,473Selling,
      general and administrative*
            
            
            44,405
            
            
            
            45,040
            
            
            
            49,016
            
            
            
            46,159
            
            
            
            38,590Proxy
      contest expense
            
            
            4,153
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Restructuring
      charges (credits)
            
            
            (842
            )
            
            
            128
            
            
            
            269
            
            
            
            —
            
            
            
            584Purchased
      in-process technology
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            303Other
      operating expense
            
            
            —
            
            
            
            86
            
            
            
            966
            
            
            
            9,282
            
            
            
            —Total
      operating expenses
            
            
            102,663
            
            
            
            99,777
            
            
            
            102,325
            
            
            
            100,672
            
            
            
            81,950Income
      from operations
            
            
            40,346
            
            
            
            47,129
            
            
            
            56,818
            
            
            
            34,125
            
            
            
            40,900Other
      income, net
            
            
            2,936
            
            
            
            21,717
            
            
            
            5,403
            
            
            
            4,180
            
            
            
            1,712Income
      before income taxes
            
            
            43,282
            
            
            
            68,846
            
            
            
            62,221
            
            
            
            38,305
            
            
            
            42,612Provision
      for income taxes
            
            
            15,025
            
            
            
            24,778
            
            
            
            24,497
            
            
            
            12,264
            
            
            
            11,246Net
      income
            
            $
            28,257
            
            
            $
            44,068
            
            
            $
            37,724
            
            
            $
            26,041
            
            
            $
            31,366Net
      income per share:Basic
            
            $
            0.40
            
            
            $
            0.57
            
            
            $
            0.46
            
            
            $
            0.30
            
            
            $
            0.34Diluted
            
            $
            0.40
            
            
            $
            0.57
            
            
            $
            0.46
            
            
            $
            0.30
            
            
            $
            0.34Shares
      used in computing per share amounts:Basic
            
            
            70,549
            
            
            
            76,918
            
            
            
            81,550
            
            
            
            87,055
            
            
            
            91,498Diluted
            
            
            70,653
            
            
            
            77,813
            
            
            
            82,842
            
            
            
            87,971
            
            
            
            93,083Cash
      dividends per common share
            
            $
            0.14
            
            
            $
            0.09
            
            
            $
            —
            
            
            $
            —
            
            
            $
            —*Share
      based compensation included in:Cost
      of revenues
            
            $
            974
            
            
            $
            1,156
            
            
            $
            1,540
            
            
            $
            159
            
            
            $
            535Research
      and development
            
            
            2,086
            
            
            
            2,130
            
            
            
            3,341
            
            
            
            161
            
            
            
            723Selling,
      general and administrative
            
            
            2,119
            
            
            
            2,199
            
            
            
            3,534
            
            
            
            450
            
            
            
            1,263





Balance
      Sheet Data(1):
            
            December 31,(in
      thousands)
            
            2008
            
            
            2007
            
            
            2006
            
            
            2005
            
            
            2004Working
      capital
            
            $
            111,397
            
            
            $
            128,365
            
            
            $
            140,790
            
            
            $
            163,939
            
            
            $
            184,898Total
      assets
            
            
            260,343
            
            
            
            295,276
            
            
            
            300,649
            
            
            
            320,016
            
            
            
            335,009Long-term
      debt and other obligations
            
            
            4,740
            
            
            
            3,149
            
            
            
            453
            
            
            
            475
            
            
            
            2,047Total
      shareholders' equity
            
            
            208,406
            
            
            
            237,143
            
            
            
            236,217
            
            
            
            256,445
            
            
            
            282,963


_____________


(1) During
the fourth quarter of 2008, the Company identified errors related to calculating
deferred income for sell-through distributors. The financial statements for the
years ended December 31, 2004, 2005, 2006 and 2007 have been revised to correct
for the immaterial errors (the impact of the error corrections on 2006 and 2007
is presented in Note 2 of Notes to Consolidated Financial
Statements). For 2005, the error correction resulted in an increase to net
income of $683,000. For 2004, the error correction resulted in an increase to
net income of $113,000.


(2) Other
income, net for the year ended December 31, 2007, includes $15.5 million in
non-operating income resulting from the settlement of litigation (see Note 11 of Notes to Consolidated Financial
Statements).


(3)
Operating results for the year ended December 31, 2006, include $2.9 million in
revenues related to a patent license granted by Micrel to Monolithic Power
Systems and $846,000 in accrued other expense related to a legal judgment
against Micrel in a patent infringement suit with Linear Technology Corporation
(see Note 11 of Notes to Consolidated Financial
Statements). In addition, operating results for the year ended December 31, 2006
also include $714,000 in cost of revenues related to the settlement of a patent
dispute with International Business Machines (see Note 14
of Notes to Consolidated Financial Statements). On January 1, 2006, Micrel
adopted the provisions of SFAS No. 123R for recording share-based compensation
(see Note 7 of Notes to Consolidated Financial
Statements).


(4)
Operating results for the year ended December 31, 2005, include $9.3 million in
accrued litigation expense related to a jury verdict against Micrel in its suit
against TRW Automotive and for TRW Automotive in its countersuit against
Micrel.


(5) Net
income for the year ended December 31, 2004, includes $6.3 million in net
reversals of accrued income and payroll tax liabilities as a result of the
completion of a federal tax audit. Page
26
 Table of Contents


ITEM 7.
            MANAGEMENT'S
      DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
      OPERATIONS





Overview





Micrel designs, develops, manufactures
and markets a range of high-performance analog power ICs, mixed-signal and
digital ICs.  These products address a wide range of end markets
including cellular handsets, enterprise and portable computing, enterprise and
home networking, wide area and metropolitan area networks and industrial
equipment.  The Company also manufactures custom analog and
mixed-signal circuits and provides wafer foundry services for customers who
produce electronic systems for communications, consumer and military
applications.





To enhance the readers' understanding
of the Company's performance, the following chronological overview of the
Company's results for the years 2006 through 2008 have been
provided.





In the first quarter of 2006, broad
based strength in customer demand, combined with continued lean channel
inventories resulted in the highest quarterly booking level for Micrel since
calendar year 2000. Net revenues increased 5% on a sequential basis to $68.2
million and were 12% above the net revenues of the year-ago
period.  The sequential growth in net revenues was primarily the
result of increased demand from customers serving the wireline communications
end market and higher resales of the Company’s products through its
distributors, partially offset by seasonal declines in sales to the wireless
handset (primarily in Korea) and computing end markets.  First quarter
of 2006 gross margin of 58.0% was the highest quarterly gross margin as of that
time in the Company’s history.





In the second quarter of 2006, overall
order rates moderated from the levels experienced in the first
quarter.  Second quarter 2006 net revenues of $70.2 million increased
by 3% sequentially and were 13% above the prior year period.  The
growth in net revenues continued to be led by demand from customers serving the
wireline communications end market. This growth was partially offset by
continued weakness in demand from Korean-based customers serving the wireless
handset end market as they experienced a sequential decline in handset shipments
during the second quarter.  Second quarter 2006 gross margin of 56.7%
declined by 1.3% as compared to the first quarter of 2006.





In the third quarter of 2006, overall
order rates declined on a sequential basis, primarily because the Company’s
sell-through distributors reduced orders and consumed backlog in an attempt to
control inventory levels.  Third quarter 2006 net revenues of $73.5
million increased by 5% sequentially.  Continued strength from the
industrial end market, combined with a rebound in the Company’s wireless handset
business, led the product revenue growth in the third quarter.  Third
quarter 2006 net revenues included $2.9 million associated with a patent license
that was previously under litigation. Third quarter 2006 gross margin of 58.7%
was the highest level in the Company’s history. The settlement of intellectual
property matters, and related licensing revenues and expenses, resulted in $2.2
million of net pre-tax operating income included in the third quarter,
increasing third quarter 2006 net income by $0.02 per diluted
share.





Fourth quarter 2006 order rates were
slightly lower than the third quarter, and remained below the level of fourth
quarter revenues as customers attempted to reduce inventory
levels.  Fourth quarter net revenues were $64.5 million, a decrease of
12% from third quarter revenues of $73.5 million. The sequential decline in
sales resulted primarily from reduced demand from wireless handset manufacturers
combined with lower distribution revenues and the absence of patent license
revenue.  Gross margin of 56.9% declined from the previous quarter
primarily due to lower revenues and the impact of reduced manufacturing volumes
leading to less absorption of fixed cost.


Page
27
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)








Micrel’s overall financial performance
in 2006 was one of the best on an annual basis in the Company’s
history.  Revenues of $276.3 million were the second highest annual
amount ever recorded.  Total sales increased by 10.4% over the $250.4
million posted in 2005.  Gross margin of 57.6% improved for the fourth
consecutive year and reached the highest level in the Company’s history,
exceeding previous peak levels recorded in the year 2000 when revenues were 25%
higher than 2006.  Income from operations of $56.8 million increased
by 66% from the $34.1 million recorded in 2005.  Operating margin
improved to 20.6% from 13.6% in 2005.  Year 2006 net income was $37.7
million, or $0.46 per diluted share, an increase of 45% from $26.0 million, or
$0.30 per diluted share in 2005.  Year 2006 net income and earnings
per share were the second highest ever recorded by Micrel on an annual
basis.  Operating cash flow for the year of 2006 was $59
million.





During the first quarter of 2007,
customers continued to control their inventories closely.  However,
the order rates the Company experienced during the quarter suggested that
customer and channel inventories had fallen to levels consistent with end
demand.  Micrel’s first quarter bookings increased in all major
geographic regions resulting in an 18% growth in orders compared with fourth
quarter 2006 levels.  The total overall amount of new orders booked in
the first quarter exceeded revenues.  The sequential improvement in
bookings was driven by higher order levels from customers serving the high speed
communications, wireless handset and industrial end markets.  Order
rates increased for both OEM customers and sell-through distributors, while
bookings from Micrel’s Asian-based sell-in distributors were flat from fourth
quarter levels.  First quarter revenues were $63.1 million, 2% less
than the $64.5 million recorded in the fourth quarter 2006 and 7% lower than the
$68.2 million posted in the first quarter of 2006.  Seasonal declines
in sales to customers serving the computing, wireless handset and consumer end
markets were partially offset by higher resales through the Company’s
sell-through distributors.  Gross margin increased sequentially to
58.0% despite lower revenues and inventory reduction due to a combination of
lower manufacturing costs and a higher gross margin sales mix.  First
quarter operating profit was $11.2 million, or 18% of sales.  The
Company’s on-hand inventory declined on a sequential basis.  Overall
channel inventories remained relatively flat from the end of 2006, with
increases at the Company’s sell-through distributors offset by lower inventory
levels at Micrel’s sell-in distributors.





In the second quarter of 2007, order
lead times remained in the four to six week range.  Although customers
continued to closely monitor their inventories, the dollar amount of second
quarter bookings exceeded the Company’s revenue level. Second quarter revenues
were $65.1 million, a sequential increase of 3% over the $63.1 million recorded
in the first quarter, and 7% lower than the $70.2 million posted in the year-ago
period. The sequential growth in second quarter revenues was led by increased
sales to customers serving the communications and computing end markets,
offsetting lower sales of the Company’s products to major Korean wireless
handset customers.  Gross margin of 57.4% increased 0.7% from the
prior year period and decreased by 0.6% from the first
quarter.  During the second quarter, the Company operated at a lower
level of factory utilization, which had the combined effect of reducing both
inventory levels and gross margin.  Channel inventories also declined
on a sequential basis as the Company’s major global sell-through distributors
attempted to take advantage of readily available semiconductor component
supplies to increase their working capital turns.


Page
28
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)





Demand for the Company's products in
the third quarter of 2007 was generally seasonal in nature.  Bookings
from industrial and wireline communication customers softened, while holiday and
back-to-school related markets such as wireless handsets, computing and consumer
were more robust.  Faced with concerns about the growth of the U.S.
economy, the Company’s sell-through distributors were cautious throughout the
third quarter as they saw their orders slow and inventories
build.  The overall amount of orders booked by the Company in the
third quarter was approximately the same as the revenue level for the
quarter.  Customers continued to control their inventories very
closely during the third quarter in the face of short lead times, due in part to
their belief that the semiconductor industry had sufficient inventory and/or the
ability to deliver sufficient quantities to meet customer demand in this shorter
lead time environment.  Micrel’s order lead times decreased throughout
the quarter, starting out at about five weeks in July and declining to three to
four weeks in September.  Third quarter revenues were $65.2 million,
up slightly compared to the second quarter, and 11% lower than the $73.5 million
posted in the year-ago period.  An increase in third quarter sales to
customers in the wireless handset and consumer end market was offset by lower
revenues from customers in the wireline communications end market, arising from
lower shipments to major Chinese communications customers as they trimmed
inventory levels.  Gross margin decreased from 57.4% in the second
quarter to 56.6% in the third quarter of 2007, and decreased from 58.7% in the
year ago period.  During the third quarter, the Company reduced
on-hand inventory levels despite a higher level of factory
utilization.  Channel inventories increased by approximately one week
over the second quarter due to seasonally slower distribution sales of the
Company’s products.  Third quarter operating profit was $12.4 million,
or 18.9% of revenues.





In the fourth quarter of 2007, the
increasingly uncertain macroeconomic environment appeared to heighten the
Company’s customer’s focus on maintaining lean inventories.  Global
distributors and certain OEM customers informed the Company that they attempted
to minimize inventory at year-end.  As a consequence, customer orders
and purchases declined more quickly than usual in the month of December,
resulting in a quarterly book-to-bill ratio of less than one, and impacting
fourth quarter revenues.  Revenues for the fourth quarter of 2007
decreased 1% from the third quarter to $64.6 million and were essentially flat
to the revenues in the year-ago period.  Sales to customers serving
the consumer, computing and the wire line communications end markets declined on
a sequential basis, partially offset by increased sales of the Company’s
Ethernet products during the quarter.  Gross margin decreased to 55.7%
in the fourth quarter from 56.6% in the third quarter primarily as a result of a
less favorable sales mix. Fourth quarter operating profit was $11.6 million, or
18% of revenues.  On-hand inventories increased during the fourth
quarter, while channel inventories decreased by approximately one week from the
end of the third quarter.





Micrel’s financial performance in 2007
remained solid.  Total year gross margin of 56.9% was the second
highest in the Company history.  Net income for fiscal 2007 increased
16.8% to $44.1 million, or $0.57 per diluted share, compared with net income of
$37.7 million, or $0.46 per diluted share in 2006.  Included in 2007
pre-tax income was a $15.5 million gain associated with a first quarter legal
settlement, which after income taxes, was equivalent to $9.5 million or $0.12
per diluted share.  Cash flows from operations of $67.8 million during
the year enabled the repurchase of 5.5 million shares of common stock for $55.1
million, representing approximately 7% of the shares outstanding at the
beginning of the year.  In addition, the Company commenced a $0.03 per
common share cash dividend payment to shareholders in the second quarter of
2007.


Page
29
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)


In the first quarter of 2008, bookings
levels rebounded from the fourth quarter of 2007, resulting in the highest
quarterly booking level since Q1 2006 and a book-to-bill ratio significantly
above one.  First quarter revenues of $66.1 million increased 2%
sequentially compared to fourth quarter 2007 revenues of $64.6 million and
increased 5% compared to revenues of $63.1 million recorded in the prior year
period.  The increase in revenues was primarily due to stronger demand
from the wire line communications, digital TV, industrial and voice-over-IP end
markets, which offset seasonal declines in sales to the computing and wireless
handset end markets.  Revenues through Micrel’s sell-through
distributors increased in the first quarter and the number of weeks of
distribution channel inventory decreased slightly on a sequential
basis.  Gross margin improved to 56.3% in the first quarter of 2008
from 55.7% in the fourth quarter of 2007 while at the same time inventory levels
were reduced.  First quarter operating profit was $11.6 million, or
18% of revenues. Earnings per diluted share for the first quarter of 2008
increased to $0.12 per share from $0.11 per share reported in the fourth quarter
of 2007.





During the first quarter of 2008, the
Company became engaged in its first proxy contest since going public in 1994,
with a small activist hedge fund, Obrem Capital Management LLC (“OCM”). This
issue resulted in Micrel incurring incremental operating expenses on this matter
of $331,000 during the first quarter, $2.4 million in the second quarter,
$349,000 in the third quarter and $1.1 million in the fourth quarter of 2008.
See “Proxy Contest Expense in the Results of Operations” section in “Management
Discussions and Analysis of Financial Conditions and Results of
Operations”.





In the second quarter of 2008, total
bookings remained firm, resulting in a book-to-bill ratio above one. Second
quarter bookings were paced by demand from customers serving the communications,
industrial, and wireless handset end markets.  Customers remained very
cautious, which continued to keep order lead times in the 4 to 5 week range. In
the second quarter, Micrel posted its highest sequential revenue growth rate in
four years.  Second quarter revenues of $70.6 million came in at the
high end of the Company’s guidance, increasing by $4.5 million, or 7%, from the
first quarter, and were up by $5.5 million, or 8% from the prior year
period.  The growth in revenues was led by stronger demand from
customers serving the wireline communications, wireless handset, and wi-fi
voice-over-IP end markets, combined with record sales through the Company’s
global sell-through distributors.  The turns fill percentage for the
second quarter was slightly above 50%.  Gross margin was 56.4%, which
was about the same as the first quarter of 2008.  Second quarter
operating profit was $11.1 million, or 16% of sales.  A total of $2.4
million of proxy contest expenses reduced Micrel’s operating income by
approximately 18% in the second quarter, and also had the effect of reducing
operating margin by approximately 3% in the second quarter.  Second
quarter 2008 net income was $7.4 million, or $0.10 per diluted
share.  This compares with first quarter 2008 net income of $8.3
million, or $0.12 per diluted share, and net income of $8.8 million or $0.11 per
diluted share in the prior year period.  Expenses related to the
Company’s proxy contest reduced net income by $0.02 per share in the second
quarter.





Financial markets in the United States,
Europe and Asia experienced extreme disruption in the second half of the fiscal
year ending December 31, 2008, including, among other things, extreme volatility
in security prices, severely diminished liquidity and credit availability,
rating downgrades of certain investments and declining valuations of others. In
the third quarter of 2008, concerns related to the deterioration in the global
financial and credit markets, including with respect to the availability and
cost of credit, contributed to instability in worldwide capital and credit
markets and diminished expectations for the U.S. and global
economy.  These conditions worsened in the fourth quarter of 2008, and
combined with uncertainty about the global economy in general, contributed to
volatility of unprecedented levels and a further economic
slowdown.  Although governments have taken unprecedented actions in an
attempt to alleviate the credit crisis, customers and consumers began to cut
back on spending in order to conserve cash in the third quarter of
2008.  This resulted in the slowing of orders from Micrel’s
distributors and direct OEM customers, which continued into the fourth quarter
of 2008.


Page
30
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)








During the third quarter of 2008, total
bookings were less than revenues, resulting in a book-to-bill ratio of less than
one. Third quarter bookings decreased abruptly in the last two weeks of the
quarter. Notwithstanding the order decrease, resales of the Company’s products
from global sell-through distributors remained strong throughout the quarter and
represented an all-time record for the Company. In the third quarter, Micrel
posted $67.5 million in revenue, a decrease of 4% sequentially and an increase
of 4% from third quarter of 2007. The sequential quarter decrease in sales
primarily resulted from reduced demand from customers serving the wireline
communications, Wi-FI voice-over IP and foundry sales to a major solar end
customer. This was offset by slight increases in the computer and consumer
markets. The OEM turns fill percentage for the third quarter was approximately
50%. Third quarter gross margin was 55.3%, down 1.1% from 56.4% in Q2. Research
and development spending was $13.8 million, or 20% of revenues in the third
quarter compared to $14.8 million or 21% of revenues in the second quarter.
Selling, general and administrative expenses were $11.3 million, or 17% of
sales, down from $11.6 million in the second quarter. GAAP operating income was
$11.9 million, or 18% of sales. This compares to operating income of $11.1
million in the second quarter and $12.3 million in the prior year period. Other
income, net was unchanged quarter to quarter at $700 thousand. The effective tax
rate was 38.9% for the third quarter. Third quarter net income was $7.7 million,
or $0.11 per diluted share. This compares with second quarter net income of $7.4
million, or $0.10 per diluted share, and GAAP net income of $9.1 million or
$0.12 per diluted share in the year ago.





Fourth quarter revenue of $55.2 million
decreased by $12.4 million, or 18%, from $67.5 million in the third
quarter.  Fourth quarter revenues were lower by $9.4 million, or 15%,
from $64.6 million in the same period last year.  The sequential and
year-over-year decrease in revenues was due to tight year-end inventory control
in most geographies, channels and end markets as a result of the worldwide
financial crisis. The worldwide macroeconomic recession in the fourth quarter
caused the Company’s customers to focus on maintaining lean
inventories.  The Company’s global distributors and a number of major
OEM customers took action to minimize inventories at year-end.  As a
consequence, customer orders and purchases declined in November and December
after strong activity in October.  For the fourth quarter, Micrel’s
overall book-to-bill ratio was below one. Order lead times from the Company’s
customers remained relatively short at from three to six weeks during the
quarter.




