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, 2006.

   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


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



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

                  2180 Fortune Drive, San Jose, CA       95131
              (Address of principal executive offices) (Zip Code)

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



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 [X]  Accelerated filer [ ]  Non-accelerated filer [ ]

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

As of October 31, 2006 there were 78,317,585 shares of common stock, no par
value, outstanding.
<PAGE>

                              MICREL, INCORPORATED
                                    INDEX TO
                              REPORT ON FORM 10-Q
             FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2006

                                                                          Page
                                                                          ----
                         PART I.  FINANCIAL INFORMATION

Item 1.  Financial Statements (Unaudited):

         Condensed Consolidated Balance Sheets - September 30, 2006
          and December 31, 2005                                             3

         Condensed Consolidated Statements of Operations - Three and Nine
          Months Ended September 30, 2006 and 2005                          4

         Condensed Consolidated Statements of Cash Flows - Nine Months
          Ended September 30, 2006 and 2005                                 5

         Notes to Condensed Consolidated Financial Statements               6

Item 2.  Management's Discussion and Analysis of Financial Condition
          and Results of Operations                                        17

Item 3.  Quantitative and Qualitative Disclosures about Market Risk        27

Item 4.  Controls and Procedures                                           27

                          PART II.  OTHER INFORMATION

Item 1.  Legal Proceedings                                                 28

Item 1A. Risk Factors                                                      28

Item 2.  Unregistered Sales of Equity Securities and Use of Proceeds       32

Item 6.  Exhibits                                                          32


         Signature                                                         33

                                       2

<PAGE>

ITEM 1.  FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
                             MICREL, INCORPORATED

                     CONDENSED CONSOLIDATED BALANCE SHEETS
                                   (Unaudited)
                      (In thousands, except share amounts)

                                                    September 30,  December 31,
                                                         2006        2005 (1)
                                                     -----------   -----------
<S>                                                  <C>           <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents                           $  93,593     $  88,130
  Restricted cash                                         2,629           --
  Short term investments                                 12,022        48,433
  Accounts receivable, net                               36,393        35,524
  Inventories, net                                       37,193        30,419
  Prepaid expenses and other                              2,256         1,919
  Deferred income taxes                                  22,021        22,134
                                                      ---------     ---------
    Total current assets                                206,107       226,559

PROPERTY, PLANT AND EQUIPMENT, NET                       77,252        77,554
DEFERRED INCOME TAXES                                    11,161        10,264
INTANGIBLE ASSETS, NET                                    5,136         4,752
OTHER ASSETS                                              1,341           411
                                                      ---------     ---------
TOTAL                                                 $ 300,997     $ 319,540
                                                      =========     =========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Accounts payable                                    $  17,924     $  20,552
  Income taxes payable                                      --          4,939
  Deferred income on shipments to distributors           21,328        14,069
  Other current liabilities                              21,405        21,672
  Current portion of long-term debt                          77           147
                                                      ---------     ---------
    Total current liabilities                            60,734        61,379

OTHER LONG-TERM OBLIGATIONS                                 456           475

SHAREHOLDERS' EQUITY:
SHAREHOLDERS' EQUITY:
  Preferred stock, no par value -
   authorized: 5,000,000 shares;
   issued and outstanding: none                             --            --
  Common stock, no par value -
   authorized: 250,000,000 shares;
   issued and outstanding:
   2006 - 79,208,302 shares;
   2005 - 84,646,680 shares                              26,153        73,848
  Deferred stock compensation                               --           (294)
  Accumulated other comprehensive loss                      (25)          (52)
  Retained earnings                                     213,679       184,184
                                                      ---------     ---------
    Total shareholders' equity                          239,807       257,686
                                                      ---------     ---------
TOTAL                                                 $ 300,997     $ 319,540
                                                      =========     =========
</TABLE>

(1) Derived from the audited balance sheet included in the Annual Report on
Form 10-K of Micrel, Incorporated for the year ended December 31, 2005.

