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,
2007.
 
  ̈           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 xNo  ̈
 
 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 xNo  ̈
 
 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
definition of “accelerated filer and large accelerated filer” 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 xNo  ̈
 
 As of
June 30, 2007, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $592 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 25, 2008, the Registrant had outstanding 71,753,339 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 22, 2008 are incorporated by reference in Part II and Part III of
this Report.
  This
Report on Form 10-K includes 78 pages with the Index to Exhibits located on page
73.
 
 Table of Contents
  MICREL,
INCORPORATED
 
 INDEX TO
 
 ANNUAL
REPORT ON FORM 10-K
 
 FOR
YEAR ENDED DECEMBER 31, 2007
 
 PagePART
      IItem
      1.
              Business
              3Item
      1A.
              Risk
      Factors
              14Item
      1B.
              Unresolved Staff
      Comments
              19Item
      2.
              Properties
              19Item
      3.
              Legal
      Proceedings
              19Item
      4.
              Submission of Matters to a Vote of Security
      Holders
              20
 
 PART
      IIItem
      5.
              Market for the Registrant's Common Equity, Related
      Shareholder Matters and Issuer Purchases of Equity
      Securities
              20Item
      6.
              Selected Financial Data
              22Item
      7.
              Management's Discussion and Analysis of Financial Condition
      and Results of Operations
              23Item
      7A.
              Quantitative and Qualitative Disclosures About Market
      Risk
              36Item
      8.
              Financial Statements and Supplementary
    Data
              36Item
      9.
              Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
              36Item
      9A.
              Controls and Procedures
              36Item
      9B.
              Other Information
              37
 
 PART
      IIIItem
      10.
              Directors, Executive Officers and Corporate
      Governance
              38Item
      11.
              Executive Compensation
              38Item
      12.
              Security Ownership of Certain Beneficial Owners and
      Management and Related Shareholder Matters
              39Item
      13.
              Certain Relationships and Related Transactions, and
      Directors Independence
              39Item
      14.
              Principal Accounting Fees and Services
              39Item
      15.
              Exhibits and Financial Statement
    Schedules
              39Signatures
              72Exhibit Index
              73Certifications
              76
 
  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; 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 hereof, and the
Company assumes no obligation to update any such forward-looking statements.
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.
 
  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 2,000
standard products and has derived the majority of its product revenue for the
year ended December 31, 2007 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, 2007, 2006, and 2005, the Company's
standard products accounted for 92%, 93%, and 96%, 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 develops and manufactures high
performance power management analog products which 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 target the digital home and industrial/embedded networking markets.
This product portfolio consists of transceivers, 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.
 
  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.
 
 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.
  5
 Table of Contents
  Cellular telephones, which 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
in metropolitan and wide area networks. The additional demand of new wireless
services utilizing the transmission of video will further consume this installed
capacity.
 
 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 printers, Internet Protocol Set-Top Boxes ("IP-STB"), Internet
Protocol Phones ("IP-phone"), game consoles, media converters 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 2,000 standard
      products, with net revenues from standard products generating 92% of the
      Company's total net revenues for the year ended December 31, 2007. 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.
 
 ·
              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.
  6
 Table of Contents
  ·
              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 31,2007
              
              
              2006
              
              
              2005Net
      Revenues:Standard
      Products
              
              $
              237,356
              
              
              $
              258,214
              
              
              $
              239,177Other
      Products
              
              
              20,618
              
              
              
              18,093
              
              
              
              11,179Total net
      revenues
              
              $
              257,974
              
              
              $
              276,307
              
              
              $
              250,356As
      a Percentage of Total Net Revenues:Standard
      Products
              
              
              92
              %
              
              
              93
              %
              
              
              96
              %Other
      Products
              
              
              8
              
              
              
              7
              
              
              
              4Total net
      revenues
              
              
              100
              %
              
              
              100
              %
              
              
              100
              %
 
 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 31,2007
              
              
              2006
              
              
              2005As
      a Percentage of Total Net Revenues:High-Speed
      Communications
              
              
              23
              %
              
              
              26
              %
              
              
              22
              %Wireless
      Handsets
              
              
              17
              
              
              
              19
              
              
              
              26Computer
              
              
              18
              
              
              
              19
              
              
              
              22Industrial
              
              
              39
              
              
              
              34
              
              
              
              27Military
      &
      Consumer
              
              
              3
              
              
              
              2
              
              
              
              3Total 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.''
 
  7
 Table of Contents
  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.
 
 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 SwapPowerControllers.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.
  8
 Table of Contents
  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 integrated circuits for communications products targeted at
fiber optic modules as well as clock recovery, clock distribution and level
translation applications.
 
 Micrel's Ethernet division offers a
broad range of physical layer ("PHY"), media access controller ("MAC"), switch
and system-on-chip ("SoC") products for the 10/100 Megabit Ethernet standard.
The primary applications for the products are Digital Home Networks, such as
Internet Protocol Set-Top Boxes ("IP-STB"), Personal Video Recorder (PVR),
Multimedia Server, Voice Over Internet Protocol ("VOIP") Phones, Analog
Telephone Adaptor ("ATA"), Network Printer and Media Converters, used to convert
signals transmitted optically over fiber to standard cable (copper) and vice
versa, 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.
 
 
 Custom
and Foundry 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. Military applications include communications
and transport aircraft.
 
 
 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.
  9
 Table of Contents
  The Company sells its products in
Europe through a direct sales staff in England, France, Germany, Finland 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 2007, sales to customers in North
America, Asia and Europe accounted for 33%, 55% and 12% respectively, of the
Company's net revenues. 2007 sales in North America, Asia and Europe, as a
percentage of net revenues, was about the same as 2006 which was 30%, 59% and
11%, respectively. As compared to 2005, 2007 sales to North America as a
percentage of net revenues was up 8%, Asia was down 10% and Europe was up 2%.
2005 sales to customers in North America, Asia and Europe accounted for 25%, 65%
and 10%, respectively, of 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 11 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.
 
 
 Customers
 
 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 an Asian based stocking representative
accounted for 13%, 12% and 10%, respectively, of the Company's net revenues. For
the year ended December 31, 2005 three customers, an Asian based original
equipment manufacturer, an Asian based stocking representative and a worldwide
distributor, accounted for 14%, 12% and 12%, 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.
  10
 Table of Contents
  
 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, 2007,
approximately 5% 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.
 
 The Company's analog design engineers
principally focus on developing next generation standard products. The Company's
new product development strategy emphasizes a broad line of standard products
that are based on customer input and requests.
 
 The Company's mixed-signal design
engineers principally focus on high-speed, low-noise media driving and
clock/data recovery devices used in communication and advanced computer
systems.
 
 In 2007, 2006, and 2005 the Company
spent $54.5 million $52.1 million, and $45.2 million,
respectively, on research and development. The Company expects that it will
continue to spend substantial funds on research and development
activities.
 
  11
 Table of Contents
  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 225 United States patents on semiconductor devices and methods,
with various expiration dates through 2026.  The Company has
applications for 102 United States patents pending.  The Company holds
46 issued foreign patents and has applications for 69 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.
 
 
 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.
  12
 Table of Contents
  
 Because the standard products market
for analog ICs is diverse and highly fragmented, 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. Each of these companies has
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, 2007, the
Company's backlog was approximately $48 million, all of which is scheduled to be
shipped during the first six months of 2008. December 31, 2007 backlog was up
12% from the December 31, 2006 backlog of approximately $43 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.
 
 
 Employees
 
 As of December 31, 2007, the
Company had 923 full-time employees as compared to 932 at December 31, 2006. The
Company's employees are not represented by any collective bargaining agreements,
and the Company has never experienced a work stoppage. The Company believes that
its employee relations are good.
 
  13
 Table of Contents
  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
11 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
 
 Demand for semiconductor components
is increasingly dependent upon the rate of growth of the global
economy.   If the rate of global economic growth slows, or
contracts, customer demand for products could 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 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 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.
  14
 Table of Contents
  The Company is reliant on certain
key suppliers for wafer fabrication, circuit assembly and testing
services. Most of these suppliers are based outside of the U.S. The
Company's supply could be interrupted as a result of any of the previously
mentioned risk factors relating to international markets.
 
 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.  Original equipment manufacturers, distributors and contract
manufacturers within the electronics industry have reduced their semiconductor
component days of inventory on hand by approximately 20% over the past six
years. Over the same six years, the industry average for semiconductor
manufacturers inventory days on hand has increased by approximately 25%. 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.
 
 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.
  15
 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 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.  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 foundry 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.
 
 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.
 
 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. 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.
  16
 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.
 
 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.
 
 The Statement of Financial
Accounting Standards No.123R, "Share-Based Payment” requires the Company to
recognize the cost of employee services received in exchange for awards of
equity instruments, based on the grant date fair value of those awards, in the
financial statements.  As discussed in Note
6 of the Notes to Consolidated Financial Statements, the effect of the
adoption of this accounting standard in 2006 has significantly increased stock
based compensation expense in the current period and such expense is expected to
continue in future periods.  The requirement to recognize the cost of
stock option awards as an expense in the financial statements has and will
continue to reduce net income and earnings per share and may have an adverse
affect on the value of the Company’s common stock.  If the Company
reduces the number of stock option grants to employees to minimize the cost
associated with share based incentive awards, it will most likely be more
difficult for the Company to hire and retain employees.
 
 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:
 
 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.
 
 The Company's long-term investments of
$16.6 million at December 31, 2007, consist of senior auction rate notes secured
by student loans. In February 2008, some of these auction rate securities failed
to auction successfully due to sell orders exceeding buy orders (see discussion
of investments in Note 1 of Notes to Consolidated
Financial Statements).
  17
 Table of Contents
  
 The Company is evaluating the impact of
these failed auctions on the fair value of these securities. If the Company
determines that the fair value of these auction rate securities is temporarily
impaired, the Company would record a temporary impairment within other
comprehensive loss, a component of shareholders' equity, in the period such
temporary decline in fair value is determined.  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’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 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.
 
 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.
 
 The Company derives a significant
portion of its net revenues from customers located in certain geographic regions
or countries.  A significant portion of the Company’s net
revenues come from customers located in South Korea. In the event that political
tensions surrounding North Korea evolve into military or social conflict, or
other factors disrupt the Korean economy, the Company’s revenues, results of
operations, cash flow and financial condition could be adversely
affected.  A significant portion of the Company’s net revenues come
from customers located in Taiwan and China.  In the event that
economic activity in these two countries declines, or is disrupted by
geopolitical events, the Company’s revenues and results of operations could be
adversely affected.
 
 The Company is involved in
litigation.  The Company is currently involved in one lawsuit
where Micrel is the defendant.  Litigation is by its nature
unpredictable and costly.  If the level of effort required to
prosecute or defend the Company’s position in any lawsuit increases
significantly, or if a judgment is entered against the Company, the resulting
expense could adversely affect the Company’s financial condition, results of
operations and cash flows.
 
 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, in addition to litigation mentioned
herein, 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.
  18
 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.  Based on the status of the
litigation described above, the Company does not believe that any material and
specific risk exists related to the loss of use of patents, products or
processes.
 
 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.
 
 
 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.
 
 The Company also leases small sales and
technical facilities located in Tempe, AZ, Medford, NJ; Richardson, TX; Irvine,
CA; Raleigh, NC; Seoul, Korea; Taipei, Taiwan; Shenzhen, P.R. China; Hong Kong;
Singapore; Tokyo, Japan; Masterton, New Zealand; Newbury, U.K.; Livingston,
Scotland; Frankfurt On Oder, Germany; Oslo, Norway; Solna, Sweden and
Courtaboeuf Cedex, France.
 
 The Company believes that its existing
and planned 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 10 of Notes to Consolidated Financial Statements under
the caption “Litigation” in Item 15 of Part III is incorporated herein by
reference.
 19
 Table of Contents
 ITEM 4.
              SUBMISSION
      OF MATTERS TO A VOTE OF SECURITY
HOLDERS
 
 In the fourth quarter of 2007, no
matters were submitted to a vote of security holders.
 