Fourth quarter gross margin was 52.0%,
compared to 55.3% in the third quarter.  The decrease in gross margin
was the result of factory underutilization and additional inventory reserves due
to a lower sales forecast. Fourth quarter 2008 net income of $4.9 million, or
$0.07 per diluted share compares with third quarter 2008 net income of $7.7
million, or $0.11 per diluted share, and net income of $8.4 million or $0.11 per
diluted share in the same period in 2007.





For the year ended December 31, 2008,
Micrel’s financial performance continued to be solid, especially in light of the
current economic conditions. The Company performed well in a difficult
environment. Full year revenues of $259.4 million were up slightly, compared
with $258.0 million in 2007.  Net income for fiscal 2008 was $28.3
million, or $0.40 per diluted share, compared with net income of $44.1 million,
or $0.57 per diluted share in 2007.  Included in 2007 net income was a
$15.5 million pre-tax gain associated with a first quarter legal settlement,
which after income taxes, is equivalent to $0.12 per diluted share. Gross
margins for 2008 were 55.1% compared to 56.9% in 2007.  The Company’s
design efforts resulted in a record number of new product releases in
2008.  Solid cash flows from operations of $53.3 million during the
year enabled the repurchase of 7.1 million shares of common stock, or
approximately 9.6% of the shares outstanding at the beginning of the
year.  In addition, Micrel continued a dividend payment to
shareholders in 2008, representing management’s confidence in Micrel’s operating
performance and commitment to enhancing shareholder value.


Page
31
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)








The Company derives a substantial
portion of its net revenues from standard products. For 2008, 2007 and 2006 the
Company's standard products sales accounted for 95%, 92%, and 93%, respectively,
of the Company's net revenues. The Company believes that a substantial portion
of its net revenues in the future will depend upon standard products sales,
although such sales as a proportion of net revenues may vary as the Company
adjusts product output levels to correspond with varying economic conditions and
demand levels in the markets which it serves. The standard products business is
characterized by short-term orders and shipment schedules, and customer orders
typically can be canceled or rescheduled without significant penalty to the
customer. Since most standard products backlog is cancelable without significant
penalty, the Company typically plans its production and inventory levels based
on forecasts of customer demand, which is highly unpredictable and can fluctuate
substantially. In addition, the Company is limited in its ability to reduce
costs quickly in response to any revenue shortfalls.





The Company may experience significant
fluctuations in its results of operations.  Factors that affect the
Company's results of operations include the volume and timing of orders
received, changes in the mix of products sold, the utilization level of
manufacturing capacity, competitive pricing pressures and the successful
development of new products.  These and other factors are described in
further detail later in this discussion and in Item 1A.  As a result
of the foregoing or other factors, including the global economic crisis, there
can be no assurance that the Company will not experience material fluctuations
in future operating results on a quarterly or annual basis, which could
materially and adversely affect the Company's business, financial condition,
results of operations or cash flows.








Revision
of Prior Period Financial Statements





During the fourth quarter of 2008, the
Company identified an error related to its calculation of deferred income on
shipments to distributors ("deferred income"). Upon review of its calculations,
management determined that the estimated shipping margin percentage used to
calculate the deferred income balance was incorrect and this resulted in an
understatement of deferred income and related cost of sales. The Company
assessed the materiality of this error on prior periods financial statements in
accordance with the SEC’s Staff Accounting Bulletin No. 99 (“SAB 99”), and
concluded that the error was not material to any prior annual or interim periods
but would be material to the year ended December 31, 2008 if the entire
correction was recorded in the current year. Accordingly, in accordance with the
SEC’s Staff Accounting Bulletin No. 108 (“SAB 108”), the 2007 and 2006 financial
statements presented herein have been revised to correct for the immaterial
error. In addition, an adjustment was also recorded to reduce the beginning
retained earnings at January 1, 2006 for the cumulative impact of this error on
prior periods. The revision had no net impact on the Company’s Consolidated
Statement of Cash Flows for the years ended December 31, 2008, 2007 and 2006
(See Note 2 of Notes to Consolidated Financial
Statements).





Page
32
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)


Critical
Accounting Policies and Estimates





The financial statements included in
this Form 10-K and discussed within this Management's Discussion and Analysis of
Financial Condition and Results of Operations have been prepared in accordance
with accounting principles generally accepted in the United States of America.
Preparation of these financial statements requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. On an on-going basis, management evaluates
its estimates and judgments. Management bases its estimates and judgments on
historical experience and on various other assumptions that are believed to be
reasonable under the circumstances, the results of which form the basis for
making judgments about the carrying values of assets and liabilities that are
not readily apparent from other sources. Actual results may differ from these
estimates under different assumptions or conditions. For a detailed discussion
of the Company's significant accounting policies, see Note
1 of Notes to Consolidated Financial Statements. The Company considers
certain accounting policies related to revenue recognition, inventory valuation,
share-based accounting, income taxes, and litigation to be critical to the fair
presentation of its financial statements.





Revenue Recognition and
Receivables. Micrel generates revenue by selling products to OEM's,
distributors and stocking representatives.  Stocking representative
firms may buy and stock the Company's products for resale or may act as the
Company's sales representative in arranging for direct sales from the Company to
an OEM customer.  The Company's policy is to recognize revenue from
sales to customers when the rights and risks of ownership have passed to the
customer, when persuasive evidence of an arrangement exists, the product has
been delivered, the price is fixed or determinable and collection of the
resulting receivable is reasonably assured.





Micrel allows certain distributors
located in North America and Europe, and in certain countries in Asia,
significant return rights, price protection and pricing adjustments subsequent
to the initial product shipment.  As these returns and price
concessions have historically been significant, and future returns and price
concessions are difficult to reliably estimate, the Company defers recognition
of revenue and related cost of sales (in the balance sheet line item “deferred
income on shipments to distributors”) derived from sales to these distributors
until they have resold the Company's products to their customers. Although
revenue and related cost of sales are not recognized, the Company records an
accounts receivable and relieves inventory at the time of initial product
shipment.  As standard terms are FOB shipping point, payment terms are
enforced from shipment date and legal title and risk of inventory loss passes to
the distributor upon shipment. In addition, where revenue is deferred upon
shipment and recognized on a sell-through basis, the Company may offer price
adjustments to its distributors to allow the distributor to price the Company's
products competitively for specific resale opportunities. The Company estimates
and records an allowance for distributor price adjustments for which the
specific resale transaction has been completed, but the price adjustment claim
has not yet been received and recorded by the Company.





Sales to OEM customers and stocking
representatives are recognized based upon the shipment terms of the sale
transaction when all other revenue recognition criteria have been
met.  The Company does not grant return rights, price protection or
pricing adjustments to OEM customers.  The Company offers limited
contractual stock rotation rights to stocking representatives.  In
addition, the Company is not contractually obligated to offer, but may
infrequently grant, price adjustments or price protection to certain stocking
representatives on an exception basis. At the time of shipment to OEMs and
stocking representatives, an allowance for returns is established based upon
historical return rates, and an allowance for price adjustments is established
based on an estimate of price adjustments to be granted. Actual future returns
and price adjustments could be different than the allowance
established.


Page
33
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)





The Company also maintains an allowance
for doubtful accounts for estimated uncollectible accounts receivable. This
estimate is based on an analysis of specific customer creditworthiness and
historical bad debts experience. Actual future uncollectible amounts could
exceed the doubtful accounts allowance established.





Inventory Valuation.
Inventories are stated at the lower of cost (first-in, first-out method) or
market. The Company records adjustments to write down the cost of obsolete and
excess inventory to the estimated market value based on historical and
forecasted demand for its products. If actual future demand for the Company's
products is less than currently forecasted, additional inventory adjustments may
be required. Once an inventory write-down provision is established, it is
maintained until the product to which it relates is sold or otherwise disposed
of. This treatment is in accordance with Accounting Research Bulletin 43 and SEC
Staff Accounting Bulletin 100 "Restructuring and Impairment
Charges."





Share-Based Compensation.
Effective January 1, 2006, Micrel adopted the provisions of SFAS No. 123R using
the modified-prospective transition method. Under SFAS No. 123R share-based
compensation is measured at the grant date based on the fair value of the award
and is recognized as expense in the statement of operations. To determine fair
value, the Company uses the Black-Scholes valuation model which requires input
factors such as expected term, stock price volatility, dividend yield and risk
free interest rate. In addition, SFAS No. 123R requires an estimate of expected
forfeiture rates of stock grants and share-based compensation expense is to be
only recognized for those shares expected to vest. Determining the input
factors, such as expected term, expected volatility and estimated forfeiture
rates, requires significant judgment based on subjective future
expectations.





Income Taxes.Deferred tax
assets and liabilities result primarily from temporary timing differences
between book and tax valuation of assets and liabilities, and state research and
development credit carryforwards. The Company must regularly assess the
likelihood that future taxable income levels will be sufficient to ultimately
realize the tax benefits of these deferred tax assets. As of December 31, 2008,
the Company believes that future taxable income levels will be sufficient to
realize the tax benefits of these deferred tax assets and has not established a
valuation allowance. Should the Company determine that future realization of
these tax benefits is not more likely than not, a valuation allowance would be
established, which would increase the Company's tax provision in the period of
such determination.





Effective January 1, 2007, the Company
adopted the provisions of FASB Interpretation (FIN) No. 48, Accounting for
Uncertainty in Income Taxes - an interpretation of FASB Statement No. 109. FIN
No. 48 contains a two-step approach to recognizing and measuring uncertain tax
positions accounted for in accordance with SFAS No. 109. The first step is to
evaluate the tax position for recognition by determining if the weight of
available evidence indicates it is more likely than not that the position will
be sustained on audit, including resolution of related appeals or litigation
processes, if any. The second step is to measure the tax benefit as the largest
amount which is more than 50% likely of being realized upon ultimate settlement.
The Company considers many factors when evaluating and estimating its tax
positions and tax benefits, which may require periodic adjustments and which may
not accurately anticipate actual outcomes.





Litigation.The
semiconductor industry is characterized by frequent litigation regarding patent
and other intellectual property rights.  In the past three years, the
Company has concluded cases involving intellectual property claims (see Note 11 of Notes to Consolidated Financial
Statements).  An estimated liability is accrued when it is determined
to be probable that a liability has been incurred and the amount of loss can be
reasonably estimated. The liability accrual is charged to income in the period
such determination is made. The Company regularly evaluates current information
available to determine whether such accruals should be made.


Page
34
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)


Results
of Operations





The following table sets forth certain
operating data as a percentage of total net revenues for the periods
indicated.


Years Ended December 31,2008
            
            
            2007(1)
            
            
            2006(1)Net
      revenues
            
            
            100.0
            %
            
            
            100.0
            %
            
            
            100.0
            %Cost
      of revenues
            
            
            44.9
            
            
            
            43.1
            
            
            
            42.4Gross
      profit
            
            
            55.1
            
            
            
            56.9
            
            
            
            57.6Operating
      expenses:Research
      and development
            
            
            21.2
            
            
            
            21.1
            
            
            
            18.8Selling,
      general and administrative
            
            
            17.1
            
            
            
            17.4
            
            
            
            17.7Restructuring
      charges (credits)
            
            
            (0.4
            )
            
            
            0.1
            
            
            
            0.1Proxy
      contest expense
            
            
            1.6
            
            
            
            —
            
            
            
            —Other
      operating expense
            
            
            —
            
            
            
            —
            
            
            
            0.4Total
      operating expenses
            
            
            39.5
            
            
            
            38.6
            
            
            
            37.0Income
      from operations
            
            
            15.6
            
            
            
            18.3
            
            
            
            20.6Other
      income, net
            
            
            1.1
            
            
            
            8.4
            
            
            
            2.0Income
      before income taxes
            
            
            16.7
            
            
            
            26.7
            
            
            
            22.6Provision
      for income taxes
            
            
            5.8
            
            
            
            9.6
            
            
            
            8.9Net
      income
            
            
            10.9
            %
            
            
            17.1
            %
            
            
            13.7
            %


___________


(1)
During the fourth quarter of 2008, the Company identified errors primarily
related to calculating deferred income for sell-through distributors. The
financial statements for the years ended December 31, 2006 and 2007 have been
revised to correct for the immaterial errors (see Note 2 of
Notes to Consolidated Financial Statements).








Net Revenues. Net revenues
increased slightly to $259.4 million for the year ended
December 31, 2008 compared to $258.0 million in 2007 due to increased
standard product revenues which were partially offset by decreased other
products revenues. For the year ended December 31, 2007, net revenues decreased
7% to $258.0 from $276.3 million in 2006 due to decreased standard product
revenues which were partially offset by increased other products
revenues.





Standard product revenues increased 4%
to $246.6 million, which represented 95% of net revenues for the year ended
December 31, 2008, compared to $237.4 million and 92% of net revenues for
2007.  These increases resulted primarily from increased sales of
standard products to the networking, telecommunications and consumer end
markets.





Other products revenues which consist
primarily of custom and foundry products revenues and revenues from the license
of patents, decreased 38% to $12.7 million, which represented 5% of net
revenues for the year ended December 31, 2008, compared to $20.6 million
and 8% of net revenues for 2007. This decrease resulted primarily from decreased
foundry product shipments.





The current global economic slowdown,
unprecedented volatility in the capital markets and severely diminished
liquidity and credit availability has exacerbated the ongoing weakness in the
semiconductor industry. This has materially softened demand for the Company’s
products, and management is not able to predict whether macroeconomic conditions
will continue to deteriorate or improve. The persistence of such conditions
could have a significant adverse effect on the Company’s revenues, profitability
and results of operations.


Page
35
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)





Customer demand for semiconductors can
change quickly and unexpectedly.  The Company’s revenue levels have
been highly dependent on the amount of new orders that are received for which
product is requested to be delivered to the customer within the same
quarter.  Within the semiconductor industry these orders that are
booked and shipped within the quarter are called “turns fill”
orders.  When the turns fill level exceeds approximately 35% of
quarterly revenue, it makes it very difficult to predict near term revenues and
income.  Because of the long cycle time to build its products, the
Company’s lack of visibility into demand when turns fill is high makes it
difficult to predict what product to build to match future
demand.  During 2008, the Company averaged from approximately 35% to
55% OEM turns fill per quarter compared to approximately 50% to 60% turns fill
per quarter during 2007.





As noted in Item 1A “Risk Factors” and
above in the overview section of this “Management's Discussion and Analysis of
Financial Condition and Results of Operations”, a trend has developed over the
last several years whereby customers in the semiconductor supply chain have
worked to minimize the amount of inventory of semiconductors they hold. As a
consequence, customers are generally providing less order backlog to the Company
and other semiconductor suppliers, and relying on short lead times to buffer
their build schedules.  Shorter lead times reduce visibility into end
demand and increase the reliance on turns fill orders.  To deal with
these market forces while maintaining reliable service levels, the Company and
other semiconductor suppliers are carrying higher relative levels of inventory
compared with historical averages prior to 2001.  The reluctance of
customers to provide order backlog together with short lead times and the
uncertain growth rate of the world economy, make it difficult to precisely
predict future levels of sales and profitability.





International sales represented 69%,
67%, and 70% of net revenues for the years ended December 31, 2008, 2007
and 2006, respectively. On a dollar basis, international sales increased 4% to
$180.0 million for the year ended December 31, 2008 from $173.6
million for the comparable period in 2007. These increases resulted primarily
from increased shipments of standard products to the networking, high speed
communications and the telecommunications end markets in Europe and
Asia.





The trend for the Company’s customers
to move their electronics manufacturing to Asian countries has brought increased
pricing pressure for Micrel and other semiconductor
manufacturers.  Asian based manufacturers are typically more concerned
about cost and less concerned about the capability of the integrated circuits
they purchase. This can make it more difficult for United States based companies
to differentiate themselves except by price. The increased concentration of
electronics procurement and manufacturing in the Asia Pacific region has led,
and may continue to lead, to continued price pressure for the Company’s products
in the future.





Share-Based Compensation.
Effective January 1, 2006, the Company adopted the fair value recognition
provisions of SFAS No. 123R using the modified prospective transition method and
therefore has not restated results for prior periods. The Company's results of
operations for the years ended December 31, 2008, 2007 and 2006 were impacted by
the recognition of non-cash expense related to the fair value of share-based
compensation awards. During 2008, Micrel recorded $5.2 million in pre-tax
share-based compensation expense, of which $1.0 million is included in cost of
revenues, $2.1 million is included in research and development expense and $2.1
million is included in sales, general and administrative expense. During 2007,
Micrel recorded $5.5 million in pre-tax share-based compensation expense, of
which $1.2 million is included in cost of revenues, $2.1 million is included in
research and development expense and $2.2 million is included in sales, general
and administrative expense.


Page
36
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)





Gross Profit.Gross profit is
affected by a variety of factors including the volume of product sales, product
mix, manufacturing capacity utilization, product yields and average selling
prices. The Company's gross margin decreased to 55% for the year ended December
31, 2008 from 57% for 2007. This decrease in gross margin resulted primarily
from an increase in sales mix of lower margin products in 2008 as compared to
2007.





For the year ended December 31,
2007, the Company's gross margin decreased to 57% from 58% for 2006. The
decrease in gross margin resulted primarily from reduced revenue levels to cover
fixed manufacturing costs. Depreciation and amortization as a percent of sales
increased to 7.0% for 2007 as compared to 6.3% for 2006 due to additional
depreciation on new equipment purchases combined with a decrease in annual
revenues. The 2007 gross margin was also affected by a greater sales mix of
lower margin products and lower revenues from the license of
patents.





Research and Development
Expenses.  Research and development expenses as a percentage of
net revenues represented 21% for each of the years ended December 31, 2008
and 2007. On a dollar basis, research and development expenses increased
$424,000 or 1% to $54.9 million for 2008 from $54.5 million in 2007. These
increases were primarily due to increased prototype fabrication costs. The
Company believes that the development and introduction of new products is
critical to its future success and expects to continue its investment in
research and development activities in the future.





For the year ended December 31,
2007 research and development expenses increased $2.4 million or 5% to $54.5
million from $52.1 million in 2006. These increases were primarily due to
increased staffing costs.





Selling, General and Administrative
Expenses. As a percentage of net revenues, selling, general and
administrative expenses represented 17% for each of the years ended
December 31, 2008 and 2007. On a dollar basis, selling, general and
administrative expenses decreased $635,000 or 1% to $44.4 million for 2008
from $45.0 million for 2007. This decrease was primarily due to decreased
outside legal costs.





For the year ended December 31,
2007 selling, general and administrative expenses decreased $4.0 million to
$45.0 million from $49.0 million for 2006. This decrease was primarily due
to decreased outside legal costs.





Proxy Contest Expense.During
the first quarter of 2008, the Company became engaged in its first proxy contest
since going public in 1994, with a small activist hedge fund, Obrem Capital
Management LLC (“OCM”). This issue resulted in Micrel incurring incremental
expenses on this matter of $331,000 during the first quarter, $2.4 million in
the second quarter, $349,000 in the third quarter and $1.1 million in the fourth
quarter of 2008. These expenses consist primarily of outside consulting and
legal fees.  Subsequent to a special meeting of shareholders on May
20, 2008, at which the Company’s shareholders rejected all proposals set forth
by OCM, OCM agreed to withdraw its slate of nominees for the board of directors,
and support Micrel’s board nominees at the upcoming annual meeting of
shareholders. Micrel’s slate of directors was subsequently elected by
shareholders at the Company’s annual meeting on October 1,
2008.


Page
37
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)


Restructuring charges
(credits). During 2003 the Company closed its Santa Clara wafer
fabrication facility. In February 2006, the Company terminated the facility
lease under the terms of the lease agreement due to major vandalism rendering
the building unusable.  The facility Lessor disputed the termination
of the lease.  In March 2008, the Company entered into a Settlement
and Mutual Release agreement with the Lessor. Under the terms of the agreement,
the Company paid $875,000 to the Lessor and released a $70,000 security deposit
for full settlement of all obligations under the lease (see Note 11).  The remaining $842,000 unused
restructuring expense accruals were credited to restructuring charges (credits)
in the statement of operations during the first quarter of 2008 (see Note 13 of Notes to Consolidated Financial
Statements)





Other Operating
Expense.  Other operating expenses in 2006 consist primarily of
accrued costs related to the settlement of patent infringement lawsuits (see Note 11 of Notes to Consolidated Financial
Statements).





Other Income, Net. Other
income, net reflects interest income from investments in short-term and
long-term investment securities and money market funds and other non-operating
income, offset by interest expense incurred on term notes and interest related
to litigation liabilities.  During 2007 the Company recorded $15.5
million in non-operating income resulting from the settlement of litigation (see
Note 11 of Notes to Consolidated Financial
Statements).





Provision for Income Taxes.
For the year ended December 31, 2008, the provision for income taxes was
$15.0 million or 35% of income before taxes as compared to 36% of income before
taxes for 2007.  The tax rate decrease resulted primarily from a
greater impact of federal and state research and development credits and federal
qualified production activity deductions due to reduced income before income
taxes. The 2008 provision for income taxes differs from taxes computed at the
federal statutory rate primarily due to the effects of non-deductible
share-based compensation expense, state income taxes, federal and state research
and development credits and federal qualified production activity
deductions.





