**UNITED
        STATES**
 **SECURITIES
        AND EXCHANGE COMMISSION**
 WASHINGTON,
        D.C. 20549
 
 
 **FORM
        10-Q**
 
 (Mark
        One)
 x  QUARTERLY
        REPORT PURSUANT TO SECTION 13 or 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 For
        the
        quarterly period ended September 30, 2007.
 
 or
 
  ̈  TRANSITION
        REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
        1934
 For
        the
        transition period from  to  .
 
 Commission
        File Number **0-25236**
 
 
 **MICREL,
        INCORPORATED**
 (Exact
        name of Registrant as specified in its charter)
 
 
 **California**
              **94-2526744**(State
                  or other jurisdiction of
              (I.R.S.
                  Employer Identification No.)incorporation
                  or organization)
 
 
 **2180
        Fortune Drive, San Jose, CA 95131**
 (Address
        of principal executive offices) (Zip Code)
 
 
 Registrant's
        telephone number, including area code: **(408)
        944-0800**
 
 
 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 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  ̈
 
 Indicate
        by check mark whether the registrant is a shell company (as defined in Rule
        12b-2 of the Exchange Act.) Yes  ̈ No x
 
 
 
 As
        of
        October 31, 2007 there were 75,878,010 shares of common stock, no par value,
        outstanding.
 
 
  Table
            Of Contents
   
 **MICREL,
                  INCORPORATED**
                **INDEX
                  TO**
                **REPORT
                  ON FORM 10-Q**
                **FOR
                  THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2007**Page**PART
                  I.****FINANCIAL
                  INFORMATION****Item
                  1**.
              Financial
                  Statements (Unaudited):Condensed
                  Consolidated Balance Sheets - at September
                  30, 2007 and at December 31, 2006
              3Condensed
                  Consolidated Statements of Operations - Three and Nine Months EndedSeptember
                  30, 2007 and 2006
              4Condensed
                  Consolidated Statements of Cash
                  Flows - Nine Months Ended September 30, 2007 and 2006
              5Notes
                  to Condensed Consolidated
                  Financial Statements
              6**Item
                  2.**
              Management’s
                  Discussion and Analysis of Financial Condition
                  and Results of Operations
              15**Item
                  3.**
              Quantitative
                  and Qualitative Disclosures
                  about Market Risk
              24**Item
                  4.**
              Controls
                  and Procedures
              24**PART
                  II. OTHER INFORMATION****Item
                  1.**
              Legal
                  Proceedings
              25**Item
                  1A.**
              Risk
                  Factors
              25**Item
                  2.**
              Unregistered
                  Sales of Equity Securities and Use of
                  Proceeds
              29**Item
                  6.**
              Exhibits
              30Signature
              31
 
 
 
  2
 
 Table
            Of Contents
 
 **ITEM
                  1. FINANCIAL STATEMENTS****MICREL,
                  INCORPORATED****CONDENSED
                  CONSOLIDATED BALANCE
                  SHEETS****(Unaudited)****(In
                  thousands, except share amounts)****September
                    30,**
              
              **December
                  31,****2007**
              
              
              **2006**ASSETSCURRENT
                  ASSETS:Cash
                  and cash equivalents
              
              $
              93,531
              
              $
              92,259Restricted
                  cash
              
              
              --
              
              
              2,629Short
                  term investments
              
              
              22,044
              
              
              15,050Accounts
                  receivable, net
              
              
              34,534
              
              
              31,092Inventories
              
              
              33,540
              
              
              37,183Income
                  taxes receivable
              
              
              3,229
              
              
              801Prepaid
                  expenses and other
              
              
              1,634
              
              
              2,283Deferred
                  income taxes
              
              
              20,092
              
              
              23,096Total
                  current assets
              
              
              208,604
              
              
              204,393PROPERTY,
                  PLANT AND EQUIPMENT, NET
              
              
              80,363
              
              
              78,665DEFERRED
                  INCOME TAXES
              
              
              9,460
              
              
              11,158INTANGIBLE
                  ASSETS, NET
              
              
              3,448
              
              
              4,714OTHER
                  ASSETS
              
              
              1,356
              
              
              1,343TOTAL
              
              $
              303,231
              
              $
              300,273LIABILITIES
                  AND SHAREHOLDERS’ EQUITYCURRENT
                  LIABILITIES:Accounts
                  payable
              
              $
              15,569
              
              $
              17,429Deferred
                  income on shipments to distributors
              
              
              21,691
              
              
              21,705Other
                  current liabilities
              
              
              11,647
              
              
              22,564Current
                  portion of long-term debt
              
              
              --
              
              
              80Total
                  current liabilities
              
              
              48,907
              
              
              61,778LONG-TERM
                  INCOME TAXES PAYABLE
              
              
              2,567
              
              
              --OTHER
                  LONG-TERM OBLIGATIONS
              
              
              346
              
              
              453SHAREHOLDERS’
                  EQUITY:Preferred
                  stock, no par value - authorized: 5,000,000 shares;issued
                  and outstanding: none
              
              
              --
              
              
              --Common
                  stock, no par value - authorized: 250,000,000 shares;issued
                  and outstanding: 2007 - 76,190,952 shares;
                2006
                  - 78,078,211
                  shares
              
              
              --
              
              
              15,585Accumulated
                  other comprehensive loss
              
              
              (33
              )
              
              (35
              )Retained
                  earnings
              
              
              251,444
              
              
              222,492Total
                  shareholders’ equity
              
              
              251,411
              
              
              238,042TOTAL
              
              $
              303,231
              
              $
              300,273The
                  accompanying notes are an integral part of these unaudited condensed
                  consolidated financial
                  statements.
  3
 
 Table
            Of Contents
  
 **MICREL,
                  INCORPORATED****CONDENSED
                  CONSOLIDATED STATEMENTS OF
                  OPERATIONS****(Unaudited)****(In
                  thousands, except per share amounts)****Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**NET
                  REVENUES
              
              $
              65,191
              
              $
              73,482
              
              $
              193,405
              
              $
              211,825COST
                  OF REVENUES(1)
              
              
              27,698
              
              
              30,449
              
              
              82,118
              
              
              88,646GROSS
                  PROFIT
              
              
              37,493
              
              
              43,033
              
              
              111,287
              
              
              123,179OPERATING
                  EXPENSES:Research
                  and development(1)
              
              
              13,680
              
              
              13,071
              
              
              41,123
              
              
              39,261Selling,
                  general and administrative(1)
              
              
              10,871
              
              
              11,867
              
              
              34,123
              
              
              37,531Restructuring
                  expense
              
              
              28
              
              
              35
              
              
              100
              
              
              101Other
                  expense
              
              
              --
              
              
              (22
              )
              
              86
              
              
              913Total
                  operating expenses
              
              
              24,579
              
              
              24,951
              
              
              75,432
              
              
              77,806INCOME
                  FROM OPERATIONS
              
              
              12,914
              
              
              18,082
              
              
              35,855
              
              
              45,373OTHER
                  INCOME (EXPENSE):Interest
                  income
              
              
              1,605
              
              
              1,538
              
              
              4,767
              
              
              4,552Interest
                  expense
              
              
              (11
              )
              
              (28
              )
              
              (83
              )
              
              (488
              )Litigation
                  settlement and other income, net (Note 12)
              
              
              10
              
              
              39
              
              
              15,533
              
              
              51Total
                  other income, net
              
              
              1,604
              
              
              1,549
              
              
              20,217
              
              
              4,115INCOME
                  BEFORE INCOME TAXES
              
              
              14,518
              
              
              19,631
              
              
              56,072
              
              
              49,488PROVISION
                  FOR INCOME TAXES
              
              
              5,095
              
              
              7,828
              
              
              20,140
              
              
              19,993NET
                  INCOME
              
              $
              9,423
              
              $
              11,803
              
              $
              35,932
              
              $
              29,495NET
                  INCOME PER SHARE:Basic
              
              $
              0.12
              
              $
              0.15
              
              $
              0.46
              
              $
              0.36Diluted
              
              $
              0.12
              
              $
              0.15
              
              $
              0.46
              
              $
              0.35WEIGHTED
                  AVERAGE SHARES USED INCOMPUTING
                  PER SHARE AMOUNTS:Basic
              
              
              76,964
              
              
              80,671
              
              
              77,466
              
              
              82,620Diluted
              
              
              77,971
              
              
              81,324
              
              
              78,625
              
              
              83,971(1)
                  Share-based compensation expense included in:Cost
                  of revenues
              
              $
              260
              
              $
              485
              
              $
              848
              
              $
              1,187Research
                  and development
              
              
              543
              
              
              733
              
              
              1,678
              
              
              2,844Selling,
                  general and administrative
              
              
              564
              
              
              792
              
              
              1,791
              
              
              2,943The
                  accompanying notes are an integral part of these unaudited condensed
                  consolidated financial
                  statements.
  4
 
 Table
            Of Contents
  **MICREL,
                  INCORPORATED****CONDENSED
                  CONSOLIDATED STATEMENTS OF CASH
                  FLOWS****(Unaudited)****(In thousands)****Nine
                  Months Ended****September
                  30,****2007**
              
              **2006**NET
                  CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:Net
                  income
              
              $
              35,932
              
              $
              29,495Adjustments
                  to reconcile net income to net cashprovided
                  by operating activities:Depreciation
                  and amortization
              
              
              13,499
              
              
              12,789Share-based
                  compensation expense
              
              
              4,317
              
              
              6,974Tax
                  benefit on the exercise of employee stock options
              
              
              1,265
              
              
              588Excess
                  tax benefits associated with share-based compensation
              
              
              (158
              )
              
              (161
              )Loss
                  on disposal of assets
              
              
              --
              
              
              11Deferred
                  rent
              
              
              (107
              )
              
              (19
              )Deferred
                  income taxes
              
              
              2,115
              
              
              (784
              )Changes
                  in operating assets and liabilities:Accounts
                  receivable
              
              
              (3,442
              )
              
              (869
              )Inventories
              
              
              3,651
              
              
              (6,487
              )Income
                  taxes receivable
              
              
              (2,428
              )
              
              (426
              )Prepaid
                  expenses and other assets
              
              
              636
              
              
              (841
              )Accounts
                  payable
              
              
              (1,860
              )
              
              (2,628
              )Income
                  taxes payable
              
              
              5,154
              
              
              (4,939
              )Other
                  current liabilities
              
              
              (10,917
              )
              
              (267
              )Deferred
                  income on shipments to distributors
              
              
              (14
              )
              
