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, 2006.

[ ] 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

                    M I C R E L,   I N C O R P O R A T E D
            (Exact name of Registrant as specified in its charter)

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


                 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 [X]   No [  ]

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

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

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

   Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act. Yes [X] No [  ]

   Indicate by check mark whether the registrant is a large accelerated filer,
an accelerated filer, or a non-accelerated filer. 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 [  ]

   As of June 30, 2006, the aggregate market value of the voting stock held by
non-affiliates of the Registrant was approximately $517 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 23, 2007, the Registrant had outstanding 77,669,102
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 24, 2007 are incorporated by reference in Part
III of this Report.

This Report on Form 10-K includes 79 pages with the Index to Exhibits located
on page 74.

<PAGE>

                              MICREL, INCORPORATED

                                    INDEX TO

                           ANNUAL REPORT ON FORM 10-K

                        FOR YEAR ENDED DECEMBER 31, 2006

                                                                           Page
                                                                           ----
                                     PART I

Item 1.  Business                                                             3
Item 1A. Risk Factors                                                        13
Item 1B. Unresolved Staff Comments                                           19
Item 2.  Properties                                                          19
Item 3.  Legal Proceedings                                                   19
Item 4.  Submission of Matters to a Vote of Security Holders                 19

                                    PART II

Item 5.  Market for the Registrant's Common Equity, Related Shareholder
          Matters and Issuer Purchases of Equity Securities                  20
Item 6.  Selected Financial Data                                             22
Item 7.  Management's Discussion and Analysis of Financial Condition and
          Results of Operations                                              23
Item 7A. Quantitative and Qualitative Disclosures About Market Risk          36
Item 8.  Financial Statements and Supplementary Data                         36
Item 9.  Changes in and Disagreements with Accountants on Accounting and
          Financial Disclosure                                               36
Item 9A. Controls and Procedures                                             36
Item 9B. Other Information                                                   37

                                   PART III

Item 10. Directors, Executive Officers and Corporate Governance              38
Item 11. Executive Compensation                                              38
Item 12. Security Ownership of Certain Beneficial Owners and Management
          and Related Shareholder Matters                                    39
Item 13. Certain Relationships and Related Transactions, and Directors
          Independence                                                       39
Item 14. Principal Accounting Fees and Services                              39
Item 15. Exhibits and Financial Statement Schedules                          39

         Signatures                                                          73
         Exhibit Index                                                       74
         Certifications                                                      77

                                       2
<PAGE>

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.

   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, 2006 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 and industrial equipment. For the years ended December 31, 2006,
2005, and 2004, the Company's standard products accounted for 93%, 96%, and
96%, respectively, of the Company's net revenues. The Company also
manufactures custom analog and mixed-signal circuits and provides wafer

                                       3
<PAGE>

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(R) devices enable customers to develop wireless control systems
significantly improving the consumer experience of their products.
Applications for the QwikRadio(R) products include remote keyless entry for
automobiles, garage door openers and remote controls. Micrel's RadioWire(R)
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.


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.

                                       4
<PAGE>

   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 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.

   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

                                       5
<PAGE>

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 2,500 standard products, with net revenues from standard products
generating 93% of the Company's total net revenues for the year ended
December 31, 2006. 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.

 * 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.

                                       6
<PAGE>

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.

<TABLE>
Net Revenues by Segment
(Dollars in thousands)                           Years Ended December 31,
                                            ---------------------------------
                                               2006        2005        2004
                                            ---------   ---------   ---------
<S>                                         <C>         <C>         <C>
Net Revenues:
Standard Products                           $ 258,214   $ 239,177   $ 246,580
Other Products                                 18,093      11,179      10,971
                                            ---------   ---------   ---------
   Total net revenues                       $ 276,307   $ 250,356   $ 257,551
                                            =========   =========   =========
As a Percentage of Total Net Revenues:
Standard Products                                 93%         96%         96%
Other Products                                     7           4           4
                                            ---------   ---------   ---------
   Total net revenues                            100%        100%        100%
                                            =========   =========   =========
</TABLE>

   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.

<TABLE>
Revenues by End Market
(Dollars in thousands)                           Years Ended December 31,
                                            ---------------------------------
                                               2006        2005        2004
                                            ---------   ---------   ---------
<S>                                         <C>         <C>         <C>
As a Percentage of Total Net Revenues:
High-Speed Communications                         26%         22%         24%
Wireless Handsets                                 19          26          25
Computer                                          19          22          23
Industrial                                        34          27          25
Military & Consumer                                2           3           3
                                            ---------   ---------   ---------
   Total net revenues                            100%        100%        100%
                                            =========   =========   =========
</TABLE>

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


   Standard Products

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

                                       7
<PAGE>


   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.

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

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

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

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

   Radio Frequency Data Communications. Micrel's QwikRadio(R) 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(R) 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.

                                       8
<PAGE>

   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 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.

   The Company sells its products in Europe through a direct sales staff in
England and France 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.

   Sales to customers in North America, Asia and Europe accounted for 30%, 59%
and 11% respectively, of the Company's net revenues for the year ended
December 31, 2006 compared to 25%, 65% and 10%, respectively, of the Company's
net revenues for the year ended December 31, 2005 and 24%, 66% and 10%,

                                       9
<PAGE>

respectively, of the Company's net revenues for 2004. The Company's standard
products are sold throughout the world, while its custom and foundry products
are primarily sold to North American customers. The Company's net revenues by
country, including the United States, are included in Note 12 of Notes to
Consolidated Financial Statements.

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


Customers

   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. For the year ended December 31, 2004, the same three customers
as in 2005 accounted for 13%, 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.

   The Company utilizes the following process technologies:
 * Bipolar
 * High Speed Bipolar
 * SuperBeta PNP(tm)
 * 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.

                                       10
<PAGE>

   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, 2006, approximately 8% 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 2006, 2005, and 2004 the Company spent $52.1 million $45.2 million, and
$42.5 million, respectively, on research and development. The Company expects
that it will continue to spend substantial funds on research and development
activities.


Patents and Intellectual Property Protection

   The Company seeks patent protection for those inventions and technologies
for which such protection is suitable and is likely to provide a competitive
advantage to the Company. The Company currently holds 192 United States
patents on semiconductor devices and methods, with various expiration dates
through 2025.  The Company has applications for 118 United States patents
pending. The Company holds 40 issued foreign patents and has applications for
42 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.

                                       11
<PAGE>

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.

   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, 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.

                                       12
<PAGE>

Backlog

   At December 31, 2006, the Company's backlog was approximately $43 million,
all of which is scheduled to be shipped during the first six months of 2007. At
December 31, 2005, the Company's backlog was approximately $45 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, 2006, the Company had 932 full-time employees. 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.


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:
increased price inflation for goods, services or materials, rising interest
rates in the United States and the rest of the world, 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.

                                       13
<PAGE>


   Market conditions may lead the Company to initiate additional cost
reduction plans, which may negatively affect near term operating results.  Weak
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. For the years ended December 31, 2006 and 2005, international
sales represented 70% and 75% of net revenues, respectively. In addition,
Company's revenues derived from export shipments to customers in Asia were 59%
and 65% of net revenues for the years ended December 31, 2006 and 2005,
respectively.  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.

   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.

                                       14
<PAGE>

   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 five
years. Over the same five 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
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.

   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.

                                       15
<PAGE>

   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.

   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.

   Customers are requiring that the Company offer its products in lead-free
packages.  Governmental regulations in certain countries and customers'
intention to produce products that are less harmful to the environment has
resulted in a requirement from many of the Company's customers to purchase
integrated circuits that do not contain lead.  The Company has responded by
offering its products in lead-free versions.  While the lead-free versions of
the Company's products are expected to be more friendly to the environment, the
ultimate impact is uncertain.  The transition to lead-free products may produce
sudden changes in demand depending on the packaging method used, which may
result in excess inventory of products packaged using traditional methods.
This may have an adverse affect on the Company's results of operations.  In
addition, the quality, cost and manufacturing yields of the lead free products
may be less favorable compared to the products packaged using more traditional
materials which may result in higher costs to the Company.

                                       16
<PAGE>

   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 7 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:

   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 proportion of the
Company's annual net revenues from customers serving the cellular telephone
market for the years ended December 21, 2006, 2005 and 2004 was approximately
19%, 26% and 25%, respectively. 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.

                                       17
<PAGE>

   An important part of the Company's strategy is to continue to focus on the
market for high-speed communications ICs.  During the first six months of 2006,
orders and revenues for the Company's high-speed communications products
increased.  In the second half of 2006, order rates declined and revenues
moderated for these products.  If weakness from the telecommunications
infrastructure and wire line networking markets continues, resulting in further
reduction in demand for the Company's high bandwidth products, 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 has recently settled two
lawsuits and is involved in one appeal.  In September 2006, the Company
resolved a patent litigation with Monolithic Power Systems; as a result, Micrel
does not anticipate any additional legal expense associated with this
litigation.  On February 23, 2007, the Company settled a lawsuit in which
Micrel was the plaintiff in an action against its former accounting firm,
Deloitte & Touche.  In another action where Micrel is a plaintiff and TRW is
the defendant, Micrel is appealing a judgment entered against the Company.  The
judgment in the TRW case has been previously recorded in Micrel's financial
statements.  Micrel is involved in other minor lawsuits where Micrel is the
defendant, but the Company does not expect significant legal costs with respect
to these actions. Litigation is by its nature unpredictable and costly.  If the
level of effort required to prosecute or defend the Company's position in any
of the lawsuits 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 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, 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.

                                       18
<PAGE>

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 11 of Notes to Consolidated Financial
Statements under the caption "Litigation" in Item 15 of Part III is
incorporated herein by reference.


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

   In the fourth quarter of 2006, no matters were submitted to a vote of
security holders.

                                       19
<PAGE>

                                    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, 2005 to December 31, 2006 was:

<TABLE>
    Year Ended December 31, 2006:                 High         Low
                                                -------      -------
<S>                                             <C>          <C>
   Fourth quarter                               $ 12.22      $  9.19
   Third quarter                                $ 10.69      $  8.30
   Second quarter                               $ 15.78      $  9.55
   First quarter                                $ 14.82      $ 11.11

Year Ended December 31, 2005:                     High         Low
                                                -------      -------
   Fourth quarter                               $ 13.05      $  9.87
   Third quarter                                $ 13.27      $ 11.03
   Second quarter                               $ 12.00      $  8.07
   First quarter                                $ 10.59      $  8.27
</TABLE>

   The reported last sale price of the Company's Common Stock on the Nasdaq
National Market on December 29, 2006 was $10.78. The approximate number of
holders of record of the shares of the Company's Common Stock was 511 as of
February 23, 2007. 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 23, 2007 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 2007 Annual Meeting of Shareholders and is
incorporated herein by reference.

Dividend Policy

   To date, the Company has not paid any cash dividends on its capital stock.
To offset dilution from the Company's stock option plans, employee stock
purchase plans and 401(k) plan, and in lieu of a dividend, the Company has
repurchased shares of its common stock.  See the following section, "Issuer
Purchases of Equity Securities". In addition, the Company's existing credit
facilities currently prohibit the payment of cash or stock dividends on the
Company's capital stock without the lender's prior written consent. See
Item 7 - "Management's Discussion and Analysis of Financial Condition and
Results of Operations - Liquidity and Capital Resources" and Note 6 of Notes to
Consolidated Financial Statements contained in Item 8.