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

                                       3
<PAGE>

<TABLE>
<CAPTION>
                               MICREL, INCORPORATED

                  CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
                                    (Unaudited)
                      (In thousands, except per share amounts)

                                       Three Months Ended   Nine Months Ended
                                          September 30,        September 30,
                                       ------------------   ------------------
                                         2006      2005       2006      2005
                                       --------  --------   --------  --------
<S>                                    <C>       <C>        <C>       <C>
NET REVENUES                           $ 73,482  $ 62,472   $211,825  $185,209
COST OF REVENUES(1)                      30,449    28,680     88,646    88,889
                                       --------  --------   --------  --------
GROSS PROFIT                             43,033    33,792    123,179    96,320
                                       --------  --------   --------  --------
OPERATING EXPENSES:
 Research and development(1)             13,071    11,369     39,261    34,146
 Selling, general and administrative(1)  11,867    11,612     37,531    31,944
 Other operating expense (income)           (22)      --         913     9,282
 Restructuring expense                       35       --         101       --
                                       --------  --------   --------  --------
    Total operating expenses             24,951    22,981     77,806    75,372
                                       --------  --------   --------  --------
INCOME FROM OPERATIONS                   18,082    10,811     45,373    20,948
OTHER INCOME, NET                         1,549     1,068      4,115     2,909
                                       --------  --------   --------  --------
INCOME BEFORE INCOME TAXES               19,631    11,879     49,488    23,857
PROVISION FOR INCOME TAXES                7,828     4,158     19,993     8,350
                                       --------  --------   --------  --------
NET INCOME                             $ 11,803  $  7,721   $ 29,495  $ 15,507
                                       ========  ========   ========  ========

NET INCOME PER SHARE:
  Basic                                $   0.15  $   0.09   $   0.36  $   0.18
                                       ========  ========   ========  ========
  Diluted                              $   0.15  $   0.09   $   0.35  $   0.18
                                       ========  ========   ========  ========

WEIGHTED-AVERAGE SHARES USED IN
 COMPUTING PER SHARE AMOUNTS:
  Basic                                  80,671    86,514     82,620    87,604
                                       ========  ========   ========  ========
  Diluted                                81,324    88,047     83,971    88,512
                                       ========  ========   ========  ========
 (1) Stock-based compensation expense
      included in:
       Cost of revenues                $    485  $     35   $  1,187  $     127
       Research and development             733        32      2,844        135
       Selling, general and
        administrative                      792        85      2,943        381
</TABLE>


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

                                       4
<PAGE>

<TABLE>
<CAPTION>
                             MICREL, INCORPORATED

                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                  (Unaudited)

                                 (In thousands)

                                                            Nine Months Ended
                                                              September  30,
                                                           -------------------
                                                             2006       2005
                                                           --------   --------
<S>                                                        <C>        <C>
NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:
  Net income                                               $ 29,495   $ 15,507
  Adjustments to reconcile net income to net cash
   provided by operating activities:
    Depreciation and amortization                            12,789     15,429
    Stock based compensation                                  6,974        643
    Tax benefit on the exercise of employee stock options       588        --
    Excess tax benefits associated with stock compensation     (161)       --
    Loss on disposal of assets                                   11        100
    Deferred rent                                               (19)       (73)
    Deferred income taxes                                      (784)    (1,730)
    Changes in operating assets and liabilities:
      Accounts receivable, net                                 (869)    (3,860)
      Inventories, net                                       (6,487)     7,034
      Prepaid expenses and other assets                      (1,267)     1,066
      Accounts payable                                       (2,628)      (405)
      Income taxes                                           (4,939)    (1,554)
      Other current liabilities                                (267)     6,970
      Deferred income on shipments to distributors            7,259     (1,089)
                                                           --------   --------
        Net cash provided by operating activities            39,695     38,038
                                                           --------   --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Change in restricted cash                                  (2,629)       --
  Purchases of property, plant and equipment                (11,281)   (10,448)
  Purchase of intangible assets                              (1,601)       --
  Proceeds from the sale of short-term investments, net      36,438     12,069
                                                           --------   --------
        Net cash provided by investing activities            20,927      1,621
                                                           --------   --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Repayments of long-term debt                                  (70)       (94)
  Proceeds from the issuance of common stock, net             2,702      6,291
  Repurchase of common stock                                (57,952)   (42,805)
  Excess tax benefits associated with stock compensation        161        --
                                                           --------   --------
        Net cash used in financing activities               (55,159)   (36,608)
                                                           --------   --------

NET INCREASE IN CASH AND CASH EQUIVALENTS                     5,463      3,051

CASH AND CASH EQUIVALENTS - Beginning of period              88,130    101,282
                                                           --------   --------
CASH AND CASH EQUIVALENTS - End of period                  $ 93,593   $104,333
                                                           ========   ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
  Interest                                                 $     86   $    193
                                                           ========   ========
  Income taxes                                             $ 25,568   $ 10,795
                                                           ========   ========
</TABLE>

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

                                       5
<PAGE>
                              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, 2006 and for
the three and nine months ended September 30, 2006 and 2005 are unaudited.
In the opinion of management, the condensed consolidated financial
statements include all adjustments (consisting only of normal recurring
accruals) 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 data as of December 31, 2005, 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. This financial data 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, 2005.
This financial data 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, 2005.