              7,259Net
                  cash provided by operating activities
              
              
              47,643
              
              
              39,695CASH
                  FLOWS FROM INVESTING ACTIVITIES:Change
                  in restricted cash
              
              
              2,629
              
              
              (2,629
              )Purchases
                  of property, plant and equipment
              
              
              (13,931
              )
              
              (11,281
              )Purchases
                  of intangible asset
              
              
              --
              
              
              (1,601
              )Purchases
                  of short-term investments
              
              
              (13,056
              )
              
              (15,052
              )Proceeds
                  from the sale of short-term investments
              
              
              6,064
              
              
              51,490Net
                  cash provided by (used in) investing activities
              
              
              (18,294
              )
              
              20,927CASH
                  FLOWS FROM FINANCING ACTIVITIES:Repayments
                  of long-term debt
              
              
              (80
              )
              
              (70
              )Proceeds
                  from the issuance of common stock
              
              
              10,914
              
              
              2,702Repurchases
                  of common stock
              
              
              (34,402
              )
              
              (57,952
              )Payment
                  of cash dividends
              
              
              (4,667
              )
              
              --Excess
                  tax benefits associated with share-based compensation
              
              
              158
              
              
              161Net
                  cash used in financing activities
              
              
              (28,077
              )
              
              (55,159
              )NET
                  INCREASE IN CASH AND CASH EQUIVALENTS
              
              
              1,272
              
              
              5,463CASH
                  AND CASH EQUIVALENTS - Beginning of period
              
              
              92,259
              
              
              88,130CASH
                  AND CASH EQUIVALENTS - End of period
              
              $
              93,531
              
              $
              93,593SUPPLEMENTAL
                  DISCLOSURE OF CASH FLOW INFORMATION:Cash
                  paid during the period for:Interest
              
              $
              816
              
              $
              86Income
                  taxes
              
              $
              13,987
              
              $
              25,568The
                  accompanying notes are an integral part of these unaudited condensed
                  consolidated financial statements.
  5
 
 Table
            Of Contents
 **MICREL,
                INCORPORATED**
 **NOTES
                TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 **1.**  **SIGNIFICANT
          ACCOUNTING POLICIES**
 
 ***Interim
          Financial Information -*** ** The
          accompanying condensed consolidated financial statements of Micrel, Incorporated
          and its wholly-owned subsidiaries (“Micrel” or the “Company”) as of September
          30, 2007 and for the three and nine months ended September 30, 2007 and
          2006 are
          unaudited. In the opinion of management, the condensed consolidated financial
          statements include all adjustments (consisting only of normal recurring
          accruals
          except for the adoption of FIN No. 48 as discussed in Note 14) that management
          considers necessary for a fair statement of its financial position, operating
          results and cash flows for the interim periods presented. Operating results
          and
          cash flows for interim periods are not necessarily indicative of results
          for the
          entire year. The Condensed Consolidated Balance Sheet as of December 31,
          2006,
          was derived from audited financial statements, but does not include all
          disclosures required by accounting principles generally accepted ("GAAP")
          in the
          United States of America. These financial statements should be read in
          conjunction with the audited consolidated financial statements and notes
          thereto
          included in the Company’s Annual Report on Form 10-K for the year ended December
          31, 2006. These financial statements should also be read in conjunction
          with the
          Company's critical accounting policies included in the Company’s Annual Report
          on Form 10-K for the year ended December 31, 2006.
 
 ***Restricted
          Cash*** - During
          the first quarter of 2006, the Company elected to post a surety bond to
          stay
          payment of potential damages and interest arising from a legal judgment
          awarded
          to TRW during 2005 (see Note 12). As collateral for the surety bond, the
          Company
          placed $2.6 million in a registered pledge account. The amount pledged
          was
          classified as Restricted Cash in the Company’s Condensed Consolidated Balance
          Sheet as of December 31, 2006. During the second quarter of 2007, the Company
          paid the legal judgment to TRW and the $2.6 million balance of the registered
          pledge account was transferred to the Company's unrestricted cash
          account.
 
 ***Net
          Income Per Common and Equivalent Share*** **-** Basic
          net
          income per share is computed by dividing net income by the number of
          weighted-average common shares outstanding. Diluted net income per share
          reflects potential dilution from outstanding stock options using the treasury
          stock method. Reconciliation of weighted-average shares used in computing
          net
          income per share is as follows (in thousands):
 **Three
                    Months Ended**
                
                **Nine
                    Months Ended****September
                    30,**
                
                **September
                    30,****2007**
                
                **2006**
                
                **2007**
                
                **2006**Weightedaverage common shares outstanding
                
                
                76,964
                
                
                80,671
                
                
                77,466
                
                
                82,620Dilutive
                    effect of stock options outstanding using the treasury stock
                    method
                
                
                1,007
                
                
                653
                
                
                1,159
                
                
                1,351Shares
                    used in computing diluted net income per share
                
                
                77,971
                
                
                81,324
                
                
                78,625
                
                
                83,971
 
 For
          the
          three and nine months ended September 30, 2007, 6.1 million stock options,
          have
          been excluded from the weighted-average number of common shares outstanding
          for
          the diluted net income per share computations as they were anti-dilutive.
          For
          the three and nine months ended September 30, 2006, 9.2 million stock options
          and 5.4 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 were anti-dilutive.
  6
 
 Table
            Of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  
 **2.**  **RECENTLY
        ISSUED ACCOUNTING STANDARDS**
 
 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.
 
 
 **3.**  **SHARE-BASED
        COMPENSATION**
 
 The
        Company accounts for share-based compensation under the provisions of Statement
        of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment”
("SFAS No. 123R"). Share-based compensation is measured at the grant date,
        based
        on the fair value of the award and is recognized over the employee's requisite
        service period. For further details regarding the Company's share-based
        compensation arrangements, refer to Note 7 of Notes to Consolidated Financial
        Statements included in the Company’s Annual Report on Form 10-K for the year
        ended December 31, 2006. The following table summarizes total share-based
        compensation expense included in the Condensed Consolidated Statement of
        Operations:
 
 **Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Cost
                  of revenues
              
              $
              260
              
              $
              485
              
              $
              848
              
              $
              1,187Research
                  and development
              
              
              543
              
              
              733
              
              
              1,678
              
              
              2,844Selling,
                  general and administrative
              
              
              564
              
              
              792
              
              
              1,791
              
              
              2,943Pre-tax
                  share-based compensation expense
              
              
              1,367
              
              
              2,010
              
              
              4,317
              
              
              6,974Less
                  income tax effect
              
              
              (276
              )
              
              (183
              )
              
              (730
              )
              
              (606
              )Net
                  share-based compensation expense
              
              $
              1,091
              
              $
              1,827
              
              $
              3,587
              
              $
              6,368
 
 During
        the three months ended September 30, 2007 and 2006, the Company granted 381,650
        and 310,400 stock options, respectively at weighted average fair values of
        $5.35
        and $5.62 per share, respectively. For the nine months ended September 30,
        2007
        and 2006, the Company granted 1,534,425 and 1,398,600 stock options,
        respectively at weighted average fair values of $6.11 and $7.31 per share,
        respectively. 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:
 
 **Three
                  Months Ended**
              **Nine
                  Months Ended****September
                  30,**
              **September
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Expected
                  term (years)
              
              
              5.8
              
              
              5.4
              
              
              5.9
              
              
              5.5Stock
                  volatility
              
              
              51.0%
              
              
              60.1%
              
              
              51.7%
              
              
              59.6%Risk
                  free interest rates
              
              
              4.3%
              
              
              5.0%
              
              
              4.6%
              
              
              5.0%Dividends
                  during expected terms
              
              
              1.1%
              
              
              0.0%
              
              
              0.7%
              
              
              0.0%
 
 
  7
 
 Table
            Of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  As
        of
        September 30, 2007, there was $17.7 million of total unrecognized share-based
        compensation related to non-vested stock option awards which is expected
        to be
        recognized over a weighted-average period of 3.7 years. Total share-based
        compensation capitalized as part of inventory as of September 30, 2007 and
        December 31, 2006 was $233,000 and $225,000, respectively.
 
 
 **4.**  **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 September 30, 2007 and December 31, 2006 is as follows
        (in
        thousands):
  **Amortized**
                **Cost**
              
              **Market**
                ******Value**
              
              **Unrealized**
                **Holding**
                **Gains**
              
              **Unrealized**
                **Holding**
                **Losses**Short-term
                  investments at September 30, 2007
              
              $
              22,077
              
              $
              22,044
              
              $
              --
              
              $
              33Short-term
                  investments at December 31, 2006
              
              $
              15,085
              
              $
              15,050
              
              $
              --
              
              $
              35
 
 
 **5.**  **INVENTORIES**
 
 Inventories
        consist of the following (in thousands):
 **September
                  30,**
              
              **December
                  31,****2007**
              
              **2006**Finished
                  goods
              
              $
              12,198
              
              $
              16,062Work
                  in process
              
              
              19,016
              
              
              19,430Raw
                  materials
              
              
              2,326
              
              
              1,691$
              33,540
              
              $
              37,183
 
 
 **6.**  **INTANGIBLE
        ASSETS**
 
 Components
        of intangible assets were as follows (in thousands):
 
 **As
                  of September 30, 2007**
              
              **As
                  of December 31, 2006****Gross**
                **Carrying**
                **Amount**
              
              **Accumulated**
                **Amortization**
              
              **Net**
                **Carrying**
                **Amount**
              
              **Gross**
                **Carrying**
                **Amount**
              
              **Accumulated**
                **Amortization**
              
              **Net**
                **Carrying**
                **Amount**Developed
                  and core technology
              
              $
              8,720
              
              $
              8,282
              
              $
              438
              
              $
              8,718
              
              $
              8,078
              
              $
              640Patents
                  and trade name
              
              
              10,318
              
              
              7,308
              
              
              3,010
              
              
              10,318
              
              
              6,244
              
              
              4,074Customer
                  relationships
              
              
              1,455
              
              
              1,455
              
              
              --
              
              
              1,455
              
              
              1,455
              
              
              --$
              20,493
              
              $
              17,045
              
              $
              3,448
              
              $
              20,491
              
              $
              15,777
              
              $
              4,714
 
 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.
        Total intangible amortization expense for the three and nine month periods
        ended
        September 30, 2007 was $422,000 and 1.3 million, respectively. Total intangible
        amortization expense for the three and nine month periods ended September
        30,
        2006 was $406,000 and $1.2 million, respectively.
  8
 