                                       20
<PAGE>

Issuer Purchases of Equity Securities

   In March 2005, the Board of Directors approved a $75 million share
repurchase program for calendar year 2005.  In November, 2005 the Company's
Board of Directors adopted a new plan which authorized the repurchase of
common stock up to a maximum value of $75 million during the period from
January 1, 2006 through December 31, 2006.  In August 2006, the Company's
Board of Directors approved an increase to the amount previously approved for
share repurchase in calendar year 2006 to $100 million.  In November 2006, the
Company's Board of Directors approved a $50 million share repurchase program
for calendar year 2007.  Shares of common stock purchased pursuant to the
repurchase program are cancelled upon repurchase and credited to an authorized
and un-issued reserve account, and are intended to offset dilution from the
Company's stock option plans, employee stock purchase plans and 401(k) plan.
Repurchases of the Company's common stock during 2006 were as follows:


<TABLE>
                                                                Maximum Dollar
                                            Total Number of    Value of Shares
                      Total                Shares Purchased    that May Yet be
                     Number     Average       as Part of      Repurchased Under
                   of Shares  Price Paid  Publicly Announced     the Plans or
Period             Purchased   Per Share   Plans or Programs   Programs ($000)
-----------------  ---------  ----------  ------------------  -----------------
<S>                <C>        <C>         <C>                 <C>
January 2006         570,800   $ 11.63           570,800           $  68,360
February 2006        297,500   $ 13.76           297,500           $  64,267
March 2006           334,600   $ 13.71           334,600           $  59,678
                   ---------   -------         ---------
   Total Q1 2006   1,202,900   $ 12.74         1,202,900
April 2006           178,900   $ 15.04           178,900           $  56,987
May 2006             441,544   $ 11.94           441,544           $  51,715
June 2006            661,000   $ 10.45           661,000           $  44,806
                   ---------   -------         ---------
   Total Q2 2006   1,281,444   $ 11.61         1,281,444
July 2006            949,400   $  9.11           949,400           $  36,158
August 2006        1,265,500   $  9.58         1,265,500           $  49,037
September 2006       698,500   $ 10.01           698,500           $  42,048
                   ---------   -------         ---------
   Total Q3 2006   2,913,400   $  9.53         2,913,400
October 2006         898,100   $  9.85           898,100           $  33,198
November 2006        224,700   $ 11.26           224,700           $  30,667
December 2006        193,935   $ 11.24           193,935           $  50,000
                   ---------   -------         ---------
   Total Q4 2006   1,316,735   $ 10.30         1,316,735
                   ---------   -------         ---------
   Total 2006      6,714,479   $ 10.65         6,714,479
                   =========    ======         =========
</TABLE>

                                       21
<PAGE>
ITEM 6.   SELECTED FINANCIAL DATA

   The selected consolidated financial data below should be read in conjunction
with "Management's Discussion and Analysis of Financial Condition and Results
of Operations" and consolidated financial statements and related notes thereto.

<TABLE>
Income Statement Data:                    Years Ended December 31,
                              ------------------------------------------------
(in thousands, except per      2006(1)   2005(2)   2004(3)    2003     2002(4)
 share amounts)               --------  --------  --------  --------  --------
<S>                           <C>       <C>       <C>       <C>       <C>
Net revenues                  $276,307  $250,356  $257,551  $211,726  $204,704
Cost of revenues*              116,201   116,564   134,854   128,007   139,554
                              --------  --------  --------  --------  --------
  Gross profit                 160,106   133,792   122,697    83,719    65,150
                              --------  --------  --------  --------  --------
Operating expenses:
  Research and development*     52,074    45,231    42,473    48,557    64,738
  Selling, general and
   administrative*              49,016    46,159    38,590    30,417    43,265
  Manufacturing facility
   impairment                      --        --        --       (624)   23,357
  Restructuring expense            269       --        584       286     5,536
  Purchased in-process
   technology                       --       --        303       --        --
  Other operating expense          966     9,282       --        --        --
                              --------  --------  --------  --------  --------
    Total operating expenses   102,325   100,672    81,950    78,636   136,896
                              --------  --------  --------  --------  --------
Income (loss) from operations   57,781    33,120    40,747     5,083   (71,746)
Other income, net                5,403     4,180     1,712       619     1,056
                              --------  --------  --------  --------  --------
Income (loss) before income
 taxes                          63,184    37,300    42,459     5,702   (70,690)
Provision (benefit) for income
 taxes                          24,876    11,942    11,206       855   (29,690)
                              --------  --------  --------  --------  --------
    Net income (loss)         $ 38,308  $ 25,358  $ 31,253  $  4,847  $(41,000)
                              ========  ========  ========  ========  ========
Net income (loss) per share:
  Basic                       $   0.47  $   0.29  $   0.34  $   0.05  $  (0.44)
                              ========  ========  ========  ========  ========
  Diluted                     $   0.46  $   0.29  $   0.34  $   0.05  $  (0.44)
                              ========  ========  ========  ========  ========
Shares used in computing per
 share amounts:
  Basic                         81,550    87,055    91,498    92,215    92,600
                              ========  ========  ========  ========  ========
  Diluted                       82,842    87,971    93,083    93,786    92,600
                              ========  ========  ========  ========  ========

*Share based compensation
 included in:
  Cost of revenues            $  1,540  $    159  $    535  $  1,104  $  7,354
  Research and development       3,341       161       723     1,604    11,430
  Selling, general and
   administrative                3,534       450     1,263     1,430    11,105
</TABLE>
<TABLE>
                                                December 31,
Balance Sheet Data:           ------------------------------------------------
(in thousands)                  2006      2005      2004      2003      2002
                              --------  --------  --------  --------  --------
<S>                           <C>       <C>       <C>       <C>       <C>
  Working capital             $142,615  $165,180  $186,822  $195,026  $182,155
  Total assets                 300,273   319,540   334,146   337,439   330,675
  Long-term debt and other
   obligations                     453       475     2,047     8,179    19,237
  Total shareholders' equity   238,042   257,686   284,887   283,609   273,619
</TABLE>
_____________
(1) Operating results for the year ended December 31, 2006, include
$2.9 million in revenues related to a patent license granted by Micrel to
Monolithic Power Systems and $846,000 in accrued other expense related to a
legal judgment against Micrel in a patent infringement suit with Linear
Technology Corporation (see Note 11 of Notes to Consolidated Financial
Statements). In addition, operating results for the year ended December 31,
2006, also include $714,000 in cost of revenues related to the settlement of a
patent dispute with International Business Machines (see Note 14 of Notes to
Consolidated Financial Statements). On January 1, 2006, Micrel adopted the
provisions of SFAS No. 123R for recording share-based compensation.  The
Company's basic and diluted net income per share for 2006 was lower by $0.09
per share under SFAS No. 123R, than if the Company had continued to account for
share-based compensation according to APB 25. (see Note 7 of Notes to
Consolidated Financial Statements.)
(2) 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 (see Note 11 of Notes to Consolidated Financial
Statements.)
(3) 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 (see Note 8 of Notes to Consolidated
Financial Statements.)
(4) Operating results for the year ended December 31, 2002, include
$17.1 million in accelerated amortization of deferred stock compensation
associated with options cancelled pursuant to an employee option exchange
program. In addition, related to the closure of the Company's Santa Clara,
California wafer fabrication facility, the Company recorded $5.5 million in
restructuring expense and $23.4 million in manufacturing facility impairment
expense (see Note 13 of Notes to Consolidated Financial Statements.)

                                       22
<PAGE>

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 2004
through 2006 have been provided.

   The Company's 2004 revenues grew to the highest level since 2000,
increasing 22 percent over 2003. The increase in customer demand in the first
half of 2004 caused lead times for semiconductor components, including
Micrel's, to expand as customers and distributors became concerned about
availability of supply.  The Company's revenues continued to grow in the first
half of the year and gross margin, operating margin and net income increased
on a sequential basis in both the first and second quarters.  By the end of
the second quarter, customers began to perceive that the supply of
semiconductor components was generally sufficient and lead times for certain
components began to shrink.

   In the third and fourth quarter of 2004, demand was below normal seasonal
levels as customers reacted quickly to uncertain demand for their products,
decreasing semiconductor lead times and uncertain economic conditions by
reducing their order rates.  Customers in certain end markets such as
networking, enterprise computing and high speed communications experienced
lower demand for their end products than they had anticipated.  This factor,
combined with rapidly shrinking lead times from most semiconductor suppliers,
led to lower order rates for the Company's products in the second half of 2004
as customers attempted to control their inventory levels.  The Company's level
of on hand inventory remained above prior year levels to provide a high level
of customer service in response to shorter customer lead times.  As a result
of lower order rates, the Company's backlog and revenues declined in both the
third and fourth quarter of 2004.  Despite the decline in customer demand and
revenue in the second half of 2004, the Company's continued focus on
manufacturing cost reductions resulted in an eight percentage point increase
in gross margin from 39.5% in 2003 to 47.6% in 2004.

   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

                                       23
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

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.

   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
customers serving the communications and industrial end markets strengthened
in the first quarter.  Bookings from Micrel's major sell-through distributors
also increased sequentially in the first quarter.  Increased end customer
demand led these distributors to extend their order backlog with Micrel during
the quarter.  This resulted in a distributor book-to-bill substantially above
one as our distributors attempted to increase their inventories and ensure
availability of supply for the second quarter of 2006.  Bookings from our
direct OEM customers and sell-in stocking representatives also increased on a
sequential basis, despite typical seasonal slowness in the handset and
personal computing end markets.  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.  The
first quarter strength in sales to the communications and industrial end
markets was partially offset by seasonal declines in sales to the wireless
handset (primarily in Korea) and computing end markets.

   In the first quarter of 2006, the Company recorded the highest quarterly
gross margin as of that time in its history.  The first quarter gross margin
of 58.5% exceeded the previous peak gross margins recorded in the year 2000,
when revenue levels were substantially higher.  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.  Despite an
increase of $2.0 million in equity-based compensation expense as a result of

                                       24
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

the adoption of SFAS No. 123R, the Company's operating profit increased on
both a sequential and year-over-year basis.  Operating margin improved to 20%
of net revenues in the first quarter of 2006 from 19% in the fourth quarter of
2005 and 15% in the year-ago period.  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.  Orders from the Company's sell-
through distributors declined in the second quarter of 2006 as compared to
levels in the first quarter of 2006.  Orders from direct OEM customers in the
second quarter increased sequentially in both North America and Europe, while
bookings from Asia-based OEM's decreased from the first quarter of 2006,
primarily due to lower demand from customers serving the computing and handset
end markets.  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.  Operating margin of 19.7% was flat on a sequential
basis and up from 1.3% in the second quarter of 2005. Operating income for the
second quarters of 2006 and 2005 includes $935,000 and $9.3 million,
respectively, in accrued litigation expense (see Note 11 of Notes to
Consolidated Financial Statements.)  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.
Micrel's channel inventories at both Asia-based stocking representatives and
sell-through distributors increased on a sequential basis in the second
quarter.  Resales of the Company's products through the distribution channel
increased by approximately 10% in the second quarter of 2006, while sales
through Asian-based stocking representatives were roughly flat in the second
quarter.  Overall inventory turns for Micrel's sell-through distributors and
Asian-based stocking representatives remained within historical average levels
at the end of the second quarter of 2006.

   In the third quarter of 2006, overall order rates declined on a sequential
basis, primarily because the Company's sell-through distributors reduced
orders and consumed backlog in an attempt to control inventory levels.  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 net revenues included $2.9 million associated with a patent
license that was previously under litigation.

   Third quarter 2006 gross margin of 58.6% matched the highest level in the
Company's history.  Operating profit was $18.1 million and operating margin
improved to 24.6% of sales.  The settlement of intellectual property matters,

                                       25
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

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.  Channel inventories at Micrel's Asia-based stocking
representatives remained flat from the end of the second quarter, while
channel inventories at the Company's sell-through distributors decreased on a
sequential basis after growing in the previous three quarters.

   During the fourth quarter of 2006 customers reduced inventory levels, which
we believe was caused by uncertain demand for their end products and the
perception that semiconductor components were readily available. Order rates
were slightly lower than the third quarter, and remained below the level of
fourth quarter revenues.  Bookings from the Company's sell-through
distributors rebounded during the fourth quarter, which we believe indicates
that distributors inventories are in balance with end demand.  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.  Fourth quarter operating profit was $12.4 million or 19.2% of
sales.  The Company's inventory was flat on a sequential basis as the Company
reduced manufacturing activity in response to reduced demand.  Channel
inventories also remained roughly flat from third quarter levels.