Restricted Cash - During the first quarter of 2006, the Company elected to
post a surety bond to stay payment of potential damages and interest arising
from a judgment awarded to TRW by a jury during 2005 (see Note 7 and Note
11).  As collateral for the surety bond, the Company placed $2.6 million in
a registered pledge account.  The amount pledged is classified as Restricted
Cash in the Company's Condensed Consolidated Balance Sheet, and is invested
in high quality, short-term investment securities consistent with the
Company's cash investment policy.  The interest earned on the pledged amount
accrues to the benefit of the Company.

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):

<TABLE>
                                       Three Months Ended   Nine Months Ended
                                          September 30,        September 30,
                                       ------------------   ------------------
                                         2006      2005       2006      2005
                                       --------  --------   --------  --------
<S>                                    <C>       <C>        <C>       <C>
Weighted-average common shares
 outstanding                             80,671    86,514     82,620    87,604
Dilutive effect of stock options
 outstanding using the treasury
 stock method                               653     1,533      1,351       908
                                       --------  --------   --------  --------
Shares used in computing diluted net
 income per share                        81,324    88,047     83,971    88,512
                                                           ========   ========
</TABLE>

For the three and nine months ended September 30, 2006, 9.2 million 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. For the three and nine months
ended September 30, 2005, 5.0 million and 7.7 million stock options,
respectively, have been excluded from the weighted-average number of common
shares outstanding for the diluted net income per share computations as they
were anti-dilutive.

                                       6
<PAGE>
                              MICREL, INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


2.   RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2006, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 48, "Accounting for Uncertainty in Income Taxes, an
Interpretation of FASB Statement No. 109" ("FIN No. 48"). FIN No. 48
clarifies the accounting for uncertainty in income taxes recognized in an
enterprise's financial statements in accordance with SFAS No. 109
"Accounting for Income Taxes".  FIN No. 48 prescribes a two-step process to
determine the amount of benefit to be recognized. First, the tax position
must be evaluated to determine the likelihood that it will be sustained upon
examination. If the tax position is deemed "more-likely-than-not" to be
sustained, the tax position is then measured to determine the amount of
benefit to recognize in the financial statements. The tax position is
measured at the largest amount of benefit that is greater than 50 percent
likely of being realized upon ultimate settlement. FIN No. 48 is effective
for fiscal years beginning after December 15, 2006.  The Company is
currently evaluating the effect that the adoption of FIN No. 48 will have on
its financial position and results of operations.

SAB108 - In September 2006, the Securities and Exchange Commission ("SEC")
issued Staff Accounting Bulletin ("SAB") No. 108 regarding the process of
quantifying financial statement misstatements. SAB No. 108 states that
registrants should use both a balance sheet approach and an income statement
approach when quantifying and evaluating the materiality of a misstatement.
The interpretations in SAB No. 108 contain guidance on correcting errors
under the dual approach as well as provide transition guidance for
correcting errors. This interpretation does not change the requirements
within SFAS No. 154, "Accounting Changes and Error Corrections" a replacement
of APB No. 20 and FASB Statement No. 3," for the correction of an error on
financial statements. SAB No. 108 is effective for annual financial
statements covering the first fiscal year ending after November 15, 2006.
The Company will be required to adopt this interpretation by December 31,
2006 and does not currently anticipate any adjustments to opening retained
earnings resulting from the application of SAB 108.


3.   SHARE-BASED COMPENSATION

In December 2004, the FASB issued SFAS No. 123R. Under the standard,
companies are no longer able to account for share-based compensation
transactions using the intrinsic value method in accordance with APB No. 25.
Instead, companies are required to account for such transactions using a
fair-value method and recognize the expense in the consolidated statements
of operations. Effective January 1, 2006, the Company adopted SFAS No. 123R
using the modified-prospective-transition method. Under this transition
method, stock compensation cost recognized beginning January 1, 2006
includes: (a) compensation cost for all share-based payments granted prior
to, but not yet vested as of January 1, 2006, based on the grant date fair
value estimated in accordance with the original provisions of SFAS No. 123,
and (b) compensation cost for all share-based payments granted or modified
on or subsequent to January 1, 2006, based on the grant-date fair value
estimated in accordance with the provisions of SFAS No. 123R. In addition,
compensation cost to be recognized under SFAS No. 123R must consider an
estimate of options which will be forfeited. Results for prior periods have
not been restated.