 Table
            Of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  The
        estimated future amortization expense of intangible assets as of September
        30,
        2007 was as follows: (in
        thousands)
 **Year
                  Ending December 31,**2007
              
              $
              4222008
              
              
              1,6882009
              
              
              8282010
              
              
              2552011
              
              
              255Thereafter
              
              
              -$
              3,448
 **7.**  **OTHER
        CURRENT LIABILITIES**
 
 Other
        current liabilities consist of the following (in thousands):
 
 **September
                    30,**
              
              
              **December
                  31,****2007**
              
              
              **2006**Accrued
                  current restructuring expenses
              
              $
              1,759
              
              $
              1,574Accrued
                  workers compensation and health insurance
              
              
              1,232
              
              
              1,339Accrued
                  litigation and related interest expense (see Note 12)
              
              
              --
              
              
              10,101Accrued
                  compensation
              
              
              6,679
              
              
              7,587Accrued
                  commissions
              
              
              1,342
              
              
              1,435All
                  other current accrued liabilities
              
              
              635
              
              
              528Total
                  other current liabilities
              
              $
              11,647
              
              $
              22,564
  **8.**  **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 September 30, 2007 and December 31, 2006, and there were $525,000
            in standby
            letters of credit outstanding as of September 30, 2007. Borrowings under
            the
            revolving line of credit bear interest rates of, at the Company's election,
            the
            prime rate (7.75% at September 30, 2007), or the bank's revolving offshore
            rate,
            which approximates LIBOR plus 2.0% (7.2% at September 30, 2007.) The
            agreement
            contains certain restrictive covenants. The Company was in compliance
            with all
            such covenants at September 30, 2007. The revolving line of credit agreement
            expires June 30, 2009.
 
 
 **9.**  **SIGNIFICANT
            CUSTOMERS**
 
 During
            the nine months ended September 30, 2007, no original equipment manufacturer
            accounted for more than 10% of net revenues and two worldwide distributors,
            accounted for $31.7 million (16%) and $24.6 million (13%) of net revenues,
            respectively. During the nine months ended September 30, 2006, two world
            wide
            distributors and an Asian-based stocking representative accounted for
            $33.1
            million (16%), $25.5 million (12%) and $23.7 million (11%) of net revenues,
            respectively.
 
 As
            of
            September 30, 2007, two worldwide distributors and an Asian-based stocking
            representative accounted for 17%, 11% and 14%, respectively, of total
            accounts
            receivable. As of December 31, 2006, two worldwide distributors and an
            Asian-based stocking representative accounted for 20%, 13% and 12%,
            respectively, of total accounts receivable.
 9
 
 Table
            Of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
 **10.**  **COMPREHENSIVE
          INCOME**
 
 Comprehensive
          income, which was comprised of the Company's net income for the periods
          and
          changes in unrealized gains or losses on investments, net of tax, was $9.4
          million and $35.9 million for the three and nine months ended September
          30,
          2007, respectively, and $11.8 million and $29.5 million for the three and
          nine
          months ended September 30, 2006, respectively.
 
 
 **11.**  **SEGMENT
          REPORTING**
 
 The
          Company follows the provisions of SFAS No. 131, Disclosures about Segments
          of an
          Enterprise and Related Information. SFAS No. 131 establishes standards
          for
          reporting information regarding operating segments in annual financial
          statements and requires selected information for those segments to be presented
          in interim financial reports issued to stockholders. SFAS No. 131 also
          establishes standards for related disclosures about products and services
          and
          geographic areas. Operating segments are identified as components of an
          enterprise about which separate discrete financial information is available
          for
          evaluation by the chief operating decision maker. The Company has two reportable
          segments: standard products and other product revenues, which consist primarily
          of custom and foundry products revenues and revenues from the license of
          patents. The chief operating decision maker evaluates segment performance
          based
          on revenue. Accordingly, all expenses are considered corporate level activities
          and are not allocated to segments. Therefore, it is not practical to show
          profit
          or loss by reportable segments. Also, the chief operating decision maker
          does
          not assign assets to these segments. Consequently, it is not practical
          to show
          assets by reportable segments.
 **Net
                  Revenues by Segment**
              
              **Three
                  Months Ended**
              **Nine
                  Months Ended**(dollars
                  in thousands)
              
              **September
                  30,**
              **September
                  30,****2007**
              
              
              **2006**
              
              
              **2007**
              
              
              **2006**Net
                  Revenues:Standard
                  Products
              
              $
              59,522
              
              $
              66,479
              
              $
              177,719
              
              $
              198,382Other
                  Products
              
              
              5,669
              
              
              7,003
              
              
              15,686
              
              
              13,443Total
                  net revenues
              
              $
              65,191
              
              $
              73,482
              
              $
              193,405
              
              $
              211,825As
                  a
                  Percentage of Total Net Revenues:Standard
                  Products
              
              
              91
              %
              
              90
              %
              
              92
              %
              
              94
              %Other
                  Products
              
              
              9
              %
              
              10
              %
              
              8
              %
              
              6
              %Total
                  net revenues
              
              
              100
              %
              
              100
              %
              
              100
              %
              
              100
              %
 
 
 **12.****LITIGATION
        AND OTHER CONTINGENCIES**
 
 On
        May 9,
        1994, Linear Technology Corporation (“LTC”), a competitor of the Company, filed
        a complaint against the Company, entitled Linear Technology Corporation v.
        Micrel, Incorporated, in the United States District Court in San Jose,
        California, alleging patent and copyright infringement and unfair competition.
        After many years of motions and appeals, a bench trial on the merits was
        commenced on November 30, 2005, and concluded on December 16, 2005. The parties
        filed post-trial briefs on January 20, 2006. On June 9, 2006, the Court ruled
        that Micrel had willfully infringed the patent-in-suit, and awarded damages
        to
        LTC. As a result of this judgment, the Company recorded $846,000 in other
        operating expense in the Company’s 2006 financial statements. ****
 
 On
        February 26, 1999, the Lemelson Medical, Education & Research Foundation
        (the “Lemelson Partnership”) filed a complaint which was served on the Company
        on June 15, 1999, entitled Lemelson Medical, Education & Research
        Foundation, Limited Partnership v. Lucent Technologies Inc., et al. in the
        United States District Court in Phoenix, Arizona, against eighty-eight
        defendants, including the Company, alleging infringement of a number of Lemelson
        Foundation patents. The complaint in the lawsuit sought unspecified compensatory
        damages, treble damages and attorneys' fees, as well as injunctive relief
        against further infringement of the Lemelson patents at issue. In defense
        of
        this action, the Company was part of a Joint Defense Group consisting of
        a
        number of companies who were opposing the law suit together (the "Joint Defense
        Group"). On January 17, 2007, the parties entered into an agreement to settle
        the litigation for payment of a mutually agreeable sum, as a result of which,
        the four companies in the Joint Defense Group have acquired a package license
        under the Lemelson patents. During the fourth quarter of 2006, Micrel accrued
        $120,000 to other operating expense for the Company's portion of the liability
        under this settlement agreement. This amount was paid during the first quarter
        of 2007.
  10
 
 Table
            Of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
   
 On
        December 27, 2002, the Company filed a complaint against TRW, Inc. (“TRW”)
        entitled Micrel, Incorporated v. TRW, Inc., dba TRW Automotive Electronics
        Group, in the United States District Court, Northern District of Ohio, Eastern
        Division, alleging various causes of action relating to breach of a relationship
        surrounding the development of certain custom products by Micrel for TRW.
        In
        this lawsuit, Micrel alleged that TRW breached various agreements to assist
        in
        Micrel’s development of, and to purchase, certain Application Specific
        Integrated Circuits. The complaint sought compensatory damages, attorneys’ fees
        and costs associated with the suit. On February 24, 2003, TRW filed an answer
        to
        the Company’s complaint and a counterclaim alleging various causes of action
        relating to breach of the above-mentioned relationship concerning ASIC
        development. On July 22, 2005, a jury ruled against the Company and in favor
        of
        TRW in its counterclaim against Micrel. The outcome of the jury trial was
        a
        judgment on July 26, 2005, awarding damages for the benefit of TRW in the
        amount
        of $9.3 million. The damages amount was accrued in other current liabilities
        in
        the Company’s second quarter 2005 financial statements. On January 13, 2006, the
        Company filed a notice of its intent to appeal the jury’s verdict. On February
        23, 2006, the Company posted a surety bond in the amount of $10.5 million
        in the
        United States District Court, Northern District of Ohio, to stay payment
        of
        damages and potential interest awarded to TRW (see Note 1). On April 24,
        2007, a
        hearing was held in the United States Court of Appeals for the Sixth Circuit,
        at
        which time the Court heard oral argument on the Appeal. On May 4, 2007, the
        Court of Appeals issued its ruling affirming the jury’s verdict. During the
        quarter ended June 30, 2007, the Company paid TRW the legal judgment for
        total
        damages and interest in the amount of $10.2 million.
 
 On
        April
        21, 2003, the Company filed a complaint against its former independent public
        accountants Deloitte & Touche LLP (“Deloitte”) entitled Micrel, Incorporated
        v. Deloitte & Touche LLP in the Superior Court of the State of California,
        County of Santa Clara, alleging various causes of action relating to certain
        professional advice received by Micrel from Deloitte. In this lawsuit, Micrel
        alleged that Deloitte negligently rendered services as accountants to Micrel,
        breached certain agreements with Micrel by failing to perform services using
        ordinary skill and competence and in conformance with generally accepted
        principles for such work and made certain false representations upon which
        Micrel justifiably relied. Deloitte has denied all allegations in the complaint.
        The complaint sought compensatory damages, costs associated with the suit
        and
        such other relief that the court may deem just and proper. On February 23,
        2007,
        the parties entered into a Settlement Agreement and Mutual Releases. Under
        the
        terms of the Agreement, the parties agreed to dismiss with prejudice the
        pending
        litigation and Deloitte paid to Micrel a settlement amount of $15.5 million.
        The
        Company recorded the $15.5 million settlement amount as other income in the
        quarter ended March 31, 2007.
 