   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 $250.3 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 marked the 27th year out of Micrel's 28-year history that the
Company was profitable. 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.  As of December 31, 2006, the Company
maintained cash and short-term investment balances of $110 million.

   In 2004, Micrel acquired BlueChip Communications AS ("BlueChip") of Oslo,
Norway.  BlueChip is a fabless semiconductor company that designs, develops
and markets high performance RF ICs and modules for the actuation and
connectivity markets.  The acquisition was accounted for as a purchase under
SFAS 141 "Business Combinations" and, accordingly, the results of operations
of BlueChip from the date of acquisition forward have been included in the
Company's consolidated financial statements. (see Note 2 of Notes to
Consolidated Financial Statements).

   The Company derives a substantial portion of its net revenues from standard
products. For 2006, 2005 and 2004 the Company's standard products sales
accounted for 93%, 96%, and 96%, respectively, of the Company's net revenues.
The Company believes that a substantial portion of its net revenues in the

                                       26
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

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.

   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, primarily 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

                                       27
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

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."

   Share-Based Compensation. Prior to fiscal 2006, the Company accounted for
share-based compensation plans under the recognition and measurement
provisions of APB Opinion No. 25. 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 cost 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 rate 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, 2006, 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.

                                       28
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

   In addition, the calculation of the Company's tax liabilities involves
dealing with uncertainties in the application of complex tax regulations. The
Company records liabilities for anticipated tax audit issues based on its
estimate of whether, and the extent to which, additional taxes may be due.
Actual tax liabilities may be different than the recorded estimates and could
result in an additional charge or benefit to the tax provision in the period
when the ultimate tax assessment is determined.

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

Results of Operations

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

<TABLE>
                                                   Years Ended December 31,
                                                 ----------------------------
                                                   2006      2005      2004
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Net revenues                                       100.0%    100.0%    100.0%
Cost of revenues                                    42.1      46.6      52.4
                                                 --------  --------  --------
  Gross profit                                      57.9      53.4      47.6
                                                 --------  --------  --------
Operating expenses:
  Research and development                          18.8      18.1      16.5
  Selling, general and administrative               17.7      18.4      15.0
  Restructuring expense                              0.1       --        0.2
  Acquisition expenses                                --       --        0.1
  Other operating expense                            0.4       3.7       --
                                                 --------  --------  --------
    Total operating expenses                        37.0      40.2      31.8
                                                 --------  --------  --------
Income from operations                              20.9      13.2      15.8
Other income, net                                    2.0       1.7       0.7
                                                 --------  --------  --------
Income before income taxes                          22.9      14.9      16.5
Provision for income taxes                           9.0       4.8       4.4
                                                 --------  --------  --------
Net income                                          13.9%     10.1%     12.1%
                                                 ========  ========  ========
</TABLE>

   Net Revenues. Net revenues increased 10% to $276.3 million for the year
ended December 31, 2006 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 the year ended December 31, 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.

                                       29
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

   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 the year ended
December 31, 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.

   For the year ended December 31, 2005, net revenues decreased 3% to $250.4
million from $257.6 million in 2004 due to decreased standard product
revenues. Standard product revenues decreased 3% to $239.2 million, which
represented 96% of net revenues for the year ended December 31, 2005, compared
to $246.6 million and 96% of net revenues for 2004. These decreases resulted
primarily from decreased unit shipments of standard products to the high speed
communications and networking end markets. Other product revenues increased 2%
to $11.2 million, which represented 4% of net revenues for the year ended
December 31, 2005, compared to $11.0 million and 4% of net revenues for 2004.

   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 2006, the Company
averaged approximately 50% to 55% turns fill per quarter compared to
approximately 55% to 60% turns fill per quarter during 2005.

   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 secular trend has developed over the last five 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 70%, 75%, and 76% of net revenues for the
years ended December 31, 2006, 2005 and 2004, respectively. On a dollar basis,
international sales increased 3% to $193.5 million for the year ended
December 31, 2006 from $187.2 million for the comparable period in 2005. These
increases resulted primarily from increased shipments of high speed
communications products primarily in Europe.

   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.

                                       30
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

   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 year ended December 31,
2006 were impacted by the recognition of non-cash expense related to the fair
value of share-based compensation awards. 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, $3.3 million is included in research and
development expense and $3.5 million is included in sales, general and
administrative expense.

   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 years ended December 31, 2005 and 2004, total amortization of
deferred stock compensation was $770,000 and $2.5 million, respectively.

   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
increased to 58% for the year ended December 31, 2006 from 53% for the year
ended December 31, 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 the year ended
December 31, 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 the year ended December 31, 2006 is
$2.9 million in net revenues for a patent license (see Note 11 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 11 of Notes to Consolidated Financial Statements.)

   For the year ended December 31, 2005, the Company's gross margin increased
to 53% from 48% for the year ended December 31, 2004. The increase 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. In addition, gross profit for the
year ended December 31, 2004 includes the reversal of $1.1 million of accrued
payroll tax liabilities, recorded in the second quarter of 2004, associated
with the conclusion of a tax audit (see Note 8 of Notes to Consolidated
Financial Statements). Depreciation and amortization (excluding amortization of
deferred stock compensation) as a percent of sales declined to 8.0% for the
year ended December 31, 2005 from 9.6% for the same period in 2004.

   Research and Development Expenses.  Research and development expenses as a
percentage of net revenues represented 19% and 18% for the years ended
December 31, 2006 and 2005, respectively. On a dollar basis, research and
development expenses increased $6.8 million or 15% to $52.1 million for the
year ended December 31, 2006 from $45.2 million in 2005. These increases were
primarily due to increased share-based compensation costs due to the adoption
of SFAS No. 123R combined with increased prototype fabrication costs. The
Company believes that the development and introduction of new products is
critical to its future success and expects to continue its investment in
research and development activities in the future.

                                       31
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

   For the year ended December 31, 2005, research and development expenses
increased $2.8 million or 6% to $45.2 million from $42.5 million in 2004. This
increase was primarily due to increased prototype fabrication costs combined
with increased staffing costs, which was partially offset by decreased
depreciation costs. In addition, 2004 included a benefit of $1.7 million from
the reversal of accrued payroll tax liabilities associated with the conclusion
of a tax audit (see Note 8 of Notes to Consolidated Financial Statements).

   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, 2006 and 2005. On a dollar basis,
selling, general and administrative expenses increased $2.9 million or 6% to
$49.0 million for the year ended December 31, 2006 from $46.2 million for the
comparable period in 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.

   For the year ended December 31, 2005 selling, general and administrative
expenses increased $7.6 million or 20% to $46.2 million from $38.6 million for
the comparable period in 2004. The increase was principally attributable to
increased outside legal costs, primarily associated with litigation activity,
combined with increased staffing costs. In addition, 2004 included a benefit
of $1.1 million from the reversal of accrued payroll tax liabilities
associated with the conclusion of a tax audit. (see Note 8 of Notes to
Consolidated Financial Statements).

   Purchased in-process technology.  In 2004, Micrel acquired 100% of the
outstanding common stock and options to purchase common stock of BlueChip, in
a cash-for-stock transaction. Micrel paid approximately $2 million in cash and
incurred approximately $300,000 in direct acquisition costs for the
outstanding BlueChip securities and options. The purchase cost allocation, as
adjusted for the final determination of certain contingent consideration,
resulted in $1.7 million of the purchase cost allocated to intangible assets.
 Of that amount, $303,000 was expensed during the year ended December 31, 2004
to purchased in-process technology, which had not reached technological
feasibility and had no alternative future.  The remaining $1.4 million in
intangible assets are included in intangible assets in the accompanying
consolidated balance sheets and are being amortized on a straight line basis
over their useful lives of three to five years (see note 2 of Notes to
Consolidated Financial Statements).

   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, 2006, the remaining restructuring accrual related to this facility closure
was $1.6 million (see Note 13 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 11 of Notes to Consolidated Financial Statements).

   During the year ended December 31, 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 11 of Notes to Consolidated Financial Statements).

                                       32
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

   Other Income, Net. Other income, net reflects interest income from
investments in short-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.  Other income,
net increased $1.2 million to $5.4 million for the year ended December 31,
2006 from $4.2 million for the comparable period in 2005.  These increases
were primarily due to an increase in average interest rates and returns on
investment balances, which was partially offset by increased accrued interest
expense related to accrued litigation liabilities.

   For the year ended December 31, 2005 other income, net increased by $2.5
million to $4.2 million from $1.7 million in 2004. The increase was primarily
due to an increase in the average interest rate earned on investment of cash
and short term investment balances.

   Provision for Income Taxes. For the year ended December 31, 2006, the
provision for income taxes was $24.9 million or 39.4% of income before taxes
as compared to $11.9 million or 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 due to 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.

   For the year ended December 31, 2004, the provision for income taxes was
$11.2 million or 26% of income before taxes. The income tax provision for 2004
was based on the Company's estimated annual statutory tax rate of 35% of
pretax income, reduced by a $3.8 million reversal of accrued income tax
liabilities in the second quarter of 2004, as a result of the completion of a
federal income tax audit (see Note 8 of Notes to Consolidated Financial
Statements).

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, 2006, consisted of cash and short-term
investments of $107.3 million and a $6.0 million revolving line of credit from
a commercial bank under which the Company could borrow $5.1 million (see Note
6 of Notes to Consolidated Financial Statements).

   Associated with the acquisition of BlueChip, the Company has $80,000
outstanding in term notes payable to the Norwegian Industrial and Regional
Development Fund.

   The Company generated $59.0 million in cash flows from operating activities
for the year ended December 31, 2006, which was primarily attributable to net
income after adding back non-cash activities of $62.7 million (consisting
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, a $2.1 million increase in prepaid expenses and other assets
combined with a $4.9 million decrease in income taxes payable and a $3.1
million decrease in accounts payable.

   For the year ended December 31, 2005, cash flows provided by operating
activities of $57.7 million were primarily attributable to net income after
adding back non-cash activities of $41.6 million (consisting primarily of $20
million in depreciation offset in part by a $6.8 million increase in deferred

                                       33
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)

income taxes) combined with a $5.3 million decrease in inventories, a $4.3
million increase in accounts payable, a $7.3 million increase in other accrued
liabilities and a $2.1 million increase in accrued compensation, which were
partially offset by a $3.5 million increase in accounts receivables.

   The Company generated $12.4 million of cash from investing activities
during the year ended December 31, 2006, 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).

   For the year ended December 31, 2005, the Company used cash of
$14.3 million in investing activities comprised of $14.4 million in purchases
of property, plant and equipment, which was partially offset by net proceeds
of $115,000 from the sale of short-term investments.

   The Company used $67.3 million of cash in financing activities during the
ended December 31, 2006, 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.

   Cash used by financing activities during the year ended December 31, 2005
of $56.6 million was the result of $63.4 million used to repurchase 6,065,300
shares of common stock which was partially offset by proceeds from the
issuance of common stock through employee stock transactions of $6.9 million.

   The Company currently intends to spend approximately $20 million to $30
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, 2007. 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
<PAGE>

          MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
          RESULTS OF OPERATIONS (CONTINUED)



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, 2006, the Company had the following contractual
obligations and commitments (in thousands):

<TABLE>
                                           Payments Due By Period
                               ------------------------------------------------
                                        Less than    1-3       4-5      After 5
                                Total     1 Year    Years     Years      Years
                               --------  --------  --------  --------  --------
<S>                            <C>       <C>       <C>       <C>       <C>
Long-term debt (see Note 6
 of Notes to Consolidated
 Financial Statements)         $     80  $     80  $    --   $    --   $    --
Operating leases (see Note 9
 of Notes to Consolidated
 Financial Statements)            6,392     1,844     2,959     1,589       --
Accrued litigation liability
(see Note 11 of Notes to
Consolidated Financial
Statements)                       9,282     9,282       --        --        --
Open purchase orders             22,700    22,700       --        --        --
                               --------  --------  --------  --------  --------
Total                          $ 38,454  $ 33,906  $  2,959  $  1,589  $    --
                               ========  ========  ========  ========  ========
</TABLE>

   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. 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, 2006 and there were $875,000 in
standby letters of credit outstanding. The letters of credit are issued to
guarantee payments for the Company's workers compensation program.