 
 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 National Market under the Symbol “MCRL.” The range of daily
closing sales prices per share for the Company’s Common Stock from
January 1, 2006 to December 31, 2007 was:
 
 Year
      Ended December 31, 2007:
              
              High
              
              
              LowFourth quarter
              
              $
              11.13
              
              
              $
              7.96Third quarter
              
              $
              13.91
              
              
              $
              9.85Second quarter
              
              $
              13.24
              
              
              $
              11.09First quarter
              
              $
              12.05
              
              
              $
              9.78Year
      Ended December 31, 2006:
              
              High
              
              
              LowFourth quarter
              
              $
              12.22
              
              
              $
              9.19Third quarter
              
              $
              10.69
              
              
              $
              8.30Second quarter
              
              $
              15.78
              
              
              $
              9.55First quarter
              
              $
              14.82
              
              
              $
              11.11
 
 The reported last sale price of the
Company’s Common Stock on the Nasdaq National Market on December 31, 2007 was
$8.45. The approximate number of holders of record of the shares of the
Company’s Common Stock was 498 as of February 25, 2008. 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 25, 2008 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 2008
Annual Meeting of Shareholders and is incorporated herein by
reference.
  20
 Table of Contents
  
 Dividend
Policy
 
 On January 31, 2008, the Company's
Board of Directors declared a $0.03 per common share cash dividend, payable
February 26, 2008 to shareholders of record on February 11,
2008.  During each of the second quarter, third quarter and fourth
quarters of 2007, the Company paid cash dividends of $2.3 million ($0.03 per
outstanding share of common stock). Total cash dividend payments during 2007
were $6.9 million.
 
 
 Issuer
Purchases of Equity Securities
 
 Repurchases of the Company's common
stock during 2007 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 2007
              
              
              380,300
              
              
              $
              10.22
              
              
              
              380,300
              
              
              $
              46,112February 2007
              
              
              261,800
              
              
              $
              10.61
              
              
              
              261,800
              
              
              $
              43,334March 2007
              
              
              188,000
              
              
              $
              11.47
              
              
              
              188,000
              
              
              $
              41,177Total Q1 2007
              
              
              830,100
              
              
              $
              10.63
              
              
              
              830,100April 2007
              
              
              161,200
              
              
              $
              11.61
              
              
              
              161,200
              
              
              $
              39,306May 2007
              
              
              134,600
              
              
              $
              12.47
              
              
              
              134,600
              
              
              $
              37,628June 2007
              
              
              173,200
              
              
              $
              12.33
              
              
              
              173,200
              
              
              $
              35,493Total Q2 2007
              
              
              469,000
              
              
              $
              12.12
              
              
              
              469,000July 2007
              
              
              142,400
              
              
              $
              12.80
              
              
              
              142,400
              
              
              $
              33,670August 2007
              
              
              1,570,279
              
              
              $
              10.35
              
              
              
              1,570,279
              
              
              $
              17,412September 2007
              
              
              164,556
              
              
              $
              11.02
              
              
              
              164,556
              
              
              $
              15,598Total Q3 2007
              
              
              1,877,235
              
              
              $
              10.60
              
              
              
              1,877,235October 2007
              
              
              420,300
              
              
              $
              10.17
              
              
              
              420,300
              
              
              $
              11,323November 2007
              
              
              1,168,400
              
              
              $
              8.54
              
              
              
              1,168,400
              
              
              $
              16,349December 2007
              
              
              750,819
              
              
              $
              8.54
              
              
              
              750,819
              
              
              $
              -Total Q4 2007
              
              
              2,339,519
              
              
              $
              8.83
              
              
              
              2,339,519Total 2007
              
              
              5,515,854
              
              
              $
              9.98
              
              
              
              5,515,854
 
 The information included in Note 6 of Notes to Consolidated Financial Statements under
the caption “Stock Repurchase Plan” in Item 15 of Part III is incorporated
herein by reference.
 
 
 
  21
 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:
              
              Years Ended
    December 31,(in
      thousands, except per share amounts)
              
              2007(1)
              
              
              2006(2)
              
              
              2005(3)
              
              
              2004(4)
              
              
              2003Net
      revenues
              
              $
              257,974
              
              
              $
              276,307
              
              
              $
              250,356
              
              
              $
              257,551
              
              
              $
              211,726Cost
      of revenues*
              
              
              110,630
              
              
              
              116,201
              
              
              
              116,564
              
              
              
              134,854
              
              
              
              128,007Gross
      profit
              
              
              147,344
              
              
              
              160,106
              
              
              
              133,792
              
              
              
              122,697
              
              
              
              83,719Operating
      expenses:Research
      and development*
              
              
              54,523
              
              
              
              52,074
              
              
              
              45,231
              
              
              
              42,473
              
              
              
              48,557Selling,
      general and administrative*
              
              
              45,040
              
              
              
              49,016
              
              
              
              46,159
              
              
              
              38,590
              
              
              
              30,417Manufacturing
      facility impairment
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (624
              )Restructuring
      expense
              
              
              128
              
              
              
              269
              
              
              
              —
              
              
              
              584
              
              
              
              286Purchased
      in-process technology
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              303
              
              
              
              —Other
      operating expense
              
              
              86
              
              
              
              966
              
              
              
              9,282
              
              
              
              —
              
              
              
              —Total
      operating expenses
              
              
              99,777
              
              
              
              102,325
              
              
              
              100,672
              
              
              
              81,950
              
              
              
              78,636Income
      from operations
              
              
              47,567
              
              
              
              57,781
              
              
              
              33,120
              
              
              
              40,747
              
              
              
              5,083Other
      income, net
              
              
              21,717
              
              
              
              5,403
              
              
              
              4,180
              
              
              
              1,712
              
              
              
              619Income
      before income taxes
              
              
              69,284
              
              
              
              63,184
              
              
              
              37,300
              
              
              
              42,459
              
              
              
              5,702Provision
      for income taxes
              
              
              24,933
              
              
              
              24,876
              
              
              
              11,942
              
              
              
              11,206
              
              
              
              855Net
      income
              
              $
              44,351
              
              
              $
              38,308
              
              
              $
              25,358
              
              
              $
              31,253
              
              
              $
              4,847Net
      income per share:Basic
              
              $
              0.58
              
              
              $
              0.47
              
              
              $
              0.29
              
              
              $
              0.34
              
              
              $
              0.05Diluted
              
              $
              0.57
              
              
              $
              0.46
              
              
              $
              0.29
              
              
              $
              0.34
              
              
              $
              0.05Shares
      used in computing per share amounts:Basic
              
              
              76,918
              
              
              
              81,550
              
              
              
              87,055
              
              
              
              91,498
              
              
              
              92,215Diluted
              
              
              77,813
              
              
              
              82,842
              
              
              
              87,971
              
              
              
              93,083
              
              
              
              93,786Cash
      dividends per common share
              
              $
              0.09
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —*Share
      based compensation included in:Cost
      of revenues
              
              $
              1,156
              
              
              $
              1,540
              
              
              $
              159
              
              
              $
              535
              
              
              $
              1,104Research
      and development
              
              
              2,130
              
              
              
              3,341
              
              
              
              161
              
              
              
              723
              
              
              
              1,604Selling,
      general and administrative
              
              
              2,199
              
              
              
              3,534
              
              
              
              450
              
              
              
              1,263
              
              
              
              1,430
 
 Balance
      Sheet Data:
              
              December 31,(in
      thousands)
              
              2007
              
              
              2006
              
              
              2005
              
              
              2004
              
              
              2003Working
      capital
              
              $
              130,473
              
              
              $
              142,615
              
              
              $
              165,180
              
              
              $
              186,822
              
              
              $
              195,026Total
      assets
              
              
              294,745
              
              
              
              300,273
              
              
              
              319,540
              
              
              
              334,146
              
              
              
              337,439Long-term
      debt and other obligations
              
              
              3,149
              
              
              
              453
              
              
              
              475
              
              
              
              2,047
              
              
              
              8,179Total
      shareholders' equity
              
              
              239,251
              
              
              
              238,042
              
              
              
              257,686
              
              
              
              284,887
              
              
              
              283,609
 _____________
 (1) Other income, net for the year ended December 31,
2007, includes $15.5 million in non-operating income resulting from the
settlement of litigation (seeNote 10of Notes
to Consolidated Financial Statements).
 (2) 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 (seeNote 10of 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 (seeNote 13of Notes to Consolidated Financial Statements). On
January 1, 2006, Micrel adopted the provisions of SFAS No. 123R for recording
share-based compensation (seeNote 6of
Notes to Consolidated Financial Statements).
 (3) 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 (seeNote 10of
Notes to Consolidated Financial Statements).
 (4) 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.
 22
 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 2005 through 2007 have been
provided.
 
 In the first quarter of 2005, demand as
measured by order rates, improved substantially over fourth quarter of 2004
levels.  First quarter bookings increased by 40% over fourth quarter
2004 levels.  The improvement in order rates was driven by customers
serving the industrial, computing and communications end markets. Bookings from
Micrel’s major distributors increased in the first quarter after falling sharply
in the second half of 2004 as distributors adjusted to shorter industry lead
times and reduced their inventory levels.  Despite increased bookings
during the first quarter and lean supply chain inventory levels, order lead
times from Micrel's customers continued to average two to three
weeks.
 
 In the second quarter of 2005, the
ongoing short lead time environment continued to cause customers to order only
what was required for their short term needs.  Second quarter order
rates declined from first quarter levels primarily due to lower order amounts
from the Company’s distributors and certain customers serving the wireless
handset end market.  Bookings from the Company’s major sell-through
distributors declined from strong first quarter levels and were less than
overall resales for the second quarter as distributors attempted to increase
their inventory turns to improve their return on working capital.  In
the wireless handset market, customers reduced both orders and production levels
in coordination with efforts to reduce channel inventories of
handsets.  Second quarter 2005 net revenues of $62.1 million increased
sequentially by 2%, but were 10% less than the net revenues of the year ago
period.  The Company continued to exercise pricing discipline for most
of its products in an attempt to improve gross profit.  Consequently,
sales of certain products, such as those serving the SOHO Ethernet market and
the low end personal computer market, declined resulting in a lower rate of
revenue growth for the Company.
 
 Third quarter 2005 order rates
increased substantially from second quarter levels, increasing sequentially in
all geographic regions.  Throughout the third quarter, customers
continued to place orders with short delivery requirements, even as the
aggregate order level increased.  Order levels from the Company's
distributors increased in the third quarter, returning to a level consistent
with sales of Micrel’s products to their end customers. Third quarter net
revenues increased sequentially by 1% to $62.5 million, but were 8% below the
revenue level of the year ago period.
 
 Continued broad based demand, combined
with lean channel inventories and short lead times, resulted in higher order
rates for the Company in the fourth quarter of 2005.  Order strength
in the quarter from customers serving the industrial and communications end
markets, and from the Company’s major distributors, resulted in the second
highest quarterly booking level since calendar year 2000.  Net
revenues increased 4% on a sequential basis in the fourth quarter to $65.1
million and were 10% above the net revenues in the year ago
period.  Although order rates increased in the fourth quarter,
customer lead times remained short, averaging three to four
weeks.
  23
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  
 In 2005, the Company’s gross margin
improved continuously throughout the year, returning to levels recorded in the
year 2000 despite significantly lower levels of revenue and capacity
utilization.  The increase in gross margin was in part, due to better
pricing discipline, improved sales mix of higher margin products, ongoing
manufacturing cost reductions and lower depreciation expense as a result of
disciplined capital spending.
 
 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.  Orders from Micrel’s major sell-through
distributors and from customers serving the communications and industrial end
markets strengthened in the first quarter.  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 58.5% was the highest quarterly gross margin as of that
time in the Company’s history.  The sequential improvement in gross
margin was primarily the result of a richer sales mix driven by increased sales
of higher margin wireline communications products.  The Company’s
inventory increased on a sequential basis in response to higher demand and in
order to provide competitive lead times to our customers.  The
sequential increase in inventory added approximately one percentage point to
first quarter gross margin, about the same as that experienced in the fourth
quarter of 2005.
 
 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 57.3%
declined by 1.2 percentage points as compared to the first quarter of 2006 but
was up 5.5 percentage points from the 51.8% reported for the comparable period
in 2005.  The sequential decline in gross margin was primarily the
result of normal fluctuations in sales mix and changes in inventory combined
with a greater unfavorable impact from stock compensation
expense.  The Company’s on-hand inventories increased by $1.5 million
on a sequential basis.  The majority of the second quarter inventory
growth was for purchased Ethernet product materials driven by increased customer
demand coupled with long 3rd party
foundry cycle times.
 