 On
        November 11, 2004, the Company filed a complaint against Monolithic Power
        Systems (“MPS”), entitled Micrel, Inc. v. Monolithic Power Systems, in the
        United States District Court, Northern District of California alleging two
        causes of action for infringement by MPS of certain patents owned by Micrel.
        In
        the complaint, the Company alleged that MPS had been and was infringing U.S.
        patent no. 5,517,046 (the “’046 patent”) and U.S. patent no. 5,556,796 (the
“’796 patent”). Subsequently, on November 29, 2004, the Company filed an amended
        complaint adding Michael R. Hsing, MPS’ President and Chief Executive Officer
        (“Hsing”), and James C. Moyer, MPS’ Chief Design Engineer (“Moyer”) as
        defendants. Hsing and Moyer are both former employees of Micrel. In addition
        to
        the original two causes of action against MPS for infringement of the '046
        and
        '796 Patents, the amended complaint added causes of action for statutory
        and
        common law misappropriation of Micrel’s trade secrets, breach of confidentiality
        agreements by Hsing and Moyer, and violation of California’s Unfair Competition
        Law. On September 21, 2006, the Company and MPS entered into a Settlement
        Agreement, agreeing to dismiss all claims and counterclaims in the litigation
        with prejudice. Micrel also agreed to release MPS, Hsing and Moyer from all
        claims for any alleged trade secret claims based on any confidential
        information. In addition, Micrel licensed U.S. Patent Nos. 5,517,046 and
        5,556,796 to MPS. Under the terms of the agreement MPS agreed to pay a license
        fee of $3.0 million of which $1.0 million was paid in September 2006, $1.0
        million was paid in December 2006 and the remaining $1.0 million balance
        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.
  11
 
 Table
            Of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
   
 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 15), filed
        a
        complaint against the Company entitled "Deerfield 3250 Scott, LLC vs. Micrel,
        Inc. et al" in the Superior Court of the State of California, County of Santa
        Clara. In February 2006, Micrel terminated this building lease under the
        terms
        of the lease agreement due to major vandalism rendering the building unusable.
        Deerfield disputes that Micrel had a right to terminate, alleging that the
        vandalism took place because of the negligence of Micrel and that Micrel
        should
        not be able to benefit from its own negligence. The complaint seeks damages
        in
        an unspecified amount for rent through the remaining term of the lease (from
        March 1 through October 31, 2006), alleged damages to the premises, and for
        wrongful removal of equipment. Micrel disputes Deerfield's allegations and
        will
        vigorously defend against the action. On July 21, 2006, Micrel answered the
        complaint with a denial of any liability 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 previously recorded operating expenses, the Company believes
        that the ultimate outcome of the legal actions discussed will not result
        in a
        material adverse effect on the Company's financial condition, results of
        operation or cash flows, and the Company believes it is not reasonably possible
        that a material loss has been incurred. However, litigation is subject to
        inherent uncertainties, and no assurance can be given that the Company will
        prevail in these lawsuits. Accordingly, the pending lawsuits, as well as
        potential future litigation with other companies, could result in substantial
        costs and diversion of resources and could have a material adverse effect
        on the
        Company’s financial condition, results of operations or cash flows.
 
 Certain
        additional claims have been filed by or have arisen against the Company in
        its
        normal course of business. The Company believes that the ultimate resolution
        of
        these claims and lawsuits will not have a material adverse effect on the
        Company's financial condition, results of operations or cash flows.
 
 
 **13.**  **SHARE
        REPURCHASE PROGRAM**
 
 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. During the nine months ended
        September 30, 2007, the Company repurchased 3,176,335 shares of its common
        stock
        for $34.4 million.
 
 On
        October 22, 2007 the Company's Board of Directors approved a share repurchase
        program for calendar year 2008 (see Note 17).
 
 Share
        repurchases are recorded as a reduction of common stock to the extent available.
        Any amounts in excess of common stock are recorded as a reduction of retained
        earnings.
 
 
 **14.**  **INCOME
        TAXES**
 
 The
        income tax provision for the three and nine months ended September 30, 2007,
        as
        a percentage of income before taxes, was 35.1% and 35.9%, respectively,
        decreasing from 39.9% and 40.4% for the comparable periods in the prior year.
        These decreases resulted from decreased non-deductible share-based compensation
        expense combined with increased tax benefits from the federal research and
        development credit and federal qualified production activity deductions.
        The
        income tax provision for such interim periods differs from taxes computed
        at the
        federal statutory rate primarily due to the effect of non-deductible share-based
        compensation expense, state income taxes, federal and state research and
        development credits and federal qualified production activity
        deductions.
  12
 
 Table
            Of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
   
 Effective
        January 1, 2007, the Company adopted the provisions of FIN No. 48. The adoption
        of FIN No. 48 did not result in a cumulative effect adjustment to retained
        earnings as of January 1, 2007. Consistent with the provisions of FIN No.
        48,
        the Company reclassified $4.4 million of current income tax liabilities as
        follows: $1.9 million increase to non-current income taxes payable and $2.5
        million decrease to non-current deferred tax assets. Upon adoption, the gross
        liability for income taxes associated with uncertain tax positions at January
        1,
        2007 was $6.6 million. This gross liability can be reduced by $2.2 million
        of
        offsetting tax benefits primarily associated with the federal effects of
        potential state income tax uncertainties.
 
 As
        of
        September 30, 2007, the gross liability for uncertain tax positions was $7.6
        million and the net liability, reduced for the federal effects of potential
        state tax exposures, was $5.1 million. If these uncertain tax positions are
        sustained upon tax authority audit, or otherwise become certain, the net
        $5.1
        million would favorably affect the company’s tax provision in such future
        periods. Included in the $5.1 million is $2.5 million which has not yet reduced
        income tax payments, and, therefore, has been netted against non-current
        deferred tax assets. The remaining $2.6 liability is included in long-term
        income taxes payable. The Company does not anticipate a significant change
        to
        the net liability for uncertain income tax positions within the next 12
        months.
 
 The
        Company continues to recognize interest and penalties related to income tax
        matters as part of the income tax provision. As of January 1, 2007 and September
        30, 2007, the Company had $140,000 and $219,000, respectively, accrued for
        interest and $0 accrued for penalties for both periods. These accruals are
        included as a component of long-term income taxes payable.
 
 The
        Company is required to file U.S. federal income tax returns as well as income
        tax returns in various states and foreign jurisdictions. The Company may
        be
        subject to examination by the Internal Revenue Service (“IRS”) for calendar
        years 2002 and forward. Significant state tax jurisdictions include California,
        New York and Texas, and generally, the Company is subject to routine examination
        for years 2001 and forward in these jurisdictions. In addition, any research
        and
        development credit carryforwards that were generated in prior years and utilized
        in these years may also be subject to examination by respective state taxing
        authorities. Generally, the Company is subject to routine examination for
        years
        2000 and forward in various immaterial foreign tax jurisdictions in which
        it
        operates.
 
 Deferred
        tax assets and liabilities result primarily from temporary differences between
        book and tax bases of assets and liabilities, state and federal research
        and
        development credit carryforwards and state manufacturers credit carryforwards.
        The Company had net current deferred tax assets of $20.1 million and net
        long-term deferred tax assets of $9.5 million as of September 30, 2007. The
        Company must regularly assess the likelihood that future taxable income levels
        will be sufficient to ultimately realize the tax benefits of these deferred
        tax
        assets. The Company currently believes that future taxable income levels
        will be
        sufficient to realize the tax benefits of these deferred tax assets and has
        not
        established a valuation allowance. Should the Company determine that future
        realization of these tax benefits is not likely, a valuation allowance would
        be
        established, which would increase the Company's tax provision in the period
        of
        such determination.
 
  13
 
 Table
            Of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**
  
 
 **15.**  **RESTRUCTURING
        AND MANUFACTURING FACILITY IMPAIRMENT**
 
 During
        2003 the Company closed its Santa Clara wafer fabrication facility. A summary
        of
        restructuring expense accruals associated with this facility closure is as
        follows: ($000)
 
 ContractualFacility
                  Costs
              
              Other
                Disposal
                Costs
              
              TotalBalance
                  December 31, 2005
              
              $
              1,399
              
              $
              360
              
              $
              1,7592006Charges
              
              
              117
              
              
              152
              
              
              2692006Uses
              
              
              (259
              )
              
              (195
              )
              
              (454
              )Balance
                  December 31, 2006
              
              
              1,257
              
              
              317
              
              
              1,5742007Charges
              
              
              100
              
              
              --
              
              
              1002007Uses
              
              
              --
              
              
              --
              
              
              --2007Other
              
              
              85
              
              
              --
              
              
              85Balance
                  September 30, 2007
              
              $
              1,442
              
              $
              317
              
              $
              1,759
 
 During
        the nine months ended September 30, 2007, the Company accrued $100,000 in
        interest expense on unpaid facility rent and reclassified $85,000 from
        non-current deferred rent into accrued restructuring.
 
 All
        of
        the $1.8 million in accrued restructuring costs has been included within
        other
        current liabilities as of September 30, 2007. Actual future costs may be
        different than these estimates and could require an adjustment to the
        restructuring accrual in the period such determination is made.
 
 
 **16.**  **DIVIDENDS**
 
 On
        July
        23, 2007 Micrel’s Board of Directors declared a cash dividend of $0.03 per
        outstanding share of common stock. The payment of $2.3 million was made on
        August 22, 2007 to shareholders of record as of August 7, 2007. During each
        of
        the second quarter and third quarters of 2007, the Company paid cash dividends
        of $2.3 million ($0.03 per outstanding share of common stock).
 
 **17.**  **SUBSEQUENT
        EVENTS**
 
 On
        October 22, 2007 the Company's Board of Directors declared a cash dividend
        of
        $0.03 per outstanding share of common stock payable on November 20, 2007,
        to
        shareholders of record at the close of business on November 5, 2007. This
        dividend will be recorded in the fourth quarter of 2007 and is expected to
        be
        approximately $2.3 million.
 
 On
        October 22, 2007 the Company's Board of Directors approved a $50 million
        share
        repurchase program for calendar year 2008. The new share repurchase plan
        will
        take effect after the Company’s previously authorized 2007 share repurchase
        program terminates on December 31, 2007. Repurchases may occur from time
        to time
        in the open market or in privately negotiated transactions through December
        31,
        2008. The timing and amount of any repurchase of shares will be determined
        by
        the Company’s management, based on its evaluation of market conditions and other
        factors.
 
 
  14
 
 Table
            Of Contents
 **ITEM
                2.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
                OF OPERATIONS**
   
 **Overview**
 
 *The
        statements contained in this Report on Form 10-Q 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 of this report,
        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. Additional factors that may affect
        operating results are contained within the Company's Form 10-K for the year
        ended December 31, 2006.*
 
 Micrel
        designs, develops, manufactures and markets a range of high-performance analog
        power integrated circuits ("ICs"), mixed-signal and digital 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. 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 quarterly periods
        from
        January 1, 2006 through September 30, 2007 has been provided.
 