   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
<PAGE>

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   At December 31, 2006, the Company held $15.1 million in short-term
investments. Short-term investments consist primarily of liquid debt
instruments and are classified as available-for-sale securities. Investments
purchased with remaining maturity dates of greater than three months and less
than 12 months are classified as short-term. Investments purchased with
remaining maturity dates of 12 months or greater are classified as long-term.
The short-term investments held at December 31, 2006 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, 2006, the fair value of the short-term investments
would decline by an immaterial amount. The Company generally expects to have
the ability to hold its fixed income investments until maturity and therefore
would not expect operating results or cash flows to be affected to any
significant degree by the effect of a sudden change in market interest rates
on short-term investments.

   At December 31, 2006, the Company held an insignificant amount of 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 70 and
supplementary data are set forth on pages 71 through 72, 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, 2006.

                                       36
<PAGE>

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).  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. 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 "Internal Control - Integrated Framework," management has
concluded that the Company's internal control over financial reporting was
effective as of December 31, 2006.  Management's assessment of the
effectiveness of the Company's internal control over financial reporting as of
December 31, 2006, has been audited by PricewaterhouseCoopers LLP, an
independent registered public accounting firm, as stated in their report which
appears herein.

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, 2006 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
<PAGE>

                                    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 2007 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 2007
Annual Meeting of Shareholders under the caption, "Committees and Meetings of
the Board of Directors."

   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 2007 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 has been 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.

   On February 16, 2007, at a special meeting, the Board of Directors of
Micrel, Inc. elected Neil J. Miotto to serve on the Company's Board of
Directors, effective immediately.  Mr. Miotto will replace Mr. George Kelly,
who resigned from the Board on February 9, 2007.  For approximately the past
year, the Nominating Committee has been conducting a search for, and has
identified, qualified candidates to serve on the Board and its committees.


ITEM 11.   EXECUTIVE COMPENSATION

   The information required by this item concerning executive compensation is
included under the captions "Executive Compensation" and "Stock Option Grants
and Exercise" in the Company's Proxy Statement to be filed in connection with
the Company's 2007 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 2007 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 2007 Annual Meeting of Shareholders.  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.

                                       38
<PAGE>

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 2007 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" and "Director Independence" in the Company's Proxy
Statement to be filed in connection with the Company's 2007 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 2007 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:

                                                                          Page
                                                                          ----
          Report of Independent Registered Public Accounting Firm           40
          Consolidated Balance Sheets as of December 31, 2006 and 2005      42
          Consolidated Statements of Operations for the Years Ended
           December 31, 2006, 2005 and 2004                                 43
          Consolidated Statements of Shareholders' Equity and
           Comprehensive Income for the Years Ended December 31,
           2006, 2005 and 2004                                              44
          Consolidated Statements of Cash Flows for the Years Ended
           December 31, 2006, 2005 and 2004                                 45
          Notes to Consolidated Financial Statements                        46

       2. Financial Statement Schedule. The following financial statement
          schedule of the Company for the years ended December 31, 2006, 2005
          and 2004, is filed as part of this report on Form 10-K and should be
          read in conjunction with the financial statements.

          Schedule                Title                                   Page
          --------                -----                                   ----
             II        Valuation and Qualifying Accounts                    72

          Schedules 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
<PAGE>


Report of Independent Registered Public Accounting Firm

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

We have completed integrated audits of Micrel, Incorporated's consolidated
financial statements and of its internal control over financial reporting as
of December 31, 2006, in accordance with the standards of the Public Company
Accounting Oversight Board (United States).  Our opinions, based on our
audits, are presented below.

Consolidated financial statements and financial statement schedule
------------------------------------------------------------------

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, 2006 and 2005, and the results of their operations and their cash flows
for each of the three years in the period ended December 31, 2006 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.  These financial
statements and financial statement schedule are the responsibility of the
Company's management.  Our responsibility is to express an opinion on these
financial statements and financial statement schedule based on our audits.  We
conducted our audits of these statements in accordance with the standards of
the Public Company Accounting Oversight Board (United States).  Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement.  An audit of financial statements includes 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.  We believe that our audits provide a reasonable basis for our
opinion.

As discussed in Note 1 to the consolidated financial statements, the Company
changed the manner in which it accounts for share-based compensation in fiscal
2006.

Internal control over financial reporting
-----------------------------------------

Also, in our opinion, Management's assessment, included in Management's
Report on Internal Control Over Financial Reporting appearing under Item 9A,
that the Company maintained effective internal control over financial
reporting as of December 31, 2006 based on criteria established in Internal
Control - Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO), is fairly stated, in all
material respects, based on those criteria. Furthermore, in our opinion, the
Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2006, based on criteria established in
Internal Control - Integrated Framework issued by the COSO.  The Company's
management is responsible for maintaining effective internal control over
financial reporting and for its assessment of the effectiveness of internal
control over financial reporting.  Our responsibility is to express opinions
on Management's assessment and on the effectiveness of the Company's internal
control over financial reporting based on our audit. We conducted our audit
of internal control over financial reporting in accordance with the standards
of the Public Company Accounting Oversight Board (United States).  Those
standards require that we plan and perform the audit to obtain reasonable
assurance about whether effective internal control over financial reporting
was maintained in all material respects.  An audit of internal control over
financial reporting includes obtaining an understanding of internal control
over financial reporting, evaluating Management's assessment, testing and
evaluating the design and operating effectiveness of internal control, and
performing such other procedures as we consider necessary in the
circumstances.  We believe that our audit provides a reasonable basis for our
opinions.

                                       40
<PAGE>

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

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



PricewaterhouseCoopers LLP
San Jose, CA
February 28, 2007

                                       41
<PAGE>
<TABLE>
                             MICREL, INCORPORATED
                         CONSOLIDATED BALANCE SHEETS
                       AS OF DECEMBER 31, 2006 AND 2005
                     (In thousands, except share amounts)
______________________________________________________________________________

                                                           2006        2005
                                                        ---------   ---------
<S>                                                     <C>         <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                             $  92,259   $  88,130
  Restricted cash                                           2,629         --
  Short-term investments                                   15,050      48,433
  Accounts receivable, less allowances:
   2006, $4,596; 2005, $4,144                              31,092      35,524
  Inventories                                              37,183      30,419
  Prepaid expenses and other                                3,084       1,919
  Deferred income taxes                                    23,096      22,134
                                                        ---------   ---------
    Total current assets                                  204,393     226,559

PROPERTY, PLANT AND EQUIPMENT, NET                         78,665      77,554
INTANGIBLE ASSETS, NET                                      4,714       4,752
DEFERRED INCOME TAXES                                      11,158      10,264
OTHER ASSETS                                                1,343         411
                                                        ---------   ---------
TOTAL                                                   $ 300,273   $ 319,540
                                                        =========   =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable                                      $  17,429   $  20,552
  Accrued compensation                                      7,587       6,951
  Accrued commissions                                       1,435       1,480
  Income taxes payable                                        --        4,939
  Other accrued liabilities                                13,542      13,241
  Deferred income on shipments to distributors             21,705      14,069
   Current portion of long-term debt                           80         147
                                                        ---------   ---------
    Total current liabilities                              61,778      61,379

DEFERRED RENT                                                 453         475
COMMITMENTS AND CONTINGENCIES (Notes 9 and 11)

SHAREHOLDERS' EQUITY:
  Preferred stock, no par value -
   authorized: 5,000,000 shares;
   issued and outstanding: none                               --          --
  Common stock, no par value -
   authorized: 250,000,000 shares;
   issued and outstanding:
   2006 - 78,078,211; 2005 - 84,646,680                    15,585      73,848
  Deferred share-based compensation                           --         (294)
  Accumulated other comprehensive loss                        (35)        (52)
  Retained earnings                                       222,492     184,184
                                                        ---------   ---------
    Total shareholders' equity                            238,042     257,686
                                                        ---------   ---------
TOTAL                                                   $ 300,273   $ 319,540
                                                        =========   =========
</TABLE>

The accompanying notes are an integral part of these consolidated
financial statements

                                       42
<PAGE>
<TABLE>
                             MICREL, INCORPORATED
                    CONSOLIDATED STATEMENTS OF OPERATIONS
                YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                   (In thousands, except per share amounts)
______________________________________________________________________________

                                                 2006       2005       2004
                                              ---------  ---------  ---------
<S>                                           <C>        <C>        <C>
NET REVENUES                                  $ 276,307  $ 250,356  $ 257,551
COST OF REVENUES(1)                             116,201    116,564    134,854
                                              ---------  ---------  ---------
GROSS PROFIT                                    160,106    133,792    122,697
                                              ---------  ---------  ---------

OPERATING EXPENSES:
  Research and development(1)                    52,074     45,231     42,473
  Selling, general and administrative(1)         49,016     46,159     38,590
  Purchased in-process technology                   --         --         303
  Restructuring expense                             269        --         584
  Other operating expense                           966      9,282        --
                                              ---------  ---------  ---------
    Total operating expenses                    102,325    100,672     81,950
                                              ---------  ---------  ---------
INCOME FROM OPERATIONS                           57,781     33,120     40,747
                                              ---------  ---------  ---------

OTHER INCOME:
  Interest income                                 5,978      4,513      2,167
  Interest expense                                 (634)      (345)      (313)
  Other income (expense), net                        59         12       (142)
                                              ---------  ---------  ---------
    Total other income, net                       5,403      4,180      1,712
                                              ---------  ---------  ---------
INCOME BEFORE INCOME TAXES                       63,184     37,300     42,459
PROVISION FOR INCOME TAXES                       24,876     11,942     11,206
                                              ---------  ---------  ---------
NET INCOME                                    $  38,308  $  25,358  $  31,253
                                              =========  =========  =========

NET INCOME PER SHARE:
  Basic                                       $    0.47  $    0.29  $    0.34
                                              =========  =========  =========
  Diluted                                     $    0.46  $    0.29  $    0.34
                                              =========  =========  =========
WEIGHTED-AVERAGE SHARES USED IN COMPUTING
 PER SHARE AMOUNTS:
   Basic                                         81,550     87,055     91,498
                                              =========  =========  =========
  Diluted                                        82,842     87,971     93,083
                                              =========  =========  =========

(1) Share- based compensation included in:
      Cost of revenues                        $   1,540  $     159  $     535
      Research and development                    3,341        161        723
      Selling, general and administrative         3,534        450      1,263
</TABLE>

The accompanying notes are an integral part of these consolidated financial
statements