 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.  Orders from direct OEM customers increased
slightly on a sequential basis in the third quarter primarily due to higher
bookings from customers serving the wireless handset and computing end markets,
and increased foundry orders.  Third quarter 2006 net revenues of
$73.5 million increased by 5% sequentially and were 18% above the prior year
period.  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 resales of the
Company’s products through the distribution channel increased slightly in what
is traditionally a seasonally slow period for North American and European
distributors.  Sales to the wireline communications markets slowed in
the quarter after rapid growth in the first half of 2006.  Third
quarter 2006 net revenues included $2.9 million associated with a patent license
that was previously under litigation.
  24
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  
 Third quarter 2006 gross margin of
58.6% matched 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 in the third
quarter, increasing third quarter 2006 net income by $0.02 per diluted share.
The Company’s September ending on-hand inventory increased $2.6 million from the
second quarter.  The majority of the inventory growth was for
purchased material for Ethernet products, as manufacturing cycle times at the
foundries that manufacture Ethernet products declined during the third quarter
while end demand for certain Ethernet products decreased.
 
 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 and 1% lower than revenues of
$65.1 million recorded in the year-ago period.   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 57.2% declined from the
previous quarter primarily due to lower revenues and the impact of reduced
manufacturing volumes leading to less absorption of fixed cost.  The
Company’s inventory was flat on a sequential basis as the Company reduced
manufacturing activity in response to reduced demand.
 
 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 57.9% 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 $57.8 million increased
by 74% from the $33.1 million recorded in 2005.  Operating margin
improved to 20.9% from 13.3% in 2005.  Year 2006 net income was $38.3
million, or $0.46 per diluted share, an increase of 50% from $25.4 million, or
$0.29 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
58.1% 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 $11.3 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.
  25
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  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 57.0% was flat to
the prior year period and decreased by approximately 1% 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.
 
 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 increased from 57.0% in the second
quarter to 57.5% in the third quarter of 2007, and decreased from 58.6% 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 $12.9 million,
or 19.8% of revenues.
 
 In the fourth quarter of 2007, the
increasingly uncertain macroeconomic environment appeared to heighten our
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 55.8% in the fourth
quarter from 57.5% in the third quarter primarily as a result of a less
favorable sales mix.  Fourth quarter operating profit was $11.7
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.
  26
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  Micrel’s financial performance in 2007
remained solid.  Total year gross margin of 57% was the second highest
in the Company history.  Net income for fiscal 2007 increased 15.8% to
$44.4 million, or $0.57 per diluted share, compared with net income of $38.3
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 $9.9 million or $0.13
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.
 
 The Company derives a substantial
portion of its net revenues from standard products. For 2007, 2006 and 2005 the
Company's standard products sales accounted for 92%, 93%, and 96%, 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 internal 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, 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.
 
 
 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.
  27
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  
 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 recognition and related cost of sales are deferred, 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 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. Actual future returns
and price adjustments could be different than the allowance
established.
 
 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."
  28
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  
 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, 2007,
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. See Note 7 of
Notes to Consolidated Financial Statements for additional information regarding
the adoption of FIN No. 48.
 
 Litigation.The
semiconductor industry is characterized by frequent litigation regarding patent
and other intellectual property rights.  In the past two years, the
Company has concluded cases involving intellectual property claims (see Note 10 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.
 
  29
 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 31,2007
              
              
              2006
              
              
              2005Net
      revenues
              
              
              100.0
              %
              
              
              100.0
              %
              
              
              100.0
              %Cost
      of revenues
              
              
              42.9
              
              
              
              42.1
              
              
              
              46.6Gross
      profit
              
              
              57.1
              
              
              
              57.9
              
              
              
              53.4Operating
      expenses:Research
      and development
              
              
              21.1
              
              
              
              18.8
              
              
              
              18.1Selling,
      general and administrative
              
              
              17.5
              
              
              
              17.7
              
              
              
              18.4Restructuring
      expense
              
              
              0.1
              
              
              
              0.1
              
              
              
              —Acquisition
      expenses
              
              
              —
              
              
              
              —
              
              
              
              —Other
      operating expense
              
              
              —
              
              
              
              0.4
              
              
              
              3.7Total
      operating expenses
              
              
              38.7
              
              
              
              37.0
              
              
              
              40.2Income
      from operations
              
              
              18.4
              
              
              
              20.9
              
              
              
              13.2Other
      income, net
              
              
              8.5
              
              
              
              2.0
              
              
              
              1.7Income
      before income taxes
              
              
              26.9
              
              
              
              22.9
              
              
              
              14.9Provision
      for income taxes
              
              
              9.7
              
              
              
              9.0
              
              
              
              4.8Net
      income
              
              
              17.2
              %
              
              
              13.9
              %
              
              
              10.1
              %
 
 Net Revenues. Net revenues
decreased 7% to $258.0 million for the year ended December 31, 2007
from $276.3 million in 2006 due to decreased standard product revenues which
were partially offset by increased other products revenues.
 
 Standard product revenues decreased 8%
to $237.4 million, which represented 92% of net revenues for the year ended
December 31, 2007, compared to $258.2 million and 93% of net revenues for 2006.
These decreases resulted primarily from decreased shipments of standard products
to the wireless handset, computer products, telecommunications, networking and
high speed communications end markets, which were partially offset by increase
unit shipments to the industrial end market.
 
 Other products revenues which consist
primarily of custom and foundry products revenues and revenues from the license
of patents, increased 14% to $20.6 million, which represented 8% of net
revenues for the year ended December 31, 2007, compared to $18.1 million
and 7% of net revenues for 2006. These increases resulted primarily from
increased foundry product shipments, which were partially offset by a $2.9
million patent license included in 2006.
 
 For the year ended December 31, 2006,
net revenues increased 10% to $276.3 million from $250.4 million in 2005 due to
increased standard product revenues and increased other products revenues.
Standard product revenues increased 8% to $258.2 million, which represented
93% of net revenues for 2006, compared to $239.2 million and 96% of net revenues
for 2005. These increases resulted primarily from increased shipments of
standard products to the industrial, networking and high-speed communications
end markets. Other products revenues which consist primarily of custom and
foundry products revenues and revenues from the license of patents, increased
62% to $18.1 million, which represented 7% of net revenues for 2006,
compared to $11.2 million and 4% of net revenues for 2005. These increases
partially resulted from a $2.9 million patent license included in 2006 combined
with increased shipments of foundry and custom products.
  30
 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 2007, the Company averaged approximately 50% to 60%
OEM turns fill per quarter compared to approximately 50% to 55% turns fill per
quarter during 2006.
 
 As noted in Item
1A “Risk Factors” and in the overview section of this Item 7 “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 67%,
70%, and 75% of net revenues for the years ended December 31, 2007, 2006
and 2005, respectively. On a dollar basis, international sales decreased 10% to
$173.6 million for the year ended December 31, 2007 from $193.5
million for the comparable period in 2006. These decreases resulted primarily
from decreased shipments of standard products to the networking communications,
wireless handsets and computer products end markets, primarily in
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, 2007 and 2006 were impacted by the
recognition of non-cash expense related to the fair value of share-based
compensation awards. 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. During 2006,
Micrel recorded $8.4 million in pre-tax share-based compensation expense, of
which $1.5 million is included in cost of revenues, $3.4 million is included in
research and development expense and $3.5 million is included in sales, general
and administrative expense.
  31
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  
 Prior to January 1, 2006, the Company
accounted for share-based awards to employees using the intrinsic value method
in accordance with Accounting Principles Board Opinion ("APB") No. 25,
"Accounting for Stock Issued to Employees". During the years 1996 through
December 2001, certain of the Company's option pricing practices resulted in
stock compensation expense under APB No. 25. In addition, the Company assumed
certain stock options granted to employees of Kendin Communications in
connection with the acquisition of Kendin Communications in 2001 which were
compensatory under APB No. 25. For the year ended December 31, 2005, total
amortization of deferred stock compensation was $770,000.
 
 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 57% for the year ended December
31, 2007 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.
 
 For the year ended December 31,
2006, the Company's gross margin increased to 58% from 53% for 2005. The
increases in gross margin resulted primarily from a greater sales mix of higher
margin products combined with decreased depreciation, decreased wafer
fabrication costs and decreased external assembly and test costs, which were
partially offset by increased share-based compensation costs due to the adoption
of SFAS No. 123R.  Depreciation and amortization as a percent of sales
declined to 6.3% for 2006 as compared to 8.0% for 2005. This reduction in
depreciation was primarily due to existing equipment becoming fully depreciated,
which was partially offset by additional depreciation on new equipment
purchases. In addition, included in gross profit for 2006 is $2.9 million in net
revenues for a patent license (see Note 10 of Notes to
Consolidated Financial Statements), which is partially offset by a $714,000
charge to cost of revenues related to the settlement of a patent dispute (see
Note 10 of Notes to Consolidated Financial Statements).
 
 Research and Development
Expenses.  Research and development expenses as a percentage of
net revenues represented 21% and 19% for the years ended December 31, 2007
and 2006, respectively. On a dollar basis, research and development expenses
increased $2.4 million or 5% to $54.5 million for 2007 from $52.1 million in
2006. These increases were primarily due to increased staffing 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,
2006, research and development expenses increased $6.8 million to $52.1 million
from $45.2 million in 2005. This increase was primarily due to increased
share-based compensation costs due to the adoption of SFAS No. 123R combined
with increased prototype fabrication costs.
 
 Selling, General and Administrative
Expenses. As a percentage of net revenues, selling, general and
administrative expenses represented 18% for both of the years ended
December 31, 2007 and 2006. On a dollar basis, selling, general and
administrative expenses decreased $4.0 million or 8% to $45.0 million for
2007 from $49.0 million for 2006. This decrease was primarily due to
decreased outside legal costs.
  32
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  For the year ended December 31,
2006 selling, general and administrative expenses increased $2.9 million to
$49.0 million from $46.2 million for 2005. These increases were
primarily due to increased share-based compensation costs due to the adoption of
SFAS No. 123R and increased staffing costs, including salaries and sales
commissions, which were partially offset by decreased outside legal
costs.
 
 Restructuring Expense. In
September 2002, the Company approved a plan to close its Santa Clara, California
wafer fabrication facility to reduce costs and improve operating
efficiencies.  During 2003, the Company ceased all manufacturing
processes within the Santa Clara facility and completed the relocation of all
employees to its San Jose, CA facilities.  As of December 31, 2007,
the remaining restructuring accrual related to this facility closure was $1.8
million (see Note 12 of Notes to Consolidated Financial
Statements) and is classified as other current liabilities. Actual future costs
may be different than these estimates and would require an adjustment to
restructuring expense in the period such determination is made.
 
 Other Operating
Expense.  Other operating expenses in 2006 consist primarily of
accrued costs related to the settlement of patent infringement lawsuits (see Note 10 of Notes to Consolidated Financial
Statements).  In 2005, the Company recorded $9.3 million in other
operating expense related to a jury verdict against Micrel in its suit against
TRW Automotive and for TRW Automotive in its countersuit against Micrel. (see
Note 10 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 accrued interest
related to accrued litigation liabilities.  During 2007 the Company
recorded $15.5 million in non-operating income resulting from the settlement of
litigation (see Note 10 of Notes to Consolidated
Financial Statements).
 
 Provision for Income Taxes.
For the year ended December 31, 2007, the provision for income taxes was
$24.9 million or 36% of income before taxes as compared to 39% of income before
taxes for 2006.  The tax rate decrease is due primarily to the
reduction in nondeductible share-based compensation expense combined with an
increased effect of federal and state research and development credits. The 2007
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,
2006, the provision for income taxes was $24.9 million or 39% of income before
taxes as compared to 32% of income before taxes for the comparable period in
2005.  The tax rate increase is due primarily to the effects of
nondeductible share-based compensation expense combined with a reduced impact of
federal qualified production activity deductions and federal and state research
and development credits as a result of significantly increased income before tax
in 2006. The provision for income taxes differs from taxes computed at the
federal statutory rate primarily due to the effect of nondeductible share-based
compensation expense, state income taxes, state research and development
credits, and federal qualified production activity deductions.
 