For the year ended December 31,
2007, the provision for income taxes was $24.8 million or 36% of income before
taxes as compared to 39% of income before taxes for 2006.  The tax
rate decrease in 2007 was due primarily to the reduction in nondeductible
share-based compensation expense combined with an increased effect of federal
and state research and development credits.








Liquidity
and Capital Resources





Since inception, the Company's
principal sources of funding have been its cash from operations, bank borrowings
and sales of common stock. Principal sources of liquidity at December 31, 2008,
consisted of cash and short-term investments of $74.2 million and a $6 million
revolving line of credit from a commercial bank under which the Company could
borrow $5.7 million (see Note 6 of Notes to Consolidated
Financial Statements).





The Company generated $53.3 million in
cash flows from operating activities for the year ended December 31, 2008.
Cash flow from operating activities were primarily attributable to net income of
$28.3 million plus non-cash activities of $26.2 million (consisting primarily of
$19.2 million in depreciation and amortization, $5.2 million in share-based
compensation and a $1.8 million decrease in deferred income taxes) combined with
a $9.0 million decrease in accounts receivable, which was partially offset by a
$3.8 million increase in income taxes receivable and a $1.8 million increase in
inventory combined with a $2.6 million decrease in accounts payable and a $2.3
million decrease in other accrued liabilities.


Page
38
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)


For the year ended December 31,
2007, the Company generated $67.8 million in cash flows from operating
activities, which was primarily attributable to net income of $44.1 million plus
non-cash activities of $27.3 million (consisting primarily of $18.0 million in
depreciation and amortization and $5.5 million in share-based compensation).
This cash flow was partially offset by a $10.0 million decrease in other current
liabilities, resulting primarily from the payment of a legal
judgment.





The Company used $26.4 million of cash
for investing activities during the year ended December 31, 2008, which was
primarily comprised of $15.4 million for the net purchases of short-term
investments  and $11.2 million in purchases of property, plant and
equipment.





For the year ended December 31,
2007, the Company used $29.3 million of cash for investing activities, which was
primarily comprised of $20.2 million in purchases of property, plant and
equipment and $11.6 million for the net purchases of investments, which was
partially offset by a $2.6 million decrease in restricted cash.





The Company used $59.5 million of cash
for financing activities during the year ended December 31, 2008, primarily for
the repurchase of $53.2 million of the Company's common stock and $9.5 million
for the payment of cash dividends, which were partially offset by $3.2 million
in proceeds from employee stock transactions.





For the year ended December 31,
2007, the Company used $49.8 million of cash for financing activities, primarily
for the repurchase of $55.1 million of the Company's common stock and $6.9
million for the payment of cash dividends, which were partially offset by $12.1
million in proceeds from employee stock transactions.





The Company currently intends to spend
approximately $10 million to $20 million to purchase capital equipment and make
facility improvements during the next twelve months primarily for manufacturing
equipment for wafer fabrication and product testing and additional research and
development related software and equipment. The Company is currently authorized
by its Board of Directors to repurchase an additional $50.0 million of its
common stock through December 31, 2009. On January 29, 2009, the Company's Board
of Directors declared a $0.035 per common share cash dividend, payable February
25, 2009 to shareholders of record on February 11, 2009. The Company believes
that its cash from operations, existing cash balances and short-term
investments, and its credit facility will be sufficient to meet its cash
requirements for at least the next twelve months. In the longer term, the
Company believes future cash requirements will continue to be met by its cash
from operations, credit arrangements and future debt or equity financings as
required.





At December 31, 2008, the Company held
$16.2 million in principal of senior auction rate notes secured by student
loans. Auctions for these auction rate notes have failed as of December 31,
2008.  The fair value of these notes, $12.6 million, has been
classified as long-term investments as of December 31, 2008. The funds
associated with failed auctions will not be accessible until a successful
auction occurs, a buyer is found outside of the auction process, the issuers
redeem the securities or the underlying securities have matured. For additional
information regarding the Company's investments, see Note 1 of Notes to Consolidated Financial
Statements.





At December 31, 2008, the Company had
cash and cash equivalents of $48.3 million.  Some of these available
cash and cash equivalents are held in accounts managed by third party financial
institutions and consist of invested cash and cash in the Company’s operating
accounts.  The invested cash is invested in interest bearing funds
managed by third party financial institutions. To date, the Company has
experienced no loss or lack of access to its invested cash or cash equivalents;
however, the Company can provide no assurances that access to its invested cash
and cash equivalents will not be impacted by adverse conditions in the financial
markets.


Page
39
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)





Recently
Issued Accounting Standards





Please refer to the caption "Recent
Accounting Pronouncements" within Note 1 of Notes
to Consolidated Financial Statements for a discussion of the expected impact of
recently issued accounting standards.








Contractual
Obligations and Commitments





As of December 31, 2008, the
Company had the following contractual obligations and commitments (in
thousands):


Payments Due By PeriodTotal
            
            
            Less
      than
              1 Year
            
            
            1-3
              Years
            
            
            4-5
              Years
            
            
            After
      5
              YearsOperating
      leases (see Note 9 of Notes to Consolidated Financial
      Statements)
            
            $
            4,746
            
            
            $
            2,087
            
            
            $
            2,551
            
            
            $
            108
            
            
            $
            —Open
      purchase orders
            
            
            12,250
            
            
            
            12,250
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            $
            16,996
            
            
            $
            14,337
            
            
            $
            2,551
            
            
            $
            108
            
            
            $
            —





Open purchase orders are defined as
agreements to purchase goods or services that are enforceable and legally
binding and that specify all significant terms, including: fixed or minimum
quantities to be purchased; fixed, minimum or variable pricing provisions; and
the approximate timing of the transactions.





Borrowing agreements consisted of a
$6.0 million revolving line of credit from a commercial bank under which the
Company could borrow $5.7 million. The revolving line of credit agreement
includes a provision for the issuance of commercial or standby letters of credit
by the bank on behalf of the Company. The value of all letters of credit
outstanding reduces the total line of credit available. There were no borrowings
under the revolving line of credit at December 31, 2008 and there were $325,000
in standby letters of credit outstanding. The letters of credit are issued to
guarantee payments for the Company's workers compensation program.





As of
December 31, 2008, the Company had $6.5 million of non-current unrecognized tax
benefits recorded in accordance with FIN 48.  Included in the $6.5
million is $2.0 million that has not yet reduced income tax payments, and,
therefore, has been netted against non-current deferred tax
assets.  The remaining $4.5 million liability is included in long-term
income taxes payable. The Company is not able to provide a reasonably reliable
estimate of the timing of future payments relating to these
obligations.








Off-Balance
Sheet Arrangements





The Company has no off-balance sheet
arrangements and has not entered into any transactions involving unconsolidated,
limited purpose entities or commodity contracts.





Page
40
 Table of Contents


ITEM7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK





At December 31, 2008, the Company held
$25.9 million in short-term investments. Short-term investments consist
primarily of liquid debt instruments and are classified as available-for-sale
securities. The short-term investments held at December 31, 2008 are primarily
fixed rate securities. These available-for-sale securities are subject to
interest rate risk and will fall in value if market interest rates increase. If
market interest rates were to increase immediately and uniformly by 10 percent
from levels at December 31, 2008, the fair value of the short-term investments
would decline by an immaterial amount.





At
December 31, 2008, the Company held $16.2 million in principal of senior auction
rate notes secured by student loans. Auctions for these auction rate notes have
failed as of December 31, 2008.  The funds associated with failed
auctions will not be accessible until a successful auction occurs, a buyer is
found outside of the auction process, the issuers redeem the securities or the
underlying securities have matured. As a result the Company’s ability to
liquidate its investment and fully recover the carrying value of its investment
in the near term may be limited or not exist. During 2008, the Company has
recorded a $3.5 million pre-tax temporary impairment of these securities to
other comprehensive income, a component of shareholders’ equity.  If
it is determined that the fair value of these securities is other than
temporarily impaired, the Company would record a loss, which could be material,
in its statement of operations in the period such other than temporary decline
in fair value is determined. The Company currently has the ability and intent to
hold these investments until a recovery of the auction process occurs or the
issuers redeem the securities. For additional information regarding the
Company's investments, see Note 1 of Notes to
Consolidated Financial Statements.





At December 31, 2008, the Company had
no fixed-rate long-term debt subject to interest rate risk.








ITEM 8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA





The Company’s financial statements are
set forth on pages 45 through 74 and supplementary data are set forth on pages
75 through 76, which follow Item 15.








ITEM 9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE





Not applicable.








ITEM 9A.
            CONTROLS
      AND PROCEDURES





Conclusion
Regarding the Effectiveness of Disclosure Controls and Procedures





The Company maintains disclosure
controls and procedures, as such term is defined under Rule 13a-15(e)
promulgated under the Securities Exchange Act of 1934, as amended (the Exchange
Act).  In designing and evaluating the disclosure controls and
procedures, management recognizes that any disclosure controls and procedures,
no matter how well designed and operated, can provide only reasonable assurance
of achieving the desired control objectives, and management necessarily is
required to apply its judgment in evaluating the cost-benefit relationship of
possible controls and procedures.


Page
41
 Table of Contents





Under the supervision and with the
participation of the Company's management, including its principal executive
officer and principal financial officer, the Company conducted an evaluation of
the effectiveness of its disclosure controls and procedures as of the end of the
period covered by this report. Based on this evaluation, the Company's principal
executive officer and principal financial officer have concluded that the
Company's disclosure controls and procedures were effective at the reasonable
assurance level as of December 31, 2008.








Management’s
Report on Internal Control Over Financial Reporting





The Company's management is responsible
for establishing and maintaining adequate internal control over financial
reporting, as such term is defined in Exchange Act Rule
13a-15(f).  The Company’s internal control over financial reporting is
a process designed to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of financial statements for external
purposes in accordance with U.S. generally accepting accounting
principles.  Internal control over financial reporting cannot provide
absolute assurance of achieving financial reporting objectives because of its
inherent limitations. Internal control over financial reporting is a process
that involves human diligence and compliance and is subject to lapses in
judgment and breakdowns resulting from human failures. Internal control over
financial reporting also can be circumvented by collusion or improper management
override. In addition, any projections of any evaluation of effectiveness to
future periods are subject to the risk that controls may become inadequate due
to changes in conditions, or that the degree of compliance with the policies or
procedures may deteriorate. Because of such limitations, there is a risk that
material misstatements may not be prevented or detected on a timely basis by
internal control over financial reporting. However, these inherent limitations
are known features of the financial reporting process. Therefore, it is possible
to design into the process safeguards to reduce, though not eliminate, this
risk.  Under the supervision and with the participation of the
Company's management, including its principal executive officer and principal
financial officer, the Company conducted an evaluation of the effectiveness of
its internal control over financial reporting based on the criteria set forth in
the report entitled "Internal Control - Integrated Framework"issued by the Committee
of Sponsoring Organizations of the Treadway Commission. Based on its evaluation
under the criteria set forth in the Internal Control — Integrated Framework,
management has concluded that the Company's internal control over financial
reporting was effective as of December 31, 2008.





The effectiveness of the Company’s
internal control over financial reporting as of December 31, 2008 has been
audited by PricewaterhouseCoopers LLP, an independent registered public
accounting firm, as stated in their report which appears in Part IV, Item 15
“Exhibits and Financial Statement Schedules” of this report.





Changes
in Internal Control Over Financial Reporting





There has been no change in the
Company’s internal controls over financial reporting that occurred during the
quarter ended December 31, 2008 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.








ITEM 9B.
            OTHER
      INFORMATION





None.





Page
42
 Table of Contents


PART
III





ITEM 10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE





The information concerning the
directors and officers of the Company is included in the Company’s Proxy
Statement to be filed in connection with the Company’s 2009 Annual Meeting of
Shareholders under the captions "Election of Directors" and “Certain Information
with Respect to Executive Officers,” respectively, and is incorporated herein by
reference.  There have been no material changes to the procedures by
which security holders may recommend nominees to the Company’s Board of
Directors.





The Company has an Audit Committee
composed of independent directors. The information required by this item with
respect to the Audit Committee and “audit committee financial experts” is
incorporated by reference from the Company’s Proxy Statement to be filed in
connection with the Company’s 2009 Annual Meeting of Shareholders under the
captions, "Committees and Meetings of the Board of Directors" and "Board
Committees"."





The information concerning compliance
with Section 16(a) of the Exchange Act is included in the Company’s Proxy
Statement to be filed in connection with the Company’s 2009 Annual Meeting of
Shareholders under the caption “Section 16(A) Beneficial Ownership Reporting
Compliance,” and is incorporated herein by reference.





The Company has adopted a code of
ethics that applies to the principal executive officer, principal financial
officer, principal accounting officer or controller, or persons performing
similar functions. The Company's code of ethics was filed as Exhibit 14 to the
Company's Annual Report on Form 10-K for the year ended December 31, 2003 and is
incorporated herein by reference.  The Company’s code of ethics can
also be viewed at www.micrel.com.  Information regarding the Company’s
code of conduct, also known as the “Worldwide Standards of Business Conduct” is
set forth in the Company’s Proxy Statement to be filed in connection with the
Company’s 2009 Annual Meeting of Shareholders under the caption “Certain
Transactions” and is incorporated herein by reference.








ITEM 11.
            EXECUTIVE
      COMPENSATION





The information required by this item
concerning executive compensation is included under the caption “Compensation
Discussion and Analysis” and “Executive Compensation” in the Company’s Proxy
Statement to be filed in connection with the Company’s 2009 Annual Meeting of
Shareholders and is incorporated herein by reference.





The information required by this item
concerning compensation committee interlocks and insider participation is
included under the captions “Compensation Committee Interlocks and Insider
Participation” in the Company’s Proxy Statement to be filed in connection with
the Company’s 2009 Annual Meeting of Shareholders and is incorporated herein by
reference.





The information required by this item
concerning the Compensation Committee Report is included in the Company’s Proxy
Statement to be filed in connection with the Company’s 2009 Annual Meeting of
Shareholders and is incorporated herein by reference.  Such
information shall be deemed “furnished” and not "filed" for purposes of Section
18 of the Securities Exchange Act of 1934, as amended, and shall not be deemed
incorporated by reference into any filing of the Company as a result of
furnishing the disclosure in this manner except to the extent incorporated by
reference into such filing.


Page
43
 Table of Contents





ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      SHAREHOLDER MATTERS





The information required by this item
is included under the caption “Security Ownership of Certain Beneficial Owners
and Management” and "Equity Compensation Plan Information" in the Company’s
Proxy Statement to be filed in connection with the Company’s 2009 Annual Meeting
of Shareholders and is incorporated herein by reference.








ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE





The information required by this item
is included under the captions “Certain Transactions” "Director Independence"
and "Board Committees" in the Company’s Proxy Statement to be filed in
connection with the Company’s 2009 Annual Meeting of Shareholders and is
incorporated herein by reference.








ITEM 14.
            PRINCIPAL
      ACCOUNTING FEES AND SERVICES





The information required by this item
is included under the caption “Independent Registered Public Accounting Firm” in
the Company’s Proxy Statement to be filed in connection with the Company’s 2009
Annual Meeting of Shareholders and is incorporated herein by
reference.


Page
44
 Table of Contents





PART
IV








ITEM 15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES





The
      following documents are filed as part of this
  Report:





(a)  1.
            Financial
      Statements. The following financial statements of the Company and the
      Report of PricewaterhouseCoopers LLP, Independent Registered Public
      Accounting Firm, are included in this Report on the pages
      indicated:PageReport of Independent Registered Public Accounting
      Firm
            46Consolidated Balance Sheets as of December 31,
      2008 and 2007
            47Consolidated Statements of Operations for the
      Years Ended December 31, 2008, 2007 and 2006
            48Consolidated Statements of Shareholders’ Equity and
      Comprehensive Income for the Years Ended December 31, 2008, 2007 and
      2006
            49Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2008, 2007 and 2006
            50Notes to Consolidated Financial
    Statements
            51





2.
            Financial
      Statement Schedule. The following financial statement schedule of the
      Company for the years ended December 31, 2008, 2007 and 2006, is
      filed as part of this report on Form 10-K and should be read in
      conjunction with the financial statements.Schedule II
            Valuation
      and Qualifying Accounts
            77Schedules
      not listed above have been omitted because they are not applicable, not
      required, or the information required to be set forth therein is included
      in the Consolidated Financial Statements or notes
  thereto.





3.
            Exhibits. Those exhibits required by Item 601 of
      Regulation S-K to be filed or incorporated by reference as a part of this
      Report are listed on the Exhibit Index immediately preceding the exhibits
      filed herewith.





Page
45
 Table of Contents


Report of Independent Registered Public Accounting
Firm





To the
Board of Directors and Shareholders' of Micrel Incorporated:





In our
opinion, the consolidated financial statements listed in the index appearing
under Item 15(a) (1) present fairly, in all material respects, the financial
position of Micrel Incorporated and its subsidiaries at December 31, 2008 and
2007, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2008 in conformity with accounting
principles generally accepted in the United States of America.  In
addition, in our opinion, the financial statement schedule listed in the index
appearing under item 15(a)(2) presents fairly, in all material respects, the
information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained,
in all material respects, effective internal control over financial reporting as
of December 31, 2008, based on criteria established in Internal Control -
Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (COSO).  The Company's management is responsible
for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of
the effectiveness of internal control over financial reporting, included in
Management’s Report on Internal Control Over Financial Reporting appearing under
Item 9A.  Our responsibility is to express opinions on these financial
statements, on the financial statement schedule, and on the Company's internal
control over financial reporting based on our integrated audits.  We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Those standards require
that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective
internal control over financial reporting was maintained in all material
respects.  Our audits of the financial statements included examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation.  Our audit of internal control over financial reporting
included obtaining an understanding of internal control over financial
reporting, assessing the risk that a material weakness exists, and testing and
evaluating the design and operating effectiveness of internal control based on
the assessed risk.  Our audits also included performing such other
procedures as we considered necessary in the circumstances. We believe that our
audits provide a reasonable basis for our opinions.





As
discussed in Note 8 to the consolidated financial
statements, the Company changed the manner in which it accounts for uncertainty
in income taxes in 2007.





A
company’s internal control over financial reporting is a process designed to
provide reasonable assurance regarding the reliability of financial reporting
and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles.  A company’s internal
control over financial reporting includes those policies and procedures that
(i) pertain to the maintenance of records that, in reasonable detail,
accurately and fairly reflect the transactions and dispositions of the assets of
the company; (ii) provide reasonable assurance that transactions are
recorded as necessary to permit preparation of financial statements in
accordance with generally accepted accounting principles, and that receipts and
expenditures of the company are being made only in accordance with
authorizations of management and directors of the company; and
(iii) provide reasonable assurance regarding prevention or timely detection
of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.





Because
of its inherent limitations, internal control over financial reporting may not
prevent or detect misstatements.  Also, projections of any evaluation
of effectiveness to future periods are subject to the risk that controls may
become inadequate because of changes in conditions, or that the degree of
compliance with the policies or procedures may deteriorate.





/s/
PricewaterhouseCoopers LLP


San Jose,
California


February
25, 2009


Page
46
 Table of Contents





MICREL, INCORPORATEDCONSOLIDATED
      BALANCE SHEETSAS
      OF DECEMBER 31,(In
      thousands, except share amounts)2008
            
            
            2007ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
            
            $
            48,343
            
            
            $
            80,977Short-term
    investments
            
            
            25,852
            
            
            
            10,150Accounts receivable, less
      allowances: 2008, $2,937; 2007, $4,212
            
            
            20,643
            
            
            
            29,614Inventories
            
            
            37,440
            
            
            
            35,660Income taxes
      receivable
            
            
            6,783
            
            
            
            2,942Prepaid expenses and
      other
            
            
            1,781
            
            
            
            3,604Deferred income
    taxes
            
            
            17,752
            
            
            
            20,402Total current
    assets
            
            
            158,594
            
            
            
            183,349LONG-TERM
      INVESTMENTS
            
            
            12,628
            
            
            
            16,552PROPERTY,
      PLANT AND EQUIPMENT, NET
            
            
            76,200
            
            
            
            82,585INTANGIBLE
      ASSETS, NET
            
            
            1,338
            
            
            
            3,026DEFERRED
      INCOME TAXES, NET
            
            
            11,135
            
            
            
            9,286OTHER
      ASSETS
            
            
            448
            
            
            
            478TOTAL
            
            $
            260,343
            
            
            $
            295,276LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts payable
            
            $
            15,365
            
            
            $
            18,010Accrued
    compensation
            
            
            7,082
            
            
            
            8,579Accrued
commissions
            
            
            2,366
            
            
            
            1,993Other accrued
      liabilities
            
            
            1,248
            
            
            
            3,525Deferred income on shipments to
      distributors
            
            
            21,136
            
            
            
            22,877Total current
      liabilities
            
            
            47,197
            
            
            
            54,984LONG-TERM
      INCOME TAXES PAYABLE
            
            
            4,468
            
            
            
            2,814ACCRUED
      RENT
            
            
            272
            
            
            
            335COMMITMENTS
      AND CONTINGENCIES (Notes 9 and 11)SHAREHOLDERS’
      EQUITY:Preferred
      stock, no par value – authorized: 5,000,000 shares;
              issued
      and outstanding: none
            
            
            —
            
            
            
            —Common
      stock, no par value – authorized: 250,000,000 shares;
              issued
      and outstanding: 2008 – 67,308,899;
      2007 – 74,001,360
            
            
            —
            
            
            
            —Accumulated other comprehensive
      loss
            
            
            (2,244
            )
            
            
            (32
            )Retained earnings
            
            
            210,650
            
            
            
            237,175Total shareholders’
      equity
            
            
            208,406
            
            
            
            237,143TOTAL
            
            $
            260,343
            
            
            $
            295,276The
      accompanying notes are an integral part of these consolidated financial
      statements.