 In
        the
        first quarter of 2006, broad based strength in customer demand, combined
        with
        continued lean channel inventories resulted in the highest quarterly booking
        level for Micrel since calendar year 2000. 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
        share-based compensation expense as a result of 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 production capacity utilization added approximately one percentage
        point to first quarter gross margin.
  15
 
 Table
            Of Contents
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
            OF OPERATIONS (CONTINUED)**
  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 share-based
        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 12 of Notes to Condensed 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 third 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, and related
        licensing revenues and expenses, resulted in net $2.2 million of additional
        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.
  16
 
 Table
            Of Contents
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
            OF OPERATIONS (CONTINUED)**
  During
        the fourth quarter of 2006 customers reduced inventory levels, which management
        believes 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 fourth quarter
        2006 revenues. Bookings from the Company’s sell-through distributors rebounded
        during the fourth quarter, which the Company believes is an indication 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.
 
 During
        the first quarter of 2007, customers continued to control their inventories
        closely. However, the order rates the Company experienced during the quarter
        suggested that customer and channel inventories had fallen to levels consistent
        with end demand. Micrel’s first quarter bookings increased in all major
        geographic regions resulting in a 18% growth in orders compared with fourth
        quarter 2006 levels. The
        total
        overall amount of new orders booked in the first quarter exceeded revenues.
        The
        sequential improvement in bookings was driven by higher order levels from
        customers serving the high speed communications, wireless handset and industrial
        end markets. Order
        rates increased for both OEM customers and sell-through distributors, while
        bookings from Micrel’s Asian-based sell-in distributors were flat from Q4
        levels. First quarter revenues were $63.1 million, 2% less than the $64.5
        million recorded in the fourth quarter 2006, and 7% lower than the $68.2
        million
        posted in the first quarter of 2006. Seasonal declines in sales to customers
        serving the computing, wireless handset and consumer end markets were partially
        offset by higher resales through the Company’s sell-through distributors. Gross
        margin increased sequentially to 58.1% despite lower revenues and inventory
        reduction due to a combination of lower manufacturing costs and a higher
        gross
        margin sales mix. First quarter operating profit was $11.3 million, or 18%
        of
        sales. The Company’s on-hand inventory declined on a sequential basis. Overall
        channel inventories remained relatively flat from the end of 2006, with
        increases at the Company’s sell-through distributors offset by lower inventory
        levels at Micrel’s sell-in distributors.
 
 In
        the
        second quarter of 2007, order lead times remained in the four to six week
        range.
        Although customers continued to closely monitor their inventories, the dollar
        amount of second quarter bookings exceeded the Company’s revenue level. Second
        quarter revenues were $65.1 million, a sequential increase of 3% over the
        $63.1
        million recorded in the first quarter, and 7% lower than the $70.2 million
        posted in the year-ago period. The sequential growth in second quarter revenues
        was led by increased sales to customers serving the communications and computing
        end markets, offsetting lower sales of the Company’s products to major Korean
        wireless handset customers. Gross margin of 57.0% was flat to the prior year
        period and decreased by approximately 1% from the first quarter. During the
        second quarter, the Company operated at a lower level of factory utilization,
        which had the combined effect of reducing both inventory levels and gross
        margin. Channel inventories also declined on a sequential basis as the Company’s
        major global sell-through distributors attempted to take advantage of readily
        available semiconductor component supplies to increase their working capital
        turns.
 
 Demand
        for the Company's products in the third quarter of 2007 was generally seasonal
        in nature. Bookings from industrial and wireline communication customers
        softened, while holiday and back-to-school related markets such as wireless
        handsets, computing and consumer were more robust. Faced with concerns about
        the
        growth of the U.S. economy, the Company’s sell-through distributors were
        cautious throughout the third quarter as they saw their orders slow and
        inventories build. The overall amount of orders booked by the Company in
        the
        third quarter was approximately the same as the revenue level for the quarter.
        Customers continued to control their inventories very closely during the
        third
        quarter in the face of short lead times, due in part to their belief that
        the
        semiconductor industry has sufficient inventory and/or the ability to deliver
        sufficient quantities to meet customer demand in this shorter lead time
        environment. Micrel’s order lead times decreased throughout the quarter,
        starting out at about five weeks in July and declining to three to four weeks
        in
        September. Third quarter revenues were $65.2 million, up slightly compared
        to
        the second quarter, and 11% lower than the $73.5 million posted in the year-ago
        period. An increase in third quarter sales to customers in the wireless handset
        and consumer end market was offset by lower revenues from customers in the
        wireline communications end market, arising from lower shipments to major
        Chinese communications customers as they trimmed inventory levels. Gross
        margin
        increased from 57.0% in the second quarter to 57.5% in the third quarter
        of
        2007, and decreased from 58.6% in the year ago period. During the third quarter,
        the Company reduced on-hand inventory levels despite a higher level of factory
        utilization. Channel inventories increased by approximately one week over
        the
        second quarter due to seasonally slower distribution sales of the Company’s
        products. Third quarter operating profit was $12.9 million, or 19.8% of
        revenues.
  17
 
 Table
            Of Contents
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
            OF OPERATIONS (CONTINUED)**
  The
        Company derives a substantial portion of its net revenues from standard
        products. For the three and nine month periods ended September 30, 2007 the
        Company's standard products sales accounted for 91% and 92% of the Company's
        net
        revenues, respectively. For the three and nine month periods ended September
        30,
        2006 the Company's standard products sales accounted for 90% and 94% of the
        Company's net revenues, respectively. The Company believes that a substantial
        portion of its net revenues in the future will depend upon standard products
        sales, although such sales as a proportion of net revenues may vary as the
        Company adjusts product output levels to correspond with varying economic
        conditions and demand levels in the markets which it serves. The standard
        products business is characterized by short-term orders and shipment schedules,
        and customer orders typically can be canceled or rescheduled without significant
        penalty to the customer. Since most standard products backlog is cancelable
        without significant penalty, the Company typically plans its production and
        inventory levels based on internal forecasts of customer demand, which is
        highly
        unpredictable and can fluctuate substantially. In addition, the Company is
        limited in its ability to reduce costs quickly in response to any revenue
        shortfalls.
 
 The
        Company may experience significant fluctuations in its results of operations.
        Factors that affect the Company's results of operations include the volume
        and
        timing of orders received, changes in the mix of products sold, the utilization
        level of manufacturing capacity, competitive pricing pressures and the
        successful development of new products. These and other factors are described
        in
        further detail later in this discussion and under the heading “Risk Factors” 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-Q 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. The Company considers certain accounting policies
        related to revenue recognition and valuation of receivables, inventory
        valuation, share-based compensation, income taxes, and litigation to be critical
        to the fair presentation of its financial statements. For a detailed discussion
        of the Company's significant accounting policies, see Note 1 of Notes to
        Consolidated Financial Statements in Item 14 of the Company's Annual Report
        on
        Form 10 K for the year ended December 31, 2006.
 
 *Revenue
        Recognition and Valuation of 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 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.
  18
 
 Table
            Of Contents
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
            OF OPERATIONS (CONTINUED)**
  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* . Effective
        January 1, 2006, Micrel adopted the provisions of SFAS No. 123R using the
        modified-prospective transition method. Under SFAS No. 123R share-based
        compensation is measured at the grant date based on the fair value of the
        award
        and is recognized as expense in the statement of operations. To
        determine fair value, the Company uses the Black-Scholes valuation model
        which
        requires input factors such as expected term, stock price volatility, dividend
        yield and risk free interest rate. In addition, SFAS No. 123R requires an
        estimate of expected forfeiture rates of stock grants and share-based
        compensation expense is to be only recognized for those shares expected to
        vest.
        Determining the input factors, such as expected term, expected volatility
        and
        estimated forfeiture rates, requires significant judgment based on subjective
        future expectations.
 
 *Income
        Taxes.* Deferred
        tax assets and liabilities result primarily from temporary timing differences
        between book and tax valuation of assets and liabilities, and state research
        and
        development credit carryforwards. The Company must regularly assess the
        likelihood that future taxable income levels will be sufficient to ultimately
        realize the tax benefits of these deferred tax assets. As of September 30,
        2007,
        the Company believes that future taxable income levels will be sufficient
        to
        realize the tax benefits of these deferred tax assets and has not established
        a
        valuation allowance. Should the Company determine that future realization
        of
        these tax benefits is not more likely than not, a valuation allowance would
        be
        established, which would increase the Company's tax provision in the period
        of
        such determination.
 
 Effective
        January 1, 2007, the Company adopted the provisions of FASB Interpretation
        (FIN)
        No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of
        FASB
        Statement No. 109. FIN No. 48 contains a two-step approach to recognizing
        and
        measuring uncertain tax positions accounted for in accordance with SFAS No.
        109.
        The first step is to evaluate the tax position for recognition by determining
        if
        the weight of available evidence indicates it is more likely than not that
        the
        position will be sustained on audit, including resolution of related appeals
        or
        litigation processes, if any. The second step is to measure the tax benefit
        as
        the largest amount which is more than 50% likely of being realized upon ultimate
        settlement. The Company considers many factors when evaluating and estimating
        its tax positions and tax benefits, which may require periodic adjustments
        and
        which may not accurately anticipate actual outcomes. See Note 14 of Notes
        to
        Condensed Consolidated Financial Statements for additional information regarding
        the adoption of FIN No. 48.
  19
 
 Table
            Of Contents
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
            OF OPERATIONS (CONTINUED)**
  *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 12 of Notes to Condensed
        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:
 
 **Three
                  Months Ended**
              
              **Nine
                  Months Ended****September
                  30,**
              
              **September
                  30,****2007**
              
              **2006**
              
              **2007**
              
              **2006**Net
                  revenues
              
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %
              
              100.0
              %Cost
                  of revenues
              
              
              42.5
              
              
              41.4
              
              
              42.4
              
              
              41.8Gross
                  profit
              
              
              57.5
              
              
              58.6
              
              
              57.6
              
              
              58.2Operating
                  expenses:Research
                  and development
              
              
              21.0
              
              
              17.8
              
              
              21.3
              
              
              18.6Selling,
                  general and administrative
              
              
              16.7
              
              
              16.2
              
              
              17.7
              
              
              17.8Restructuring
                  expense
              
              
              --
              
              
              --
              
              
              --
              
              
              --Other
                  expense
              
              
              --
              
              
              --
              
              
              --
              
              
              0.4Total
                  operating expenses
              
              
              37.7
              
              
              34.0
              
              
              39.0
              
              
              36.8Income
                  from operations
              
              
              19.8
              
              
              24.6
              
              
              18.6
              
              
              21.4Other
                  income (expense):Interest
                  income
              
              
              2.5
              
              
              2.1
              
              
              2.4
              
              
              2.2Interest
                  expense
              
              
              --
              
              
              --
              
              
              --
              
              
              (0.2
              )Litigation
                  settlement and other income, net
              
              
              --
              
              
              --
              
              
              8.0
              
              
              __Total
                  other income, net
              
              
              2.5
              
              
              2.1
              
              
              10.4
              
              
              2.0Income
                  before income taxes
              
              
              22.3
              
              
              26.7
              
              
              29.0
              
              
              23.4Provision
                  for income taxes
              
              
              7.8
              
              
              10.6
              
              
              10.4
              
              
              9.5Net
                  income
              
              
              14.5
              %
              
              16.1
              %
              
              18.6
              %
              
              13.9
              %
 
 *Net
        Revenues.* For the
        three months ended September 30, 2007, net revenues decreased 11% to $65.2
        million from $73.5 million for the same period in the prior year. For the
        nine
        months ended September 30, 2007, net revenues decreased 9% to $193.4 million
        from $211.8 million for the same period in the prior year. These decreases
        were
        due to decreases in standard products revenues and other products
        revenues.
 