Stock Option Plans - Under the Company's 2003 Incentive Award Plan, 1994
Stock Option Plan and its 2000 Non-Qualified Stock Incentive Plan,
39,958,672 shares of Common Stock are authorized for issuance to employees.
The 1994 Stock Option Plan and 2000 Non-Qualified Stock Incentive Plan
provide that the option price will be determined by the Board of Directors
at a price not less than the fair value as represented by the closing price
of the Company's Common Stock on the last trading day before the date of
grant.  The 2003 Incentive Award Plan provides that the option price will be
determined by the Board of Directors at a price not less than the fair value
as represented by the closing price of the Company's Common Stock on the
date of grant.  Certain shareholder/employees of the Company are granted
options at 110% of the current fair market value. Options granted under the
2000 Non-Qualified Stock Incentive Plan are exercisable in 20% increments
with the initial 20% vesting occurring six months after the date of grant
and then in annual increments of 20% per year from the date of grant.

                                       7
<PAGE>
                              MICREL, INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)



Options granted under the 2003 Incentive Award Plan and 1994 Stock Option
Plan typically become exercisable in not less than cumulative annual
increments of 20% per year from the date of grant. The term of each stock
option is no more than ten years from the date of grant. A summary of the
Company's stock option plan activities for the nine months ended September
30, 2006 is as follows:

<TABLE>
                                                          Weighted
                                              Weighted     Average    Aggregate
                                    Number     Average    Remaining   Intrinsic
                                      of      Exercise  Contractual     Value
                                    Shares      Price   Term (years)    ($000)
                                  ----------  --------  ------------  ---------
<S>                               <C>         <C>       <C>           <C>
Outstanding, December 31, 2005    12,487,003   $ 12.65
  Granted                          1,398,600     12.53
  Exercised                         (350,106)     7.48
  Forfeited or expired              (607,626)    12.77
                                  ----------
Outstanding, September 30, 2006   12,927,871   $ 12.80        5.5      $ 4,744

Exercisable at September 30, 2006  8,538,844   $ 13.20        4.1      $ 4,288
Exercisable and expected to vest
 at September 30, 2006            11,997,397   $ 12.86        5.3      $ 4,647
</TABLE>

The weighted average fair value (computed using the Black-Scholes option
pricing model) of options granted under the stock option plans during the
three and nine months ended September 30, 2006 was $5.62 and $7.31 per
share, respectively.  The total intrinsic value of options (which is the
amount by which the stock price exceeded the exercise price of the options
on the date of exercise) exercised during the three and nine months ended
September 30, 2006 was $189,000 and $1.5 million, respectively. During the
three and nine months ended September 30, 2006, the amount of cash received
from the exercise of stock options was $390,000 and $2.6 million,
respectively.

Employee Stock Purchase Plan - The Company's 1994 Employee Stock Purchase
Plan (the "1994 ESPP"), as amended and restated as of January 1, 1996,
terminated on January 1, 2006. On May 25, 2006 the Company's shareholders
approved a new Employee Stock Purchase Plan (the "2006 ESPP".)  Under the
terms of the 2006 ESPP, eligible employees are permitted to have salary
withholdings to purchase shares of Common Stock at a price equal to 95% of
the market value of the stock at the end of each three-month offer period,
subject to an annual limitation. The aggregate number of shares of common
stock which may be issued under the plan shall be no more than 2,000,000
shares. For the three months ended September 30, 2006,  8,529 shares of
Common Stock were purchased under the 2006 ESPP. The 2006 ESPP is
considered non-compensatory under SFAS No. 123R.