Page
47
 Table of Contents





MICREL, INCORPORATEDCONSOLIDATED
      STATEMENTS OF OPERATIONSYEARS
      ENDED DECEMBER 31,(In
      thousands, except per share amounts)2008
            
            
            2007
            
            
            2006NET
      REVENUES
            
            $
            259,360
            
            
            $
            257,974
            
            
            $
            276,307COST
      OF REVENUES(1)
            
            
            116,351
            
            
            
            111,068
            
            
            
            117,164GROSS
      PROFIT
            
            
            143,009
            
            
            
            146,906
            
            
            
            159,143OPERATING
      EXPENSES:Research and development(1)
            
            
            54,947
            
            
            
            54,523
            
            
            
            52,074Selling, general and
      administrative(1)
            
            
            44,405
            
            
            
            45,040
            
            
            
            49,016Proxy contest
    expense
            
            
            4,153
            
            
            
            —
            
            
            
            —Restructuring charges
      (credits)
            
            
            (842
            )
            
            
            128
            
            
            
            269Other operating
      expense
            
            
            —
            
            
            
            86
            
            
            
            966Total operating
      expenses
            
            
            102,663
            
            
            
            99,777
            
            
            
            102,325INCOME
      FROM OPERATIONS
            
            
            40,346
            
            
            
            47,129
            
            
            
            56,818OTHER
      INCOME:Interest income
            
            
            2,936
            
            
            
            6,267
            
            
            
            5,978Interest expense
            
            
            (57
            )
            
            
            (93
            )
            
            
            (634
            )Other income
            
            
            57
            
            
            
            15,543
            
            
            
            59Total other income,
      net
            
            
            2,936
            
            
            
            21,717
            
            
            
            5,403INCOME
      BEFORE INCOME TAXES
            
            
            43,282
            
            
            
            68,846
            
            
            
            62,221PROVISION
      FOR INCOME TAXES
            
            
            15,025
            
            
            
            24,778
            
            
            
            24,497NET
      INCOME
            
            $
            28,257
            
            
            $
            44,068
            
            
            $
            37,724NET
      INCOME PER SHARE:Basic
            
            $
            0.40
            
            
            $
            0.57
            
            
            $
            0.46Diluted
            
            $
            0.40
            
            
            $
            0.57
            
            
            $
            0.46WEIGHTED-AVERAGE
      SHARES USED IN COMPUTING PER SHARE AMOUNTS:Basic
            
            
            70,549
            
            
            
            76,918
            
            
            
            81,550Diluted
            
            
            70,653
            
            
            
            77,813
            
            
            
            82,842Cash dividends per common
      share
            
            $
            0.14
            
            
            $
            0.09
            
            
            $
            —(1)
      Share- based compensation included in:Cost of revenues
            
            $
            974
            
            
            $
            1,156
            
            
            $
            1,540Research and
      development
            
            
            2,086
            
            
            
            2,130
            
            
            
            3,341Selling, general and
      administrative
            
            
            2,119
            
            
            
            2,199
            
            
            
            3,534The
      accompanying notes are an integral part of these consolidated financial
      statements.


Page
48
 Table of Contents




MICREL, INCORPORATEDCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY
              AND
      COMPREHENSIVE INCOMEYEARS
      ENDED DECEMBER 31, 2008, 2007 AND 2006(In
      thousands, except share amounts)AccumulatedDeferred
            
            
            Other
            
            
            
            
            
            TotalCommon Stock
            
            
            Share-Based
            
            
            Comprehensive
            
            
            Retained
            
            
            Shareholders'
            
            
            ComprehensiveShares
            
            
            Amount
            
            
            Compensation
            
            
            Income (Loss)
            
            
            Earnings
            
            
            Equity
            
            
            IncomeBalances,
      December 31, 2005
            
            
            84,646,680
            
            
            $
            73,848
            
            
            $
            (294
            )
            
            $
            (52
            )
            
            $
            184,184
            
            
            $
            257,686Adjustment
      for prior period  error correction (Note
      2)
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (1,241
            )
            
            
            (1,241
            )Adjusted
      balances, December 31, 2005
            
            
            84,646,680
            
            
            
            73,848
            
            
            
            (294
            )
            
            
            (52
            )
            
            
            182,943
            
            
            
            256,445Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            37,724
            
            
            
            37,724
            
            
            $
            37,724Other
      comprehensive income, change in net unrealized losses from
      investments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            17
            
            
            
            
            
            
            
            17
            
            
            
            17Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            37,741Reversal
      of deferred share-based compensation upon adoption of
      SFAS No. 123(R)
            
            
            
            
            
            
            (294
            )
            
            
            294
            
            
            
            —
            
            
            
            —
            
            
            
            —Share-based
      compensation
            
            
            —
            
            
            
            8,640
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            8,640Repurchases
      of common stock
            
            
            (6,714,479
            )
            
            
            (71,513
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (71,513
            )Escrow
      shares cancelled
            
            
            (400,050
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Employee
      stock transactions
            
            
            546,060
            
            
            
            4,120
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,120Tax
      effect of employee stock transactions
            
            
            —
            
            
            
            784
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            784Balances,
      December 31, 2006
            
            
            78,078,211
            
            
            
            15,585
            
            
            
            —
            
            
            
            (35
            )
            
            
            220,667
            
            
            
            236,217Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            44,068
            
            
            
            44,068
            
            
            $
            44,068Other
      comprehensive income, change in net unrealized losses from
      investments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            3
            
            
            
            
            
            
            
            3
            
            
            
            3Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            44,071Share-based
      compensation
            
            
            —
            
            
            
            5,382
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,382Payment
      of cash dividends
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (6,945
            )
            
            
            (6,945
            )Repurchases
      of common stock
            
            
            (5,515,854
            )
            
            
            (34,447
            )
            
            
            —
            
            
            
            —
            
            
            
            (20,615
            )
            
            
            (55,062
            )Employee
      stock transactions
            
            
            1,439,003
            
            
            
            12,133
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            12,133Tax
      effect of employee stock transactions
            
            
            —
            
            
            
            1,347
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            1,347Balances,
      December 31, 2007
            
            
            74,001,360
            
            
            
            —
            
            
            
            —
            
            
            
            (32
            )
            
            
            237,175
            
            
            
            237,143Net
      income
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            28,257
            
            
            
            28,257
            
            
            $
            28,257Other
      comprehensive income, change in net unrealized losses from
      investments
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            (2,212
            )
            
            
            
            
            
            
            (2,212
            )
            
            
            (2,212
            )Comprehensive
      income
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            
            $
            26,045Share-based
      compensation
            
            
            —
            
            
            
            5,159
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            5,159Payment
      of cash dividends
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (9,540
            )
            
            
            (9,540
            )Repurchases
      of common stock
            
            
            (7,241,187
            )
            
            
            (9,085
            )
            
            
            —
            
            
            
            —
            
            
            
            (45,242
            )
            
            
            (54,327
            )Employee
      stock transactions
            
            
            548,726
            
            
            
            4,254
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            4,254Tax
      effect of employee stock transactions
            
            
            —
            
            
            
            (328
            )
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            (328
            )Balances,
      December 31, 2008
            
            
            67,308,899
            
            
            $
            —
            
            
            $
            —
            
            
            $
            (2,244
            )
            
            $
            210,650
            
            
            $
            208,406The
      accompanying notes are an integral part of these consolidated financial
      statements.


Page
49
 Table of Contents





MICREL, INCORPORATEDCONSOLIDATED
      STATEMENTS OF CASH FLOWSYEARS
      ENDED DECEMBER 31,(In
      thousands)2008
            
            
            2007
            
            
            2006CASH
      FLOWS FROM OPERATING ACTIVITIES:Net income
            
            $
            28,257
            
            
            $
            44,068
            
            
            $
            37,724Adjustments to reconcile net
      income to net cash provided
              by operating
      activities:Depreciation and
      amortization
            
            
            19,227
            
            
            
            18,001
            
            
            
            17,291Share-based
      compensation
            
            
            5,179
            
            
            
            5,485
            
            
            
            8,415Tax benefit on the exercise of
      employee stock options
            
            
            230
            
            
            
            1,347
            
            
            
            784Excess tax benefits associated
      with stock compensation
            
            
            —
            
            
            
            (159
            )
            
            
            (206
            )Loss (gain) on disposal of
      assets
            
            
            (110
            )
            
            
            —
            
            
            
            11Accrued rent
            
            
            (63
            )
            
            
            (118
            )
            
            
            (22
            )Deferred income tax provision
      (benefit)
            
            
            1,777
            
            
            
            2,779
            
            
            
            (2,227
            )Changes in operating assets and
      liabilities:Accounts
    receivable
            
            
            8,971
            
            
            
            1,478
            
            
            
            4,432Inventories
            
            
            (1,799
            )
            
            
            1,420
            
            
            
            (6,539
            )Income taxes
      receivable
            
            
            (3,841
            )
            
            
            (2,612
            )
            
            
            (330
            )Prepaid expenses and other
      assets
            
            
            1,853
            
            
            
            (456
            )
            
            
            (1,296
            )Accounts
payable
            
            
            (2,645
            )
            
            
            581
            
            
            
            (3,123
            )Accrued
      compensation
            
            
            (1,576
            )
            
            
            992
            
            
            
            636Accrued
    commissions
            
            
            373
            
            
            
            558
            
            
            
            (45
            )Income taxes
      payable
            
            
            1,508
            
            
            
            5,448
            
            
            
            (5,418
            )Other accrued
      liabilities
            
            
            (2,277
            )
            
            
            (10,017
            )
            
            
            301Deferred income on shipments to
      distributors
            
            
            (1,741
            )
            
            
            (1,029
            )
            
            
            8,599Net cash provided by operating
      activities
            
            
            53,323
            
            
            
            67,766
            
            
            
            58,987CASH
      FLOWS FROM INVESTING ACTIVITIES:Change in restricted
      cash
            
            
            —
            
            
            
            2,629
            
            
            
            (2,629
            )Purchases of property, plant
      and equipment
            
            
            (11,044
            )
            
            
            (20,233
            )
            
            
            (16,774
            )Purchase of intangible
      assets
            
            
            —
            
            
            
            —
            
            
            
            (1,601
            )Purchases of
      investments
            
            
            (29,852
            )
            
            
            (23,713
            )
            
            
            (18,090
            )Proceeds from sales and
      maturities of investments
            
            
            14,474
            
            
            
            12,064
            
            
            
            51,490Net cash provided (used) in
      investing activities
            
            
            (26,422
            )
            
            
            (29,253
            )
            
            
            12,396CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayments of
    debt
            
            
            —
            
            
            
            (80
            )
            
            
            (67
            )Proceeds from the issuance of
      common stock
            
            
            3,242
            
            
            
            12,133
            
            
            
            4,120Repurchase of common
      stock
            
            
            (53,237
            )
            
            
            (55,062
            )
            
            
            (71,513
            )Payments of cash
      dividends
            
            
            (9,540
            )
            
            
            (6,945
            )
            
            
            —Excess tax benefits associated
      with stock compensation
            
            
            —
            
            
            
            159
            
            
            
            206Net cash used in financing
      activities
            
            
            (59,535
            )
            
            
            (49,795
            )
            
            
            (67,254
            )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
            
            
            (32,634
            )
            
            
            (11,282
            )
            
            
            4,129CASH
      AND CASH EQUIVALENTS - Beginning of year
            
            
            80,977
            
            
            
            92,259
            
            
            
            88,130CASH
      AND CASH EQUIVALENTS - End of year
            
            $
            48,343
            
            
            $
            80,977
            
            
            $
            92,259SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year
      for:Interest
            
            $
            68
            
            
            $
            818
            
            
            $
            86Income taxes
            
            $
            15,240
            
            
            $
            17,744
            
            
            $
            31,695The
      accompanying notes are an integral part of these consolidated financial
      statements.


Page
50
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2008, 2007 and 2006


1.
            SIGNIFICANT
      ACCOUNTING POLICIES





Nature of
Business —Micrel, Incorporated
and its wholly-owned subsidiaries (the “Company”) develops, manufactures and
markets analog, mixed-signal and digital semiconductor devices. The Company also
provides custom and foundry services which include silicon wafer fabrication,
integrated circuit ("IC") assembly and testing. The Company’s standard ICs are
sold principally in North America, Asia, and Europe for use in a variety of
products, including those in the computer, communication, and industrial
markets. The Company’s custom circuits and wafer foundry services are provided
to a wide range of customers that produce electronic systems for communications,
consumer, automotive and military applications. The Company produces the
majority of its wafers at the Company’s wafer fabrication facilities located in
San Jose, California. After wafer fabrication, the completed wafers are then
separated into individual circuits and packaged at independent assembly and
final test contract facilities primarily located in Malaysia.





Basis of
Presentation —The accompanying
consolidated financial data has been prepared by the Company pursuant to the
rules and regulations of the U.S. Securities and Exchange Commission ("SEC") and
is in conformity with U.S. generally accepted accounting principles ("US
GAAP").





Principles of
Consolidation —The accompanying
consolidated financial statements include the accounts of Micrel, Incorporated
and its wholly-owned subsidiaries. All significant intercompany accounts and
transactions have been eliminated.





Use of Estimates
—In
accordance with accounting principles generally accepted in the United States of
America, management utilizes certain estimates and assumptions that affect the
reported amounts of assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. On an on-going basis, management evaluates its estimates and
judgments. Management bases its estimates and judgments on historical experience
and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about
the carrying values of assets and liabilities that are not readily apparent from
other sources. The primary estimates underlying the Company's financial
statements include allowances for doubtful accounts receivable, allowances for
product returns and price adjustments, provisions for obsolete and slow moving
inventory, share-based compensation, income taxes, litigation and accrual for
other liabilities. Actual results could differ from those
estimates.





Cash Equivalents
—The
Company considers all highly liquid debt instruments purchased with remaining
maturities of three months or less to be cash equivalents.





Investments —The Company accounts
for its investment instruments in accordance with Statement of Financial
Accounting Standards No. 115 (“SFAS 115”), “Accounting for Certain
Investments in Debt and Equity Securities.” Investments purchased with remaining
maturity dates of greater than three months and less than 12 months are
classified as short-term. Investments purchased with remaining maturity dates of
12 months or greater are classified either as short-term or as long-term based
on maturities and the Company's intent with regard to those securities
(expectations of sales and redemptions). Short-term investments as of December
31, 2008 consist primarily of liquid corporate debt instruments and are
classified as available-for-sale securities. Long-term investments as of
December 31, 2008, consist of senior auction rate notes secured by student loans
and are classified as available-for-sale securities.  Per SFAS 115
available-for sale securities are stated at market value with unrealized gains
and losses included in shareholders’ equity. Unrealized losses are charged
against income when a decline in the fair market value of an individual security
is determined to be other than temporary. Realized gains and losses on
investments are included in other income or expense.


Page
51
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006


A summary
of the Company’s short-term investments at December 31, 2008 and 2007 is as
follows (in thousands):





As of December 31, 2008
            
            
            As of December 31, 2007Cost
            
            
            Gross
              Gains
            
            
            Gross
              Losses
            
            
            Fair
              Value
            
            
            Cost
            
            
            Gross
              Gains
            
            
            Gross
              Losses
            
            
            Fair
              ValueCorporate
      Securities
            
            $
            17,888
            
            
            $
            2
            
            
            $
            63
            
            
            $
            17,827
            
            
            $
            10,177
            
            
            $
            —
            
            
            $
            27
            
            
            $
            10,150Certificates
      of Deposits
            
            
            8,025
            
            
            
            —
            
            
            
            —
            
            
            
            8,025
            
            
            
            —
            
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            $
            25,913
            
            
            $
            2
            
            
            $
            63
            
            
            $
            25,852
            
            
            $
            10,177
            
            
            $
            —
            
            
            $
            27
            
            
            $
            10,150





Effective
January 1, 2008, the Company adopted the fair value measurement and disclosure
provisions of SFAS No. 157, Fair Value Measurements, which establishes specific
criteria for the fair value measurements of financial and nonfinancial assets
and liabilities that are already subject to fair value measurements under
current accounting rules. SFAS No. 157 also requires expanded disclosures
related to fair value measurements. In February 2008, the FASB approved FSP SFAS
No. 157-2, Effective Date of FASB Statement No. 157, which allows companies to
elect a one-year delay in applying SFAS No. 157 to certain fair value
measurements, primarily related to nonfinancial assets and nonfinancial
liabilities, except for items that are recognized or disclosed at fair value in
the financial statements on a recurring basis (at least annually). The Company
elected the delayed adoption date for the portions of SFAS No. 157 impacted by
FSP SFAS No. 157-2. The partial adoption of SFAS No. 157 was prospective and did
not have a significant effect on the Company’s Condensed Consolidated Financial
Statements. The Company is currently evaluating the impact of applying the
deferred portion of SFAS No. 157 to the nonrecurring fair value measurements of
its nonfinancial assets and nonfinancial liabilities. In accordance with FSP
SFAS No. 157-2, the fair value measurements for nonfinancial assets and
liabilities will be adopted effective for fiscal years beginning after November
15, 2008.





Concurrently
with the adoption of SFAS No. 157, the Company adopted SFAS No. 159,
Establishing the Fair Value Option for Financial Assets and Liabilities, which
permits entities to elect, at specified election dates, to measure eligible
financial instruments at fair value. As of December 31, 2008, the Company did
not elect the fair value option under SFAS No. 159 for any financial assets and
liabilities that were not previously measured at fair value.





SFAS No.
157 establishes a fair value hierarchy that prioritizes the inputs to valuation
techniques used to measure fair value. The hierarchy gives the highest priority
to unadjusted quoted prices in active markets for identical assets or
liabilities (level 1 measurements) and the lowest priority to unobservable
inputs (level 3 measurements). The three levels of the fair value hierarchy
under SFAS No. 157 are described below:





•
            Level
      1 - Quoted prices in active markets for identical assets or
      liabilities.


•
            Level
      2 - Inputs other than Level 1 that are observable, either directly or
      indirectly, such as quoted prices for similar assets or liabilities;
      quoted prices in markets that are not active; or other inputs that are
      observable or can be corroborated by observable market data for
      substantially the full term of the assets or
  liabilities.


•
            Level
      3 - Unobservable inputs that are supported by little or no market activity
      and that are significant to the fair value of the assets or
      liabilities.





A
financial instrument’s level within the fair value hierarchy is based on the
lowest level of any input that is significant to the fair value
measurement.


Page
52
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006


Most of
the Company’s financial instruments are classified within Level 1 or Level 2 of
the fair value hierarchy because they are valued using quoted market prices,
broker or dealer quotations, or alternative pricing sources with reasonable
levels of price transparency. The types of instruments valued based on quoted
market prices in active markets include money market funds and commercial paper.
Such instruments are generally classified within Level 1 of the fair value
hierarchy.





The types
of instruments valued based on other observable inputs include U.S. agency
securities. Such instruments are generally classified within Level 2 of the fair
value hierarchy.