 Standard
        products revenues for the three months ended September 30, 2007 decreased
        10% to
        $59.5 million from $66.5 million for the same period in the prior year. For
        the
        nine months ended September 30, 2007, standard products revenues decreased
        10%
        to $177.7 million from $198.4 million for the same period in the prior year.
        These decreases resulted primarily from decreased unit shipments of standard
        products to the computer products, telecommunications, networking and high
        speed
        communications end markets, which were partially offset by increase unit
        shipments to the industrial end market.
 
 Other
        products, which consist primarily of custom and foundry products revenues
        and
        revenues from the license of patents, for the three months ended September
        30,
        2007 decreased 19% to $5.7 million from $7.0 million for the same period
        in the
        prior year. This decrease resulted primarily from a $2.9
        million sale of intellectual property included in 2006 ,
        which
        was partially offset by increased foundry product shipments. For the nine
        months
        ended September 30, 2007, other products revenues increased 17% to $15.7
        million
        from $13.4 million for the same period in the prior year. This increase resulted
        primarily from increased unit shipments of foundry products, which was partially
        offset by a $2.9 million sale of intellectual property included in
        2006.
  20
 
 Table
            Of Contents
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
            OF OPERATIONS (CONTINUED)**
  Customer
        demand for semiconductors can change quickly and unexpectedly. The Company’s
        revenue levels have been highly dependent on the amount of new orders that
        are
        received for which product is requested to be delivered to the customer within
        the same quarter. Within the semiconductor industry these orders that are
        booked
        and shipped within the quarter are called “turns fill” orders. When the turns
        fill level exceeds approximately 35% of quarterly revenue, it makes it very
        difficult to predict near term revenues and income. Because of the long cycle
        time to build its products, the Company’s lack of visibility into demand when
        turns fill is high makes it difficult to predict what product to build to
        match
        future demand. During 2006, the Company averaged approximately 50% to 55%
        turns
        fill per quarter. During the first nine months of 2007, turns fill rate for
        OEM
        and stocking representatives remained in the 55% to 60% range.
 
 As
        noted
        in Item 1A “Risk Factors” and above in the overview section of this
“Management's Discussion and Analysis of Financial Condition and Results of
        Operations”, a trend has developed over the last 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, combined 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 66% and 68% of net revenues for the three months ended
        September 30, 2007 and 2006, respectively. On a dollar basis, international
        sales decreased 14% to $43.1 million for the three months ended September
        30, 2007 from $50.3 million for the comparable period in 2006. For the nine
        months ended September 30, 2007 and 2006, international sales represented
        68%
        and 71% of net revenues, respectively. For the nine months ended September
        30,
        2007 international sales decreased 13% to $130.5 million from $149.8
        million for the comparable period in 2006. These decreases resulted primarily
        from decreased shipments of standard products to the networking communications
        and computer products end markets, primarily in Asia.
 
 The
        trend
        for the Company’s customers to move their electronics manufacturing to Asian
        countries has brought increased pricing pressure for Micrel and other
        semiconductor manufacturers. Asian based manufacturers are typically more
        concerned about cost and less concerned about the capability of the integrated
        circuits they purchase. This can make it more difficult for United States
        based
        companies to differentiate themselves except by price. The increased
        concentration of electronics procurement and manufacturing in the Asia Pacific
        region has led, and may continue to lead, to continued price pressure for
        the
        Company’s products in the future.
 
 *Share-Based
        Compensation* .
        Effective January 1, 2006, the Company adopted the fair value recognition
        provisions of SFAS No. 123R using the modified prospective transition method.
        The Company's results of operations for the three month periods ended September
        30, 2007 and 2006 include $1.4 million and $2.0 million, respectively, of
        non-cash expense related to the fair value of share-based compensation awards.
        For the nine month periods ended September 30, 2007 and 2006, the Company's
        results of operations include $4.3 million and $7.0 million, respectively,
        of
        non-cash expense related to the fair value of share-based compensation awards
        (see Note 3 of Notes to Condensed Consolidated Financial Statements.)
 
 *Gross
        Profit* .
        Gross
        profit is affected by a variety of factors including the volume of product
        sales, product mix, manufacturing capacity utilization, product yields and
        average selling prices. The Company's gross margin decreased to 57.5% for
        the
        three months ended September 30, 2007 from 58.6% for the comparable period
        in
        2006. For the nine months ended September 30, 2007, the Company's gross margin
        decreased to 57.5% from 58.2% for the comparable period in 2006. These decreases
        in gross margin resulted primarily from decreased manufacturing capacity
        utilization and the inclusion of, in 2006, $2.9 million in net revenues for
        sale
        of intellectual property, which is partially offset by a $714,000 charge
        to cost
        of revenues related to the settlement of a patent dispute.
 
 *Research
        and Development Expenses.* Research
        and development expenses as a percentage of net revenues represented 21.0%
        and
        17.8%, for the three months ended September 30, 2007 and 2006, respectively.
        On
        a dollar basis, research and development expenses increased $609,000 or 5%
        to
        $13.7 million for the three months ended September 30, 2007 from $13.1 million
        for the comparable period in 2006. For the nine months ended September 30,
        2007
        and 2006, research and development expenses as a percentage of net revenues
        represented 21.3% and 18.6%, respectively. On a dollar basis, research and
        development expenses increased $1.9 million or 5% to $41.1 million for the
        nine
        months ended September 30, 2007 from $39.3 million for the comparable period
        in
        2006. These increases were primarily due to increased staffing costs 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.
  21
 
 Table
            Of Contents
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
            OF OPERATIONS (CONTINUED)**
  *Selling,
        General and Administrative Expenses.* As
        a
        percentage of net revenues, selling, general and administrative expenses
        represented 16.7% and 16.2% for the three months ended September 30, 2007
        and
        2006, respectively. On a dollar basis, selling, general and administrative
        expenses decreased $1.0 million or 8% to $10.9 million for the three months
        ended September 30, 2007 from $11.9 million for the comparable period in
        2006.
        For the nine months ended September 30, 2007 and 2006, as a percentage of
        net
        revenues, selling, general and administrative expenses represented 17.7%
        and
        17.8%, respectively. On a dollar basis, selling, general and administrative
        expenses decreased $3.4 million or 9% to $34.1 million for the nine months
        ended
        September 30, 2007 from $37.5 million for the comparable period in 2006.
        These
        decreases were primarily due to decreased outside legal expenses.
 
 *Other
        Income (Expense)* .
        Other
        income (expense) reflects interest income from investments in short-term
        investment grade securities and money market funds and other non-operating
        income, offset by interest expense incurred on term notes and accrued interest
        related to the settlement of certain previously provided for litigation
        liabilities. For the nine months ended September 30, 2007, other income includes
        $15.5 million in non-operating income resulting from the settlement of
        litigation (see Note 12 of Notes to Condensed Consolidated Financial
        Statements).
 
 *Provision
        for Income Taxes.* The
        income tax provision for the three and nine months ended September 30, 2007,
        as
        a percentage of income before taxes, was 35.1% and 35.9%, respectively,
        decreasing from 39.9% and 40.4% for the comparable periods in the prior year.
        These decreases resulted from decreased non-deductible share-based compensation
        expense combined with increased tax benefits from the federal research and
        development credit and federal qualified production activity deductions.
        The
        income tax provision for such interim periods differs from taxes computed
        at the
        federal statutory rate primarily due to the effect of non-deductible share-based
        compensation expense, state income taxes, federal and state research and
        development credits and federal qualified production activity
        deductions.
 
 
 **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 September 30, 2007, consisted of cash and short-term investments
        of
        $115.6 million and a $6 million revolving line of credit from a commercial
        bank
        (see Note 8 of Notes to Condensed Consolidated Financial
        Statements).
 
 The
        Company generated $47.6 million in cash flows from operating activities for
        the
        nine months ended September 30, 2007, primarily attributable to net income
        of
        $35.9 million plus additions for non-cash activities of $20.9 million
        (consisting primarily of $13.5 million in depreciation and amortization,
        $4.3
        million in share-based compensation expense and a $2.1 million decrease in
        deferred tax assets) combined with a $5.2 million increase in income taxes
        payable and a $3.7 million decrease in inventories, which was partially offset
        by a $10.9 million decrease in other current liabilities, resulting primarily
        from the payment of a legal judgment, $1.9 million decrease in accounts payable
        combined with a $3.4 million increase in accounts receivable and a $2.4 million
        increase in income taxes receivable.
 
 For
        the
        nine months ended September 30, 2006, the Company generated $39.7 million
        in
        cash flows from operating activities, primarily attributable to net income
        of
        $29.5 million plus additions for non-cash activities of $19.4 million
        (consisting primarily of $12.8 million in depreciation and amortization,
        $7.0
        million in share-based compensation expense) combined with a $7.3 million
        increase in deferred income on shipments to distributors, which was partially
        offset by a $6.5 million increase in inventories combined with a $4.9 million
        decrease in income taxes payable and a $2.6 million decrease in accounts
        payable.
  22
 
 Table
            Of Contents
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
            OF OPERATIONS (CONTINUED)**
  The
        Company used $18.3
        million of cash in investing activities during the nine months ended September
        30, 2007, comprised of $13.9 million in purchases of property, plant and
        equipment and $7.0 million in net purchases of short-term investments which
        was
        partially offset by a $2.6 million decease in restricted cash.
 