                                       43
<PAGE>
<TABLE>
                                                                MICREL, INCORPORATED
                                                   CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                                              AND COMPREHENSIVE INCOME
                                                    YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                                        (In thousands, except share amounts)
_________________________________________________________________________________________________________________________________
                                                                                Accumulated                              Compre-
                                                 Common Stock      Deferred        Other                     Total       hensive
                                          ---------------------   Share-Based  Comprehensive   Retained  Shareholders'    Income
                                             Shares     Amount   Compensation  Income(Loss)    Earnings     Equity        (Loss)
                                          -----------  --------  ------------  -------------  ---------  -------------  ---------
<S>                                       <C>          <C>       <C>           <C>            <C>        <C>            <C>
Balances, December 31, 2003                92,522,513  $160,015    $ (3,954)      $    (25)    $127,573     $283,609
Net income                                        --        --          --             --        31,253       31,253     $ 31,253
Other comprehensive loss,
 Change in net unrealized
 Losses from investments                                                               (60)                      (60)         (60)
                                                                                                                         --------
Comprehensive income                                                                                                     $ 31,193
                                                                                                                         ========
Deferred share-based compensation, net            --       (315)      2,836            --           --         2,521
Repurchase of common stock                 (3,538,000)  (39,388)        --             --           --       (39,388)
Employee stock transactions                   841,481     6,779         --             --           --         6,779
Tax effect of employee stock transactions         --        173         --             --           --           173
                                          -----------  --------    --------       --------     --------     --------
Balances, December 31, 2004                89,825,994   127,264      (1,118)           (85)     158,826      284,887
Net income                                        --        --          --             --        25,358       25,358     $ 25,358
Other comprehensive loss,
 Change in net unrealized
 Losses from investments                                                                33                        33           33
                                                                                                                         --------
Comprehensive income                                                                                                     $ 25,391
                                                                                                                         ========
Deferred share-based compensation, net            --        (54)        824            --           --           770
Repurchase of common stock                  6,065,300)  (63,399)        --             --           --       (63,399)
Employee stock transactions                   885,986     6,949         --             --           --         6,949
Tax effect of employee stock transactions         --      3,088         --             --           --         3,088
                                          -----------  --------    --------       --------     --------     --------
Balances, December 31, 2005                84,646,680    73,848        (294)           (52)     184,184      257,686
Net income                                        --        --          --             --        38,308       38,308     $ 38,308
Other comprehensive loss,
 Change in net unrealized
 Losses from investments                                                                17                        17           17
                                                                                                                         --------
Comprehensive income                                                                                                     $ 38,325
                                                                                                                         ========
Reversal of deferred share-based
 compensation upon adoption of
 SFAS No.123(R)                                            (294)        294            --           --           --
Share-based compensation, net                     --      8,640         --             --           --         8,640
Repurchase of common stock                 (6,714,479)  (71,513)        --             --           --       (71,513)
Escrow shares cancelled                      (400,050)      --          --             --           --           --
Employee stock transactions                   546,060     4,120         --             --           --         4,120
Tax effect of employee stock transactions         --        784         --             --           --           784
                                          -----------  --------    --------       --------     --------     --------
Balances, December 31, 2006                78,078,211  $ 15,585    $    --        $    (35)    $222,492     $238,042
                                          ===========  ========    ========       ========     ========     ========
</TABLE>

The accompanying notes are an integral part of these consolidated financial
 statements

                                       44
<PAGE>
<TABLE>

                             MICREL, INCORPORATED
                    CONSOLIDATED STATEMENTS OF CASH FLOWS
                 YEARS ENDED DECEMBER 31, 2006, 2005 AND 2004
                                (In thousands)
______________________________________________________________________________
                                                  2006       2005       2004
                                               ---------  ---------  ---------
<S>                                            <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net income                                   $  38,308  $  25,358  $  31,253
  Adjustments to reconcile net income to
   net cash provided by operating activities:
    Depreciation and amortization                 17,291     19,952     24,828
    Share-based compensation                       8,415        770      2,521
    Tax benefit on the exercise of employee
     stock options                                   784        --         --
    Excess tax benefits associated with
     stock compensation                             (206)       --         --
    Purchased in-process technology                  --         --         303
    Loss on disposal of assets                        11        140        283
    Deferred rent                                    (22)      (100)       (14)
    Deferred income taxes                         (1,856)    (6,773)    11,592
    Changes in operating assets and liabilities,
     net of effects of an acquisition:
      Accounts receivable                          4,432     (3,469)     1,703
      Inventories                                 (6,539)     5,325     (4,456)
      Prepaid expenses and other assets           (2,097)       615       (156)
      Accounts payable                            (3,123)     4,277      2,967
      Accrued compensation                           636      2,052       (388)
      Accrued commissions                            (45)       188        (10)
      Income taxes payable                        (4,939)     3,067     (2,494)
      Other accrued liabilities                      301      7,267         18
      Other non-current accrued liabilities          --      (1,389)    (2,921)
      Deferred income on shipments to
       distributors                                7,636        421      1,376
                                               ---------  ---------  ---------
      Net cash provided by operating activities   58,987     57,701     66,405
                                               ---------  ---------  ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Change in restricted cash                       (2,629)       --         --
  Purchases of property, plant and equipment     (16,774)   (14,418)   (16,917)
  Purchase of intangible assets                   (1,601)       --      (1,030)
  Purchases of short-term investments            (18,090)   (74,620)   (57,575)
  Proceeds from sales and maturities
   of investments                                 51,490     74,735      9,000
  Purchase of BlueChip Communications, net
   of cash acquired                                  --         --      (2,033)
                                               ---------  ---------  ---------
      Net cash provided (used) in investing
       activities                                 12,396    (14,303)   (68,555)
                                               ---------  ---------  ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayments of debt                                 (67)      (100)    (4,018)
  Proceeds from the issuance of common stock       4,120      6,949      6,779
  Repurchase of common stock                     (71,513)   (63,399)   (39,388)
  Excess tax benefits associated with
   stock compensation                                206        --         --
                                               ---------  ---------  ---------
      Net cash used in financing activities      (67,254)   (56,550)   (36,627)
                                               ---------  ---------  ---------
NET INCREASE (DECREASE) IN CASH AND
 CASH EQUIVALENTS                                  4,129    (13,152)   (38,777)
CASH AND CASH EQUIVALENTS - Beginning of year     88,130    101,282    140,059
                                               ---------  ---------  ---------
CASH AND CASH EQUIVALENTS - End of year        $  92,259  $  88,130  $ 101,282
                                               =========  =========  =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
  Cash paid during the year for:
    Interest                                   $      86  $     345  $     313
                                               =========  =========  =========
    Income taxes                               $  31,695  $  15,952  $   2,184
                                               =========  =========  =========
</TABLE>
The accompanying notes are an integral part of these consolidated financial
statements

                                       45
<PAGE>
                              MICREL, INCORPORATED
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                  Years Ended December 31, 2006, 2005 and 2004

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,
provision 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 judgment awarded to TRW by a jury during 2005 (see Note 6
and Note 11).  As collateral for the surety bond, the Company placed $2.6
million in a registered pledge account.  The amount pledged is classified
as Restricted Cash in the Company's Consolidated Balance Sheet, and is
invested in high quality, short-term investment securities consistent with
the Company's cash investment policy.  The interest earned on the pledged
amount accrues to the benefit of the Company.

                                       45
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

Investments - Short-term investments consist 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, 2006 and 2005 is as follows (in thousands):

<TABLE>
                                                        Unrealized   Unrealized
                                 Amortized    Market      Holding     Holding
                                   Cost        Value       Gains      Losses
                                ----------  ----------  ----------  -----------
<S>                             <C>         <C>         <C>         <C>
Short-term investments at
 December 31, 2006               $  15,085   $  15,050    $    --     $     35

Short-term investments at
 December 31, 2005               $  48,485   $  48,433    $    --     $     52
</TABLE>

As of December 31, 2006, all maturities of debt securities are less than
one year.

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, 2006, three customers accounted for 20%, 13% and 12% of total
accounts receivable. At December 31, 2005, three customers accounted for
18%, 15% and 15% of total accounts receivable. For the year ended
December 31, 2006 three customers accounted for 13%, 12% and 10%,
respectively, of the Company's net revenues. For the year ended
December 31, 2005 three customers, accounted for 14%, 12% and 12%,
respectively, of the Company's net revenues. For the year ended
December 31, 2004 three customers accounted for 13%, 12% and 12%,
respectively, of the Company's net revenues.

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

                                       47
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

technologies and industry standards; changes in product mix; changes in
third-party manufacturers; changes in key suppliers; changes in certain
strategic relationships or customer relationships; litigation or claims
against the Company based on intellectual property, patents (see Note 11),
product, regulatory or other factors; risks associated with the ability to
obtain necessary components; risks associated with the Company's ability
to attract and retain employees necessary to support its growth.

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

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

Intangible Assets - In accordance with SFAS No. 142, beginning January 1,
2002, goodwill is no longer amortized, but is reviewed at least annually
for impairment. The Company has no goodwill. 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, 2006 and 2005. 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):

<TABLE>
                                   As of December 31, 2006            As of December 31, 2005
                              --------------------------------    -------------------------------
                                Gross                    Net       Gross                   Gross
                              Carrying   Accumulated  Carrying   Carrying  Accumulated   Carrying
                               Amount   Amortization   Amount     Amount   Amortization   Amount
                              --------  ------------  --------   --------  ------------  --------
<S>                           <C>       <C>           <C>        <C>       <C>           <C>
Developed and core technology $  8,718    $  8,078    $    640   $   8,718   $  7,626    $  1,092
Patents and tradename           10,318       6,244       4,074       8,717      5,084       3,633
Customer relationships           1,455       1,455         --        1,455      1,428          27
                              --------    --------    --------    --------   --------    --------
                              $ 20,491    $ 15,777    $  4,714    $ 18,890   $ 14,138    $  4,752
                              ========    ========    ========    ========   ========    ========
</TABLE>

Total intangible amortization expense for the year ended December 31, 2006
was $1.6 million, for the year ended December 31, 2005 was $1.6 million
and for the year ended December 31, 2004 was $1.8 million. Estimated
future intangible amortization expense for intangible assets as of
December 31, 2006, is expected to be approximately $1.7 million in 2007
and 2008, $828,000 in 2009, and $254,000 in 2010 and 2011.

In September 2006, Micrel entered into a Patent License Agreement with
International Business Machines Corporation ("IBM").  Pursuant to the
Agreement, Micrel recorded $1.3 million as an intangible asset which is
being amortized to cost of revenues on a straight-line basis over its
estimated useful life of approximately 5 years.

                                       48
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

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, including identifiable
intangible 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, primarily 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 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

                                       49
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

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, 2006 and 2005, accrued warranty expense was $47,000 and
$162,000, respectively. 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 typically 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 workers' compensation claims and health benefit claims. Losses are
accrued based upon the Company's estimates of the aggregate liability for
claims incurred using historical experience and certain actuarial
assumptions followed in the insurance industry.

Advertising Expenses - The Company expenses advertising costs as incurred.
Advertising expenses for fiscal 2006, 2005 and 2004 were $2.1 million,
$1.8 and $1.6 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 $23.1 million and net long-term deferred tax assets of $11.2
million as of December 31, 2006.  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.
The Company records liabilities for anticipated tax audit issues based on
its estimate of whether, and the extent to which, additional taxes may be
due.

                                       50
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

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 7). 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):

<TABLE>
                                                   Years Ended December 31,
                                                 ----------------------------
                                                   2006      2005      2004
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Weighted-average common shares outstanding         81,550    87,055    91,498
Dilutive effect of stock options outstanding,
 using the treasury stock method                    1,292       916     1,585
                                                 --------  --------  --------
Shares used in computing diluted earnings
 per share                                         82,842    87,971    93,083
                                                 ========  ========  ========
</TABLE>

For the years ended December 31, 2006, 2005 and 2004, 5.7 million, 7.2
million and 4.9 million stock options, respectively, have been excluded
from the weighted-average number of common shares outstanding for the
diluted net income per share computations as they are anti-dilutive.

Fair Value of Financial Instruments - Financial instruments included in
the Company's consolidated balance sheets at December 31, 2006 and 2005,
consist of cash, cash equivalents, accounts receivable, accounts payable
and short-term 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 short-term 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".  FIN No. 48
prescribes a two-step process to determine the amount of benefit to be
recognized. First, the tax position must be evaluated to determine the
likelihood that it will be sustained upon examination. If the tax position
is deemed "more-likely-than-not" to be sustained, the tax position is then
measured to determine the amount of benefit to recognize in the financial
statements. The tax position is measured at the largest amount of benefit
that is greater than 50 percent likely of being realized upon ultimate
settlement. FIN No. 48 is effective for fiscal years beginning after
December 15, 2006.  The Company is currently evaluating the effect that
the adoption of FIN No. 48 will have on its financial position and results
of operations.