The types
of instruments valued based on unobservable inputs include the auction rate
notes held by the Company. Such instruments are generally classified within
Level 3 of the fair value hierarchy. The Company estimated the fair value of
these auction rate securities using a discounted cash flow model incorporating
assumptions that market participants would use in their estimates of fair value.
Some of these assumptions include estimates for interest rates, timing and
amount of cash flows and expected holding periods of the auction rate
securities. Financial assets and liabilities measured at fair value on a
recurring basis as of December 31, 2008 were as follows (in
thousands):





Fair Value Measurements as of December 31,
      2008Description
            
            Quoted
      Prices in Active Markets for Identical Assets
              Level 1
            
            
            Significant
      Other Observable Inputs
              Level 2
            
            
            Significant
      Unobservable Inputs
              Level 3
            
            
            TotalMoney
      market funds
            
            $
            42,220
            
            
            $
            4,457
            
            
            $
            −
            
            
            $
            46,677Short-term
      available-for-sale securities
            
            
            25,852
            
            
            
            −
            
            
            
            −
            
            
            
            25,852Auction
      rate notes
            
            
            −
            
            
            
            −
            
            
            
            12,628
            
            
            
            12,628Total
            
            $
            68,072
            
            
            $
            4,457
            
            
            $
            12,628
            
            
            $
            85,157





As of
December 31, 2008, the Company had $12.6 million of auction rate notes, the fair
value of which has been measured using Level 3 inputs. Auction rate notes are
securities that are structured with short-term interest rate reset dates of
generally less than ninety days, but with contractual maturities that can be
well in excess of ten years. At the end of each reset period, which occurs every
seven or twenty eight days for the securities held by the Company, investors can
sell or continue to hold the securities at par. During the first quarter of 2008
and continuing into the fourth quarter of 2008, the auction rate securities
market experienced a significant increase in the number of failed auctions,
which occurs when sell orders exceed buy orders. Auctions for the student
loan-backed notes held by the Company have failed as of December 31, 2008. To
date the Company has collected all interest payable on all of its auction-rate
securities when due and expect to continue to do so in the future. The
principal associated with failed auctions will not be accessible until a
successful auction occurs, a buyer is found outside of the auction process, the
issuers redeem the securities, the issuers repay principal over time from cash
flows prior to final maturity or final payments come due according to
contractual maturities ranging from 24 to 37 years.  As a result, the
Company has classified all auction rate notes as long-term investments as of
December 31, 2008. In the event of a failed auction, the notes bear interest at
a predetermined maximum rate based on the credit rating of notes as determined
by one or more nationally recognized statistical rating
organizations.  For the auction rate notes held by the Company as of
December 31, 2008, the maximum interest rate is generally one month LIBOR plus
1.5% based on the notes’ AAA rating as of that date.  The auction rate
notes in the Company’s portfolio had successful auctions until February 2008 and
as such, their fair value would have been measured using level 1 inputs at
January 1, 2008.  However, since auctions have failed as of
December 31, 2008, for all auction rate notes held by the Company, the auction
rate notes have been transferred from Level 1 to Level 3 category as of December
31, 2008.


Page
53
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006


The
Company has used a discounted cash flow model to determine the estimated fair
value of its investment in auction rate notes as of December 31, 2008. The
assumptions used in preparing the discounted cash flow model include estimates
for interest rates, estimates for discount rates using yields of comparable
traded instruments adjusted for illiquidity and other risk factors, amount of
cash flows and expected holding periods of the auction rate
notes.  Based on this assessment of fair value, as of December 31,
2008, the Company determined there was a decline in the fair value of its
auction rate notes of approximately $3.5 million (recorded net of tax as an
unrealized loss in accumulated other comprehensive loss), which was deemed
temporary as the Company currently has the ability and intent to hold these
investments until a recovery of the auction process occurs, the issuers redeem
the securities or principal is repaid by the issuers over time or at the
contractual maturity date. For the Year ended December 31, 2008 the changes in
the Company’s Level 3 securities is as follows (in thousands):


Fair
      Value Measurements Using Significant Unobservable Inputs
              (Level 3)Beginning
      balance, December 31, 2007
            
            $
            −Transfers
      in and/or out of Level 3
            
            
            16,517Total
      gains or losses (unrealized), before tax:
            
            
            (3,539
            )Settlements
            
            
            (350
            )Ending
      balance, December 31, 2008
            
            $
            12,628





Certain
Significant Risks and Uncertainties —Financial instruments
that potentially subject the Company to concentrations of credit risk consist of
cash and cash equivalents, investments and accounts receivable. Risks associated
with cash are mitigated by banking with creditworthy institutions. Cash
equivalents and investments consist primarily of commercial paper, bank
certificates of deposit, money market funds and auction rate notes and are
regularly monitored by management. Credit risk with respect to the trade
receivables is spread over geographically diverse customers. The Company
performs ongoing credit evaluations of its customers and maintains an allowance
for potential credit losses. At December 31, 2008, three world-wide
distributors and a stocking representative, accounted for 21%, 13%, 11% and 10%,
respectively, of total accounts receivable. At December 31, 2007, two
world-wide distributors and a stocking representative, accounted for 18%, 10%
and 15%, respectively, of total accounts receivable.





Micrel
currently purchases certain components from a limited group of vendors. The
packaging of the Company's products is performed by, and certain of the raw
materials included in such products are obtained from, a limited group of
suppliers. The wafer supply for the Company’s Ethernet products is currently
dependent upon two large third-party wafer foundry suppliers. Although the
Company seeks to reduce its dependence on limited source suppliers, disruption
or termination of any of these sources could occur and such disruptions could
have an adverse effect on the Company's financial condition, results of
operations, or cash flows.





The
Company participates in a dynamic high technology industry and believes that
changes in any of the following areas could have a material adverse effect on
the Company’s future financial position, results of operations, or cash flows:
changes in the overall demand for products offered by the Company; competitive
pressures in the form of new products or price reductions on current products;
advances and trends in new technologies and industry standards; changes in
product mix; changes in third-party manufacturers; changes in key suppliers;
changes in certain strategic relationships or customer relationships; litigation
or claims against the Company based on intellectual property, patents (see Note 11), product, regulatory or other factors; risks
associated with the ability to obtain necessary components; risks associated
with the Company’s ability to attract and retain employees necessary to support
its growth.




Page
54
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006


Inventories
— Inventories are stated at the lower of cost (first-in, first-out
method) or market. The Company records adjustments to write down the cost of
obsolete and excess inventory to the estimated market value based on historical
and forecasted demand for its products. Once an inventory write-down provision
is established, it is maintained until the product to which it relates is sold
or otherwise disposed of. This treatment is in accordance with Accounting
Research Bulletin 43 and Staff Accounting Bulletin 100 "Restructuring and
Impairment Charges."




Property, Plant
and Equipment —Equipment, building and
leasehold improvements are stated at cost and depreciated using the
straight-line method. Equipment is depreciated over estimated useful lives of
three to five years. Buildings are depreciated over an estimated useful life of
thirty years. Building improvements are depreciated over estimated useful lives
of fifteen to thirty years. Leasehold improvements are amortized over the
shorter of the lease term or the useful lives of the improvements which is
generally 3 to 5 years.




Intangible
Assets —The
Company applies the provisions of SFAS No. 144 in evaluating whether any
impairment indicators exist for intangible assets and has determined that its
intangible assets were not impaired at December 31, 2008 and 2007. Acquired
technology, patents and other intangible assets continue to be amortized over
their estimated useful lives of 3 to 7 years using the straight-line method.
Components of intangible assets were as follows (in thousands):





As of December 31, 2008
            
            
            As of December 31, 2007Gross
              Carrying
              Amount
            
            
            Accumulated
              Amortization
            
            
            Net
              Carrying
              Amount
            
            
            Gross
              Carrying
              Amount
            
            
            Accumulated
              Amortization
            
            
            Net
              Carrying
              AmountDeveloped
      and core technology
            
            $
            8,718
            
            
            $
            8,620
            
            
            $
            98
            
            
            $
            8,718
            
            
            $
            8,349
            
            
            $
            369Patents
      and tradename
            
            
            10,318
            
            
            
            9,078
            
            
            
            1,240
            
            
            
            10,318
            
            
            
            7,661
            
            
            
            2,657Customer
      relationships
            
            
            1,455
            
            
            
            1,455
            
            
            
            -
            
            
            
            1,455
            
            
            
            1,455
            
            
            
            -$
            20,491
            
            
            $
            19,153
            
            
            $
            1,338
            
            
            $
            20,491
            
            
            $
            17,465
            
            
            $
            3,026





Total
intangible amortization expense for the years ended December 31, 2008, 2007 and
2006 was $1.7 million, $1.7 million and $1.6 million, respectively. Estimated
future intangible amortization expense for intangible assets as of
December 31, 2008, is expected to be approximately $828,000 in 2009, and
$255,000 in 2010 and 2011.





Impairment of
Long-Lived Assets —Pursuant to SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” the
Company periodically assesses whether long-lived assets have been impaired. An
asset is initially evaluated for impairment if its estimated future undiscounted
cash flows are less than the carrying value recorded on the Company's balance
sheet. If a shortfall exists, any impairment is measured based on the difference
between the fair value and the carrying value of the long-lived asset. The
Company's estimate of fair value is based on either fair market value
information, if available, or based on the net present value of expected future
cash flows attributable to the asset. Predicting future cash flows attributable
to a particular asset is difficult, and requires the use of significant
judgment.


Page
55
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006





Revenue
Recognition and Receivables — Micrel generates revenue by selling
products to original equipment manufacturers ("OEM"s), distributors and stocking
representatives.  Stocking representative firms may buy and stock the
Company's products for resale or may act as the Company's sales representative
in arranging for direct sales from the Company to an OEM
customer.  The Company's policy is to recognize revenue from sales to
customers when the rights and risks of ownership have passed to the customer,
when persuasive evidence of an arrangement exists, the product has been
delivered, the price is fixed or determinable and collection of the resulting
receivable is reasonably assured.





Micrel
allows certain distributors located in North America and Europe, and to a lesser
extent Asia, significant return rights, price protection and pricing adjustments
subsequent to the initial product shipment.  As these returns and
price concessions have historically been significant, and future returns and
price concessions are difficult to reliably estimate, the Company defers
recognition of revenue and related cost of sales (in the balance sheet line item
“deferred income on shipments to distributors”) derived from sales to these
distributors until they have resold the Company's products to their customers.
Although revenue and related cost of sales are not recognized, the Company
records an accounts receivable and relieves inventory at the time of initial
product shipment.  As standard terms are FOB shipping point, payment
terms are enforced from shipment date and legal title and risk of inventory loss
passes to the distributor upon shipment. In addition, the Company may offer to
its distributors, where revenue is deferred upon shipment and recognized on a
sell-through basis, price adjustments to allow the distributor to price the
Company's products competitively for specific resale opportunities. The Company
estimates and records an allowance for distributor price adjustments for which
the specific resale transaction has been completed, but the price adjustment
claim has not yet been received and recorded by the Company.





Sales to
OEM customers and Asian based stocking representatives are recognized based upon
the shipment terms of the sale transaction when all other revenue recognition
criteria have been met.  The Company does not grant return rights,
price protection or pricing adjustments to OEM customers.  The Company
offers limited contractual stock rotation rights to stocking
representatives.  In addition, the Company is not contractually
obligated to offer, but may infrequently grant, price adjustments or price
protection to certain stocking representatives on an exception basis. At the
time of shipment to OEMs and stocking representatives, an allowance for returns
is established based upon historical return rates, and an allowance for price
adjustments is established based on an estimate of price adjustments to be
granted.





The
Company's accounts receivable balances represent trade accounts receivables
which have been recorded at invoiced amount and do not bear
interest.  The Company maintains an allowance for doubtful accounts
for estimated uncollectible accounts receivable. This estimate is based on an
analysis of specific customer creditworthiness and historical bad debts
experience.





Litigation
— An
estimated liability is accrued when it is determined to be probable that a
liability has been incurred and the amount of loss can be reasonably estimated.
The liability accrual is charged to income in the period such determination is
made. The Company regularly evaluates current information available to determine
whether such accruals should be made.


Page
56
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006





Warranty Costs —The Company warrants products against defects for a period of up to 30
days. The majority of Micrel's product warranty claims are settled through the
return of defective product and the reshipment of replacement product. Warranty
returns are included in Micrel's allowance for returns, which is based on
historical return rates. Actual future returns could be different than the
returns allowance established. In addition, Micrel accrues a liability for
specific warranty costs that are expected to be settled other than through
product return and replacement. As of December 31, 2008 and 2007, respectively,
accrued warranty expenses were immaterial amounts. Future actual warranty costs
may be different from the accrued warranty expense.





Research and
Development Expenses —Research and development costs are expensed as
incurred and consist primarily of payroll and other headcount related costs and
cost of materials associated with the development of new wafer fabrication
processes and the definition, design and development of standard products. The
Company also expenses prototype wafers and new production mask sets related to
new products as research and development costs until products based on new
designs are released to production by the Company and are demonstrated to
support published data sheets and satisfy reliability tests.





Self
Insurance —The
Company utilizes third-party insurance subject to varying retention levels or
self insurance. The Company is self insured for a portion of the losses and
liabilities primarily associated with earthquake damage, workers’ compensation
claims and health benefit claims. Losses are accrued based upon the Company’s
estimates of the aggregate liability for claims incurred using historical
experience and certain actuarial assumptions followed in the insurance
industry.





Advertising
Expenses — The
Company expenses advertising costs to selling, general and administrative
expense as incurred. Advertising expenses for 2008, 2007 and 2006 were $1.6
million, $2.0 and $2.1 million respectively.





Income Taxes
— Deferred tax assets and liabilities result from temporary differences
between book and tax bases of assets and liabilities and state research and
development credit carryforwards.  The Company had net current
deferred tax assets of $17.8 million and net long-term deferred tax assets of
$11.1 million as of December 31, 2008.  The Company must assess
the likelihood that future taxable income levels will be sufficient to
ultimately realize the tax benefits of these deferred tax assets.  The
Company currently believes that future taxable income levels will be sufficient
to realize the tax benefits of these deferred tax assets and has not established
a valuation allowance.





In
addition, the calculation of the Company's tax liabilities involves dealing with
uncertainties in the application of complex tax
regulations.  Effective January 1, 2007, the Company adopted the
provisions of FASB Interpretation (FIN) No. 48, Accounting for Uncertainty in
Income Taxes - an interpretation of FASB Statement No. 109.  The
Company considers many factors when evaluating and estimating its tax positions
and tax benefits, which may require periodic adjustments and which may not
accurately anticipate actual outcomes (see Note 8 for
additional information regarding the adoption of FIN No. 48).





Share-based
Compensation — As of January 1, 2006, the Company adopted SFAS No.
123(R), Share-Based Payment, ("SFAS 123(R)"), which requires companies to
recognize in the statement of operations the grant-date fair value of stock
awards issued to employees and directors (see Note
7).


Page
57
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006





Net Income per
Share —Basic earnings per share ("EPS") is computed by dividing net
income by the number of weighted-average common shares outstanding. Diluted EPS
reflects potential dilution from outstanding stock options, using the treasury
stock method. Reconciliation of weighted-average shares used in computing
earnings per share is as follows (in thousands):


Years Ended
    December 31,2008
            
            
            2007
            
            
            2006Weighted-average
      common shares outstanding
            
            
            70,549
            
            
            
            76,918
            
            
            
            81,550Dilutive
      effect of stock options outstanding, using the treasury stock
      method
            
            
            104
            
            
            
            895
            
            
            
            1,292Shares
      used in computing diluted earnings per share
            
            
            70,653
            
            
            
            77,813
            
            
            
            82,842





For the
years ended December 31, 2008, 2007 and 2006, 9.2 million, 6.4 million and 5.7
million stock options, respectively, have been excluded from the
weighted-average number of common shares outstanding for the diluted net income
per share computations as they are anti-dilutive.





Fair Value of
Financial Instruments —Financial instruments included in the Company’s
consolidated balance sheets at December 31, 2008 and 2007, consist of cash,
cash equivalents, accounts receivable, accounts payable and investments. For
cash, the carrying amount is the fair value. The carrying amount for cash
equivalents, accounts receivable and accounts payable approximates fair value
because of the short maturity of those instruments. The fair value of
investments are based on quoted market prices or valuation models for
investments for which quoted market prices are unavailable.





Recent Accounting Pronouncements — In June 2008,
the FASB issued FASB Staff Position EITF 03-6-1, “Determining Whether
Instruments Granted in Share-Based Payment Transactions Are Participating
Securities” ("FSP EITF 03-6-1"). FSP EITF 03-6-1 addresses whether participating
share-based payment awards, that contain non-forfeitable rights to dividends or
dividend equivalents (paid or unpaid) prior to vesting, should be included in
the computation of earnings per share under the two-class method. FSP EITF
03-6-1 will be effective for financial statements issued for fiscal years
beginning after December 15, 2008. The Company is currently evaluating the
potential impact, if any, of the adoption of FSP EITF 03-6-1 on its financial
position, cash flows and results of operations.





In May
2008, the FASB issued Statement No. 162 ("SFAS 162"), "The Hierarchy of
Generally Accepted Accounting Principles". SFAS 162 identifies the sources of
accounting principles and the framework for selecting the principles used in the
preparation of financial statements. SFAS 162 is effective 60 days following the
SEC's approval of the Public Company Accounting Oversight Board amendments to AU
Section 411, "The Meaning of Present Fairly in Conformity with Generally
Accepted Accounting Principles." The Company does not expect that this standard
will have a material impact on its results of operations, financial position or
cash flows.


Page
58
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006





In April
2008, the FASB issued Staff Position No. FAS 142-3, Determination of the Useful
Life of Intangible Assets (“FSP FAS 142-3”). FSP FAS 142-3 amends the factors
that should be considered in developing renewal or extension assumptions used to
determine the useful life of a recognized intangible asset under SFAS No. 142,
Goodwill and Other Intangible Assets (“SFAS 142”). The intent of FSP FAS 142-3
is to improve the consistency between the useful life of a recognized intangible
asset under SFAS 142 and the period of expected cash flows used to measure the
fair value of the asset under SFAS 141(R) and other applicable accounting
literature. FSP FAS 142-3 is effective for fiscal years beginning after December
15, 2008. The Company is currently evaluating the potential impact of FSP FAS
142-3 on its consolidated financial statements.





In
December 2007, the FASB issued Statement No. 141(R) (“SFAS 141(R)”), “Business
Combinations”, which replaces FASB Statement No. 141. SFAS 141(R) establishes
principles and requirements for how an acquirer in a business combination
recognizes and measures in its financial statements the identifiable assets
acquired, the liabilities assumed, and any controlling interest; recognizes and
measures the goodwill acquired in the business combination or a gain from a
bargain purchase; and determines what information to disclose to enable users of
the financial statements to evaluate the nature and financial effects of the
business combination. FAS 141(R) is to be applied prospectively to business
combinations for which the acquisition date is on or after an entity’s fiscal
year that begins after December 15, 2008. The Company will assess the impact of
SFAS 141(R) if and when a future acquisition occurs.








2.
            REVISION
      OF PRIOR PERIOD FINANCIAL
STATEMENTS





During
the fourth quarter of 2008, the Company identified an error related to its
calculation of deferred income on shipments to distributors ("deferred income").
Upon review of its calculations, management determined that the estimated
shipping margin percentage used to calculate the deferred income balance was
incorrect and this resulted in an understatement of deferred income and related
cost of sales. The Company assessed the materiality of this error on prior
periods financial statements in accordance with the SEC’s Staff Accounting
Bulletin No. 99 (“SAB 99”), and concluded that the error was not material to any
prior annual or interim periods but would be material to the year ended December
31, 2008 if the entire correction was recorded in the current year. Accordingly,
in accordance with the SEC’s Staff Accounting Bulletin No. 108 (“SAB 108”), the
2007 and 2006 financial statements presented herein have been revised to correct
for the immaterial error. In addition, an adjustment was also recorded to reduce
the beginning retained earnings at January 1, 2006 for the cumulative impact of
this error on prior periods.


Page
59
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006





Set out
below are the line items within the consolidated financial statements as of and
for the year-ended December 31, 2007 and 2006 that have been impacted by the
revisions.  The revision had no impact on the Company’s total cash
flows from operating, investing or financing activities for the years ended
December 31, 2006 and 2007 included in the Consolidated Statement of Cash
Flows.





As
      of and for the
              Year
      Ended
              December 31, 2007
            
            
            As
      of and for the
              Year
      Ended
              December 31, 2006(in
      thousands except per share amounts)
            
            As
              Reported
            
            
            As
              Revised
            
            
            As
              Reported
            
            
            As
              RevisedConsolidated Statement of
      Operations:Cost
      of revenues
            
            $
            110,630
            
            
            $
            111,068
            
            
            $
            116,201
            
            
            $
            117,164Gross
      Profit
            
            
            147,344
            
            
            
            146,906
            
            
            
            160,106
            
            
            
            159,143Income
      from operations
            
            
            47,567
            
            
            
            47,129
            
            
            
            57,781
            
            
            
            56,818Income
      before income taxes
            
            
            69,284
            
            
            
            68,846
            
            
            
            63,184
            
            
            
            62,221Provision
      for income taxes
            
            
            24,933
            
            
            
            24,778
            
            
            
            24,876
            
            
            
            24,497Net
      income
            
            
            44,351
            
            
            
            44,068
            
            
            
            38,308
            
            
            
            37,724Net
      income per share:Basic
            
            
            0.58
            
            
            
            0.57
            
            
            
            0.47
            
            
            
            0.46Diluted
            
            
            0.57
            
            
            
            0.57
            
            
            
            0.46
            
            
            
            0.46Consolidated Balance
Sheets:Income
      taxes receivable
            
            $
            3,426
            
            
            $
            2,942
            
            
            $
            801
            
            
            $
            330Deferred
      income taxes
            
            
            19,387
            
            
            
            20,402
            
            
            
            23,096
            
            
            
            23,943Total
      current assets
            
            
            182,818
            
            
            
            183,349
            
            
            
            204,393
            
            
            
            204,769Total
      assets
            
            
            294,745
            
            
            
            295,276
            
            
            
            300,273
            
            
            
            300,649Deferred
      income on shipments to distributors
            
            
            20,238
            
            
            
            22,877
            
            
            
            21,705
            
            
            
            23,906Total
      current liabilities
            
            
            52,345
            
            
            
            54,984
            
            
            
            61,778
            
            
            
            63,979Retained
      earnings
            
            
            239,283
            
            
            
            237,175
            
            
            
            222,492
            
            
            
            220,667Total
      shareholders’ equity
            
            
            239,251
            
            
            
            237,143
            
            
            
            238,042
            
            
            
            236,217Total
      liabilities and shareholders’ equity
            
            
            294,745
            
            
            
            295,276
            
            
            
            300,273
            
            
            
            300,649








3.
            INVENTORIES





Inventories
at December 31 consist of the following (in thousands):





2008
            
            
            2007Finished
      goods
            
            $
            12,669
            
            
            $
            14,261Work
      in process
            
            
            22,213
            
            
            
            19,439Raw
      materials
            
            
            2,558
            
            
            
            1,960$
            37,440
            
            
            $
            35,660





Page
60
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006





4.
            PROPERTY,
      PLANT AND EQUIPMENT





Property,
plant and equipment at December 31 consist of the following (in
thousands):





2008
            
            
            2007Manufacturing
      equipment
            
            $
            181,514
            
            
            $
            181,421Land
            
            
            6,636
            
            
            
            6,636Buildings
      and improvements
            
            
            47,513
            
            
            
            46,876Leasehold  improvements
            
            
            746
            
            
            
            638Office
      furniture and research equipment
            
            
            13,560
            
            
            
            12,544249,969
            
            
            
            248,115Accumulated
      depreciation and amortization
            
            
            (173,769
            )
            
            
            (165,530
            )$
            76,200
            
            
            $
            82,585





Depreciation
expense for the years ended December 31, 2008, 2007 and 2006 was $17.5 million,
$16.3 million and $15.7 million, respectively.