 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, 2007,
consisted of cash and short-term investments of $91.1 million and a $6.0 million
revolving line of credit from a commercial bank under which the Company could
borrow $5.5 million (see Note 5 of Notes to Consolidated
Financial Statements).
  33
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  The Company generated $67.8 million in
cash flows from operating activities for the year ended December 31, 2007,
which was primarily attributable to net income, after adding back non-cash
activities, of $71.9 million (net income of $44.4 million plus non-cash
activities of $27.5 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.
 
 For the year ended December 31,
2006, the Company generated $59.0 million in cash flows from operating
activities, which was primarily attributable to net income, after adding back
non-cash activities, of $62.7 million (non-cash activities consisted primarily
of $17.2 million in depreciation and amortization and $8.4 million in
share-based compensation) combined with a $4.4 million decrease in accounts
receivable and a $7.6 million increase in deferred income on shipments to
distributors, which were partially offset by $6.5 million increase in
inventories combined with a $4.9 million decrease in income taxes payable and a
$3.1 million decrease in accounts payable.
 
 The Company used $29.3 million of cash
for investing activities during the year ended December 31, 2007, which was
primarily comprised of $20.2 million in purchases of property, plant and
equipment and $11.6 million from the net purchases of investments, which was
partially offset by a $2.6 million decrease in restricted cash.
 
 For the year ended December 31,
2006, the Company generated $12.4 million of cash from investing activities,
which was primarily comprised of $33.4 million from the net proceeds from the
sale of short-term investments, which was partially offset by $16.8 million in
purchases of property, plant and equipment, $1.6 million in purchases of
intangible assets and $2.6 million increase in restricted cash (see Note 1 of Notes to Consolidated Financial
Statements).
 
 The Company used $49.8 million of cash
for financing activities during the year ended December 31, 2007, 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.
 
 For the year ended December 31,
2006, the Company used $67.3 million of cash in financing activities, primarily
for the repurchase of $71.5 million of the Company's common stock, which was
partially offset by $4.1 million in proceeds from employee stock
transactions.
 
 The Company currently intends to spend
approximately $16 million to $23 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 million of its common
stock through December 31, 2008. Since inception, the Company's principal
sources of funding have been its cash from operations, bank borrowings and sales
of common stock. 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 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.
  34
 Table of Contents
 MANAGEMENT'S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
(CONTINUED)
  At December 31, 2007, the Company held
$16.6 million in long-term investments (see discussion of investments in Note 1 of Notes to Consolidated Financial
Statements).  Long-term investments consisted of senior auction rate
notes secured by student loans. In February 2008, some of these auction rate
securities failed to auction successfully due to sell orders exceeding buy
orders. The Company is evaluating the impact of these failed auctions on the
fair value of these securities.  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.
 
 
 Recently
Issued Accounting Standards
 
 Please refer to the caption "New
Accounting Standards" 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, 2007, 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 8 of Notes to Consolidated
      Financial Statements)
              
              $
              5,341
              
              
              $
              1,911
              
              
              $
              2,844
              
              
              $
              571
              
              
              $
              15Open
      purchase orders
              
              
              13,700
              
              
              
              13,700
              
              
              
              —
              
              
              
              —
              
              
              
              —Total
              
              $
              19,041
              
              
              $
              15,611
              
              
              $
              2,844
              
              
              $
              571
              
              
              $
              15
 
 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 $5.5 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, 2007 and there were $525,000
in standby letters of credit outstanding. The letters of credit are issued to
guarantee payments for the Company's workers compensation program.
 
 Effective
January 1, 2007, the Company adopted the provisions of FIN No. 48 (see Note 7 of Notes to Consolidated Financial Statements). As of
December 31, 2007, the liability for uncertain tax positions, net of federal
impacts on state tax issues was $5.4 million, of which none is expected to be
paid within one year.  Included in the $5.4 million is $2.6 million
that has not yet reduced income tax payments, and, therefore, has been netted
against non-current deferred tax assets.  The remaining $2.8 million
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.
 
 The Company has no other off-balance
sheet arrangements and has not entered into any transactions involving
unconsolidated, limited purpose entities or commodity
contracts.
  35
 Table of Contents
  ITEM7 A.
              QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK
 
 At December 31, 2007, the Company held
$10.2 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, 2007 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, 2007, the fair value of the short-term investments
would decline by an immaterial amount.
 
 At
December 31, 2007, the Company held $16.6 million in long-term investments.
Long-term investments consisted of senior auction rate notes secured by student
loans. In February 2008, some of these auction rate securities failed to auction
successfully due to sell orders exceeding buy orders. The Company is evaluating
the impact of these failed auctions on the fair value of these
securities.  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 under the caption “Investments” in Item 15
of Part III which is incorporated herein by reference.
 
 At December 31, 2007, 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 39 through 69 and supplementary data are set forth on pages
70 through 71, 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.
 
 
 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, 2007.
  36
 Table of Contents
  
 
 
 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, 2007.
 
 The effectiveness of the Company’s
internal control over financial reporting as of December 31, 2007 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, 2007 that has materially affected, or is reasonably
likely to materially affect, the Company’s internal control over financial
reporting.
 
 
 ITEM 9B.
              OTHER
      INFORMATION
 
 None.
 
  37
 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 2008 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 2008 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 2008 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 2008 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 2008 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 2008 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 2008 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 we incorporate by
reference into such filing.
  38
 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 2008 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 2008 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 2008
Annual Meeting of Shareholders and is incorporated herein by
reference.
 
 
 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
              40Consolidated Balance Sheets as of December 31,
      2007 and 2006
              42Consolidated Statements of Operations for the Years
      Ended December 31, 2007, 2006 and 2005
              43Consolidated Statements of Shareholders’ Equity and
      Comprehensive Income for the Years Ended December 31, 2007, 2006 and
      2005
              44Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2007, 2006 and 2005
              45Notes to Consolidated Financial
      Statements
              46
 
 2.
              Financial
      Statement Schedule. The following financial statement schedule of the
      Company for the years ended December 31, 2007, 2006 and 2005, 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
              71Schedules
      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.
 
  39
 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,
2007 and 2006, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2007 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, 2007, 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 6 to the consolidated financial
statements, the Company changed the manner in which it accounts for share-based
compensation in 2006.
  As
discussed in Note 7 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.
  40
 Table of Contents
  
 
 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
27, 2008
  41
 Table of Contents
  
 MICREL,
      INCORPORATEDCONSOLIDATED
      BALANCE SHEETSAS
      OF DECEMBER 31,(In
      thousands, except share amounts)2007
              
              
              2006ASSETSCURRENT
      ASSETS:Cash and cash
      equivalents
              
              $
              80,977
              
              
              $
              92,259Restricted cash
              
              
              —
              
              
              
              2,629Short-term
    investments
              
              
              10,150
              
              
              
              15,050Accounts receivable, less
      allowances: 2007, $4,212; 2006, $4,596
              
              
              29,614
              
              
              
              31,092Inventories
              
              
              35,660
              
              
              
              37,183Income taxes
      receivable
              
              
              3,426
              
              
              
              801Prepaid expenses and
      other
              
              
              3,604
              
              
              
              2,283Deferred income
    taxes
              
              
              19,387
              
              
              
              23,096Total current
    assets
              
              
              182,818
              
              
              
              204,393LONG-TERM
      INVESTMENTS (Note 1)
              
              
              16,552
              
              
              
              —PROPERTY,
      PLANT AND EQUIPMENT, NET
              
              
              82,585
              
              
              
              78,665INTANGIBLE
      ASSETS, NET
              
              
              3,026
              
              
              
              4,714DEFERRED
      INCOME TAXES, NET
              
              
              9,286
              
              
              
              11,158OTHER
      ASSETS
              
              
              478
              
              
              
              1,343TOTAL
              
              $
              294,745
              
              
              $
              300,273LIABILITIES
      AND SHAREHOLDERS’ EQUITYCURRENT
      LIABILITIES:Accounts payable
              
              $
              18,010
              
              
              $
              17,429Accrued
    compensation
              
              
              8,579
              
              
              
              7,587Accrued
commissions
              
              
              1,993
              
              
              
              1,435Other accrued
      liabilities
              
              
              3,525
              
              
              
              13,542Deferred income on shipments to
      distributors
              
              
              20,238
              
              
              
              21,705Current portion of long-term
      debt
              
              
              —
              
              
              
              80Total current
      liabilities
              
              
              52,345
              
              
              
              61,778LONG-TERM
      INCOME TAXES PAYABLE (Note 7)
              
              
              2,814
              
              
              
              —DEFERRED
      RENT
              
              
              335
              
              
              
              453COMMITMENTS
      AND CONTINGENCIES (Notes 8 and 10)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: 2007 – 74,001,360;
      2006 – 78,078,211
              
              
              —
              
              
              
              15,585Accumulated other comprehensive
      loss
              
              
              (32
              )
              
              
              (35
              )Retained earnings
              
              
              239,283
              
              
              
              222,492Total shareholders’
      equity
              
              
              239,251
              
              
              
              238,042TOTAL
              
              $
              294,745
              
              
              $
              300,273The
      accompanying notes are an integral part of these consolidated financial
      statements.
  42
 Table of Contents
  
 MICREL,
      INCORPORATEDCONSOLIDATED
      STATEMENTS OF OPERATIONSYEARS
      ENDED DECEMBER 31,(In
      thousands, except per share amounts)2007
              
              
              2006
              
              
              2005NET
      REVENUES
              
              $
              257,974
              
              
              $
              276,307
              
              
              $
              250,356COST
      OF REVENUES(1)
              
              
              110,630
              
              
              
              116,201
              
              
              
              116,564GROSS
      PROFIT
              
              
              147,344
              
              
              
              160,106
              
              
              
              133,792OPERATING
      EXPENSES:Research and development(1)
              
              
              54,523
              
              
              
              52,074
              
              
              
              45,231Selling, general and
      administrative(1)
              
              
              45,040
              
              
              
              49,016
              
              
              
              46,159Restructuring
    expense
              
              
              128
              
              
              
              269
              
              
              
              —Other operating
      expense
              
              
              86
              
              
              
              966
              
              
              
              9,282Total operating
      expenses
              
              
              99,777
              
              
              
              102,325
              
              
              
              100,672INCOME
      FROM OPERATIONS
              
              
              47,567
              
              
              
              57,781
              
              
              
              33,120OTHER
      INCOME:Interest income
              
              
              6,267
              
              
              
              5,978
              
              
              
              4,513Interest expense
              
              
              (93
              )
              
              
              (634
              )
              
              
              (345
              )Other income (Note 10)
              
              
              15,543
              
              
              
              59
              
              
              
              12Total other income,
      net
              
              
              21,717
              
              
              
              5,403
              
              
              
              4,180INCOME
      BEFORE INCOME TAXES
              
              
              69,284
              
              
              
              63,184
              
              
              
              37,300PROVISION
      FOR INCOME TAXES
              
              
              24,933
              
              
              
              24,876
              
              
              
              11,942NET
      INCOME
              
              $
              44,351
              
              
              $
              38,308
              
              
              $
              25,358NET
      INCOME PER SHARE:Basic
              
              $
              0.58
              
              
              $
              0.47
              
              
              $
              0.29Diluted
              
              $
              0.57
              
              
              $
              0.46
              
              
              $
              0.29WEIGHTED-AVERAGE
      SHARES USED IN COMPUTING PER SHARE AMOUNTS:Basic
              
              
              76,918
              
              
              
              81,550
              
              
              
              87,055Diluted
              
              
              77,813
              
              
              
              82,842
              
              
              
              87,971Cash dividends per common
      share
              
              $
              0.09
              
              
              $
              —
              
              
              $
              —(1)
      Share- based compensation included in:Cost of revenues
              
              $
              1,156
              
              
              $
              1,540
              
              
              $
              159Research and
      development
              
              
              2,130
              
              
              
              3,341
              
              
              
              161Selling, general and
      administrative
              
              
              2,199
              
              
              
              3,534
              
              
              
              450The
      accompanying notes are an integral part of these consolidated financial
      statements.
  43
 Table of Contents
  MICREL,
      INCORPORATEDCONSOLIDATED
      STATEMENTS OF SHAREHOLDERS’ EQUITY
                AND
      COMPREHENSIVE INCOMEYEARS
      ENDED DECEMBER 31, 2007, 2006 AND 2005(In
      thousands, except share amounts)AccumulatedDeferred
              