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

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

                                       8
<PAGE>
                              MICREL, INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


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

<TABLE>
                                       Three Months Ended   Nine Months Ended
                                          September 30,        September 30,
                                       ------------------   ------------------
                                         2006      2005       2006      2005
                                       --------  --------   --------  --------
<S>                                    <C>       <C>        <C>       <C>
Expected term (years)                     5.4       5.0        5.5       5.0
Stock volatility                         60.1%     76.0%      59.6%     78.8%
Risk free interest rates                  5.0%      4.2%       5.0%      4.0%
Dividends during expected terms          none      none       none      none
</TABLE>

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

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

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

The Company has never paid cash dividends and does not currently intend to
pay cash dividends, thus has assumed a 0% dividend yield.

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

The following table shows total stock-based compensation expense recognized
in the Condensed Consolidated Statement of Operations for the three and nine
months ended September 30, 2006, pursuant to SFAS No. 123R and for the three
and nine months ended September 30, 2005 pursuant to APB 25 (in thousands):

<TABLE>
                                       Three Months Ended   Nine Months Ended
                                          September 30,        September 30,
                                       ------------------   ------------------
                                         2006      2005       2006      2005
                                       --------  --------   --------  --------
<S>                                    <C>       <C>        <C>       <C>
Cost of revenues                       $    485  $     35   $  1,187  $    127
Research and development                    733        32      2,844       135
Selling, general and administrative         792        85      2,943       381
                                       --------  --------   --------  --------
Pre-tax stock-based compensation
 expense                                  2,010       152      6,974       643
Less income tax effect                     (183)      (60)      (606)     (252)
                                       --------  --------   --------  --------
Net stock-based compensation expense   $  1,827  $     92   $  6,368  $    391
                                       ========  ========   ========  ========
</TABLE>

The Company's basic and diluted earnings per share for the three and nine
months ended September 30, 2006 were lower by $0.02 and $0.08 per share,
respectively under SFAS No. 123R, than if the Company had continued to
account for share-based compensation under APB 25. Total stock-based
compensation cost capitalized as part of inventory as of September 30,
2006 was $287,000. At September 30, 2006, there was $16.9 million of total

                                       9
<PAGE>
                              MICREL, INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)



unrecognized compensation cost related to non-vested stock option awards
which is expected to be recognized over a weighted-average period of 3.7
years.

Pro Forma Information under SFAS No. 123 for Periods Prior to SFAS No. 123R
Adoption - As discussed above, results for prior periods have not been
restated to reflect the effects of implementing SFAS No. 123R. The following
table illustrates the effect on net income and earnings per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
stock options granted under the Company's stock option plans and shares
issued under the employee stock purchase plan for the three and nine months
ended September 30, 2005. For purposes of this pro forma disclosure, the
value of the stock options was estimated using a Black-Scholes option-
pricing model using a multiple option valuation approach with forfeitures
recognized as they occur (in thousands, except per-share amounts):

<TABLE>
                                                      Three           Nine
                                                   Months Ended   Months Ended
                                                   September 30,  September 30,
                                                       2005           2005
                                                   ------------   ------------
<S>                                                <C>            <C>
Net income as reported                               $  7,721       $ 15,507
                                                     ========       ========
Add:  stock-based employee compensation expense
 included in reported net income, net of tax effects       92            391
Deduct:  stock-based employee compensation expense
 determined under fair value based method, net
 of tax effects                                        (1,893)        (7,541)
                                                     --------       --------
Pro forma net income (loss)                          $  5,920       $  8,357
                                                     ========       ========

Net income per share as reported:
  Basic                                              $   0.09       $   0.18
                                                     ========       ========
  Diluted                                            $   0.09       $   0.18
                                                     ========       ========

Pro forma net income per share:
  Basic                                              $   0.07       $   0.10
                                                     ========       ========
  Diluted                                            $   0.07       $   0.10
                                                     ========       ========
</TABLE>


4.   INVESTMENTS

Short-term investments consist primarily of liquid 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, 2006 is as follows (in thousands):

<TABLE>
                                 Amortized    Market    Unrealized   Unrealized
                                   Cost        Value       Gains      Losses
                                ----------  ----------  ----------  -----------
<S>                             <C>         <C>         <C>         <C>
  Short-term investments        $   12,045  $   12,022   $    --      $     23

</TABLE>

                                       10
<PAGE>
                              MICREL, INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


5.   INVENTORIES

Inventories, net, consist of the following (in thousands):

<TABLE>
                                                   September 30,  December 31,
                                                       2006           2005
                                                   ------------   ------------
<S>                                                <C>            <C>
  Finished goods                                     $  14,515      $  12,472
  Work in process                                       21,492         17,044
  Raw materials                                          1,186            903
                                                     ---------      ---------
                                                     $  37,193      $  30,419
                                                     =========      =========
</TABLE>