5.
            OTHER
      ACCRUED LIABILITIES





Other
accrued liabilities at December 31 consist of the following (in
thousands):





2008
            
            
            2007Accrued
      current restructuring expenses
            
            $
            —
            
            
            $
            1,787Accrued
      workers' compensation and health insurance
            
            
            880
            
            
            
            1,121Other
      current accrued liabilities
            
            
            368
            
            
            
            617$
            1,248
            
            
            $
            3,525








6.
            BORROWING
      ARRANGEMENTS





Borrowing
arrangements consist of a $6 million revolving line of credit from a commercial
bank.  The revolving line of credit agreement includes a provision for
the issuance of commercial or standby letters of credit by the bank on behalf of
the Company.  The value of all letters of credit outstanding reduces
the total line of credit available.  There were no borrowings under
the revolving line of credit at December 31, 2008, and there were $325,000 in
standby letters of credit outstanding.  The revolving line of credit
expires June 20, 2010.  Borrowings under the revolving line of credit
bear interest rates of, at the Company's election, the prime rate (3.25% at
December 31, 2008), or the bank's revolving offshore rate, which approximates
LIBOR plus 2% (3.43% at December 31, 2008). The agreement contains certain
restrictive covenants. The Company was in compliance with all such covenants at
December 31, 2008.





Page
61
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006





7.
            SHAREHOLDERS’
      EQUITY AND SHARE-BASED COMPENSATION





Preferred
Stock





The
Company has authorized 5,000,000 shares of preferred stock, no par value, of
which none were issued or outstanding at December 31, 2008. The preferred
stock may be issued from time to time in one or more series. The Board of
Directors is authorized to determine or alter the rights, preferences,
privileges and restrictions of such preferred stock.





Stock
Repurchase Plan





In
October 2007, the Company's Board of Directors approved a $50 million share
repurchase program for calendar year 2008. On October 1, 2008, the Board of
Directors approved the addition of $10 million to the total amount that may be
spent under the 2008 share repurchase program.  Shares of common stock
purchased pursuant to the repurchase program are cancelled from outstanding
shares upon repurchase and credited to an authorized and un-issued reserve
account, and are intended to reduce the number of outstanding shares of Common
Stock to increase shareholder value and offset dilution from the Company's stock
option plans and employee stock purchase plan. During the year ended December
31, 2008, the Company repurchased 7,241,187 shares of its common stock for an
aggregate price of $54.3 million.





On
December 30, 2008, the Company's Board of Directors approved a $50 million share
repurchase program for calendar year 2009. The timing and amount of any
repurchase of shares will be determined by the Company’s management, based on
its evaluation of market conditions and other factors.





Share
repurchases are recorded as a reduction of common stock to the extent available.
Any amounts in excess of common stock are recorded as a reduction of retained
earnings.





Incentive
Award Plans





Under the
Company's 2003 Incentive Award Plan (the “2003 Plan”), 1994 Stock Option Plan
and its 2000 Non-Qualified Stock Incentive Plan, 43,458,672 shares of Common
Stock are authorized for issuance to employees. The 1994 Stock Option Plan and
2000 Non-Qualified Stock Incentive Plan provide that, for stock options, the
option price will be determined by the Board of Directors at a price not less
than the fair value as represented by the closing price of the Company's Common
Stock on the last trading day before the date of grant.  The 2003
Incentive Award Plan provides that, for stock options, the option price will be
determined by the Board of Directors at a price not less than the fair value as
represented by the closing price of the Company's Common Stock on the date of
grant.  Certain shareholder/employees of the Company are granted
options at 110% of the current fair market value. Options granted under the 2000
Non-Qualified Stock Incentive Plan are exercisable in 20% increments with the
initial 20% vesting occurring six months after the date of grant and then in
annual increments of 20% per year from the date of grant. The Company is not
currently awarding option grants under the 2000 Non-Qualified Stock Incentive
Plan. Options granted under the 2003 Incentive Award Plan and 1994 Stock Option
Plan typically become exercisable in not less than cumulative annual increments
of 20% per year from the date of grant. The term of each stock option is no more
than ten years from the date of grant. At December 31, 2008, 15,892,092
total shares were reserved for future issuance, of which 5,313,648 shares were
available for future grants under the Option Plans.


Page
62
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006


Option
activity under the Option Plans is as follows:


Number
              of Shares
            
            
            Weighted
      Avg.
              Exercise
      Price
              Per ShareOutstanding,
      December 31, 2005 (8,291,040 exercisable at a weighted average price
      of $13.08 per share)
            
            
            12,487,003
            
            
            $
            12.65Granted
            
            
            1,758,550
            
            
            
            12.18Exercised
            
            
            (530,363
            )
            
            
            7.49Canceled
            
            
            (939,413
            )
            
            
            13.62Outstanding,
      December 31, 2006 (8,470,755 exercisable at a weighted average price
      of $13.23 per share)
            
            
            12,775,777
            
            
            
            12.76Granted
            
            
            1,985,110
            
            
            
            11.08Exercised
            
            
            (1,411,021
            )
            
            
            8.40Canceled
            
            
            (1,336,822
            )
            
            
            12.88Outstanding,
      December 31, 2007 (7,638,949 exercisable at a weighted average price
      of $13.83 per share and a weighted average remaining contractual life of
      3.7 years)
            
            
            12,013,044
            
            
            
            12.97Granted
            
            
            1,556,815
            
            
            
            7.39Exercised
            
            
            (516,719
            )
            
            
            7.72Canceled
            
            
            (2,527,129
            )
            
            
            12.72Outstanding,
      December 31, 2008 (6,345,428 exercisable at a weighted average price
      of $14.07 per share and a weighted average remaining contractual life of
      5.6 years)
            
            
            10,526,011
            
            
            $
            12.46





The
weighted average fair value (computed using the Black-Scholes option pricing
model) of options granted under the stock option plans during the years ended
December 31, 2008, 2007 and 2006 was $3.40, $5.64 and $7.04 per share,
respectively.  The total intrinsic value of options (which is the
amount by which the stock price exceeded the exercise price of the options on
the date of exercise) exercised during the years ended December 31, 2008, 2007
and 2006 was $1.0 million, $4.8 million and $2.5 million, respectively. During
the years ended December 31, 2008, 2007 and 2006, the amount of cash received
from the exercise of stock options was $3.0 million, $11.9 million and $4.0
million, respectively. The net tax benefit realized from the exercise of
non-qualified stock options and disqualifying dispositions of incentive stock
options was $230,000, $1.3 million and $784,000 for the years ended December 31,
2008, 2007 and 2006, respectively. Additional information regarding options
outstanding as of December 31, 2008 is as follows:





Stock
      Options
      Outstanding
            
            Options
      ExercisableWeighted
      Avg.Remaining
            Weighted
      Avg.
            
            
            Weighted
      Avg.Range
      of
            Number
            Contractual
            Exercise
      Price
            
            Number
            Exercise
      PriceExercise Prices
            Outstanding
            Life (yrs)
            Per Share
            
            Exercisable
            Per Share$   0.12
      to $   7.50
            1,068,682
            8.3
            $  6.49
            
            132,652
            $  5.20$   7.51
      to $   9.00
            879,270
            8.0
            8.41
            
            236,753
            8.58$   9.01
      to $ 10.50
            1,531,425
            6.4
            9.77
            
            719,013
            9.76$
      10.51 to $ 12.00
            2,586,637
            5.5
            10.98
            
            1,897,275
            10.89$
      12.01 to $ 13.50
            1,937,080
            5.1
            12.74
            
            1,178,754
            12.87$
      13.51 to $ 15.00
            640,520
            5.6
            14.20
            
            389,944
            14.14$
      15.01 to $ 20.00
            1,303,700
            3.0
            17.40
            
            1,212,340
            17.50$
      20.01 to $ 30.00
            375,597
            2.1
            23.34
            
            375,597
            23.34$
      30.01 to $ 63.81
            203,100
            1.5
            40.30
            
            203,100
            40.30$   0.12
      to $ 63.81
            10,526,011
            5.6
            $
      12.46
            
            6,345,428
            $
      14.07





Page
63
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006





As of
December 31, 2008, the aggregate pre-tax intrinsic value (which is the amount by
which the closing price of the Company's common stock at December 31, 2008
exceeded the exercise price of the in the money options) of options outstanding
and options exercisable was approximately $888,000 and $280,000, respectively.
As of December 31, 2008, the estimated number of options exercisable and
expected to vest was 9.4 million shares with a weighted average remaining
contractual life of 5 years and estimated aggregate intrinsic value of $1.0
million.





The 2003
Plan also provides for the use of incentive awards other than stock
options.  In October 2007, the Company’s Compensation Committee
approved a plan to begin granting Restricted Stock Units ("RSU"s) to employees
in accordance with the provisions of the 2003 Plan. The Company’s RSUs vest over
5 years. Information with respect to outstanding restricted stock unit activity
is as follows:





Number
              of Shares
            
            
            Weighted
              Average
              Grant-Date
              Fair ValueOutstanding,
      December 31, 2007
            
            
            —
            
            
            $
            —Granted
            
            
            54,999
            
            
            
            7.89Vested
            
            
            —Forfeited
            
            
            (2,566
            )
            
            
            8.36Outstanding,
      December 31, 2008
            
            
            52,433
            
            
            $
            7.87








Accounting
for Share-based Compensation





Under
SFAS No. 123R, share-based compensation costs for stock option grants are based
on the fair value calculated from a stock option pricing model on the date of
grant. The Company has utilized the Black-Scholes option pricing model to
determine the fair value for stock option grants.  The fair value of
stock option grants issued from January 1, 2006 onwards are recognized as
compensation expense on a straight-line basis over the vesting period of the
grants. Compensation expense recognized is shown in the operating activities
section of the consolidated statements of cash flows.





Prior to
adopting SFAS No. 123R, the Company accounted for stock option grants under the
recognition and measurement provisions of APB 25. Compensation cost related to
stock options granted at fair value under those plans was not recognized in the
consolidated statements of operations. Compensation cost related to stock
options granted below the fair market value on the grant date was recognized in
the consolidated statements of operations. In addition, prior to adopting SFAS
No. 123R, the Company presented all tax benefits of deductions resulting from
the exercise of stock grants as operating cash flows in the consolidated
statements of cash flows. SFAS No. 123R requires the cash flows resulting from
the tax benefits from tax deductions in excess of the compensation cost
recognized (excess tax benefits) to be classified as financing cash
flows.


Page
64
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006





The fair
value of the Company’s stock options granted under the Option Plans was
estimated at the date of grant using the Black-Scholes option pricing model with
the following weighted-average assumptions:


Years Ended December 31,2008
            2007
            2006Expected
      life (years)
            6.2
            6.0
            5.5Stock
      volatility
            49.3%
            51.4%
            58.7%Risk
      free interest rates
            2.8%
            4.4%
            4.9%Dividends
      during expected terms
            1.6%
            0.9%
            - %





Expected
term is based on an analysis of historical exercises and the remaining
contractual life of options. The calculation of expected term for previous SFAS
No. 123 disclosure fair value estimates was based solely on an analysis of
historical exercises of stock options. The Company believes that an analysis of
historical exercises and remaining contractual life of options provides a better
estimate of future exercise patterns.





Stock
volatility is based upon a combination of both historical stock price volatility
and implied volatility derived from traded options on the Company’s stock in the
marketplace.  The calculation of expected volatility for previous SFAS
No. 123 fair value disclosure estimates was based solely on historical stock
price volatility. The Company believes that the combination of historical
volatility and implied volatility provides a better estimate of future stock
price volatility.





The
Company continues to base the estimate of risk-free rate on the U.S. Treasury
yield curve in effect at the time of grant.





As part
of the requirements of SFAS No. 123R, the Company is required to estimate
potential forfeitures of stock grants and adjust compensation cost recorded
accordingly. The estimate of forfeitures will be adjusted over the requisite
service period to the extent that actual forfeitures differ, or are expected to
differ, from such estimates. Changes in estimated forfeitures will be recognized
through a cumulative catch-up adjustment in the period of change and will also
impact the amount of stock compensation expense to be recognized in future
periods.





The
following table shows total share-based compensation expense recognized in the
Consolidated Statement of Operations for 2008, 2007 and 2006 (in
thousands):





Years Ended December 31,2008
            
            
            2007
            
            
            2006Cost
      of revenues
            
            $
            974
            
            
            $
            1,156
            
            
            $
            1,540Research
      and development
            
            
            2,086
            
            
            
            2,130
            
            
            
            3,341Selling,
      general and administrative
            
            
            2,119
            
            
            
            2,199
            
            
            
            3,534Pre-tax
      share-based compensation expense
            
            
            5,179
            
            
            
            5,485
            
            
            
            8,415Less
      income tax effect
            
            
            1,105
            
            
            
            920
            
            
            
            819Net
      share-based compensation expense
            
            $
            4,074
            
            
            $
            4,565
            
            
            $
            7,596





Total
share-based compensation cost capitalized as part of inventory as of
December 31, 2008 and 2007 was $102,000 and $122,000, respectively. At
December 31, 2008, there was $14.6 million of total unrecognized compensation
cost related to non-vested stock option and RSU awards which is expected to be
recognized over a weighted-average period of 3.5 years.


Page
65
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006


Employee
Stock Purchase Plan





Under the
Company’s Employee Stock Purchase Plan (“ESPP”), eligible employees are
permitted to have salary withholdings to purchase shares of Common Stock at a
price equal to 95% of the market value of the stock at the end of each
three-month offer period, subject to an annual limitation. The aggregate number
of shares of common stock which may be issued under the plan shall be no more
than 2,000,000 shares. Shares of Common Stock issued under the ESPP during 2008,
2007 and 2006 were 32,007, 27,482 and 14,916, respectively, at weighted average
prices of $8.36, $10.02 and $9.61, respectively. The ESPP is considered
non-compensatory under SFAS No. 123R.





Cancellation
of Shares Held in Escrow





In July
2006, 400,050 shares of the Company’s Common Stock which were held in an escrow
account pursuant to a contract dispute, were returned to the Company and
cancelled.








8.
            INCOME
      TAXES





The
income tax provisions for the years ended December 31, 2008, 2007 and 2006, as a
percentage of income before taxes, were 35%, 36% and 39%,
respectively.  The income tax provision for such periods differs from
taxes computed at the federal statutory rate primarily due to the effect of
non-deductible share-based compensation expense, state income taxes, federal and
state research and development credits and federal qualified production activity
deductions.





A
reconciliation of the statutory federal income tax rate to the effective tax
rate for the years ended December 31 is as follows:


2008
            2007
            2006Statutory
      federal income tax rate
            35%
            35%
            35%Research
      and development credit
            (2)
            (2)
            (1)Qualified
      production activities credit
            (1)
            (1)
            (1)State
      income taxes (net of federal income tax benefit)
            1
            2
            2Non-deductible
      stock compensation
            2
            2
            3Other
            -
            -
            1Effective
      tax rate
            35%
            36%
            39%





The
provision for income taxes for the years ended December 31 consists of the
following (in thousands):


2008
            
            
            2007
            
            
            2006Current:Federal
            
            $
            12,892
            
            
            $
            21,318
            
            
            $
            26,904State
            
            
            1,332
            
            
            
            668
            
            
            
            (172
            )Total
      current
            
            
            14,224
            
            
            
            21,986
            
            
            
            26,732Deferred:Federal
            
            
            1,902
            
            
            
            2,107
            
            
            
            (3,954
            )State
            
            
            (1,101
            )
            
            
            685
            
            
            
            1,719Total
      deferred
            
            
            801
            
            
            
            2,792
            
            
            
            (2,235
            )Total
      provision
            
            $
            15,025
            
            
            $
            24,778
            
            
            $
            24,497





Pre-tax
income from non-U.S. jurisdictions was not material in all periods
presented.


Page
66
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006


Deferred
tax assets and liabilities result primarily from temporary differences between
book and tax bases of assets and liabilities and state research and development
credit carryforwards.  The Company had net current deferred tax assets
of $17.8 million and net long-term deferred tax assets of $11.1 million as of
December 31, 2008.  The Company must regularly assess the likelihood
that future taxable income levels will be sufficient to ultimately realize the
tax benefits of these deferred tax assets.  The Company currently
believes that future taxable income levels will be sufficient to realize the tax
benefits of these deferred tax assets and has not established a valuation
allowance.  Should the Company determine that future realization of
these tax benefits is not likely, a valuation allowance would be established,
which would increase the Company's tax provision in the period of such
determination.





Deferred
tax assets and liabilities at December 31 are as follows (in
thousands):





2008
            
            
            2007Deferred
      tax assets:Accruals
      and reserves not currently deductible
            
            $
            9,348
            
            
            $
            11,129Deferred
      income
            
            
            8,130
            
            
            
            8,809Tax
      net operating loss and credit carryforwards
            
            
            10,748
            
            
            
            9,675Non-qualified
      stock compensation
            
            
            4,169
            
            
            
            3,658Capitalized
      research and development
            
            
            654
            
            
            
            819Unrealized
      impairment of auction rate securities
            
            
            1,380
            
            
            
            -Total
      deferred tax assets
            
            
            34,429
            
            
            
            34,090Deferred
      tax liabilities:Depreciation
            
            
            (5,454
            )
            
            
            (4,311
            )State
      income taxes
            
            
            (88
            )
            
            
            (91
            )Total
      deferred tax liability
            
            
            (5,542
            )
            
            
            (4,402
            )Net
      deferred tax assets (current and non-current)
            
            $
            28,887
            
            
            $
            29,688





Included
in net deferred assets are net operating loss and credit carryforwards. Due to
the Company's acquisition of Synergy in 1998, the Company has available
pre-ownership change federal net operating loss carryforwards of approximately
$4.8 million which will expire in the years 2009 through 2014 if not utilized.
Under Section 382 of the Internal Revenue Code, these pre-ownership change net
operating loss carryforwards are subject to an annual limitation. The Company
believes that it is more likely than not that these net operating loss
carryforwards will be utilized before expiration. In addition, the Company has
available state research and development credit carryforwards of approximately
$16.6 million, of which approximately $2.3 million represents pre-ownership
change carryforwards subject to the Section 382 annual limitation. The state
research credit carryforwards are not subject to expiration and may be carried
forward indefinitely until utilized.





As of
December 31, 2008, the gross liability for uncertain tax positions was $9.0
million and the net liability, reduced for the federal effects of potential
state tax exposures, was $6.5 million. If these uncertain tax positions are
sustained upon tax authority audit, or otherwise become certain, the net $6.5
million would favorably affect the Company’s tax provision in such future
periods.  Included in the $6.5 million is $2.0 million which has not
yet reduced income tax payments, and, therefore, has been netted against
non-current deferred tax assets.  The remaining $4.5 liability is
included in long-term income taxes payable. The Company does not anticipate a
significant change to the net liability for uncertain income tax positions
within the next 12 months.


Page
67
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006


A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):


Balance
      at January 1, 2008
            
            $
            5,443Additions
      based on tax positions related to the current year
            
            
            881Additions
      for accrued interest for tax positions of prior years
            
            
            199Balance
      at December 31, 2008
            
            $
            6,523





The
Company continues to recognize interest and penalties related to income tax
matters as part of the income tax provision. As of December 31, 2008 and 2007,
the Company had $450,000 and $251,000, respectively, accrued for interest and $0
accrued for penalties for both periods. These accruals are included as a
component of long-term income taxes payable.





The
Company is required to file U.S. federal income tax returns as well as income
tax returns in various states and foreign jurisdictions. The Company may be
subject to examination by the Internal Revenue Service (“IRS”) for calendar
years 2004 and forward. Significant state tax jurisdictions include California,
New York and Texas, and generally, the Company is subject to routine examination
for years 2003 and forward in these jurisdictions. In addition, any research and
development credit carryforwards that were generated in prior years and utilized
in these years may also be subject to examination by respective state taxing
authorities. Generally, the Company is subject to routine examination for years
2002 and forward in various immaterial foreign tax jurisdictions in which it
operates.