              
              Other
              
              
              
              
              
              TotalCommon
Stock
              
              
              Share-Based
              
              
              Comprehensive
              
              
              Retained
              
              
              Shareholders'
              
              
              ComprehensiveShares
              
              
              Amount
              
              
              Compensation
              
              
              Income
    (Loss)
              
              
              Earnings
              
              
              Equity
              
              
              IncomeBalances,
      December 31, 2004
              
              
              89,825,994
              
              
              $
              127,264
              
              
              $
              (1,118
              )
              
              $
              (85
              )
              
              $
              158,826
              
              
              $
              284,887Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              25,358
              
              
              
              25,358
              
              
              $
              25,358Other
      comprehensive income, change in net unrealized losses from
      investments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              33
              
              
              
              
              
              
              
              33
              
              
              
              33Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              25,391Deferred
      share-based compensation
              
              
              —
              
              
              
              (54
              )
              
              
              824
              
              
              
              —
              
              
              
              —
              
              
              
              770Repurchases
      of common stock
              
              
              (6,065,300
              )
              
              
              (63,399
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (63,399
              )Employee
      stock transactions
              
              
              885,986
              
              
              
              6,949
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              6,949Tax
      effect of employee stock transactions
              
              
              —
              
              
              
              3,088
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              3,088Balances,
      December 31, 2005
              
              
              84,646,680
              
              
              
              73,848
              
              
              
              (294
              )
              
              
              (52
              )
              
              
              184,184
              
              
              
              257,686Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              38,308
              
              
              
              38,308
              
              
              $
              38,308Other
      comprehensive income, change in net unrealized losses from
      investments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              17
              
              
              
              
              
              
              
              17
              
              
              
              17Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              38,325Reversal
      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
              )
              
              
              222,492
              
              
              
              238,042Net
      income
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              44,351
              
              
              
              44,351
              
              
              $
              44,351Other
      comprehensive income, change in net unrealized losses from
      investments
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              3
              
              
              
              
              
              
              
              3
              
              
              
              3Comprehensive
      income
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              
              $
              44,354Share-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
              )
              
              $
              239,283
              
              
              $
              239,251
 The
accompanying notes are an integral part of these consolidated financial
statements.
 44
 Table of Contents
  
 MICREL,
      INCORPORATEDCONSOLIDATED
      STATEMENTS OF CASH FLOWSYEARS
      ENDED DECEMBER 31,(In
      thousands)2007
              
              
              2006
              
              
              2005CASH
      FLOWS FROM OPERATING ACTIVITIES:Net income
              
              $
              44,351
              
              
              $
              38,308
              
              
              $
              25,358Adjustments to reconcile net
      income to net cash provided
                by operating
      activities:Depreciation and
      amortization
              
              
              18,001
              
              
              
              17,291
              
              
              
              19,952Share-based
      compensation
              
              
              5,485
              
              
              
              8,415
              
              
              
              770Tax benefit on the exercise of
      employee stock options
              
              
              1,347
              
              
              
              784
              
              
              
              —Excess tax benefits associated
      with stock compensation
              
              
              (159
              )
              
              
              (206
              )
              
              
              —Loss on disposal of
      assets
              
              
              —
              
              
              
              11
              
              
              
              140Deferred rent
              
              
              (118
              )
              
              
              (22
              )
              
              
              (100
              )Deferred income tax provision
      (benefit)
              
              
              2,947
              
              
              
              (1,856
              )
              
              
              (6,773
              )Changes in operating assets and
      liabilities, net of
                effects of an
      acquisition:Accounts
    receivable
              
              
              1,478
              
              
              
              4,432
              
              
              
              (3,469
              )Inventories
              
              
              1,420
              
              
              
              (6,539
              )
              
              
              5,325Income taxes
      receivable
              
              
              (2,625
              )
              
              
              (801
              )
              
              
              —Prepaid expenses and other
      assets
              
              
              (456
              )
              
              
              (1,296
              )
              
              
              615Accounts
payable
              
              
              581
              
              
              
              (3,123
              )
              
              
              4,277Accrued
      compensation
              
              
              992
              
              
              
              636
              
              
              
              2,052Accrued
    commissions
              
              
              558
              
              
              
              (45
              )
              
              
              188Income taxes
      payable
              
              
              5,448
              
              
              
              (4,939
              )
              
              
              3,067Other accrued
      liabilities
              
              
              (10,017
              )
              
              
              301
              
              
              
              7,267Other non-current accrued
      liabilities
              
              
              —
              
              
              
              —
              
              
              
              (1,389
              )Deferred income on shipments to
      distributors
              
              
              (1,467
              )
              
              
              7,636
              
              
              
              421Net cash provided by operating
      activities
              
              
              67,766
              
              
              
              58,987
              
              
              
              57,701CASH
      FLOWS FROM INVESTING ACTIVITIES:Change in restricted
      cash
              
              
              2,629
              
              
              
              (2,629
              )
              
              
              —Purchases of property, plant
      and equipment
              
              
              (20,233
              )
              
              
              (16,774
              )
              
              
              (14,418
              )Purchase of intangible
      assets
              
              
              —
              
              
              
              (1,601
              )
              
              
              —Purchases of
      investments
              
              
              (23,713
              )
              
              
              (18,090
              )
              
              
              (74,620
              )Proceeds from sales and
      maturities of investments
              
              
              12,064
              
              
              
              51,490
              
              
              
              74,735Net cash provided (used) in
      investing activities
              
              
              (29,253
              )
              
              
              12,396
              
              
              
              (14,303
              )CASH
      FLOWS FROM FINANCING ACTIVITIES:Repayments of
    debt
              
              
              (80
              )
              
              
              (67
              )
              
              
              (100
              )Proceeds from the issuance of
      common stock
              
              
              12,133
              
              
              
              4,120
              
              
              
              6,949Repurchase of common
      stock
              
              
              (55,062
              )
              
              
              (71,513
              )
              
              
              (63,399
              )Payments of cash
      dividends
              
              
              (6,945
              )
              
              
              —
              
              
              
              —Excess tax benefits associated
      with stock compensation
              
              
              159
              
              
              
              206
              
              
              
              —Net cash used in financing
      activities
              
              
              (49,795
              )
              
              
              (67,254
              )
              
              
              (56,550
              )NET
      INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS
              
              
              (11,282
              )
              
              
              4,129
              
              
              
              (13,152
              )CASH
      AND CASH EQUIVALENTS - Beginning of year
              
              
              92,259
              
              
              
              88,130
              
              
              
              101,282CASH
      AND CASH EQUIVALENTS - End of year
              
              $
              80,977
              
              
              $
              92,259
              
              
              $
              88,130SUPPLEMENTAL
      DISCLOSURE OF CASH FLOW INFORMATION:Cash paid during the year
      for:Interest
              
              $
              818
              
              
              $
              86
              
              
              $
              345Income taxes
              
              $
              17,744
              
              
              $
              31,695
              
              
              $
              15,952The
      accompanying notes are an integral part of these consolidated financial
      statements.
  45
 Table of Contents
 MICREL,
INCORPORATED
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 Years
Ended December 31, 2007, 2006 and 2005
  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.
 
 Restricted Cash
— During the first quarter of 2006, the Company elected to post a surety
bond to stay payment of potential damages and interest arising from a legal
judgment awarded to TRW during 2005 (see Note
10).  As collateral for the surety bond, the Company placed $2.6
million in a registered pledge account.  The amount pledged was
classified as Restricted Cash in the Company’s Consolidated Balance Sheet as of
December 31, 2006. During the second quarter of 2007, the Company paid the legal
judgment to TRW and the $2.6 million balance of the registered pledge account
was transferred to the Company's unrestricted cash account.
  46
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  Investments
—Short-term
investmentsconsist primarily of
liquid corporate debt instruments and are classified as available-for-sale
securities and 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. 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 regards to those securities
(expectations of sales and redemptions).  A summary of investments at
December 31, 2007 and 2006 is as follows (in thousands):
 
 Amortized
                Cost
              
              
              Market
                Value
              
              
              Unrealized
      HoldingGains
              
              
              Unrealized
      HoldingLossesShort-term
      investments at December 31, 2007
              
              $
              10,177
              
              
              $
              10,150
              
              
              $
              —
              
              
              $
              27Short-term
      investments at December 31, 2006
              
              $
              15,085
              
              
              $
              15,050
              
              
              $
              —
              
              
              $
              35
 Long-term
investments of $16.6 million at December 31, 2007, consist of senior auction
rate notes secured by student loans. 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 twenty eight days for
the securities held by the Company, investors can sell or continue to hold the
securities at par. In February 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 four of the six student
loan-backed notes held by the Company have failed as of February 27, 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 has classified all auction rate notes as long-term assets in the
consolidated balance sheet as of December 31, 2007. 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, 2007, the maximum interest rate is generally one
month LIBOR plus 1.5% based on the notes’ AAA rating as of that date. The
Company is evaluating the impact of these failed auctions on the fair value of
these securities. If the Company determines that the fair value of these auction
rate securities is temporarily impaired, the Company would record a temporary
impairment, within other comprehensive loss, a component of shareholders'
equity, in the period such temporary decline in fair value is determined.
 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.
 
 Amortized
                Cost
              
              
              Market
                Value
              
              
              Unrealized
      HoldingGains
              
              
              Unrealized
      HoldingLossesLong-term
      investments at December 31, 2007
              
              $
              16,557
              
              
              $
              16,552
              
              
              $
              —
              
              
              $
              5Long-term
      investments at December 31, 2006
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
  47
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  
 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 securities 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, 2007, two world-wide
distributors and an Asian based stocking representative, accounted for 18%, 10%
and 15%, respectively, of total accounts receivable. At December 31, 2006,
two world-wide distributors and an Asian based stocking representative,
accounted for 20%, 13% and 12%, 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 10), 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.
  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.
   48
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  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, 2007 and 2006. 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, 2007
              
              
              As of December 31, 2006Gross
                Carrying
                Amount
              
              
              Accumulated
                Amortization
              
              
              Net
                Carrying
                Amount
              
              
              Gross
                Carrying
                Amount
              
              
              Accumulated
                Amortization
              
              
              Net
                Carrying
                AmountDeveloped
      and core technology
              
              $
              8,718
              
              
              $
              8,349
              
              
              $
              369
              
              
              $
              8,718
              
              
              $
              8,078
              
              
              $
              640Patents
      and tradename
              
              
              10,318
              
              
              
              7,661
              
              
              
              2,657
              
              
              
              10,318
              
              
              
              6,244
              
              
              
              4,074Customer
      relationships
              
              
              1,455
              
              
              
              1,455
              
              
              
              -
              
              
              
              1,455
              
              
              
              1,455
              
              
              
              -$
              20,491
              
              
              $
              17,465
              
              
              $
              3,026
              
              
              $
              20,491
              
              
              $
              15,777
              
              
              $
              4,714
 
 Total
intangible amortization expense for the years ended December 31, 2007, 2006 and
2005 was $1.7 million, $1.6 million and $1.6 million, respectively. Estimated
future intangible amortization expense for intangible assets as of
December 31, 2007, is expected to be approximately $1.7 million in 2008,
$828,000 in 2009, and $254,000 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.
 
 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 recognition and related cost of sales are deferred, 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
  49
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  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 receivables 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.
 
 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, 2007 and 2006, 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 expenses are recognized
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 fully characterized 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.
  50
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  
 Advertising
Expenses — The
Company expenses advertising costs to selling, general and administrative
expense as incurred. Advertising expenses for 2007, 2006 and 2005 were $2.0
million, $2.1 and $1.8 million respectively.
 
 Income Taxes
— Deferred tax assets and liabilities result from temporary differences
between book and tax bases of assets and liabilities, state and federal research
and development credit carryforwards, and state manufacturers credit
carryforwards.  The Company had net current deferred tax assets of
$19.4 million and net long-term deferred tax assets of $9.3 million as of
December 31, 2007.  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 7 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. The Company adopted SFAS 123(R) using
the modified prospective transition method. In accordance with the modified
prospective transition method, the Company’s Consolidated Financial Statements
for prior periods have not been restated to reflect the impact of SFAS 123(R)
(see Note 6). Prior to the adoption of SFAS 123(R), the
Company applied Accounting Principles Board Opinion No. 25 ("APB 25"),
Accounting for Stock Issued to Employees, and related interpretations to account
for awards of share-based compensation granted to employees.
 