 For
        the
        nine months ended September 30, 2006, the Company generated $20.9 million
        of cash from investing activities, comprised of $36.4 million in proceeds
        from
        net sales of short-term investments which was partially offset by $11.3 million
        in purchases of property, plant and equipment, $1.6 million in purchases
        of
        intangible assets and $2.6 million increase in restricted cash.
 
 The
        Company used $28.1 million of cash in financing activities during the nine
        months ended September 30, 2007 primarily for the repurchase of $34.4 million
        of
        the Company's common stock and $4.7 million for the payment of cash dividends,
        which was partially offset by $10.9 million in proceeds from the exercise
        of
        employee stock awards.
 
 For
        the
        nine months ended September 30, 2006, the Company used $55.2 million of cash
        in
        financing activities during the nine months ended September 30, 2006 primarily
        for the repurchase of $58.0 million of the Company's common stock, which
        was
        partially offset by $2.7 million in proceeds from employee stock
        transactions.
 
 The
        Company currently intends to spend approximately $18 million to $23 million
        to
        purchase capital equipment and make facility improvements during the next
        12
        months primarily 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
        $65.6
        million of its common stock through December 31, 2008. In addition, on October
        22, 2007, the Company's Board of Directors declared a $0.03 per common share
        cash dividend, payable November 20, 2007 to shareholders of record on November
        5, 2007. The cash dividend payout by the Company on November 20 2007 is
        expected to be approximately $2.3 million. 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 flows from
        operations, existing cash balances and short-term investments, and its credit
        facility will be sufficient to meet its cash requirements for the next 12
        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.
 
 
 **Recently
        Issued Accounting Standards**
 
 Please
        refer to Note 2 of Notes to Condensed Consolidated Financial Statements for
        a
        discussion of the expected impact of recently issued accounting
        standards.
 
 
 **Contractual
        Obligations and Commitments**
 
 As
        of
        September 30, 2007, the Company had the following contractual obligations
        and commitments:
 
 (in
                  thousands)
              
              **Payments
                  Due By Period****Total**
              
              **Less
                  than**
                **1
                  Year**
              
              **1-3**
                **Years**
              
              **4-5**
                **Years**
              
              **After
                  5**
                **Years**Operating
                  leases
              
              $
              5,171
              
              $
              1,844
              
              $
              2,653
              
              $
              674
              
              $
              —Open
                  purchase orders
              
              
              16,221
              
              
              16,221
              
              
              —
              
              
              —
              
              
              —Total
              
              $
              21,392
              
              $
              18,065
              
              $
              2,653
              
              $
              674
              
              $
              —
 
 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 September 30, 2007 and there were $525,000 in standby letters of
        credit outstanding as of September 30, 2007. The letters of credit are issued
        to
        guarantee payments for the Company's workers compensation
        program.
  23
 
 Table
            Of Contents
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND** **RESULTS
            OF OPERATIONS (CONTINUED)**
  Effective
        January 1, 2007, the Company adopted the provisions of FIN No. 48 (see Note
        14
        of Notes to Condensed Consolidated Financial Statements.) As of September
        30,
        2007, the liability for uncertain tax positions, net of federal impacts on
        state
        tax issues was $5.1 million, of which, none is expected to be paid within
        one
        year. Included in the $5.1 million is $2.5 million which has not yet reduced
        income tax payments, and, therefore, has been netted against non-current
        deferred tax assets. The remaining $2.6 liability is included in long-term
        income taxes payable. The Company does not anticipate a significant change
        to
        the net liability for uncertain income tax positions within the next 12
        months.
 
 The
        Company has no other off-balance sheet arrangements and has not entered into
        any
        transactions involving unconsolidated, limited purpose entities or commodity
        contracts.
 
 
 **ITEM
        3. QUANTITATIVE
        AND QUALITATIVE DISCLOSURES
        ABOUT MARKET RISK**
 
 At
        September 30, 2007, the Company held $22.0 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 September 30, 2007 are primarily fixed rate securities.
        These available-for-sale securities are subject to interest rate risk and
        will
        fall in value if market interest rates increase. If market interest rates
        were
        to increase immediately and uniformly by 10 percent from levels at September
        30,
        2007, 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
        September 30, 2007, the Company had no fixed-rate long-term debt subject
        to
        interest rate risk.
  **ITEM
          4: 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 September 30, 2007.
 
 There
          has
          been no change in the Company’s internal control over financial reporting during
          the Company’s most recent fiscal quarter that has materially affected, or is
          reasonably likely to materially affect, the Company’s internal control over
          financial reporting.
 
  24
 
 Table
            Of Contents
   
 **PART
        II. OTHER INFORMATION**
 
 **ITEM
        1. LEGAL PROCEEDINGS**
 
 The
        information included in Note 12 of Notes to Condensed
        Consolidated Financial Statements under the caption "Litigation and Other
        Contingencies" in Item 1 of Part I is incorporated herein by
        reference.
 
 
 **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.
 
 *The
        Company has generated a substantial portion of its net revenues from export
        sales.* The
        Company believes that a substantial portion of its future net revenues will
        depend on export sales to customers in international markets, including Asia.
        International markets are subject to a variety of risks, including changes
        in
        policy by the U.S. or foreign governments, acts of terrorism, foreign government
        instability, social conditions such as civil unrest, economic conditions
        including high levels of inflation, fluctuation in the value of foreign
        currencies and currency exchange rates and trade restrictions or prohibitions.
        Changes in exchange rates that strengthen the U.S. dollar could increase
        the
        price of the Company's products in the local currencies of the foreign markets
        it serves. This would result in making the Company's products relatively
        more
        expensive than its competitors' products that are denominated in local
        currencies, leading to a reduction in sales or profitability in those foreign
        markets. The Company has not taken any protective measures against exchange
        rate
        fluctuations, such as purchasing hedging instruments. In addition, the Company
        sells to domestic customers that do business worldwide and cannot predict
        how
        the businesses of these customers may be affected by economic or political
        conditions elsewhere in the world. Such factors could adversely affect the
        Company's future revenues, financial condition, results of operations or
        cash
        flows.
 
 *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 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.
  25
 
 Table
            Of Contents
  **Semiconductor
        Industry Specific Risks**
 
 *The
        volatility of customer demand in the semiconductor industry limits a company's
        ability to predict future levels of sales and profitability* .
        Semiconductor suppliers can rapidly increase production output, leading to
        a
        sudden oversupply situation and a subsequent reduction in order rates and
        revenues as customers adjust their inventories to true demand rates. A rapid
        and
        sudden decline in customer demand for products can result in excess quantities
        of certain products relative to demand. Should this occur the Company’s
        operating results may be adversely affected as a result of charges to reduce
        the
        carrying value of the Company’s inventory to the estimated demand level or
        market price. The Company's quarterly revenues are highly dependent upon
        turns
        fill orders (orders booked and shipped in the same quarter). The short-term
        and
        volatile nature of customer demand makes it extremely difficult to accurately
        predict near term revenues and profits.
 
 *The
        semiconductor industry is highly competitive and subject to rapid technological
        change, price-erosion and increased international competition.* Significant competitive factors include product features, performance and
        price;
        timing of product introductions; emergence of new computer and communications
        standards; quality and customer support. If the Company is unable to compete
        favorably in these areas, revenues and profits could be negatively
        affected.
 
 *The
        short lead time environment in the semiconductor industry has allowed many
        end
        consumers to rely on semiconductor suppliers, stocking representatives and
        distributors to carry inventory to meet short term requirements and minimize
        their investment in on-hand inventory.* Over
        the
        past several years, customers have worked to minimize the amount of inventory
        of
        semiconductors they hold. 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.
  26
 
 Table
            Of Contents
  *During
        periods when economic growth and customer demand have been less certain,
        both
        the semiconductor industry and the Company have experienced significant price
        erosion.* If price
        erosion occurs, it will have the effect of reducing revenue levels and gross
        margins in future periods. Furthermore, the trend for the Company’s customers to
        move their electronics manufacturing to Asian countries has brought increased
        pricing pressure for Micrel and the semiconductor industry. Asian based
        manufacturers are typically more concerned about cost and less concerned
        about
        the capability of the integrated circuits they purchase. The increased
        concentration of electronics procurement and manufacturing in the Asia Pacific
        region may lead to continued price pressure and additional product advertising
        costs for the Company’s products in the future.
 
 *Because
        the standard products market for ICs is diverse and highly fragmented, the
        Company encounters different competitors in various market
        areas.* Many of
        these competitors have substantially greater technical, financial and marketing
        resources and greater name recognition than the Company. The Company may
        not be
        able to compete successfully in either the standard products or custom and
        foundry products business in the future and competitive pressures may adversely
        affect the Company's financial condition, results of operations, or cash
        flows.
 
 *The
        success of companies in the semiconductor industry depends in part upon
        intellectual property, including patents, trade secrets, know-how and continuing
        technology innovation.* The
        success of companies like Micrel may depend on their ability to obtain necessary
        intellectual property rights and protect such rights. There can be no assurance
        that the steps taken by the Company to protect its intellectual property
        will be
        adequate to prevent misappropriation or that others will not develop competitive
        technologies or products. There can be no assurance that any patent owned
        by the
        Company will not be invalidated, circumvented or challenged, that the rights
        granted thereunder will provide competitive advantages or that any of its
        pending or future patent applications will be issued with the scope of the
        claims sought, if at all. Furthermore, others may develop technologies that
        are
        similar or superior to the Company's technology, duplicate technology or
        design
        around the patents owned by the Company. Additionally, the semiconductor
        industry is characterized by frequent litigation regarding patent and other
        intellectual property rights. Claims alleging infringement of intellectual
        property rights have been asserted against the Company in the past and could
        be
        asserted against the Company in the future. These claims could result in
        the
        Company having to discontinue the use of certain processes; cease the
        manufacture, use and sale of infringing products; incur significant litigation
        costs and damages; attempt to obtain a license to the relevant intellectual
        property and develop non-infringing technology. The Company may not be able
        to
        obtain or renew such licenses on acceptable terms or to develop non-infringing
        technology. Existing claims or other assertions or claims for indemnity
        resulting from infringement claims, or the failure to obtain a key license
        or
        renew or renegotiate existing licenses on favorable terms could adversely
        affect
        the Company's business, financial condition, results of operations, or cash
        flows.
 
 *The
        significant investment in semiconductor manufacturing capacity and the rapid
        growth of circuit design centers in China may present a competitive threat
        to
        established semiconductor companies due to the current low cost of labor
        and
        capital in China.* The
        emergence of low cost competitors in China could reduce the revenues and
        profitability of established semiconductor manufacturers.
 