9.
            COMMITMENTS
      AND CONTINGENCIES





Lease
Agreements





The
Company leases some of its facilities and equipment under operating lease
agreements that expire in the years 2009 through 2013. Some of the facility
lease agreements provide for escalating rental payments over the lease periods.
Rent expense is recognized on a straight-line basis over the term of the lease.
Accrued rent represents the difference between rental payments and rent expense
recognized on a straight-line basis.





Future
minimum payments under these agreements are as follows (in
thousands):





Year
      Ending December 31,2009
            
            $
            2,0872010
            
            
            1,8522011
            
            
            6992012
            
            
            932013
            
            
            15$
            4,746





Rent
expense under operating leases for the years ended December 31, 2008, 2007,
and 2006 was $2.2 million, $1.8 million and $1.9 million,
respectively.


Page
68
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006





Open
Purchase Orders





As of
December 31, 2008, the Company had approximately $12.3 million in open purchase
orders. Open purchase orders are defined as agreements to purchase goods or
services that are enforceable and legally binding and that specify all
significant terms, including: fixed or minimum quantities to be purchased;
fixed, minimum or variable pricing provisions; and the approximate timing of the
transactions. These obligations primarily relate to future purchases of wafer
fabrication raw materials, foundry wafers, assembly and testing services and
manufacturing equipment. The amounts are based on the Company's contractual
commitments.





Letters
of Credit





Micrel's
borrowing arrangements (see Note 6) include a provision for
the issuance of commercial or standby letters of credit by the bank on behalf of
the Company. At December 31, 2008 there was $325,000 in standby letters of
credit outstanding. The letters of credit are issued to guarantee payments for
the Company's workers compensation program.





Indemnification
Obligations





Micrel is
a party to a variety of contractual relationships pursuant under which it may be
obligated to indemnify the other party with respect to certain matters.
Typically, these obligations arise in the context of contracts entered into by
Micrel, or regular sales and purchasing activities, under which Micrel may agree
to hold the other party harmless against losses arising from claims related to
such matters as title to assets sold, certain intellectual property rights,
specified environmental matters, certain income taxes, etc.  In these
circumstances, indemnification by Micrel is customarily conditioned on the other
party making a claim pursuant to the procedures specified in the particular
contract or in Micrel’s standard terms and conditions, which procedures may
allow Micrel to challenge the other party's claims, or afford Micrel the right
to settle such claims in its sole discretion.  Further, Micrel's
obligations under these agreements may be limited in terms of time and/or
amount, and in some instances, Micrel may have recourse against third parties
for certain payments made by it under these agreements.





It is not
possible to predict the maximum potential amount of future payments or
indemnification costs under these or similar agreements due to the conditional
nature of Micrel's obligations and the unique facts and circumstances involved
in each particular agreement. Historically, payments made by Micrel under these
agreements have not had a material effect on its business, financial condition,
cash flows, or results of operations. Micrel believes that if it were to incur a
loss in any of these matters, such loss would not have a material effect on its
business, financial condition, cash flows or results of operations.





Page
69
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006


10.
            PROFIT-SHARING
      401(k) PLAN





The
Company has a profit-sharing and deferred compensation plan (the “Plan”). All
employees completing one month of service are eligible to participate in the
Plan. Participants may contribute 1% to 15% of their annual compensation on a
before tax basis, subject to Internal Revenue Service limitations.
Profit-sharing contributions by the Company are determined at the discretion of
the Board of Directors. The Company accrued $570,000 in contributions for the
year ended December 31, 2008 and made $750,000 and $725,000 in
contributions to the Plan for the years ended December 31, 2007 and 2006,
respectively. Participants vest in Company contributions ratably over six years
of service.








11.
            LITIGATION





On May 9,
1994, Linear Technology Corporation (“LTC”), a competitor of the Company, filed
a complaint against the Company, entitled Linear Technology Corporation v.
Micrel, Incorporated, in the United States District Court in San Jose,
California, alleging patent and copyright infringement and unfair
competition.  After many years of motions and appeals, a bench trial
on the merits was commenced on November 30, 2005, and concluded on December 16,
2005.  The parties filed post-trial briefs on January 20, 2006. On
June 9, 2006, the Court ruled that Micrel had willfully infringed the
patent-in-suit, and awarded damages to LTC.  As a result of this
judgment, the Company recorded $846,000 in other operating expense in the
Company’s 2006 financial statements. This accrued liability was paid in
2006.





On
December 27, 2002, the Company filed a complaint against TRW, Inc. (“TRW”)
entitled Micrel, Incorporated v. TRW, Inc., dba TRW Automotive Electronics
Group, in the United States District Court, Northern District of Ohio, Eastern
Division, alleging various causes of action relating to breach of a relationship
surrounding the development of certain custom products by Micrel for
TRW.  The complaint sought compensatory damages, attorneys’ fees and
costs associated with the suit.  On February 24, 2003, TRW filed an
answer to the Company’s complaint and a counterclaim alleging various causes of
action relating to breach of the above-mentioned relationship concerning ASIC
development.  On July 22, 2005, a jury ruled against the Company and
in favor of TRW in its counterclaim against Micrel, resulting in a judgment on
July 26, 2005 awarding damages for the benefit of TRW in the amount of $9.3
million.  The damages amount was accrued in other current liabilities
in the Company’s second quarter 2005 financial statements.  On January
13, 2006, the Company filed a notice of its intent to appeal the jury’s verdict
and on October 24, 2006, filed an appeal brief in the United States District
Court, Northern District of Ohio.  On May 4, 2007, the Court of
Appeals issued its ruling affirming the jury’s verdict.  During the
quarter ended June 30, 2007, the Company paid TRW the legal judgment for total
damages and interest in the amount of $10.2 million.





On April
21, 2003, the Company filed a complaint against its former independent public
accountants Deloitte & Touche LLP (“Deloitte”) entitled Micrel, Incorporated
v. Deloitte & Touche LLP in the Superior Court of the State of California,
County of Santa Clara, alleging various causes of action relating to certain
professional advice received by Micrel from Deloitte.  The complaint
sought compensatory damages, costs associated with the suit and such other
relief that the court may deem just and proper.  Deloitte denied all
allegations in the complaint.  On February 23, 2007, the parties
entered into a Settlement Agreement and Mutual Releases. Under the terms of the
agreement, the parties agreed to dismiss with prejudice the pending litigation
and Deloitte paid to Micrel a settlement amount of $15.5 million. The Company
recorded the $15.5 million settlement amount, in the quarter ended March 31,
2007, as other non-operating income as the settlement payment did not represent,
either directly or indirectly, income earned from the Company’s operations, nor
did it represent reimbursement of operating expenses incurred.


Page
70
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006


On
November 11, 2004, the Company filed a complaint against Monolithic Power
Systems (“MPS”), entitled Micrel, Inc. v. Monolithic Power Systems, in the
United States District Court, Northern District of California alleging two
causes of action for infringement by MPS of certain patents owned by
Micrel.  In the complaint, the Company alleged that MPS had been and
was infringing U.S. patent no. 5,517,046 (the “’046 patent”) and U.S. patent no.
5,556,796 (the “’796 patent”).    Subsequently, on November
29, 2004, the Company filed an amended complaint adding Michael R. Hsing, MPS’
President and Chief Executive Officer (“Hsing”), and James C. Moyer, MPS’ Chief
Design Engineer (“Moyer”) as defendants.  Hsing and Moyer are both
former employees of Micrel.  In addition to the original two causes of
action against MPS for infringement of the '046 and '796 Patents, the amended
complaint added causes of action for statutory and common law misappropriation
of Micrel’s trade secrets, breach of confidentiality agreements by Hsing and
Moyer, and violation of California’s Unfair Competition Law.  On
September 21, 2006, the Company and MPS entered into a Settlement Agreement,
agreeing to dismiss all claims and counterclaims in the litigation with
prejudice.  Micrel also agreed to release MPS, Hsing and Moyer from
all claims for any alleged trade secret claims based on any confidential
information. In addition, Micrel licensed U.S. Patent Nos. 5,517,046 and
5,556,796 to MPS. Under the terms of the agreement MPS agreed to pay a license
fee of $3.0 million of which $1.0 million was paid in September 2006, $1.0
million was paid in December 2006 and the remaining $1.0 million balance was
paid in January 2008.  In the third quarter of 2006 the Company
recorded $2.9 million in net revenues representing the present value of the
license payments from MPS.





On June
9, 2006, Deerfield 3250 Scott, LLC ("Deerfield"), the building owner of Micrel's
Santa Clara Wafer Fab facility which was closed in 2003, filed a complaint
against the Company entitled "Deerfield 3250 Scott, LLC vs. Micrel, Inc. et al"
in the Superior Court of the State of California, County of Santa
Clara.  In February 2006, Micrel terminated this building lease under
the terms of the lease agreement due to major vandalism rendering the building
unusable.  Deerfield disputes that Micrel had a right to terminate,
alleging that the vandalism took place because of the negligence of Micrel and
that Micrel should not be able to benefit from its own
negligence.  The complaint sought damages in an unspecified amount for
rent through the remaining term of the lease (from March 1 through October 31,
2006), alleged damages to the premises, and for wrongful removal of
equipment.   On July 21, 2006, Micrel answered the complaint with
a denial of any liability and the filing of a cross-complaint against Deerfield
seeking return of the security deposit and rent paid from the date of the
casualty, January 20, 2006 through February 28, 2006.  On February 13,
2008, the parties participated in a mediation session.  Ultimately, on
March 5, 2008, the Company and Deerfield entered into a Settlement Agreement,
agreeing to dismiss with prejudice all claims and counterclaims in the
litigation.  Under the terms of the Agreement, the Company paid
Deerfield $875,000 in the first quarter of 2008 (see Note
13).





With the
exception of the previously recorded operating expenses, the Company believes it
is not reasonably likely that an unrecorded material loss has been
incurred.  Generally, litigation is subject to inherent uncertainties,
and no assurance can be given that the Company will prevail in any particular
lawsuit.  Accordingly, the pending lawsuits, as well as potential
future litigation with other companies, could result in substantial costs and
diversion of resources and could have a material adverse effect on the Company’s
financial condition, results of operations or cash flows.





Additional
claims have been filed by or have arisen against the Company in its normal
course of business.  The Company believes that the ultimate resolution
of these claims and lawsuits will not have a material adverse effect on the
Company's financial condition, results of operations or cash
flows.


Page
71
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006








12.           SEGMENT
REPORTING





The
Company follows the provisions of SFAS No. 131, Disclosures about Segments of an
Enterprise and Related Information. SFAS No. 131 establishes standards for
reporting information regarding operating segments in annual financial
statements and requires selected information for those segments to be presented
in interim financial reports issued to stockholders. SFAS No. 131 also
establishes standards for related disclosures about products and services and
geographic areas. Operating segments are identified as components of an
enterprise about which separate discrete financial information is available for
evaluation by the chief operating decision maker. The Company has two reportable
segments: standard products and other product revenues, which consist primarily
of custom and foundry products revenues and revenues from the license of
patents. The chief operating decision maker evaluates segment performance based
on revenue. Accordingly, all expenses are considered corporate level activities
and are not allocated to segments. Therefore, it is not practical to show profit
or loss by reportable segments. Also, the chief operating decision maker does
not assign assets to these segments. Consequently, it is not practical to show
assets by reportable segments.





Net
      Revenues by Segment (in thousands):
            
            Years
      Ended December 31,2008
            
            
            2007
            
            
            2006Standard
      Products
            
            $
            246,644
            
            
            $
            237,356
            
            
            $
            258,214Other
      Products
            
            
            12,716
            
            
            
            20,618
            
            
            
            18,093Total net
revenues
            
            $
            259,360
            
            
            $
            257,974
            
            
            $
            276,307





For the
year ended December 31, 2008, one customer, a world-wide distributor,
accounted for $34.1 million (13%) of the Company's net revenues. For the year
ended December 31, 2007 two world-wide distributors accounted for $38.7
million (15%) and $33.1 million (13%), respectively, of the Company's net
revenues. For the year ended December 31, 2006 three customers, consisting
of two world-wide distributors and an Asian based stocking representative,
accounted for $41.3 million (13%), $34.2 million (12%) and $28.0 million (10%),
respectively, of the Company's net revenues.





For the
year ended December 31, 2008, the Company recorded revenue from customers
throughout the United States; Canada and Mexico (collectively referred to as
"Other North American Countries"); the U.K., Italy, Germany, France, Israel,
Sweden, Hungary, Austria, Finland, Switzerland, and other European countries
(collectively referred to as "Europe"); Korea; Taiwan; Singapore; China; Japan;
Hong Kong, Malaysia and other Asian countries (collectively referred to as
"Other Asian Countries").


Page
72
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006





Geographic
      Information (in thousands):2008
            
            
            2007
            
            
            2006Total
      Net
              Revenues(1)
            
            
            Long-Lived
              Assets(2)
            
            
            Total
      Net
              Revenues(1)
            
            
            Long-Lived
              Assets(2)
            
            
            Total
      Net
              Revenues(1)United
      States of America
            
            $
            59,339
            
            
            $
            72,244
            
            
            $
            67,751
            
            
            $
            77,863
            
            
            $
            66,713Other
      North American Countries
            
            
            19,990
            
            
            
            1
            
            
            
            16,663
            
            
            
            1
            
            
            
            16,116Korea
            
            
            40,658
            
            
            
            84
            
            
            
            37,442
            
            
            
            86
            
            
            
            46,913Taiwan
            
            
            24,438
            
            
            
            506
            
            
            
            28,514
            
            
            
            322
            
            
            
            27,475Singapore
            
            
            24,980
            
            
            
            17
            
            
            
            29,356
            
            
            
            3
            
            
            
            33,264China
            
            
            18,923
            
            
            
            318
            
            
            
            17,965
            
            
            
            27
            
            
            
            16,851Hong
      Kong
            
            
            18,033
            
            
            
            -
            
            
            
            16,110
            
            
            
            -
            
            
            
            21,572Japan
            
            
            15,654
            
            
            
            -
            
            
            
            11,554
            
            
            
            -
            
            
            
            13,503Other
      Asian Countries
            
            
            2,038
            
            
            
            2,807
            
            
            
            1,696
            
            
            
            4,084
            
            
            
            2,442Europe
            
            
            35,307
            
            
            
            223
            
            
            
            30,923
            
            
            
            199
            
            
            
            31,458Total
            
            $
            259,360
            
            
            $
            76,200
            
            
            $
            257,974
            
            
            $
            82,585
            
            
            $
            276,307(1)Total
      revenues are attributed to countries based on "ship to" location of
      customer.
              (2)Long-lived
      assets consist of property, plant and equipment.








13.           RESTRUCTURING
AND MANUFACTURING FACILITY IMPAIRMENT





In 2003
the Company closed its Santa Clara wafer fabrication facility. In February 2006,
the Company terminated the facility lease under the terms of the lease agreement
due to major vandalism rendering the building unusable.  The facility
Lessor disputed the termination of the lease.  In March 2008, the
Company entered into a Settlement and Mutual Release agreement with the Lessor.
Under the terms of the agreement, the Company paid $875,000 to the Lessor and
released a $70,000 security deposit for full settlement of all obligations under
the lease (see Note 11).  The remaining unused
restructuring expense accruals were credited to restructuring charges (credits)
in the statement of operations during the first quarter of 2008. A summary of
restructuring expense accruals associated with this facility closure is as
follows: ($000)





Contractual
      Facility Costs
            
            
            Disposal
              Costs
            
            
            TotalBalance
      December 31, 2005
            
            $
            1,399
            
            
            $
            360
            
            
            $
            1,7592006   
      Charges
            
            
            117
            
            
            
            152
            
            
            
            269Uses
            
            
            (259
            )
            
            
            (195
            )
            
            
            (454
            )Balance
      December 31, 2006
            
            
            1,257
            
            
            
            317
            
            
            
            1,5742007   
      Charges
            
            
            128
            
            
            
            --
            
            
            
            128Other
            
            
            85
            
            
            
            --
            
            
            
            85Balance
      December 31, 2007
            
            
            1,470
            
            
            
            317
            
            
            
            1,7872008   
      Uses
            
            
            (945
            )
            
            
            —
            
            
            
            (945
            )Other
      reductions
            
            
            (525
            )
            
            
            (317
            )
            
            
            (842
            )Balance
      December 31, 2008
            
            $
            —
            
            
            $
            —
            
            
            $
            —





Page
73
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006


14.           PATENT
LICENSE AGREEMENT





In
September 2006, Micrel entered into a Patent License Agreement with
International Business Machines Corporation ("IBM").  Under the
Agreement, each party licensed to the other all patents issued or issuing on
patent applications entitled to an effective filing date prior to January 1,
2012.  Certain IBM patents are not licensed to Micrel owing to IBM’s
arrangements with third parties.  In consideration for the license to
IBM’s patents, Micrel paid IBM $2,050,000. Based on the estimated historical and
future benefits of the Patent License Agreement, the Company has allocated the
payment as follows (in thousands):





Settlement
      of patent disputes
            
            $
            714Patent
      license
            
            
            1,336Total
      payment
            
            $
            2,050





To
determine the amounts to be apportioned to settlement of patent disputes and to
patent license, the Company apportioned the payment based on the ratio of
estimated risk adjusted pre-settlement revenues for products that may have
utilized certain IBM patents to the present value of estimated future revenues
from products that are expected to utilize one or more of the IBM patents under
the Patent License Agreement. The $714,000 valuation of the settlement of patent
disputes was expensed to cost of revenues in the third quarter of 2006. The
patent license valuation of $1.3 million was recorded as an intangible asset and
is being amortized to cost of revenues on a straight-line basis over its
estimated useful life of 5.25 years.








15.           SHAREHOLDER
RIGHTS PLAN





In March
2008, the Company has adopted a limited duration Shareholder Rights Plan (the
“Rights Plan”). The Rights Plan is designed to ensure that all of the Company’s
shareholders receive fair and equal treatment in the event of any unsolicited
takeover of the Company and to protect shareholders from partial tender offers,
open market accumulations and other abusive or coercive tactics to gain control
of the Company without offering an adequate price to all shareholders. The
Rights Plan is not intended to prevent a takeover, but rather to encourage
anyone seeking to acquire the Company to negotiate with the Board of Directors
prior to attempting a takeover. The Rights Plan is intended to enable all of the
Company’s shareholders to realize the long-term value of their investment in the
Company.





As a
result of the Board’s adoption of the Rights Plan, one preferred stock purchase
right was distributed as a dividend on each common share held of record as of
the close of business on April 15, 2008 (a “Right”). Each Right, if and
when it becomes exercisable, entitles the holder to buy one one-thousandth of a
share of a new series of participating preferred stock for
$36.00.


Page
74
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2008, 2007 and 2006


Initially
the rights will be represented by the Company’s Common Stock certificates and
will not be exercisable. If any person or group becomes the beneficial owner of
15% or more of Micrel’s Common Stock (which includes for this purpose stock
referenced in derivative transactions and securities) at any time after the
March 24, 2008 date of adoption of the Rights Plan (with certain limited
exceptions including the result of an acquisition of Common Shares by the
Company which, by reducing the number of shares outstanding, increases the
proportionate number of shares beneficially owned by such person or group to 15%
or more of the Common Shares of the Company then outstanding) or if any
additional such securities are acquired in the case or a person or group that
owned 15% or more of such securities as of the date of adoption of the Rights
Plan (an “Acquiring Person”), then each Right not owned by such Acquiring Person
will entitle its holder to purchase, at the Right’s then-current exercise price,
shares of Common Stock having a market value of twice the Right’s then-current
exercise price. In addition, if, after any person has become an Acquiring
Person, the Company is involved in a merger or other business combination
transaction with another person, each Right will entitle its holder (other than
such Acquiring Person) to purchase, at the Right’s then-current exercise price,
common shares of the acquiring company having a value of twice the Right’s
then-current exercise price.





The
Company may redeem the Rights at a price of $.01 per Right at any time prior to
the date on which any person has become an Acquiring Person. The Rights Plan
will continue in effect until the close of business March 24, 2009, unless
earlier redeemed or terminated by Micrel, as provided in the Rights
Plan.








16.           PROXY
CONTEST EXPENSE





During
the first quarter of 2008, the Company became engaged in a proxy contest with a
small activist hedge fund, Obrem Capital Management LLC (“OCM”).  This
issue resulted in Micrel incurring incremental expenses on this matter of
$331,000 during the first quarter, $2.4 million in the second quarter, $349,000
in the third and $1.1 million in the fourth quarter of 2008. These expenses
consist primarily of outside consulting and legal fees.  Subsequent to
a special meeting of shareholders on May 20, 2008, at which the Company’s
shareholders rejected all proposals set forth by OCM, OCM agreed to withdraw its
slate of nominees for the board of directors, and support Micrel’s board
nominees at the upcoming annual meeting of shareholders. Micrel’s slate of
directors was subsequently elected by shareholders at the Company’s annual
meeting on October 1, 2008.