6.   OTHER CURRENT LIABILITES

Other current liabilities consist of the following (in thousands):

<TABLE>
                                                   September 30,  December 31,
                                                       2006           2005
                                                   ------------   ------------
<S>                                                <C>            <C>
  Accrued current restructuring expenses             $   1,430      $   1,759
  Accrued workers compensation and health insurance      1,535          1,343
  Accrued litigation                                     9,349          9,282
  Accrued compensation                                   6,424          6,951
  Accrued commissions                                    1,544          1,480
  All other current accrued liabilities                  1,123            857
                                                     ---------      ---------
    Total other current liabilities                  $  21,405      $  21,672
                                                     =========      =========
</TABLE>


7.   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
direct borrowings under the revolving line of credit at September 30, 2006,
and there were $875,000 in standby letters of credit outstanding.  The
revolving line of credit agreement expires on June 30, 2007.  Borrowings
under the revolving line of credit bear interest rates of, at the Company's
election, the prime rate (8.25% at September 30, 2006), or the bank's
revolving offshore rate, which approximates LIBOR (5.4% at September 30,
2006) plus 2.0%.  The agreement contains certain restrictive covenants that
include a restriction on the declaration and payment of dividends without
the lender's consent.  The Company was in compliance with all such covenants
at September 30, 2006.

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

Associated with the acquisition of BlueChip Communications in 2004, the
Company has $77,000 outstanding in term notes payable to the Norwegian
Industrial and Regional Development Fund.

                                       11
<PAGE>
                              MICREL, INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


8.   SIGNIFICANT CUSTOMERS

During the nine months ended September 30, 2006, three customers, comprised
of 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. During the nine months ended September
30, 2005, three customers, comprised of a direct original equipment
manufacturer ("OEM"), a world wide distributor and an Asian based stocking
representative accounted for $28.8 million (16%), $21.4 million (12%) and
$21.3 million (12%) of net revenues, respectively.


At September 30, 2006, five customers, comprised of two world wide
distributors, two Asian based stocking representatives and a direct OEM
accounted for 14%, 12%, 13%, 10% and 11%, respectively, of total accounts
receivable. As of December 31, 2005, three customers accounted for 18%, 15%
and 15%, respectively, of total accounts receivable.


9.   COMPREHENSIVE INCOME

Comprehensive income, which is comprised of the Company's net income for the
periods and changes in unrealized gains or losses on investments was $11.8
million and $29.5 million for the three and nine months ended September 30,
2006 and 2005.


10.   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. 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 products which consists of custom products, foundry
products and revenues from the sale of intellectual property. The chief
operating decision maker evaluates segment performance based on revenue.
Accordingly, all expenses are considered corporate level activities and are
not allocated to segments. Therefore, it is not practical to show profit or
loss by reportable segments. Also, the chief operating decision maker does
not assign assets to these segments. Consequently, it is not practical to
show assets by reportable segments.

<TABLE>
                            Net Revenues by Segment
                             (Dollars in thousands)

                                       Three Months Ended   Nine Months Ended
                                          September 30,        September 30,
                                       ------------------   ------------------
                                         2006      2005       2006      2005
                                       --------  --------   --------  --------
<S>                                    <C>       <C>        <C>       <C>
Net Revenues:

Standard Products                      $ 66,479  $ 59,532   $198,382  $177,660
Other Products                            7,003     2,940     13,443     7,549
                                       --------  --------   --------  --------
  Total net revenues                   $ 73,482  $ 62,472   $211,825  $185,209
                                       ========  ========   ========  ========
As a Percentage of Total Net Revenues:
Standard Products                           90%       95%        94%       96%
Other Products                              10%        5%         6%        4%
                                       --------  --------   --------  --------
  Total net revenues                       100%      100%       100%      100%
                                       ========  ========   ========  ========
</TABLE>


                                       12
<PAGE>
                              MICREL, INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