 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 31,2007
                
                
                2006
                
                
                2005Weighted-average
      common shares outstanding
                
                
                76,918
                
                
                
                81,550
                
                
                
                87,055Dilutive
      effect of stock options outstanding, using the treasury stock
      method
                
                
                895
                
                
                
                1,292
                
                
                
                916Shares
      used in computing diluted earnings per share
                
                
                77,813
                
                
                
                82,842
                
                
                
                87,971
  For the
years ended December 31, 2007, 2006 and 2005, 6.4 million, 5.7 million and 7.2
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.
  51
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  
 Fair Value of
Financial Instruments —Financial instruments included in the Company’s
consolidated balance sheets at December 31, 2007 and 2006, 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.
 
 New Accounting
Standards — In July 2006, the Financial Accounting Standards Board
("FASB") issued FASB Interpretation No. 48, "Accounting for Uncertainty in
Income Taxes, an Interpretation of FASB Statement No. 109" ("FIN No. 48"). FIN
No. 48 clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109 "Accounting
for Income Taxes".  This interpretation prescribes a model for the
financial statement recognition, measurement, presentation and disclosure of
uncertain tax positions taken or expected to be taken in income tax returns. See
Note 7 for additional information, including the effects
of adoption on the Company’s Consolidated Financial Statements.
 
 In
September 2006, the FASB issued Statement 157, “Fair Value Measurements” (“SFAS
157”). SFAS 157 establishes a framework for measuring fair value by providing a
standard definition of fair value as it applies to assets and liabilities. SFAS
157, which does not require any new fair value measurements, clarifies the
application of other accounting pronouncements that require or permit fair value
measurements. The effective date for the Company is January 1, 2008. The Company
is currently evaluating the effect that the adoption of SFAS 157 will have on
its financial position and results of operations.
 
 In
February 2007, the FASB issued Statement 159, "The Fair Value Option for
Financial Assets and Financial Liabilities ("SFAS 159"). The new Statement
allows entities to choose, at specified election dates, to measure eligible
financial assets and liabilities at fair value in situations in which they are
not otherwise required to be measured at fair value. If a company elects the
fair value option for an eligible item, changes in that item's fair value in
subsequent reporting periods must be recognized in current earnings. SFAS 159
also establishes presentation and disclosure requirements designed to draw
comparison between entities that elect different measurement attributes for
similar assets and liabilities. SFAS 159 is effective for fiscal years beginning
after November 15, 2007. The Company is currently evaluating the effect that the
adoption of SFAS 159 will have on its financial position and results of
operations.
 
 In
December 2007, the FASB issued SFAS No. 141(R), “Business Combinations” (“SFAS
141(R)”), which replaces FAS 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.
  52
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  2.
              INVENTORIES
 
 Inventories
at December 31 consist of the following (in thousands):
 
 2007
              
              
              2006Finished
      goods
              
              $
              14,261
              
              
              $
              16,062Work
      in process
              
              
              19,439
              
              
              
              19,430Raw
      materials
              
              
              1,960
              
              
              
              1,691$
              35,660
              
              
              $
              37,183
 
 
 3.
              PROPERTY, PLANT AND
EQUIPMENT
 
 Property,
plant and equipment at December 31 consist of the following (in
thousands):
 
 2007
              
              
              2006Manufacturing
      equipment
              
              $
              181,421
              
              
              $
              172,537Land
              
              
              6,636
              
              
              
              6,636Buildings
      and improvements
              
              
              46,876
              
              
              
              43,050Leasehold  improvements
              
              
              638
              
              
              
              636Office
      furniture and research equipment
              
              
              12,544
              
              
              
              12,356248,115
              
              
              
              235,215Accumulated
      depreciation and amortization
              
              
              (165,530
              )
              
              
              (156,550
              )$
              82,585
              
              
              $
              78,665
  Depreciation
expense for the years ended December 31, 2007 and 2006 and 2005 was $16.3
million, $15.7 million and $18.3 million, respectively.
 
 
 4.
              OTHER ACCRUED
LIABILITIES
 
 Other
accrued liabilities at December 31 consist of the following (in
thousands):
 
 2007
              
              
              2006Accrued
      current restructuring expenses
              
              $
              1,787
              
              
              $
              1,574Accrued
      workers' compensation and health insurance
              
              
              1,121
              
              
              
              1,339Accrued
      litigation and related interest
              
              
              —
              
              
              
              10,101Other
      current accrued liabilities
              
              
              617
              
              
              
              528$
              3,525
              
              
              $
              13,542
 
 
 5.
              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, 2007, and there were $525,000 in
standby letters of credit outstanding.  The revolving line of credit
agreement expires on June 30, 2009.  Borrowings under the revolving
line of credit bear interest rates of, at the Company's election, the prime rate
(7.25% at December 31, 2007), or the bank's revolving offshore rate, which
approximates LIBOR plus 2% (6.7% at December 31, 2007).  The agreement
contains certain restrictive covenants.  The Company was in compliance
with all such covenants at December 31, 2007.
  53
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  6.
              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, 2007. 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
November 2006, the Company's Board of Directors approved a $50 million share
repurchase program for calendar year 2007.  On November 13, 2007, the
Board of Directors of Micrel approved a modification to the plan to increase the
aggregate amount authorized to be used to repurchase shares in calendar year
2007 to $65,000,000.  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, employee stock
purchase plan and 401(k) plan.  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. During the year ended
December 31, 2007, the Company repurchased 5,515,854 shares of its common stock
for $55.1 million.
 
 Share
repurchases are recorded as a reduction of common stock to the extent available.
Any amounts repurchased in excess of common stock are recorded as a reduction of
retained earnings.
 
 On
October 22, 2007, the Company's Board of Directors approved a $50 million share
repurchase program for calendar year 2008.  Repurchases may occur from
time to time in the open market or in privately negotiated transactions through
December 31, 2008.
 
 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, 39,958,672 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, 2007, 14,536,314
total shares were reserved for future issuance, of which 2,523,270 shares were
available for future grants under the Option Plans.
  54
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  Option
activity under the Option Plans is as follows:
 Number
                of Shares
              
              
              Weighted
      Avg.
                Exercise
      Price
                Per ShareOutstanding,
      December 31, 2004 (8,253,200 exercisable at a weighted average price
      of $12.76 per share)
              
              
              12,097,083
              
              
              $
              12.85Granted
              
              
              1,840,200
              
              
              
              10.62Exercised
              
              
              (683,661
              )
              
              
              7.38Canceled
              
              
              (766,619
              )
              
              
              15.62Outstanding,
      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
              
              
              
              12.97
 
 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, 2007, 2006 and 2005 was $5.64, $7.04 and $6.86 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, 2007, 2006
and 2005 was $4.8 million, $2.5 million and $2.6 million, respectively. During
the years ended December 31, 2007, 2006 and 2005, the amount of cash received
from the exercise of stock options was $11.9 million, $4.0 million and $5.0
million, respectively. The net tax benefit realized from the exercise of
non-qualified stock options and disqualifying dispositions of incentive stock
options was $1.3 million, $784,000 and $3.1 million for the years ended December
31, 2007, 2006 and 2005, respectively. Additional information regarding options
outstanding as of December 31, 2007 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
              
              
              
              536,023
              
              
              
              1.3
              
              
              $
              6.82
              
              
              
              536,023
              
              
              $
              6.82$ 
      7.51 to $   9.00
              
              
              
              784,445
              
              
              
              7.1
              
              
              
              8.51
              
              
              
              243,700
              
              
              
              8.47$ 
      9.01 to $ 10.50
              
              
              
              2,462,361
              
              
              
              5.0
              
              
              
              9.65
              
              
              
              1,479,393
              
              
              
              9.49$10.51
      to $ 12.00
              
              
              
              2,805,888
              
              
              
              6.7
              
              
              
              10.97
              
              
              
              1,742,220
              
              
              
              10.84$12.01
      to $ 13.50
              
              
              
              2,086,950
              
              
              
              6.2
              
              
              
              12.73
              
              
              
              950,716
              
              
              
              12.96$13.51
      to $ 15.00
              
              
              
              808,700
              
              
              
              6.3
              
              
              
              14.18
              
              
              
              388,100
              
              
              
              14.09$15.01
      to $ 20.00
              
              
              
              1,393,580
              
              
              
              4.1
              
              
              
              17.33
              
              
              
              1,163,700
              
              
              
              17.62$20.01
      to $ 30.00
              
              
              
              914,097
              
              
              
              2.4
              
              
              
              21.77
              
              
              
              914,097
              
              
              
              21.77$30.01
      to $ 49.50
              
              
              
              221,000
              
              
              
              2.5
              
              
              
              39.79
              
              
              
              221,000
              
              
              
              39.79$ 
      0.12 to $ 49.50
              
              
              
              12,013,044
              
              
              
              5.3
              
              
              
              12.97
              
              
              
              7,638,949
              
              
              
              13.83
 
  55
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  
 As of
December 31, 2007, the aggregate pre-tax intrinsic value (which is the amount by
which the closing price of the Company's common stock at December 31, 2007
exceeded the exercise price of the options) of options outstanding and options
exercisable was approximately $946,000 and $913,000, respectively. As of
December 31, 2007, the estimated number of options exercisable and expected to
vest was 10.9 million shares with a weighted average remaining contractual life
of 5 years and estimated aggregate intrinsic value of $937,000.
 
 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.  As of
December 31, 2007 there were no RSUs granted.
 
 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.
 
 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 31,2007
              
              
              2006
              
              
              2005Expected
      life (years)
              
              
              6.0
              
              
              
              5.5
              
              
              
              5.0Stock
      volatility
              
              
              51.4%
              
              
              
              58.7%
              
              
              
              76.9%Risk
      free interest rates
              
              
              4.4%
              
              
              
              4.9%
              
              
              
              4.1%Dividends
      during expected terms
              
              
              0.9%
              
              
              none
              
              
              none
 
 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.
  56
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  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 2007 and 2006, pursuant to SFAS No.
123R and for 2005 pursuant to APB 25 (in thousands):
 
 Years Ended December 31,2007
              
              
              2006
              
              
              2005Cost
      of revenues
              
              $
              1,156
              
              
              $
              1,540
              
              
              $
              159Research
      and development
              
              
              2,130
              
              
              
              3,341
              
              
              
              161Selling,
      general and administrative
              
              
              2,199
              
              
              
              3,534
              
              
              
              450Pre-tax
      share-based compensation expense
              
              
              5,485
              
              
              
              8,415
              
              
              
              770Less
      income tax effect
              
              
              920
              
              
              
              819
              
              
              
              296Net
      share-based compensation expense
              
              $
              4,565
              
              
              $
              7,596
              
              
              $
              474
 
 Total
share-based compensation cost capitalized as part of inventory as of
December 31, 2007 and 2006 was $122,000 and $225,000, respectively. At
December 31, 2007, there was $17.1 million of total unrecognized compensation
cost related to non-vested stock option awards which is expected to be
recognized over a weighted-average period of 3.6 years.
 
 Beginning
in 1996, the Company began to follow a practice of granting employee stock
options on the date with the lowest closing price within the thirty-day period
subsequent to the employee’s date of hire (the "Thirty-Day
Method").  The Company continued to utilize this method for the
majority of grants, both for new hires and for replenishment grants to existing
employees, until December 20, 2001.  At that time, the Company
determined that options granted using the Thirty-Day Method were compensatory
under APB No 25, and discontinued use of the Thirty-Day Method thereafter. For
financial reporting purposes, per APB No 25, the measurement date for
determining compensation cost in stock option plans is the first date on which
are known both (1) the number of shares that an individual is entitled to
receive and (2) the option purchase price.  Compensation cost is
calculated for any difference between the option exercise price and the fair
market value on the measurement date. When applying APB 25 to the Thirty-Day
Method described above, the measurement date was the thirtieth day following a
new-hire's commencement of employment, when the lowest price (the exercise
price) within the first thirty days following employment commencement was known.
Compensation expense related to options granted under the
Thirty-Day
  57
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  Method
was calculated based on the price difference between the exercise price and the
closing price on the thirtieth day following a new-hire's commencement of
employment multiplied by the number of options granted and recognized as expense
over the vesting period (generally five years). The Company continued to
recognize stock compensation expense through 2005 for amortization of options
granted under the Thirty-Day method in 2001 and earlier.
 