17.           DIVIDENDS





During
the years ended December 31, 2008 and 2007 the Company paid cash dividends of
$9.5 million and $6.9 million or $0.14 per share and $0.09 per share,
respectively.








18.           SUBSEQUENT
EVENTS




On
January 29, 2009, the Company's Board of Directors declared a $0.035 per common
share cash dividend, payable February 25, 2009 to shareholders of record on
February 11, 2009.





On
February 11, 2009, the Company, and certain of the Company’s directors and
executive officers entered into a Stock Purchase Agreement with Obrem Capital
Offshore Master, LP and Obrem Capital (QP), LP, or the Obrem entities, to
purchase 1,883,000 shares of the Company’s common stock owned by the Obrem
entities in a privately negotiated transaction. The Company purchased 1,600,000
shares at a price per share of $6.25 and an aggregate price of $10,000,000. The
purchase was made as part of the Company’s share repurchase program previously
announced on December 30, 2008. The shares purchased by the Company will return
to the status of authorized but unissued shares of common stock of the
Company


Page
75
 Table of Contents





SUPPLEMENTAL QUARTERLY FINANCIAL SUMMARY —
UNAUDITED








(in
      thousands, except per share amounts)
            
            Three Months Ended 2008Mar. 31,
            
            
            June 30,
            
            
            Sept. 30,
            
            
            Dec. 31,Net
      revenues
            
            $
            66,052
            
            
            $
            70,593
            
            
            $
            67,549
            
            
            $
            55,166Gross
      profit(1)
            
            $
            37,182
            
            
            $
            39,784
            
            
            $
            37,355
            
            
            $
            28,688Net
      income (1)
      (2)
            
            $
            8,318
            
            
            $
            7,388
            
            
            $
            7,657
            
            
            $
            4,894Net
      income per share:Basic
            
            $
            0.12
            
            
            $
            0.10
            
            
            $
            0.11
            
            
            $
            0.07Diluted
            
            $
            0.12
            
            
            $
            0.10
            
            
            $
            0.11
            
            
            $
            0.07Weighted-average
      shares used in computing
              per
      share amounts:Basic
            
            
            72,266
            
            
            
            71,118
            
            
            
            70,299
            
            
            
            68,325Diluted
            
            
            72,310
            
            
            
            71,413
            
            
            
            70,427
            
            
            
            68,374Cash dividends per common
      share
            
            $
            0.03
            
            
            $
            0.035
            
            
            $
            0.035
            
            
            $
            0.035





(in
      thousands, except per share amounts)
            
            Three Months Ended 2007Mar. 31,(3)
            
            
            June 30,
            
            
            Sept. 30,
            
            
            Dec. 31,Net
      revenues
            
            $
            63,113
            
            
            $
            65,101
            
            
            $
            65,191
            
            
            $
            64,569Gross
      profit(1)
            
            $
            36,628
            
            
            $
            37,366
            
            
            $
            36,921
            
            
            $
            35,991Net
      income(1)
            
            $
            17,831
            
            
            $
            8,808
            
            
            $
            9,052
            
            
            $
            8,377Net
      income per share:Basic
            
            $
            0.23
            
            
            $
            0.11
            
            
            $
            0.12
            
            
            $
            0.11Diluted
            
            $
            0.23
            
            
            $
            0.11
            
            
            $
            0.12
            
            
            $
            0.11Weighted-average
      shares used in computing
              per
      share amounts:Basic
            
            
            77,738
            
            
            
            77,740
            
            
            
            76,964
            
            
            
            75,248Diluted
            
            
            78,750
            
            
            
            79,018
            
            
            
            77,971
            
            
            
            75,432Cash dividends per common
      share
            
            $
            -
            
            
            $
            0.03
            
            
            $
            0.03
            
            
            $
            0.03


__________


(1)
During the fourth quarter of 2008, the Company identified errors primarily
related to calculating deferred income for sell-through distributors. The
Company has determined that these errors were not material to any of the prior
periods presented but would be material to the year ended December 31, 2008. The
financial statements for the each quarter of 2007 and the first three quarters
of 2008 have been revised to correct for the immaterial errors (see Note 2 of Notes to Consolidated Financial Statements). The
effect of the error correction on net income for the first quarter of 2007 was a
decrease of $37,000, for the second quarter an increase of $167, 000, for the
third quarter a decrease of $371,000 and for the fourth quarter a decrease of
$42,000. The effect of the error correction on net income for the first quarter
of 2008 was a decrease of $71,000, for the second quarter an increase of $149,
000 and for the third quarter a decrease of $820,000.





(2)
During the first quarter of 2008, the Company became engaged in a proxy contest
with a small activist hedge fund, Obrem Capital Management LLC
(“OCM”).  This issue resulted in Micrel incurring incremental expenses
on this matter of $331,000 during the first quarter, $2.4 million in the second
quarter, $349,000 in the third and $1.1 million in the fourth quarter of 2008
(see Note 16).





(3) Net
Income for the quarter ended March 31, 2007includes $15.5 million in pre-tax
non-operating income resulting from the settlement of litigation (see Note 11 of Notes to Consolidated Financial
Statements).








Page
76
 Table of Contents





SCHEDULE II





MICREL,
INCORPORATED


VALUATION
AND QUALIFYING ACCOUNTS


For
the Years Ended December 31, 2008, 2007, and 2006


(In
thousands)








Description
            
            Balance
      at Beginning
              of Year
            
            
            Allowance
      Additions or
              (Reductions)
            
            
            Returns
      and Price
              Adjustments
            
            
            Bad
      Debt
              Write-offs
            
            
            Balance
      at
              End of YearYear Ended December 31,
      2008Allowances
      for OEM and stockingRepresentative
      returns and price adjustments
            
            $
            1,589
            
            
            $
            2,464
            
            
            $
            (2,769
            )
            
            $
            --
            
            
            $
            1,284Allowances
      for unclaimed distributorprice
      adjustments(1)
            
            
            2,468
            
            
            
            50,564
            
            
            
            (51,534
            )
            
            
            --
            
            
            
            1,498Allowances
      for doubtful accounts
            
            
            155
            
            
            
            --
            
            
            
            --
            
            
            
            --
            
            
            
            155Total allowances
            
            $
            4,212
            
            
            $
            53,028
            
            
            $
            (54,303
            )
            
            $
            --
            
            
            $
            2,937Year Ended December 31,
      2007Allowances
      for OEM and stockingRepresentative
      returns and price adjustments
            
            $
            2,490
            
            
            $
            2,215
            
            
            $
            (3,116
            )
            
            $
            --
            
            
            $
            1,589Allowances
      for unclaimed distributorprice
      adjustments(1)
            
            
            1,950
            
            
            
            40,609
            
            
            
            (40,091
            )
            
            
            --
            
            
            
            2,468Allowances
      for doubtful accounts
            
            
            156
            
            
            
            (1
            )
            
            
            --
            
            
            
            --
            
            
            
            155Total allowances
            
            $
            4,596
            
            
            $
            42,823
            
            
            $
            (43,207
            )
            
            $
            --
            
            
            $
            4,212Year Ended December 31,
      2006Allowances
      for OEM and stockingRepresentative
      returns and price adjustments
            
            $
            2,665
            
            
            $
            4,668
            
            
            $
            (4,843
            )
            
            $
            --
            
            
            $
            2,490Allowances
      for unclaimed distributorprice
      adjustments(1)
            
            
            1,240
            
            
            
            33,204
            
            
            
            (32,494
            )
            
            
            --
            
            
            
            1,950Allowances
      for doubtful accounts
            
            
            239
            
            
            
            (3
            )
            
            
            --
            
            
            
            (80
            )
            
            
            156Total allowances
            
            $
            4,144
            
            
            $
            37,869
            
            
            $
            (37,337
            )
            
            $
            (80
            )
            
            $
            4,596


___________


(1) The
Company estimates and records an allowance for distributor price adjustments for
which the specific resale transaction has been completed, but the price
adjustment claim has not yet been received from the distributor and recorded by
the Company. This allowance typically represents approximately one to three
weeks of unclaimed price adjustments.











Page
77
 Table of Contents


SIGNATURES





Pursuant to the requirements of
Section 13 or 15(d) of the Securities and Exchange Act of 1934, the registrant
has duly caused this Report to be signed on its behalf by the undersigned,
thereunto duly authorized, in San Jose, California on the 26th day of February,
2009.





MICREL,
INCORPORATED





By   /S/ Raymond D.
Zinn


Raymond
D. Zinn


President
and Chief Executive Officer





POWER OF ATTORNEY





KNOW ALL PERSONS BY THESE PRESENTS,
that each person whose signature appears below constitutes and appoints Raymond
D. Zinn and Clyde R. Wallin, and each of them, his attorneys-in-fact, each with
the power of substitution, for him in any and all capacities, to sign any
amendments to this Report on Form 10-K and to file the same, with exhibits
thereto and other documents in connection therewith, with the Securities and
Exchange Commission, hereby ratifying and confirming all that each of said
attorneys-in-fact, or his substitute or substitutes, may do or cause to be done
by virtue hereof.





Pursuant to the requirements of the
Securities Exchange Act of 1934, as amended, this Report has been signed below
by the following persons on behalf of the registrant and in the capacities and
on the date indicated.





Signature
            
            Title
            
            Date/S/Raymond
      D. Zinn
              Raymond
      D. Zinn
            
            President,
      Chief Executive Officer and Chairman of the Board of Directors (Principal Executive
      Officer)
            
            February
      26, 2009/S/ Clyde R. Wallin
              Clyde
      R. Wallin
            
            Vice
      President, Finance and Chief Financial Officer (Principal Financial and
      Accounting Officer)
            
            February
      26, 2009/S/ Daniel A.
      Artusi
              Daniel
      A. Artusi
            
            Director
            
            February
      26, 2009/S/ Michael J.
      Callahan
              Michael
      J. Callahan
            
            Director
            
            February
      26, 2009/S/ Daniel
      Heneghan
              Daniel
      Heneghan
            
            Director
            
            February
      26, 2009/S/ Neil J.
      Miotto
              Neil
      J. Miotto
            
            Director
            
            February
      26, 2009/S/ Frank W.
      Schneider
              Frank
      W. Schneider
            
            Director
            
            February
      26, 2009





Page
78
 Table of Contents





Micrel,
Incorporated


Exhibits
      Pursuant to Item 601 of Regulation
S-K





Exhibit
              Number
            Description3.1
            Amended
      and Restated Articles of Incorporation of the Registrant.
    (1)3.2
            Certificate
      of Amendment of Articles of Incorporation of the Registrant.
      (2)3.3
            Amended
      and Restated Bylaws of the Registrant. (9)3.4
            Certificate
      of Amendment of Articles of Incorporation of the Registrant.
      (7)3.5
            Certificate
      of Determination of Series A Participating Preferred Stock of Micrel,
      Incorporated, classifying and designating the Series A Participating
      Preferred Stock, as filed March 28, 2008 with the Secretary of State
      of the State of California. (13)3.6
            Certificate
      of Amendment to the Bylaws of the Company, dated April 22,
      2008.  (15)4.1
            Certificate
      for Shares of Registrant’s Common Stock. (3)4.2
            Rights
      Agreement, dated as of March 24, 2008, between Micrel, Incorporated
      and Mellon Investor Services LLC, as Rights Agent, which includes the form
      of Certificate of Determination of the Series A Participating Preferred
      Stock of Micrel, Incorporated as Exhibit A, the form of Right Certificate
      as Exhibit B and the Summary of Rights to Purchase Preferred Shares as
      Exhibit C. (14)10.1
            Indemnification
      Agreement between the Registrant and each of its officers and directors.
      (3)10.3
            1994
      Stock Option Plan and form of Stock Option Agreement. (1)*10.4
            1994
      Stock Purchase Plan. (3)10.5
            2003
      Incentive Award Plan. (8)*10.8
            Form
      of Domestic Distribution Agreement. (2)10.9
            Form
      of International Distributor Agreement. (2)10.10
            Amended
      and Restated 1994 Employee Stock Purchase Plan, as amended January 1,
      1996. (4)10.11
            Commercial
      Lease between Harris Corporation and Synergy Semiconductor Corporation
      dated February 29, 1996. (5)10.12
            Standard
      Industrial/Commercial Single-Tenant Lease Agreement Dated March 3, 2000
      between the Registrant and Rose Ventures II (6)10.13
            Micrel/IBM
      Patent License Agreement, dated September 26, 2006 (10)10.14
            Credit
      Line Agreement dated as of April 24, 2007 among Bank of the West and
      Micrel, Incorporated. (11)10.15
            Offer
      Letter, by and between Micrel Incorporated and Clyde R. Wallin, dated
      December 13, 2008. (16)10.16
            Stock
      Purchase Agreement, dated as of February 11, 2009, by and among the
      sellers listed on Schedule I attached thereto, and Micrel, Incorporated
      and each of the purchasers listed on Schedule II attached thereto.
      (17)14.1
            Micrel,
      Incorporated Code of Ethics for Senior Officers (12)21.1
            Subsidiaries
      of the Registrant23.1
            Consent
      of Independent Registered Public Accounting Firm24.1
            Power
      of Attorney. (See Signature Page)31
            Certification
      of the Company's Chief Executive Officer and Chief Financial Officer
      Pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
            Certification
      of the Company's Chief Executive Officer and Chief Financial Officer
      Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002





*
            Management
      contract or compensatory plan or
agreement.





(1)
            Incorporated
      herein by reference to the Company’s Registration Statement on
      Form S-1 (“Registration Statement”), File No. 33-85694, in which this
      exhibit bears the same number, unless otherwise
  indicated.


Page
79
 Table of Contents





(2)
            Incorporated
      by reference to Amendment No. 1 to the Registration Statement, in which
      this exhibit bears the same number, unless otherwise
      indicated.





(3)
            Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 1995, in which this exhibit bears the same number,
      unless otherwise indicated.





(4)
            Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 1996, in which this exhibit bears the number
      10.14.





(5)
            Incorporated
      by reference to the Company’s Annual Report on Form 10-K for the year
      ended December 31, 1998, in which this exhibit bears the number
      10.14.





(6)
            Incorporated
      by reference to exhibit 10.1 filed with the Company’s quarterly report on
      Form 10-Q for the period ended March 31,
2000.





(7)
            Incorporated
      by reference to exhibit 3.1 filed with the Company’s quarterly report on
      Form 10-Q for the period ended September 30,
  2000.





(8)
            Incorporated
      by reference to exhibit 1 filed with the Company’s Proxy Statement on
      Schedule 14A dated May 9, 2003.





(9)
            Incorporated
      by reference to exhibit 3.3 filed with the Company’s quarterly report on
      Form 10-Q for the period ended September 30,
  2006.





(10)
            Incorporated
      by reference to exhibit 10.17 filed with the Company’s quarterly report on
      Form 10-Q for the period ended September 30,
  2006.





(11)
            Incorporated
      by reference to exhibit 10.1 filed with the Company’s report on Form 8-K
      dated April 24, 2007.





(12)
            Incorporated
      by reference to exhibit 14.1 filed with the Company’s Annual Report on
      Form 10-K for the year ended December 31,
  2003.





(13)
            Incorporated
      by reference to exhibit 3.5 filed with the Company’s report on Form 8-K
      dated March 24, 2008.





(14)
            Incorporated
      by reference to exhibit 4.2 filed with the Company’s report on Form 8-K
      dated March 24, 2008.





(15)
            Incorporated
      by reference to exhibit 3.1 filed with the Company’s report on Form 8-K
      dated April 22, 2008.





(16)
            Incorporated
      by reference to exhibit 10.1 filed with the Company’s report on Form 8-K
      dated December 18, 2008.





(17)
            Incorporated
      by reference to exhibit 10.1 filed with the Company’s report on Form 8-K
      dated February 11, 2009.








Page
80
 Table of Contents


Exhibit
23.1








CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING
FIRM








We hereby
consent to the incorporation by reference in the Registration Statements on Form
S-3 (No. 333-70876, 333-63620 and 333-37808) and S-8 (No. 333-63618, 33-90396,
333-10167, 333-89223, 333-52136, 333-37832 and 333-105862) of Micrel,
Incorporated of our report dated February 25, 2009 relating to the consolidated
financial statements, the financial statement schedule and the effectiveness of
internal control over financial reporting, which appears in this Form
10-K.











/s/
PricewaterhouseCoopers LLP


San Jose,
California


February
25, 2009





Page
81
 Table of Contents


Exhibit
31


Certification of Chief Executive Officer




Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002




I,
Raymond D. Zinn, certify that:




1.           I
have reviewed this annual report on Form 10-K of Micrel,
Incorporated;




2.           Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;




3.           Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;




4.           The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
designed in the Exchange Act Rules 13a-15(d) and 15d-15(f) for the registrant
and have:




(a)           designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;




(b)           designed
such internal control over financial reporting, or caused such internal control
over financial control to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;




(c)           evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and




(d)           disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and




5.           The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):




(a)           all
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and




(b)           any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.









Date:
      February 26, 2009
            
            /S/ Raymond D.
      Zinn
              Raymond
      D. Zinn
              President,
      Chief Executive Officer and Director
              (Principal
      Executive Officer)


Page
82
 Table of Contents









Certification of Chief Financial Officer




Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002




I, Clyde
R. Wallin, certify that:




1.           I
have reviewed this annual report on Form 10-K of Micrel,
Incorporated;




2.           Based
on my knowledge, this report does not contain any untrue statement of a material
fact or omit to state a material fact necessary to make the statements made, in
light of the circumstances under which such statements were made, not misleading
with respect to the period covered by this report;




3.           Based
on my knowledge, the financial statements, and other financial information
included in this report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and
for, the periods presented in this report;




4.           The
registrant’s other certifying officer and I are responsible for establishing and
maintaining disclosure controls and procedures (as defined in Exchange Act Rules
13a-15(e) and 15d-15(e)) and internal control over financial reporting (as
designed in the Exchange Act Rules 13a-15(d) and 15d-15(f) for the registrant
and have:




(a)           designed
such disclosure controls and procedures, or caused such disclosure controls and
procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries,
is made known to us by others within those entities, particularly during the
period in which this report is being prepared;




(b)           designed
such internal control over financial reporting, or caused such internal control
over financial control to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the
preparation of financial statements for external purposes in accordance with
generally accepted accounting principles;




(c)           evaluated
the effectiveness of the registrant’s disclosure controls and procedures and
presented in this report our conclusions about the effectiveness of the
disclosure controls and procedures, as of the end of the period covered by this
report based on such evaluation; and




(d)           disclosed
in this report any change in the registrant’s internal control over financial
reporting that occurred during the registrant’s most recent fiscal quarter (the
registrant’s fourth fiscal quarter in the case of an annual report) that has
materially affected, or is reasonably likely to materially affect, the
registrant’s internal control over financial reporting; and




5.           The
registrant’s other certifying officer and I have disclosed, based on our most
recent evaluation of internal control over financial reporting, to the
registrant’s auditors and the audit committee of the registrant’s board of
directors (or persons performing the equivalent functions):




(a)           all
significant deficiencies and material weaknesses in the design or operation of
internal control over financial reporting which are reasonably likely to
adversely affect the registrant’s ability to record, process, summarize and
report financial information; and




(b)           any
fraud, whether or not material, that involves management or other employees who
have a significant role in the registrant’s internal control over financial
reporting.









Date:
      February 26, 2009
            
            /S/ Clyde R.
      Wallin
              Clyde
      R. Wallin
              Vice
      President, Finance and Chief Financial Officer
              (Principal
      Financial and Accounting Officer)







Page
83
 Table of Contents


Exhibit
32




Certifications of




Chief
Executive Officer and Chief Financial Officer




Pursuant
to 18 U.S.C. Section 1350,




As
Adopted Pursuant to




Section
906 of the Sarbanes-Oxley Act Of 2002




In
connection with the Annual Report of Micrel, Incorporated (the “Company”) on
Form 10-K for the period ended December 31, 2008 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Raymond D. Zinn,
Chief Executive Officer of the Company, certify, pursuant to 18 U.S.C. Section
1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that
to my knowledge:




1.           The
Report fully complies with the requirements of Section 13(a) or 15(d), of the
Securities Exchange Act of 1934; and




2.           That
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.




Date:
      February 26, 2009
            
            /S/ Raymond D.
      Zinn
              Raymond
      D. Zinn
              President,
      Chief Executive Officer and Director
              (Principal
      Executive Officer)












In
connection with the Annual Report of Micrel, Incorporated (the “Company”) on
Form 10-K for the period ended December 31, 2008 as filed with the Securities
and Exchange Commission on the date hereof (the “Report”), I, Richard D.
Crowley, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C.
Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002, that to my knowledge:




1.           The
Report fully complies with the requirements of Section 13(a) or 15(d), of the
Securities Exchange Act of 1934; and




2.           That
information contained in the Report fairly presents, in all material respects,
the financial condition and results of operations of the Company.









Date:
      February 26, 2009
            
            /S/ Clyde R.
      Wallin
              Clyde
      R. Wallin
              Vice
      President, Finance and Chief Financial Officer
              (Principal
      Financial and Accounting Officer)