 *There
        is intense competition for qualified personnel in the semiconductor industry,
        in
        particular design engineers.* The
        Company may not be able to continue to attract and train engineers or other
        qualified personnel necessary for the development of its business or to replace
        engineers or other qualified personnel who may leave its employ in the future.
        Loss of the services of, or failure to recruit, key design engineers or other
        technical and management personnel could be significantly detrimental to
        the
        Company's product and process development programs.
 
 *Companies
        in the semiconductor industry are subject to a variety of federal, state
        and
        local governmental regulations related to the use, storage, discharge and
        disposal of toxic, volatile or otherwise hazardous chemicals used in its
        manufacturing process.* Any
        failure to comply with present or future regulations could result in the
        imposition of fines, the suspension of production, alteration of manufacturing
        processes or a cessation of operations. In addition, these regulations could
        restrict the Company's ability to expand its facilities at their present
        locations or construct or operate a new wafer fabrication facility or could
        require the Company to acquire costly equipment or incur other significant
        expenses to comply with environmental regulations or clean up prior discharges.
        The Company's failure to appropriately
        control the use of, disposal or storage of, or adequately restrict the discharge
        of, hazardous substances could subject it to future liabilities and could
        have a
        material adverse effect on its business.
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 Table
            Of Contents
 
 *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 3 of the Notes to Condensed 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:**
 
 *An
        important part of the Company's strategy is to continue to focus on the market
        for high-speed communications IC’s.* 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 and the first
        half
        of 2007, order rates declined and revenues moderated for these products.
        The
        high speed communications end market can experience slower seasonal growth
        and
        lower manufacturing levels in the second half of the calendar year. Third
        quarter 2007 revenues from this end market segment declined from the second
        quarter of 2007. Should demand from the Company’s customers in this end market
        decrease further in the fourth quarter of 2007, or if lower customer demand
        for
        the Company’s high bandwidth products materializes, the Company's future revenue
        growth and profitability could be adversely affected.
 
 *The
        Company’s gross margin, operating margin and net income are highly dependent on
        the level of revenue and capacity utilization that the Company
        experiences.* Semiconductor manufacturing is a capital-intensive business resulting in
        high
        fixed costs. If the Company is unable to utilize its installed wafer fabrication
        or test capacity at a high level, the costs associated with these facilities
        and
        equipment would not be fully absorbed, resulting in higher average unit costs
        and lower profit margins.
 
 *The
        cellular telephone (wireless handset) market comprises a significant portion
        of
        the Company’s standard product revenues.* The
        Company derives a significant portion of its net revenues from customers
        serving
        the cellular telephone market. Due to the highly competitive and fast changing
        environment in which the Company’s cellular telephone customers operate, demand
        for the product the Company sells into this end market can change rapidly
        and
        unexpectedly. If the Company’s cellular telephone customers acceptance of
        Micrel’s products decreases, or if these customers lose market share, or
        accumulate too much inventory of completed handsets, the demand for the
        Company’s products can decline sharply which could adversely affect the
        Company’s revenues and results of operations.
 
 *The
        Company derives a significant portion of its net revenues from customers
        located
        in certain geographic regions or countries.* A
        significant portion of the Company’s net revenues come from customers located in
        South Korea. In the event that political tensions surrounding North Korea
        evolve
        into military or social conflict, or other factors disrupt the Korean economy,
        the Company’s revenues, results of operations, cash flow and financial condition
        could be adversely affected. A significant portion of the Company’s net revenues
        come from customers located in Taiwan and China. In the event that economic
        activity in these two countries declines, or is disrupted by geopolitical
        events, the Company’s revenues and results of operations could be adversely
        affected.
 
 *The
        Company is involved in litigation* .
        The
        Company is currently involved in one lawsuit where Micrel is the defendant.
        Litigation is by its nature unpredictable and costly. If the level of effort
        required to prosecute or defend the Company’s position in any lawsuit increases
        significantly, or if a judgment is entered against the Company, the resulting
        expense could adversely affect the Company’s financial condition, results of
        operations and cash flows.
 
 The
        semiconductor industry is characterized by frequent litigation regarding
        patent
        and other intellectual property rights. To the extent that the Company becomes
        involved in such intellectual property litigation, in addition to litigation
        mentioned herein, it could result in substantial costs and diversion of
        resources to the Company and could have a material adverse effect on the
        Company's financial condition, results of operation or cash
        flows.
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  In
        the
        event of an adverse ruling in any intellectual property litigation that might
        arise in the future, the Company might be required to discontinue the use
        of
        certain processes, cease the manufacture, use and sale of infringing products,
        expend significant resources to develop non-infringing technology or obtain
        licenses to the infringing technology. There can be no assurance, however,
        that
        under such circumstances, a license would be available under reasonable terms
        or
        at all. In the event of a successful claim against the Company and the Company's
        failure to develop or license substitute technology on commercially reasonable
        terms, the Company's financial condition, results of operations, or cash
        flows
        could be adversely affected. Based on the status of the litigation described
        above, the Company does not believe that any material and specific risk exists
        related to the loss of use of patents, products or processes.
 
 *The
        Company manufactures most of its semiconductors at its San Jose, California
        fabrication facilities.* The
        Company's existing wafer fabrication facility, located in Northern California,
        may be subject to natural disasters such as earthquakes. A significant natural
        disaster, such as an earthquake or prolonged drought, could have a material
        adverse impact on the Company's business, financial condition and operating
        results. Furthermore, manufacturing semiconductors requires manufacturing
        tools
        that are unique to each product being produced. If one of these unique
        manufacturing tools was damaged or destroyed, the Company's ability to
        manufacture the related product would be impaired and its business would
        suffer
        until the tool was repaired or replaced. Additionally, the fabrication of
        ICs is
        a highly complex and precise process. Small impurities, contaminants in the
        manufacturing environment, difficulties in the fabrication process, defects
        in
        the masks used to print circuits on a wafer, manufacturing equipment failures,
        wafer breakage or other factors can cause a substantial percentage of wafers
        to
        be rejected or numerous die on each wafer to be nonfunctional. The Company
        maintains approximately two to three months of inventory that has completed
        the
        wafer fabrication manufacturing process. This inventory is generally located
        offshore at third party subcontractors and can act to buffer some of the
        adverse
        impact from a disruption to the Company’s San Jose wafer fabrication activity
        arising from a natural disaster such as an earthquake.
 
 
 **ITEM
        2. UNREGISTERED SALES OF EQUITY
        SECURITIES AND USE OF
        PROCEEDS**
 
 **Dividend
        Policy**
 
 On
        July
        23, 2007 Micrel’s Board of Directors declared a cash dividend of $0.03 per share
        of outstanding common stock. The payment of $2.3 million was made on August
        22,
        2007 to shareholders of record as of August 7, 2007. During each of the second
        quarter and third quarters of 2007, the Company paid cash dividends of $2.3
        million ($0.03 per outstanding share of common stock).
 
 On
        October 22, 2007, the Company's Board of Directors declared a $0.03 per common
        share cash dividend, payable November 20, 2007 to shareholders of record
        on
        November 5, 2007.
 
 **Issuer
        Repurchases of Equity Securities**
 
 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. The timing and amount of any
        repurchase of shares will be determined by the Company’s management, based on
        its evaluation of market conditions and other factors.
 
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 Table
            Of Contents
  Repurchases
        of the Company's common stock during 2007 were as follows:
 Period
              
              Total
                  Number ofShares Purchased
              
              Average
                  Price
                Paid
                  Per Share
              
              Total
                  Number of Shares Purchased as Part of Publicly Announced
                Plans
                  or Programs
              
              Maximum
                  Dollar Value of Shares that May Yet be Repurchased Under the
                Plans
                  or Programs ($000)January
                  2007
              
              
              380,300
              
              $
              10.22
              
              
              380,300
              
              $
              46,112February
                  2007
              
              
              261,800
              
              $
              10.61
              
              
              261,800
              
              $
              43,334March
                  2007
              
              
              188,000
              
              $
              11.47
              
              
              188,000
              
              $
              41,177Total
                  Q1 2007
              
              
              830,100
              
              $
              10.63
              
              
              830,100April
                  2007
              
              
              161,200
              
              $
              11.61
              
              
              161,200
              
              $
              39,306May
                  2007
              
              
              134,600
              
              $
              12.47
              
              
              134,600
              
              $
              37,628June
                  2007
              
              
              173,200
              
              $
              12.33
              
              
              173,200
              
              $
              35,493Total
                  Q2 2007
              
              
              469,000
              
              $
              12.12
              
              
              469,000July
                  2007
              
              
              142,400
              
              $
              12.80
              
              
              142,400
              
              $
              33,670August
                  2007
              
              
              1,570,279
              
              $
              10.35
              
              
              1,570,279
              
              $
              17,412September
                  2007
              
              
              164,556
              
              $
              11.02
              
              
              164,556
              
              $
              15,598Total
                  Q3 2007
              
              
              1,877,235
              
              $
              10.60
              
              
              1,877,235Total
                  2007
              
              
              3,176,335
              
              $
              10.83
              
              
              3,176,335
 
 On
        October 22, 2007, the Company's Board of Directors approved a $50 million
        share
        repurchase program for calendar year 2008. The new share repurchase plan
        will
        take effect after the Company’s previously authorized 2007 share repurchase
        program terminates on December 31, 2007. Repurchases may occur from time
        to time
        in the open market or in privately negotiated transactions through December
        31,
        2008.
 
 
 **ITEM
        6. EXHIBITS**
 
 Exhibit
                  No.
              Description31
              Certifications
                  of the Company’s Chief Executive Officer and Chief Financial Officer
                  pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
              Certifications
                  of the Company’s Chief Executive Officer and Chief Financial Officer
                  pursuant to Section 906 of the Sarbanes-Oxley Act of
                  2002
 
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 Table
            Of Contents
  
 
 **SIGNATURE**
 
 Pursuant
        to the requirements of the Securities Exchange Act of 1934, the registrant
        has
        duly caused this report to be signed on its behalf by the undersigned thereunto
        duly authorized.
 
 
 
 **MICREL,
                  INCORPORATED***(Registrant)*Date:
                  November 7, 2007
              By/s/ Richard D. Crowley, Jr.Richard
                  D. Crowley, Jr.Vice
                  President, Finance andChief
                  Financial Officer(*Authorized
                  Officer and**Principal
                  Financial Officer)*




31