11.   LITIGATION AND OTHER CONTINGENCIES

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 seeks unspecified
compensatory damages, treble damages and attorneys' fees, as well as
injunctive relief against further infringement of the Lemelson patents at
issue.  The Company is part of a Joint Defense Group consisting of four
companies who are opposing this law suit together (the "Joint Defense
Group").  Based on a recent court ruling in another case brought by the
Lemelson Foundation against another set of defendants, the Foundation has
filed a motion to dismiss with prejudice 14 barcode and machine vision
patents asserted in the current case against the Company, to which the Joint
Defense Group has filed a non-opposition.  Otherwise, the case continues to
move very slowly through the motion and hearing phase.  On August 8, 2006,
the Court issued its claim construction order.  The Lemelson partnership
filed a Motion for Partial reconsideration on August 22, 2006.  On September
12, 2006, the Joint Defense Group filed a response to the Motion for Partial
reconsideration.  On October 13, 2006 the Court issued an order denying the
Partnership's Motion and affirmed its prior construction of disputed claims.
The Company, in conjunction with the Joint Defense Group, intends to continue
to defend itself against the claims in suit


On May 9, 1994, Linear Technology Corporation ("Linear" or "LTC"), a
competitor of the Company, filed a complaint against the Company, entitled
Linear Technology Corporation v. Micrel, Incorporated, in the United States
District Court in San Jose, California, alleging patent and copyright
infringement and unfair competition.  After many years of motions and
appeals, a claim construction hearing (also called a "Markman" hearing) was
held before the District Court on December 16, 2003.  The Court issued its
ruling on January 24, 2004, interpreting the claims at issue in the
litigation.  A bench trial on the merits was commenced on November 30, 2005
and concluded on December 16, 2005.  The parties filed post-trial briefs on
January 20, 2006. On June 9, 2006 the Court ruled that Micrel had willfully
infringed the patent-in-suit, and awarded damages to LTC. As a result of this
judgment, the Company has recorded $913,000 in other operating expense in the
Company's 2006 financial statements.

On December 27, 2002, the Company filed a complaint against TRW, Inc. ("TRW")
entitled Micrel, Incorporated v. TRW, Inc., dba TRW Automotive Electronics
Group, in the United States District Court, Northern District of Ohio,
Eastern Division, alleging various causes of action relating to breach of a
relationship surrounding the development of certain custom products by Micrel
for TRW.  In this lawsuit, Micrel is alleging that TRW breached various
agreements to assist in Micrel's development of, and to purchase, certain
Application Specific Integrated Circuits.  The complaint seeks compensatory
damages, attorneys' fees and costs of suit.  On February 24, 2003, TRW filed
an answer to the Company's complaint and a counterclaim alleging various
causes of action relating to breach of the above-mentioned relationship
concerning ASIC development.  On July 22, 2005, a jury ruled against the
Company and in favor of TRW in its counterclaim against Micrel.  The outcome
of the jury trial was a judgment on July 26, 2005 awarding damages for the
benefit of TRW in the amount of $9.3 million.  The damages amount was accrued
in the Company's second quarter 2005 financial statements.  On February 23,
2006, the Company posted a surety bond in the amount of $10.5 million in the
United States District Court, Northern District of Ohio, to stay payment of
damages and potential interest awarded to TRW (see Notes 1 and 7).  The
Company is currently appealing the verdict. On August 9, 2005, the Company
filed a Motion for an order setting aside the jury verdict and the subsequent
judgment and granting a new trial on the issue of the Company's breach of
contract claim against TRW, which Motion was denied by the Court.  On January
13, 2006, the Company filed a notice of its intent to appeal the jury's
verdict.  As of October 23, 2006, the parties had filed final appeal, reply
and response briefs.  The parties are now awaiting a hearing date for oral
argument.

On April 21, 2003, the Company filed a complaint against its former principal
accountants Deloitte & Touche LLP ("Deloitte") entitled Micrel, Incorporated
v. Deloitte & Touche LLP in the Superior Court of the State of California,
County of Santa Clara, alleging various causes of action relating to certain
professional advice received by Micrel from Deloitte.  In this lawsuit,
Micrel is alleging 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