 In
addition to the stock options granted using the Thirty-Day Method, Micrel
assumed certain stock options granted to employees of Kendin Communications in
connection with the acquisition of Kendin Communications in the second quarter
of 2001.  Because the fair market value of the shares subject to those
options assumed in the Kendin acquisition exceeded their exercise prices as of
the date Micrel assumed them, the Company recorded deferred stock compensation
expense for the unvested portion of the assumed options.
 
 Deferred
stock compensation expense balances were recorded as a contra-equity amount and
then amortized as a charge to operating results over the applicable vesting
periods.  As of December 31, 2005 total unamortized stock compensation
related to the Thirty-Day Method and the Kendin Communication acquisition noted
above was $294,000. Upon the adoption of SFAS No. 123R on January 1, 2006, the
unamortized APB 25 stock compensation was reversed with a corresponding
reduction to common stock.
 
 Pro Forma
Information under SFAS No. 123 for Periods Prior to SFAS No. 123R Adoption -As discussed above, results for prior periods have not been restated to
reflect the effects of implementing SFAS No. 123R. The following table
illustrates the effect on net income and earnings per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock options
granted under the Company’s stock option plans and shares issued under the
employee stock purchase plan for the year ended December 31, 2005. For purposes
of this pro forma disclosure, the value of the stock options was estimated using
a Black-Scholes option-pricing model, amortization computed using the graded
vesting method and forfeitures accounted for as they occurred:
  (in
      thousands, except per-share amounts)
                
                Year
      Ended December 31,2005Net
      income as reported
                
                $
                25,358Add:  share-based
      employee compensation expense included in reported net income, net of tax
      effects
                
                
                474Deduct:  share-based
      employee compensation expense determined under fair value based method,
      net of tax effects
                
                
                (10,181
                )Pro
      forma net income
                
                $
                15,651Net
      income per share as reported:Basic
                
                $
                0.29Diluted
                
                $
                0.29Pro
      forma net income per share:Basic
                
                $
                0.18Diluted
                
                $
                0.18
  58
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  Employee
Stock Purchase Plan
 
 Under the
Company’s 1994 Employee Stock Purchase Plan (the “1994 ESPP”), as amended and
restated as of January 1, 1996, eligible employees were permitted to have salary
withholdings to purchase shares of Common Stock at a price equal to 85% of the
lower of the market value of the stock at the beginning or end of each six-month
offer period, subject to an annual limitation. Shares of Common Stock issued
under the Purchase Plan were 202,325 in 2005 at a weighted average price of
$9.42. At December 31, 2005, there were 2,278,346 shares of Common Stock
issued under the 1994 Employee Stock Purchase Plan. The 1994 ESPP terminated on
January 1, 2006.
 
 In May,
2006 the Company's shareholders approved a new Employee Stock Purchase Plan (the
“2006 ESPP”).  Under the terms of the 2006 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. Stock issued under the Purchase Plan during 2007 and 2006
was 27,482 and 14,916, respectively, shares of Common Stock at weighted average
prices of $10.02 and $9.61, respectively. The 2006 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.
 
 
 7.
              INCOME TAXES
 
 The
income tax provisions for the years ended December 31, 2007, 2006 and 2005, as a
percentage of income before taxes, were 36%, 39% and 32%,
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:
 2007
              
              
              2006
              
              
              2005Statutory
      federal income tax rate
              
              
              35%
              
              
              
              35%
              
              
              
              35%Research
      and development credit
              
              
              (2)
              
              
              
              (1)
              
              
              
              (2)Qualified
      production activities credit
              
              
              (1)
              
              
              
              (1)
              
              
              
              (1)State
      income taxes (net of federal income tax benefit)
              
              
              2
              
              
              
              2
              
              
              
              (1)Non-deductible
      stock compensation
              
              
              2
              
              
              
              3
              
              
              
              -Other
              
              
              -
              
              
              
              1
              
              
              
              1Effective
      tax rate
              
              
              36%
              
              
              
              39%
              
              
              
              32%
 
  59
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  
 The
provision for income taxes for the years ended December 31 consists of the
following (in thousands):
 2007
              
              
              2006
              
              
              2005Current:Federal
              
              $
              21,318
              
              
              $
              26,904
              
              
              $
              19,807State
              
              
              668
              
              
              
              (172
              )
              
              
              (1,092
              )Total
      current
              
              
              21,986
              
              
              
              26,732
              
              
              
              18,715Deferred:Federal
              
              
              2,247
              
              
              
              (3,609
              )
              
              
              (7,452
              )State
              
              
              700
              
              
              
              1,753
              
              
              
              679Total
      deferred
              
              
              2,947
              
              
              
              (1,856
              )
              
              
              (6,773
              )Total
      provision
              
              $
              24,933
              
              
              $
              24,876
              
              
              $
              11,942
 
 Pre-tax
income from non-U.S. jurisdictions was not material in all periods
presented.
 
 Deferred
tax assets and liabilities result primarily from temporary differences between
book and tax bases of assets and liabilities, state and federal research and
development credit carryforwards and state manufacturers credit
carryforwards.  The Company had net current deferred tax assets of
$19.4 million and net long-term deferred tax assets of $9.3 million as of
December 31, 2007.  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):
 
 2007
              
              
              2006Deferred
      tax assets:Accruals
      and reserves not currently deductible
              
              $
              11,129
              
              
              $
              14,408Deferred
      income
              
              
              7,794
              
              
              
              8,345Tax
      net operating loss and credit carryforwards
              
              
              9,675
              
              
              
              12,870Non-qualified
      stock compensation
              
              
              3,658
              
              
              
              3,122Capitalized
      research and development
              
              
              819
              
              
              
              997Total
      deferred tax assets
              
              
              33,075
              
              
              
              39,742Deferred
      tax liabilities:Depreciation
              
              
              (4,311
              )
              
              
              (5,488
              )State
      income taxes
              
              
              (91
              )
              
              
              -Total
      deferred tax liability
              
              
              (4,402
              )
              
              
              (5,488
              )Net
      deferred tax assets (current and non-current)
              
              $
              28,673
              
              
              $
              34,254
 
  60
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  
 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
$5.4 million which will expire in the years 2008 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 credit carryforwards of approximately $15.5 million consisting
of research credit carryforwards, 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.
 
 Effective
January 1, 2007, the Company adopted the provisions of FIN No. 48. The adoption
of FIN No. 48 did not result in a cumulative effect adjustment to retained
earnings as of January 1, 2007. Consistent with the provisions of FIN No. 48,
the Company reclassified $4.4 million of current income tax liabilities as
follows: $1.9 million increase to non-current income taxes payable and $2.5
million decrease to non-current deferred tax assets. Upon adoption, the gross
liability for income taxes associated with uncertain tax positions at January 1,
2007 was $6.6 million. This gross liability can be reduced by $2.2 million of
offsetting tax benefits primarily associated with the federal effects of
potential state income tax uncertainties.
 
 As of
December 31, 2007, the gross liability for uncertain tax positions was $8.0
million and the net liability, reduced for the federal effects of potential
state tax exposures, was $5.4 million. If these uncertain tax positions are
sustained upon tax authority audit, or otherwise become certain, the net $5.4
million would favorably affect the Company’s tax provision in such future
periods.  Included in the $5.4 million is $2.6 million which has not
yet reduced income tax payments, and, therefore, has been netted against
non-current deferred tax assets.  The remaining $2.8 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.
 
 A
reconciliation of the beginning and ending amount of unrecognized tax benefits
is as follows (in thousands):
 Balance
      at January 1, 2007
              
              $
              4,352Additions
      based on tax positions related to the current year
              
              
              980Additions
      for accrued interest for tax positions of prior years
              
              
              111Balance
      at December 31, 2007
              
              $
              5,443
 
 The
Company continues to recognize interest and penalties related to income tax
matters as part of the income tax provision. As of January 1, 2007 and December
31, 2007, the Company had $140,000 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.
  61
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  
 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 2002 and forward. Significant state tax jurisdictions include California,
New York and Texas, and generally, the Company is subject to routine examination
for years 2002 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
2000 and forward in various immaterial foreign tax jurisdictions in which it
operates.
 
 
 8.
              COMMITMENTS AND
CONTINGENCIES
 
 Lease
Agreements
 
 The
Company leases some of its facilities and equipment under operating lease
agreements that expire in the years 2008 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.
Deferred 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 31,2008
                
                $
                1,9112009
                
                
                1,4962010
                
                
                1,3482011
                
                
                4782012
                
                
                93Thereafter
                
                
                15$
                5,341
 Rent
expense under operating leases for the years ended December 31, 2007, 2006,
and 2005 was $1.8 million, $1.9 million and $1.4 million,
respectively.
 
 Open
Purchase Orders
 
 As of
December 31, 2007, the Company had approximately $13.7 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.
  62
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  
 Letters
of Credit
 
 Micrel's
borrowing arrangements (see Note 5) include a provision
for the issuance of commercial or standby letters of credit by the bank on
behalf of the Company. At December 31, 2007 there was $525,000 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.
 
 
 9.
              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 $750,271 in contributions for the
year ended December 31, 2007 and made $725,000 and $622,000 in
contributions to the Plan for the years ended December 31, 2006 and 2005,
respectively. Participants vest in Company contributions ratably over six years
of service.
 
  63
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  
 10.
              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
February 26, 1999, the Lemelson Medical, Education & Research Foundation
(the “Lemelson Partnership”) filed a complaint which was served on the Company
on June 15, 1999, entitled Lemelson Medical, Education & Research
Foundation, Limited Partnership v. Lucent Technologies Inc., et al. in the
United States District Court in Phoenix, Arizona, against eighty-eight
defendants, including the Company, alleging infringement of a number of Lemelson
Foundation patents.  The complaint in the lawsuit sought unspecified
compensatory damages, treble damages and attorneys' fees, as well as injunctive
relief against further infringement of the Lemelson patents at
issue.  In defense of this action, the Company was part of a Joint
Defense Group consisting of a number of companies who were opposing the lawsuit
together (the "Joint Defense Group").  On January 17, 2007, the
parties entered into an agreement to settle the litigation for payment of a
mutually agreeable sum, as a result of which, the four companies in the Joint
Defense Group have acquired a package license under the Lemelson patents. During
the fourth quarter of 2006, Micrel accrued $120,000 to other operating expense
for the Company's portion of the liability under this settlement
agreement.  This amount was paid during the first quarter of
2007.
 
 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.  In this lawsuit, Micrel alleged that TRW breached various
agreements to assist in Micrel’s development of, and to purchase, certain
Application Specific Integrated Circuits.  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.  The outcome of
the jury trial was 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.  On February 23, 2006, the
Company posted a surety bond in the amount of $10.5 million in the United States
District Court, Northern District of Ohio, to stay payment of damages and
potential interest awarded to TRW (see Note
1).  On April 24, 2007, a hearing was held in the United States
Court of Appeals for the Sixth Circuit, at which time the Court heard oral
argument on the Appeal.  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.
  64
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  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.  In this
lawsuit, Micrel alleged that Deloitte negligently rendered services as
accountants to Micrel, breached certain agreements with Micrel by failing to
perform services using ordinary skill and competence and in conformance with
generally accepted principles for such work and made certain false
representations upon which Micrel justifiably relied.  Deloitte denied
all allegations in the complaint.  The complaint sought compensatory
damages, costs associated with the suit and such other relief that the court may
deem just and proper.  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.
 
 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 (see Note 12), 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 seeks 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.  Micrel disputes Deerfield's allegations and
will vigorously defend against the action.  On July 21, 2006, Micrel
answered the complaint with a denial of any liability
  65
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  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.  The case is in the discovery and pre-trial phase
and a trial date has been set for May 19, 2008.
 
 With the
exception of the previously recorded operating expenses, the Company believes
that the ultimate outcome of the legal actions discussed will not result in a
material adverse effect on the Company's financial condition, results of
operation or cash flows, and the Company believes it is not reasonably possible
that a material loss has been incurred.  However, litigation is
subject to inherent uncertainties, and no assurance can be given that the
Company will prevail in these lawsuits.  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.
 