In September 2006, the Securities and Exchange Commission ("SEC") issued
Staff Accounting Bulletin ("SAB") No. 108 regarding the process of
quantifying financial statement misstatements. SAB No. 108 states that
registrants should use both a balance sheet approach and an income

                                       51
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

statement approach when quantifying and evaluating the materiality of a
misstatement. The interpretations in SAB No. 108 contain guidance on
correcting errors under the dual approach as well as provide transition
guidance for correcting errors. This interpretation does not change the
requirements within SFAS No. 154, "Accounting Changes and Error
Corrections - a replacement of APB No. 20 and FASB Statement No. 3," for the
correction of an error on financial statements. SAB No. 108 is effective
for annual financial statements covering the first fiscal year ending
after November 15, 2006. The adoption of SAB No. 108 had no effect 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.
Early adoption is permitted subject to specific requirements outlined in
the new Statement. The Company is currently evaluating the effect that the
adoption of SFAS 159 will have on its financial position and results of
operations.


2.   ACQUISITION

On March 3, 2004, Micrel acquired a controlling interest in BlueChip
Communications AS ("BlueChip") of Oslo, Norway.  BlueChip is a fabless
semiconductor company that designs, develops and markets high performance
Radio Frequency integrated circuits and modules for the actuation and
connectivity markets.  During 2004, Micrel acquired 100% of the
outstanding BlueChip common stock and options to purchase BlueChip common
stock in a cash-for-stock transaction.  The acquisition was accounted for
as a purchase under SFAS 141 "Business Combinations" and, accordingly, the
results of operations of BlueChip from the date of acquisition forward
have been included in the Company's consolidated financial statements.
Under the terms of the agreement, Micrel paid approximately $2 million and
incurred approximately $300,000 in direct acquisition costs for the
outstanding BlueChip securities and options.  The fair value of the
acquired assets exceeded the purchase price by $1.3 million. The Company
deferred $1.0 million of this excess amount as potential contingent
consideration of $1.0 million was payable, under the terms of the
agreement, if certain revenue and gross profit targets were met by the
BlueChip operations during calendar year 2004.

As of December 31, 2004, it was determined that the additional contingent
consideration of $1.0 million, which was initially recorded in the first
quarter of 2004, would not be payable as certain revenue and gross profit

                                       52
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

targets were not achieved by the BlueChip operations and accordingly, was
reversed in the fourth quarter of 2004.

A summary of the purchase price allocation recorded as of the acquisition
date, and then as adjusted for the final determination of the contingent
consideration is as follows (in thousands):

<TABLE>
                                               Allocation of Purchase Price for
                                                   BlueChip Communications
                                               --------------------------------
                                                Initially    Adjusted for Final
                                               Recorded at      Determination
                                               Acquisition      of Contingent
                                                   Date         Consideration
                                               -----------   ------------------
<S>                                            <C>           <C>
Current assets                                   $  1,117         $  1,117
Equipment and other, net                               44               28
Deferred tax assets                                   440              440
Intangible assets, purchased in-process
 technology                                           480              303
Intangible assets, core technology                  1,714            1,075
Intangible assets, customer relationships             450              282
Liabilities assumed                                  (945)            (945)
                                                 --------         --------
Acquisition cost                                 $  3,300         $  2,300
                                                 ========         ========
</TABLE>

Purchased in-process technology, which had not reached technological
feasibility and had no alternative future use, was recorded as a charge to
the line item purchased in-process technology in the consolidated
statement of operations for the year ended December 31, 2004. In-process
technology costs consist of five research and development projects that
had not yet reached technological feasibility at the time of acquisition.
In addition, the amounts above which have been allocated to existing
technology and customer relationships are included in intangible assets in
the accompanying consolidated balance sheet.  These intangible assets are
being amortized over their useful lives of five and three years,
respectively.  The amounts assigned to existing technology, customer
relationships and purchased in-process technology were determined by
management, based in part on a valuation by an independent appraisal firm
based on Management's forecast of future revenues, cost of revenues and
operating expenses related to the purchased technologies.  The calculation
gave consideration to relevant market sizes and growth factors, expected
industry trends, the anticipated nature and timing of new product
introductions, individual product cycles, and the estimated lives of each
of the products underlying the technology.

The Company has not presented supplemental pro-forma results of operations
reflecting the impact of the BlueChip acquisition as the effect is not
material.

In addition, Micrel has recorded an intangible asset of $800,000 for the
license of certain developed technology pursuant to a pre-acquisition
development and license agreement which was entered into with BlueChip in
2001.  This intangible asset was amortized to cost of revenues over its
estimated useful life of five years.

                                       53
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

3.   INVENTORIES

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

<TABLE>
                                                         2006        2005
                                                       --------    --------
<S>                                                    <C>         <C>
Finished goods                                         $ 16,062    $ 12,472
Work in process                                          19,430      17,044
Raw materials                                             1,691         903
                                                       --------    --------
                                                       $ 37,183    $ 30,419
                                                       ========    ========
</TABLE>


4.   PROPERTY, PLANT AND EQUIPMENT

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

<TABLE>
                                                         2006        2005
                                                       --------    --------
<S>                                                    <C>         <C>
Manufacturing equipment                                $172,537    $164,240
Land                                                      6,636       6,635
Buildings and improvements                               43,050      42,541
Leasehold  improvements                                     636         739
Office furniture and research equipment                  12,356      11,765
                                                       --------    --------
                                                        235,215     225,920
Accumulated depreciation and amortization              (156,550)   (148,366)
                                                       --------    --------
                                                       $ 78,665    $ 77,554
                                                       ========    ========
</TABLE>

Depreciation expense for the years ended December 31, 2006 and 2005 and
2004 was $15.7 million, $18.3 million and $23.0 million, respectively.


5.   OTHER ACCRUED LIABILITIES

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

<TABLE>
                                                         2006        2005
                                                       --------    --------
<S>                                                    <C>         <C>
Accrued current restructuring expenses                 $  1,574    $  1,759
Accrued workers' compensation and health insurance        1,339       1,343
Accrued litigation and related interest                  10,101       9,554
Other current accrued liabilities                           528         585
                                                       --------    --------
                                                       $ 13,542    $ 13,241
                                                       ========    ========
</TABLE>


6.   BORROWING ARRANGEMENTS

Borrowing arrangements consist of a $6 million revolving line of credit
from a commercial bank.  The revolving line of credit agreement includes a
provision for the issuance of commercial or standby letters of credit by
the bank on behalf of the Company.  The value of all letters of credit
outstanding reduces the total line of credit available.  There were no
borrowings under the revolving line of credit at December 31, 2006, and
there were $875,000 in standby letters of credit outstanding.  The
revolving line of credit agreement expires on June 30, 2007.  Borrowings
under the revolving line of credit bear interest rates of, at the
Company's election, the prime rate (8.25% at December 31, 2006), or the
bank's revolving offshore rate, which approximates LIBOR (5.4% at December 31,

                                       54
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

2006) plus 2.0%.  The agreement contains certain restrictive covenants
that include a restriction on the declaration and payment of dividends
without the lender's consent.  The Company was in compliance with all such
covenants at December 31, 2006.

In February 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 potential damages and interest arising from a judgment
awarded to TRW by a jury on July 26, 2005 (see Note 11).  The Company is
currently appealing the verdict.  As collateral for the surety bond, the
Company placed $2.6 million in a registered pledge account.  The amount
pledged is classified as Restricted Cash in the Company's Consolidated
Balance Sheet (see Note 1).

Associated with the acquisition of BlueChip Communications, the Company
has $80,000 outstanding in term notes payable to the Norwegian Industrial
and Regional Development Fund.


7.   SHAREHOLDERS' EQUITY AND SHARE-BASED COMPENSATION

Preferred Stock

The Company has authorized 5,000,000 shares of preferred stock, no par
value, of which none were issued or outstanding at December 31, 2006. 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 March 2005, the Board of Directors approved a $75 million share
repurchase program for calendar year 2005.  In November, 2005 the
Company's Board of Directors adopted a new plan which authorized the
repurchase of common stock up to a maximum value of $75 million during the
period from January 1, 2006 through December 31, 2006.  In August 2006,
the Company's Board of Directors approved an increase to the amount
previously approved for share repurchase in calendar year 2006 to $100
million.  In November 2006, the Company's Board of Directors approved a
$50 million share repurchase program for calendar year 2007.  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.

Stock Option Plans

Under the Company's 2003 Incentive Award 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 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 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

                                       55
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

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, 2006, 16,263,239 total
shares were reserved for future issuance, of which 4,869,715 shares were
available for future grants under the Option Plans.

Option activity under the Option Plans is as follows:
<TABLE>
                                                                      Weighted
                                                                       Average
                                                            Number    Exercise
                                                          of Shares     Price
                                                         -----------  ---------
<S>                                                      <C>          <C>
Outstanding, December 31, 2003 (7,353,219 exercisable
 at a weighted average price of $11.94 per share)         11,517,985  $ 12.72
  Granted                                                  1,665,000    12.43
  Exercised                                                 (607,989)    7.53
  Canceled                                                  (477,913)   15.04
                                                         -----------
Outstanding, December 31, 2004 (8,253,200 exercisable
 at a weighted average price of $12.76 per share)         12,097,083    12.85
  Granted                                                  1,840,200    10.62
  Exercised                                                 (683,661)    7.38
  Canceled                                                  (766,619)   15.62
                                                         -----------
Outstanding, December 31, 2005 (8,291,040 exercisable
 at a weighted average price of $13.08 per share)         12,487,003    12.65
  Granted                                                  1,758,550    12.18
  Exercised                                                 (530,363)    7.49
  Canceled                                                  (939,413)   13.62
                                                         -----------
Outstanding, December 31, 2006 (8,470,755 exercisable
 at a weighted average price of $13.23 per share)         12,775,777   $ 12.76
                                                         ===========
</TABLE>

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, 2006, 2005 and 2004 was $7.04, $6.86 and $8.45
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, 2006, 2005 and 2004 was $2.5 million, $2.6 million and $3.2 million,
respectively. During the years ended December 31, 2006, 2005 and 2004, the
amount of cash received from the exercise of stock options was $4.0
million, $5.0 million and $4.6 million, respectively. The net tax benefit
realized from the exercise of non-qualified stock options and
disqualifying dispositions of incentive stock options was $784,000, $3.1
million and 173,000 for the years ended December 31, 2006, 2005 and 2004,
respectively.

                                       56
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

Additional information regarding options outstanding as of December 31, 2006
is as follows:

<TABLE>
             Stock Options Outstanding                 Options Exercisable
----------------------------------------------------  ----------------------
                                Weighted    Weighted               Weighted
                                 Average     Average                Average
                                Remaining   Exercise               Exercise
    Range of         Number    Contractual    Price     Number      Price
Exercise Prices   Outstanding  Life(yrs)    Per Share Exercisable  Per Share
----------------  -----------  -----------  --------  -----------  ---------
<S>               <C>          <C>          <C>       <C>          <C>
$ 1.18 to $ 7.50     993,181        2.1       $ 6.62     952,520     $ 6.60
$ 7.51 to $ 9.00     987,736        3.4         8.59     755,356       8.56
$ 9.01 to $10.50   2,644,851        5.7         9.62   1,432,806       9.45
$10.51 to $12.00   2,851,897        7.3        10.97   1,708,976      10.80
$12.01 to $13.50   1,482,085        5.6        12.84     883,097      12.98
$13.51 to $15.00   1,149,380        6.6        14.24     490,880      14.17
$15.01 to $20.00   1,484,850        5.1        17.31   1,105,390      17.82
$20.01 to $30.00     935,197        3.4        21.76     895,190      21.69
$30.01 to $49.50     246,600        3.6        39.49     246,540      39.49
                  ----------                           ---------
$ 0.47 to $49.50  12,775,777        5.4       $12.76   8,470,755     $13.23
                  ==========                           =========
</TABLE>

As of December 31, 2006, the aggregate pre-tax intrinsic value (which is
the amount by which the closing price of the Company's common stock at
December 31, 2006 exceeded the exercise price of the options) of options
outstanding and options exercisable was approximately $9.5 million and $
7.7 million, respectively. As of December 31, 2006, the estimated number
of options exercisable and expected to vest was 11.8 million shares with
an estimated aggregate intrinsic value of $9.1 million.

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.

                                       57
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

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:

<TABLE>
                                                 2006       2005       2004
                                              ---------  ---------  ---------
<S>                                           <C>        <C>        <C>
Expected life (years)                            5.5          5         5
Stock volatility                                58.7%       76.9%     84.0%
Risk free interest rates                         4.9%        4.1%      3.4%
Dividends during expected terms                 none        none      none
</TABLE>

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

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

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

The Company has never paid cash dividends, thus has assumed a 0% dividend
yield.

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 2006, pursuant to SFAS No.
123R and for 2005 and 2004 pursuant to APB 25 (in thousands):

<TABLE>
                                                 2006       2005       2004
                                              ---------  ---------  ---------
<S>                                           <C>        <C>        <C>
Cost of revenues                              $   1,540  $     159  $     535
Research and development                          3,341        161        723
Selling, general and administrative               3,534        450      1,263
                                              ---------  ---------  ---------
  Pre-tax share-based compensation expense        8,415        770      2,521
Less income tax effect                              819        296        988
                                              ---------  ---------  ---------
Net share-based compensation expense          $   7,596  $     474  $   1,533
                                              =========  =========  =========
</TABLE>

The Company's basic and diluted net earnings per share for 2006 was lower
by $0.09 per share under SFAS No. 123R, than if the Company had continued
to account for share-based compensation under APB 25. Total share-based

                                       58
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

compensation cost capitalized as part of inventory as of December 31, 2006
was $225,000. At December 31, 2006, there was $16.4 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 3.9
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 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 for amortization of
options granted under the Thirty-Day method through 2005.

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 years ended December
31, 2005 and 2004. 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:

                                       59
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

<TABLE>
(in thousands, except per-share amounts)            Years Ended December 31,
                                                         2005        2004
                                                       --------    --------
<S>                                                    <C>         <C>
Net income as reported                                 $ 25,358    $ 31,253
Add:  share-based employee compensation expense
 included in reported net income, net of tax effects        474       1,533
Deduct:  share-based employee compensation expense
 determined under fair value based method, net of
 tax effects                                            (10,181)    (12,608)
                                                       --------    --------
Pro forma net income                                   $ 15,651    $ 20,178
                                                       ========    ========
Net income per share as reported:
  Basic                                                $   0.29    $   0.34
                                                       ========    ========
  Diluted                                              $   0.29    $   0.34
                                                       ========    ========
Pro forma net income per share:
  Basic                                                $   0.18    $   0.22
                                                       ========    ========
  Diluted                                              $   0.18    $   0.22
                                                       ========    ========
</TABLE>

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 and 233,492 in 2004 at weighted average prices of $9.42
and $9.41, respectively. 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 2006 was 14,916 shares of Common Stock at
weighted average prices of $9.61. 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.

                                       60
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

8.   INCOME TAXES

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

<TABLE>
                                                 2006       2005       2004
                                              ---------  ---------  ---------
<S>                                           <C>        <C>        <C>
Current:
  Federal                                     $  26,904  $  19,807  $     (27)
  State                                            (172)    (1,092)        81
                                              ---------  ---------  ---------
Total current                                    26,732     18,715         54
                                              ---------  ---------  ---------

Deferred:
  Federal                                        (3,609)    (7,452)    10,775
  State                                           1,753        679        377
                                              ---------  ---------  ---------
Total deferred                                   (1,856)    (6,773)    11,152
                                              ---------  ---------  ---------
Total provision                               $  24,876  $  11,942  $  11,206
                                              =========  =========  =========
</TABLE>

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

The calculation of the Company's tax liabilities involves dealing with
uncertainties in the application of complex tax regulations.  The Company
records liabilities for anticipated tax audit issues based on its estimate
of whether, and the extent to which, additional taxes may be due.  Actual
tax liabilities may be different than the recorded estimates and could
result in an additional charge or benefit to the tax provision in the
period when the ultimate tax assessment is determined.

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

<TABLE>
                                                 2006       2005       2004
                                              ---------  ---------  ---------
<S>                                           <C>        <C>        <C>
Statutory federal income tax rate                 35%         35%       35%
Research and development credit                   (1)         (2)        -
Qualified production activities credit            (1)         (1)        -
State income taxes (net of federal income
 tax benefit)                                      2          (1)        1
Extraterritorial income exclusion                  -           -        (3)
Non-deductible stock compensation                  3           -         -
Effects of reversal of accrued income
 tax liabilities                                   -          (1)       (9)
Other                                              1           2         2
                                              ------      ------   -------
Effective tax rate                                39%         32%       26%
                                              ======      ======   =======
</TABLE>

                                       61
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

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.

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

<TABLE>
                                                         2006        2005
                                                       --------    --------
<S>                                                    <C>         <C>
Deferred tax assets:
  Accruals and reserves not currently deductible       $ 15,103    $ 14,573
  Deferred income                                         8,747       5,670
  Tax net operating loss and credit carryforwards        18,418      20,192
  Non-qualified stock compensation                        3,122       2,442
  Capitalized research and development                    1,534       1,832
                                                       --------    --------
Total deferred tax asset                                 46,924      44,709
                                                       --------    --------

Deferred tax liabilities:
  Depreciation                                           (5,534)     (4,562)
  State income taxes                                     (7,136)     (7,749)
                                                       --------    --------
Total deferred tax liability                            (12,670)    (12,311)
                                                       --------    --------
Net deferred tax asset (current and non-current)       $ 34,254    $ 32,398
                                                       ========    ========
</TABLE>

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.  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.

Included in net deferred assets are net operating loss and credit
carryforwards. Due to the Company's acquisition of Synergy, the Company
has available pre-ownership change federal net operating loss
carryforwards of approximately $5.9 million which will expire in the years
2007 through 2013 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 estimated to be approximately
$500,000. 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 $15.9 million consisting primarily of research credit
carryforwards, of which approximately $2.4 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.

During the second quarter of 2004, the Company reversed $3.8 million of
accrued income tax liabilities as a result of the completion of a federal
income tax audit.  In May 2004, the Company received an audit report from
the Internal Revenue Service ("IRS") which recommended no changes to
Micrel's federal tax return filings covering the tax years 1994 through
2001.  In addition, the Company subsequently received a notice dated July
6, 2004 from the Joint Committee on Taxation which stated that the
committee took no exceptions to conclusions in the IRS audit report.  This
reversal of accrued income tax liabilities was recorded as a reduction to
provision for income taxes in the second quarter of 2004.

                                       62
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

In addition, related to the federal tax audit completion, the Company also
reversed in operating expenses $3.9 million (offset in part by a $1.4
million income tax effect) in accrued payroll tax liabilities, which were
recorded in prior periods.

The effects of these accrued tax liability reversals on the below-noted
items in the Company's statement of operations for the year ended December
31, 2004 is summarized as follows (in thousands):

<TABLE>
Reversal of accrued payroll tax liabilities:
                                                          Increase
                                                         (Decrease)
                                                         ---------
<S>                                                      <C>
  Cost of revenues                                       $  (1,111)
  Research and development                                  (1,697)
  Selling, general and administrative                       (1,140)
                                                         ---------
   Total reversed in operating expense                      (3,948)
Income tax effect of payroll tax liability reversal          1,382
Reversal of accrued income tax liabilities                  (3,760)
                                                         ---------
Increase to net income                                   $   6,326
                                                         =========
</TABLE>


9.   COMMITMENTS AND CONTINGENCIES

Lease Agreements

The Company leases some of its facilities and equipment under operating
lease agreements that expire in the years 2007 through and 2011. 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):

<TABLE>
Year Ending December 31,
------------------------
<S>                                                    <C>
         2007                                                1,844
         2008                                                1,615
         2009                                                1,344
         2010                                                1,203
         2011                                                  386
      Thereafter                                               --
                                                         ---------
                                                         $   6,392
                                                         =========
</TABLE>

Rent expense under operating leases for the years ended December 31, 2006,
2005, and 2004 was  $1.9 million, $1.4 million and $1.5 million,
respectively.

                                       63
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004


Open Purchase Orders

As of December 31, 2006, the Company had approximately $22.7 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.

Letters of Credit

Micrel's borrowing arrangements (see Note 6) include a provision for the
issuance of commercial or standby letters of credit by the bank on behalf
of the Company. At December 31, 2006 there was $875,000 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.


10.   PROFIT-SHARING 401(k) PLAN

The Company has a profit-sharing plan 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 $710,000 in contributions for the year ended December 31, 2006 and

                                       64
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

made $622,000 and $617,000 in contributions to the Plan for the years
ended December 31, 2005 and 2004, respectively. Participants vest in
Company contributions ratably over six years of service.


11.   LITIGATION

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 many companies who were
opposing the law suit together (the "Joint Defense Group").  After many
defendants settled with the Lemelson Foundation, four companies remained
in the Joint Defense Group.    On August 8, 2006, the Court issued its
claim construction order.  The Lemelson partnership filed a Motion for
Partial reconsideration on August 22, 2006.  On September 12, 2006, the
Joint Defense Group filed a response to the Motion for Partial
reconsideration.  On October 13, 2006 the Court issued an order denying
the Partnership's Motion and affirmed its prior construction of disputed
claims.  Subsequently, 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.

On May 9, 1994, Linear Technology Corporation ("Linear" or "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 has recorded $846,000 in other
operating expense in the Company's 2006 financial statements.

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 of 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 the Company's second

                                       65
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

quarter 2005 financial statements.  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 Notes 1 and 7).  The Company is
currently appealing the verdict. On August 9, 2005, the Company filed a
Motion for an order setting aside the jury verdict and the subsequent
judgment and granting a new trial on the issue of the Company's breach of
contract claim against TRW, which Motion was denied by the Court.  On
January 13, 2006, the Company filed a notice of its intent to appeal the
jury's verdict.  As of October 23, 2006, the parties had filed final
appeal, reply and response briefs.  The parties are now awaiting a hearing
date for oral argument.

On April 21, 2003, the Company filed a complaint against its former
principal 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 has denied all allegations in the complaint.  The complaint
sought compensatory damages, costs of 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 Agreement, the
parties agreed to dismiss with prejudice the litigation pending between
the parties (see Note 15.)

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 (the
"Court") alleging two causes of action for infringement by MPS of certain
patents owned by Micrel.  In the complaint, the Company alleges that MPS
has been and is 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 adds 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 and its chief executive officer Michael Hsing and
its chief design engineer Jim 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 will be paid by 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 14), 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

                                       66
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

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 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 phase and no trial date
has yet been set.

With the exception of the TRW, LTC and Lemelson litigation discussed
above, for which the Company has recorded in other operating expense $9.3
million in 2005 (included in other accrued liabilities at December 31,
2006), $846,000 in 2006, and $120,000 in 2006, respectively, and the MPS
litigation, for which the Company has recorded $2.9 million in net
revenues, 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.

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.

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.

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


12.   SEGMENT REPORTING

The Company follows the provisions of SFAS No. 131, Disclosures about
Segments of an Enterprise and Related Information. SFAS No. 131
establishes standards for reporting information regarding operating

                                       67
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

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.

<TABLE>
Net Revenues by Segment (in thousands):            Years Ended December 31,
                                                 ----------------------------
                                                   2006      2005      2004
                                                 --------  --------  --------
<S>                                              <C>       <C>       <C>
Standard Products                                $258,214  $239,177  $246,580
Other Products                                     18,093    11,179    10,971
                                                 --------  --------  --------
  Total net revenues                             $276,307  $250,356  $257,551
                                              =========  =========  =========
</TABLE>

For the year ended December 31, 2006, 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").