 Certain
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.
 
 
 11.           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 31,2007
              
              
              2006
              
              
              2005Standard
      Products
              
              $
              237,356
              
              
              $
              258,214
              
              
              $
              239,177Other
      Products
              
              
              20,618
              
              
              
              18,093
              
              
              
              11,179Total net
revenues
              
              $
              257,974
              
              
              $
              276,307
              
              
              $
              250,356
 
 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, 2005 three customers, consisting of an original equipment
manufacturer, an Asian based stocking representative and a world-wide
distributor, accounted for $34.9 million (14%), $29.5 million (12%) and $29.5
million (12%), respectively, of the Company's net revenues.  These
significant customers for 2007, 2006 and 2005 primarily purchased the Company's
standard products.
  66
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  
 
 For the
year ended December 31, 2007, 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").
  Geographic
      Information (in thousands):2007
                
                
                2006
                
                
                2005Total
      Net
                  Revenues(1)
                
                
                Long-Lived
                  Assets(2)
                
                
                Total
      Net
                  Revenues(1)
                
                
                Long-Lived
                  Assets(2)
                
                
                Total
      NetRevenues(1)United
      States of America
                
                $
                67,751
                
                
                $
                77,863
                
                
                $
                66,713
                
                
                $
                73,079
                
                
                $
                42,706Other
      North American Countries
                
                
                16,663
                
                
                
                1
                
                
                
                16,116
                
                
                
                2
                
                
                
                20,379Korea
                
                
                37,442
                
                
                
                86
                
                
                
                46,913
                
                
                
                53
                
                
                
                63,865Taiwan
                
                
                28,514
                
                
                
                322
                
                
                
                27,475
                
                
                
                246
                
                
                
                31,095Singapore
                
                
                29,356
                
                
                
                3
                
                
                
                33,264
                
                
                
                11
                
                
                
                23,218China
                
                
                17,965
                
                
                
                27
                
                
                
                16,851
                
                
                
                46
                
                
                
                17,171Hong
      Kong
                
                
                16,110
                
                
                
                -
                
                
                
                21,572
                
                
                
                -
                
                
                
                12,515Japan
                
                
                11,554
                
                
                
                -
                
                
                
                13,503
                
                
                
                20
                
                
                
                12,495Other
      Asian Countries
                
                
                1,696
                
                
                
                4,084
                
                
                
                2,442
                
                
                
                5,025
                
                
                
                2,193Europe
                
                
                30,923
                
                
                
                199
                
                
                
                31,458
                
                
                
                183
                
                
                
                24,719Total
                
                $
                257,974
                
                
                $
                82,585
                
                
                $
                276,307
                
                
                $
                78,665
                
                
                $
                250,356(1)Total
      revenues are attributed to countries based on "ship to" location of
      customer.
                  (2)Long-lived
      assets consist of property, plant and equipment.
 12.           RESTRUCTURING AND MANUFACTURING FACILITY
IMPAIRMENT
 
 In
September 2002, the Company approved a plan to close its Santa Clara, California
wafer fabrication facility to reduce costs and improve operating
efficiencies.  The Company accrued $5.5 million in restructuring
expenses associated with the facility closure which consisted of $1.0 million
for equipment disposal costs and $4.5 million in net contractual building lease
costs, excluding estimated sublease income, that will provide no future
benefit.  During July 2003, the Company ceased all manufacturing
processes within the Santa Clara facility and completed the relocation of all
employees to its San Jose, California facilities. During 2004, the Company
increased its accrued restructuring expenses for contractual building lease
costs by $584,000 to eliminate remaining estimated future sub-lease income as
efforts to sub-lease the facility were unsuccessful. In February 2006, the
Company terminated the lease under the terms of the lease agreement due to major
vandalism rendering the building unusable.  The Lessor is disputing
the termination of the lease (see Note
10).  Although the Company is no longer making payments to the
Lessor, the restructuring costs shown above represent the estimated potential
amount owed under the lease prior to termination.  Other disposal
costs include estimated costs associated with the final closing of the
facility.
  67
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  
 A summary
of restructuring expense accrual is as follows (in thousands):
 
 Contractual
      Facility Costs
              
              
              Disposal
                Costs
              
              
              TotalBalance
      December 31, 2004
              
              $
              3,049
              
              
              $
              360
              
              
              $
              3,4092005
      Uses
              
              
              (1,650
              )
              
              
              --
              
              
              
              (1,650
              )Balance
      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
              
              
              $
              1,787
 
 During
2007, the Company accrued $128,000 in interest expense on unpaid facility rent
and reclassified $85,000 from non-current deferred rent into accrued
restructuring.
 
 All of
the $1.8 million in accrued restructuring costs has been included within other
current liabilities as of December 31, 2007.  Actual future costs may
be different than these estimates and could require an adjustment to the
restructuring accrual in the period such determination is made.
 
 
 13.           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.
 
  68
 Table of Contents
 MICREL,
INCORPORATED
 NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
 Years
Ended December 31, 2007, 2006 and 2005
  14.           DIVIDENDS
 
 During
each of the second quarter, third quarter and fourth quarters of 2007, the
Company paid cash dividends of $2.3 million ($0.03 per outstanding share of
common stock).
 
 
 15.           SUBSEQUENT EVENTS
  On
January 31, 2008, the Company's Board of Directors declared a $0.03 per common
share cash dividend, payable February 26, 2008 to shareholders of record on
February 11, 2008.
 
 At
December 31, 2007, the Company held $16.6 million in long-term investments.
Long-term investments consisted of senior auction rate notes secured by student
loans. In February 2008, some of these auction rate securities failed to auction
successfully due to sell orders exceeding buy orders (see the discussion of
investments included in Note 1).
 
 
  69
 Table of Contents
  
 SUPPLEMENTAL
QUARTERLY FINANCIAL SUMMARY — UNAUDITED
 
 
 (in
      thousands, except per share amounts)
              
              Three Months Ended 2007Mar. 31,(1)
              
              
              June 30,
              
              
              Sept. 30,
              
              
              Dec. 31,Net
      revenues
              
              $
              63,113
              
              
              $
              65,101
              
              
              $
              65,191
              
              
              $
              64,569Gross
      profit
              
              $
              36,687
              
              
              $
              37,107
              
              
              $
              37,493
              
              
              $
              36,057Net
      income
              
              $
              17,868
              
              
              $
              8,641
              
              
              $
              9,423
              
              
              $
              8,419Net
      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
 
 (in
      thousands, except per share amounts)
              
              Three Months Ended 2006Mar. 31,
              
              
              June 30,(2)
              
              
              Sept. 30,(3)
              
              
              Dec. 31,Net
      revenues
              
              $
              68,151
              
              
              $
              70,192
              
              
              $
              73,482
              
              
              $
              64,482Gross
      profit
              
              $
              39,894
              
              
              $
              40,252
              
              
              $
              43,033
              
              
              $
              36,927Net
      income
              
              $
              8,701
              
              
              $
              8,991
              
              
              $
              11,803
              
              
              $
              8,813Net
      income per share:Basic
              
              $
              0.10
              
              
              $
              0.11
              
              
              $
              0.15
              
              
              $
              0.11Diluted
              
              $
              0.10
              
              
              $
              0.11
              
              
              $
              0.15
              
              
              $
              0.11Weighted-average
      shares used in computing
                per
      share amounts:Basic
              
              
              84,025
              
              
              
              83,201
              
              
              
              80,671
              
              
              
              78,372Diluted
              
              
              85,794
              
              
              
              84,696
              
              
              
              81,324
              
              
              
              79,476Cash dividends per common
      share
              
              $
              -
              
              
              $
              -
              
              
              $
              -
              
              
              $
              -
 __________
 (1) 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 10 of Notes to Consolidated Financial
Statements).
 (2)
Operating results for the quarter ended June 30, 2006, September 30, 2006 and
December 31, 2006 include pre-tax charges/(credits) of $935,000, ($22,000) and
($67,000), respectively in other expense related to a legal judgment against
Micrel in a patent infringement suit with Linear Technology Corporation (see Note 10 of Notes to Consolidated Financial
Statements).
 (3)
Operating results for the quarter ended September 30, 2006, include $2.9 million
in revenues related to a patent license granted by Micrel to Monolithic Power
Systems (see Note 10 of Notes to Consolidated Financial Statements). In
addition, operating results for the quarter ended September 30, 2006, also
includes $714,000 in cost of revenues related to the settlement of a patent
dispute with International Business Machines (see Note 13
of Notes to Consolidated Financial Statements).
 
 
  70
 Table of Contents
  
 SCHEDULE II
 
 MICREL,
INCORPORATED
 VALUATION
AND QUALIFYING ACCOUNTS
 For
the Years Ended December 31, 2007, 2006, and 2005
 (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,
      2007Allowances
      for OEM and stocking
                representative
      returns and price adjustments
              
              $
              2,490
              
              
              $
              2,215
              
              
              $
              (3,116
              )
              
              $
              --
              
              
              $
              1,589Allowances
      for unclaimed distributor
                price
      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 stocking
                representative
      returns and price adjustments
              
              $
              2,665
              
              
              $
              4,668
              
              
              $
              (4,843
              )
              
              $
              --
              
              
              $
              2,490Allowances
      for unclaimed distributor
                price
      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
              )
              
              $
              4,596Year Ended December 31,
      2005Allowances
      for OEM and stocking
                representative
      returns and price adjustments
              
              $
              2,493
              
              
              $
              4,714
              
              
              $
              (4,542
              )
              
              $
              --
              
              
              $
              2,665Allowances
      for unclaimed distributor
                price
      adjustments(1)
              
              
              1,254
              
              
              
              19,465
              
              
              
              (19,479
              )
              
              
              --
              
              
              
              1,240Allowances
      for doubtful accounts
              
              
              231
              
              
              
              11
              
              
              
              --
              
              
              
              (3
              )
              
              
              239Total allowances
              
              $
              3,978
              
              
              $
              24,190
              
              
              $
              (24,021
              )
              
              $
              (3
              )
              
              $
              4,144
 ___________
 (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 three to four
weeks of unclaimed price adjustments.
 
 
 
  71
 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 27th day of February,
2008.
 
 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 Richard D. Crowley, Jr., 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
      27, 2008/S/
      Richard D. Crowley, Jr.
                Richard
      D. Crowley, Jr.
              
              Vice
      President, Finance and Chief Financial Officer (Principal Financial and
      Accounting Officer)
              
              February
      27, 2008/S/
      Michael J. Callahan
                Michael
      J. Callahan
              
              Director
              
              February
      27, 2008/S/
      David W. Conrath
                David
      W. Conrath
              
              Director
              
              February
      27, 2008/S/
      Neil J. Miotto
                Neil
      J. Miotto
              
              Director
              
              February
      27, 2008/S/
      Frank W. Schneider
                Frank
      W. Schneider
              
              Director
              
              February
      27, 2008
 
  72
 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)4.1
              Certificate
      for Shares of Registrant’s Common Stock. (3)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)14.1
              Micrel,
      Incorporated Code of Ethics for Senior Officers23.1
              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.
 
 (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.
  73
 Table of Contents
  
 
 (7)
              Incorporated
      by reference to exhibit 3.1 filed with the Company’s quarterly report on
      Form 10-Qfor 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 10.1 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.
 
  74
 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 27, 2008 relating to the consolidated
financial statements and 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
27, 2008
 
  75
 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 27, 2008
              
              /S/
      Raymond D. Zinn
                Raymond
      D. Zinn
                President,
      Chief Executive Officer and Director
                (Principal
      Executive Officer)
  76
 Table of Contents
  Certification
of Chief Financial Officer
  Pursuant
to Section 302 of the Sarbanes-Oxley Act of 2002
  I,
Richard D. Crowley, 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 27, 2008
              
              /S/
      Richard D. Crowley
                Richard
      D. Crowley
                Vice
      President, Finance and Chief Financial Officer
                (Principal
      Financial and Accounting Officer)
  77
 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, 2007 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 27, 2008
              
              /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, 2007 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 27, 2008
              
              /S/
      Richard D. Crowley
                Richard
      D. Crowley
                Vice
      President, Finance and Chief Financial Officer
                (Principal
      Financial and Accounting Officer)