<TABLE>
Geographic Information (in thousands):
                                 2006                  2005             2004
                         -------------------   -------------------   ---------
                                      Long-                 Long-
                         Total Net    Lived    Total Net    Lived    Total Net
                         Revenues*   Assets    Revenues*   Assets    Revenues*
                         ---------  --------   ---------  --------   ---------
<S>                      <C>        <C>        <C>        <C>        <C>
United States of America  $ 66,713  $ 73,079    $ 42,706  $ 72,090    $ 45,489
Other North American
 Countries                  16,116         2      20,379       --       15,196
Korea                       46,913        53      63,865        92      62,221
Taiwan                      27,475       246      31,095       107      43,233
Singapore                   33,264        11      23,218        15      24,178
China                       16,851        46      17,171        49      23,827
Hong Kong                   21,572       --       12,515       --        3,332
Japan                       13,503        20      12,495        41      12,072
Other Asian Countries        2,442     5,025       2,193     4,948       1,555
Europe                      31,458       183      24,719       212      26,448
                         ---------  --------   ---------  --------   ---------
Total                    $ 276,307  $ 78,665   $ 250,356  $ 77,554   $ 257,551
                          ========  ========    ========  ========    ========
</TABLE>

* Total revenues are attributed to countries based on "ship to" location of
customer.

Long-lived assets consist of property, plant and equipment.

                                       68
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

13.   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 11.)  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.

A summary of restructuring expense accrual is as follows: ($000)
<TABLE>
                                             Contractual
                                  Severance   Facility    Disposal
                                    Costs       Costs       Costs      Total
                                  ---------  -----------  ---------  ---------
<S>                              <C>        <C>          <C>        <C>
2002  Charges                    $      --    $   4,536   $   1,000  $   5,536
      Uses                              --          --          --         --
                                  ---------   ---------   ---------  ---------
      Balance December 31, 2002         --        4,536       1,000      5,536
2003  Charges                           320         466        (500)       286
      Uses                             (320)       (883)        (89)    (1,292)
                                  ---------   ---------   ---------  ---------
      Balance December 31, 2003         --        4,119         411      4,530
2004  Charges                           --          584         --         584
      Uses                              --       (1,654)        (51)    (1,705)
                                  ---------   ---------   ---------  ---------
      Balance December 31, 2004         --        3,049         360      3,409
2005  Charges                           --          --          --         --
      Uses                              --       (1,650)        --      (1,650)
                                  ---------   ---------   ---------  ---------
      Balance December 31, 2005         --        1,399         360      1,759
2006  Charges                           --          117         152        269
      Uses                              --         (259)       (195)      (454)
                                  ---------   ---------   ---------  ---------
      Balance December 31, 2006   $     --    $   1,257   $     317  $   1,574
                                  =========   =========   =========  =========
</TABLE>

All of the $1.6 million in accrued restructuring costs has been included
within other accrued liabilities as of December 31, 2006. 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.

14.   PATENT LICENSE AGREEMENT

In September 2006, Micrel entered into a Patent License Agreement with
International Business Machines Corporation ("IBM").  Under the Agreement,
each party licensed to the other all patents issued or issuing on patent
applications entitled to an effective filing date prior to January 1, 2012.
Certain IBM patents are not licensed to Micrel owing to IBM's arrangements
with third parties.  In consideration for the license to IBM's patents, Micrel
paid IBM $2,050,000.

                                       69
<PAGE>
                              MICREL, INCORPORATED
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
                  Years Ended December 31, 2006, 2005 and 2004

Based on the estimated historical and future benefits of the Patent License
Agreement, the Company has allocated the payment as follows (in thousands):

<TABLE>
<S>                                           <C>
    Settlement of patent disputes             $     714
    Patent license                                1,336
                                              ---------
    Total payment                             $   2,050
</TABLE>

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


15.   SUBSEQUENT EVENT

On February 23, 2007, the Company and its former principal accountants
Deloitte & Touche LLP, ("Deloitte") 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 agreed to
pay Micrel a settlement amount of $15.5 million dollars. The Company
expects to record the settlement amount as other income in the quarter
ending March 31, 2007.

                                       70
<PAGE>

              SUPPLEMENTAL QUARTERLY FINANCIAL SUMMARY - UNAUDITED
<TABLE>
 (in thousands, except per                      Three Months Ended
  share amounts)                       --------------------------------------
                                       Mar. 31,  June 30,  Sept. 30, Dec. 31,
                                         2006     2006(1)   2006(2)    2006
                                       --------  --------  --------  --------
<S>                                    <C>       <C>       <C>       <C>
Net revenues                           $ 68,151  $ 70,192  $ 73,482  $ 64,482
Gross profit                           $ 39,894  $ 40,252  $ 43,033  $ 36,927
Net income                             $  8,701  $  8,991  $ 11,803  $  8,813
Net income per share:
  Basic                                $   0.10  $   0.11  $   0.15  $   0.11
  Diluted                              $   0.10  $   0.11  $   0.15  $   0.11

Weighted-average shares used in
 computing per share amounts:
  Basic                                  84,025    83,201    80,671    78,372
  Diluted                                85,794    84,696    81,324    79,476

(in thousands, except per                      Three Months Ended
  share amounts)                       --------------------------------------
                                       Mar. 31,  June 30,  Sept. 30, Dec. 31,
                                         2005     2005(3)    2005      2005
                                       --------  --------  --------  --------
Net revenues                           $ 60,685  $ 62,052  $ 62,472  $ 65,147
Gross profit                           $ 30,376  $ 32,152  $ 33,792  $ 37,472
Net income                             $  6,603  $  1,183  $  7,721  $  9,851
Net income per share:
  Basic                                $   0.07  $   0.01  $   0.09  $   0.12
  Diluted                              $   0.07  $   0.01  $   0.09  $   0.11

Weighted-average shares used in
 computing per share amounts:
  Basic                                  89,102    87,256    86,514    85,619
  Diluted                                89,624    88,097    88,047    86,641
</TABLE>
__________
(1) 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 11 of Notes to Consolidated Financial Statements).
(2) 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 11 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 14 of Notes to
Consolidated Financial Statements).(3) Operating results for the quarter ended
June 30, 2005, include pre-tax $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. (see Note 11 of Notes to
Consolidated Financial Statements).

                                       71
<PAGE>

                                                                SCHEDULE II
<TABLE>
                                       MICREL, INCORPORATED
                               VALUATION AND QUALIFYING ACCOUNTS
                     For the Years Ended December 31, 2006, 2005, and 2004
                                     (Amounts in thousands)

                                    Balance at    Allowance   Returns and
                                    Beginning   Additions or     Price      Bad Debt    Balance at
         Description                 of Year    (Reductions)  Adjustments  Write-offs  End of Year
---------------------------------  -----------  ------------  -----------  ----------  -----------
<S>                                <C>          <C>           <C>          <C>         <C>
Year Ended December 31, 2006
----------------------------
Allowances for OEM and stocking
 representative returns and
 price adjustments                   $  2,665     $  4,668      $ (4,843)   $   --       $  2,490
Allowances for unclaimed
 distributor price adjustments(1)       1,240       33,204       (32,494)        --         1,950
Allowances for doubtful accounts          239           (3)          --          (80)         156
                                     --------     --------      --------    --------     --------
   Total allowances                  $  4,144     $ 37,869      $(37,337)   $    (80)    $  4,596
                                     ========     ========      ========    ========     ========
Year Ended December 31, 2005
----------------------------
Allowances for OEM and stocking
 representative returns and
 price adjustments                   $  2,493     $  4,714      $ (4,542)    $   --      $  2,665
Allowances for unclaimed
 distributor price adjustments(1)       1,254       19,465       (19,479)        --         1,240
Allowances for doubtful accounts          231           11           --           (3)         239
                                     --------     --------      --------    --------     --------
   Total allowances                  $  3,978     $ 24,190      $(24,021)   $     (3)    $  4,144
                                     ========     ========      ========    ========     ========
Year Ended December 31, 2004
----------------------------
Allowances for OEM and stocking
 representative returns and
 price adjustments                   $  1,392     $  6,941      $ (5,840)   $    --      $  2,493
Allowances for unclaimed
 distributor  price adjustments(1)      1,264       20,290       (20,300)        --         1,254
Allowances for doubtful accounts          180           51           --          --           231
                                     --------     --------      --------    --------     --------
   Total allowances                  $  2,836     $ 27,282      $(26,140)   $    --      $  3,978
                                     ========     ========      ========    ========     ========
</TABLE>
___________
(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.

                                       72
<PAGE>

                                   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 28th day of February, 2007.

                                               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          President, Chief Executive       February 28, 2007
---------------------------  Officer and Chairman of the
    Raymond D. Zinn          Board of Directors (Principal
                             Executive Officer)

/S/ Richard D. Crowley       Vice President, Finance and      February 28, 2007
---------------------------  Chief  Financial Officer
    Richard D. Crowley       (Principal Financial and
                             Accounting Officer)

/S/ Donald Livingstone       Director                         February 28, 2007
---------------------------
    Donald Livingstone

/S/ David W. Conrath         Director                         February 28, 2007
---------------------------
    David W. Conrath

/S/ Michael J. Callahan      Director                         February 28, 2007
---------------------------
    Michael J. Callahan

/S/ Neil J. Miotto           Director                         February 28, 2007
---------------------------
    Neil J. Miotto

                                       73
<PAGE>

                              Micrel, Incorporated
                 Exhibits Pursuant to Item 601 of Regulation S-K

Exhibit
Number                           Description
-------                          -----------

 2.1     Agreement and Plan of Merger and Reorganization among Micrel,
         Incorporated, Kournikova Acquisition Sub, Inc., Kendin Communications
         Inc., and with respect to Articles VIII and IX only, John C.C. Fan,
         as Stockholders' Agent, dated May 4, 2001. (8)
 3.1     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. (2)
 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. (13)*
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    Loan and Security Agreement Dated June 29, 2001 between the Registrant
         and Bank of the West (9)
10.14    Amendment No. Two to Loan and Security Agreement Dated June 29, 2001
         between the Registrant and Bank of the West (10)
10.15    Commercial Mortgage Financing Agreement between Micrel, Incorporated
         and Bank of the West, dated September 27, 2002 (11)
10.16    Credit Agreement between the Registrant and Bank of The West dated
         June 30, 2003 (12)
14.1     Micrel, Incorporated Code of Ethics for Senior Officers
23.1     Consent of Independent Registered Public Accounting Firm
24.1     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
         2002
32       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.

                                       74
<PAGE>

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

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

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

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

(8)  Incorporated by reference to exhibit 10.1 filed with the Company's
     registration statement on Form S-3 filed with the S.E.C. on June 22, 2001.

(9)  Incorporated by reference to exhibit 10.1 filed with the Company's
     quarterly report on Form 10-Q for the period ended June 30, 2001.

(10)  Incorporated by reference to exhibit 10.16 filed with the Company's
      annual report on Form 10-K for the period ended December 31, 2002.

(11)  Incorporated by reference to exhibit 10.1 filed with the Company's
      quarterly report on Form 10-Q for the period ended September 30, 2002.

(12)  Incorporated by reference to exhibit 10.1 filed with the Company's
      quarterly report on Form 10-Q for the period ended June 30, 2003.

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

                                       75
<PAGE>

                                                                  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 28, 2007,
relating to the financial statements and financial statement schedule,
management's assessment of the effectiveness of internal control over
financial reporting and the effectiveness of internal control over financial
reporting, which appears in this Form 10-K.



/s/ PricewaterhouseCoopers LLP
San Jose, California
February 28, 2007

                                       76
<PAGE>

                                                                    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 28, 2007          /S/ Raymond D. Zinn
                                   -------------------------------------------
                                   Raymond D. Zinn
                                   President, Chief Executive Officer
                                   and Director (Principal Executive Officer)

                                       77
<PAGE>

                    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 28, 2007          /S/ Richard D. Crowley
                                   -------------------------------------------
                                   Richard D. Crowley
                                   Vice President, Finance and
                                   Chief Financial Officer
                                   (Principal Financial and Accounting Officer)

                                       78
<PAGE>

                                                                    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, 2006 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 28, 2007          /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, 2006 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 28, 2007          /S/ Richard D. Crowley
                                   -------------------------------------------
                                   Richard D. Crowley
                                   Vice President, Finance and
                                   Chief Financial Officer
                                   (Principal Financial and Accounting Officer)



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