                                       13
<PAGE>
                              MICREL, INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)



representations upon which Micrel justifiably relied.  Specifically,
beginning in 1996, the Company began to follow a practice of granting
employee stock options on the date with the lowest closing price within the
thirty-day period subsequent to the employee's date of hire (the "Thirty-Day
Method").  The Company began this practice after receiving advice from
Deloitte that options granted using the Thirty-Day Method would not be
compensatory under APB No 25.  The Company subsequently determined that
options granted using the Thirty-Day Method were compensatory under APB No
25, and discontinued use of the Thirty-Day Method thereafter.  As a direct
result of Deloitte's actions, Micrel alleges damages including: expenses
incurred in the form of payments to various professionals to address the
impact on Micrel's financial statements and other effects of the wrongful
conduct; loss of cash as well as equity from stock options; additional
charges to earnings that Micrel would not incur but for the wrongful advice
and the harm to Micrel in both financial and semiconductor markets resulting
in loss of overall value of the Company as a whole.  Deloitte has denied all
allegations in the complaint.  The complaint seeks compensatory damages,
costs of suit and such other relief that the court may deem just and proper.
The case is currently in the discovery and pre-trial phase.  The parties have
stipulated to continuation of initial and subsequent trial dates.  A trial
date of March 5, 2007 has been set, with a discovery cut-off date of January
5, 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 (the "Court")
alleging two causes of action for infringement by MPS of certain patents owned
by Micrel.  In the complaint, the Company alleges that MPS has been and is
infringing U.S. patent no. 5,517,046 (the "'046 patent") and U.S. patent no.
5,556,796 (the " '796 patent").    Subsequently, on November 29, 2004 the
Company filed an amended complaint adding Michael R. Hsing, MPS' President and
Chief Executive Officer ("Hsing"), and James C. Moyer, MPS' Chief Design
Engineer ("Moyer") as defendants.  Hsing and Moyer are both former employees
of Micrel.  In addition to the original two causes of action against MPS for
infringement of the '046 and '796 Patents, the amended complaint adds causes
of action for statutory and common law misappropriation of Micrel's trade
secrets, breach of confidentiality agreements by Hsing and Moyer, and
violation of California's Unfair Competition Law.  On September 21, 2006, the
Company and MPS entered into a Settlement Agreement, agreeing to dismiss all
claims and counterclaims in the litigation with prejudice.  Micrel also agreed
to release MPS and its chief executive officer Michael Hsing and its chief
design engineer Jim Moyer from all claims for any alleged trade secret claims
based on any confidential information. In addition, Micrel licensed U.S.
Patent Nos. 5,517,046 and 5,556,796 to MPS. Under the terms of the agreement
MPS agreed to pay a license fee of $3.0 million of which $1.0 million was paid
in September 2006, $1.0 million will be paid in January 2007 and the remaining
$1.0 million balance will be paid in January 2008. In the third quarter of
2006 the Company recorded $2.9 million in net revenues representing the
present value of the license payments from MPS.

On June 9, 2006, Deerfield 3250 Scott, LLC ("Deerfield"), the building owner
of Micrel's Santa Clara Wafer Fab facility which was closed in 2003 (see note
14), filed a complaint against the Company entitled "Deerfield 3250 Scott,
LLC vs. Micrel, Inc. et al" in the Superior Court of the State of California,
County of Santa Clara.  In February 2006, Micrel terminated this building
lease under the terms of the lease agreement due to major vandalism rendering
the building unusable.  Deerfield disputes that Micrel had a right to
terminate, alleging that the vandalism took place because of the negligence
of Micrel and that Micrel should not be able to benefit from its own
negligence.  The complaint seeks damages in an unspecified amount for rent
through the remaining term of the lease (from March 1 through October 31,
2006), alleged damages to the premises, and for wrongful removal of
equipment.  Micrel disputes Deerfield's allegations and will vigorously
defend against the action.  On July 21, 2006, Micrel answered the complaint
with a denial of any liability and the filing of a cross-complaint against
Deerfield seeking return of the security deposit and rent paid from the date
of the casualty, January 20, 2006 through February 28, 2006.  The case is in
the discovery phase and no trial date has yet been set.

With the exception of the TRW and LTC litigation discussed above, for which
the Company has recorded $9.3 million and $913,000, respectively, in other
operating expense, and the MPS litigation, for which the Company has recorded
$2.9 million in net revenues, the Company believes that the ultimate outcome
of the legal actions discussed will not result in a material adverse effect
on the Company's financial condition, results of operation or cash flows, and
the Company believes it is not reasonably possible that a material loss has
been incurred.  However, litigation is subject to inherent uncertainties, and
no assurance can be given that the Company will prevail in these lawsuits.
Accordingly, the pending lawsuits, as well as potential future litigation
with other companies, could result in substantial costs and diversion of

                                       14
<PAGE>
                              MICREL, INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)



resources and could have a material adverse effect on the Company's financial
condition, results of operations or cash flows.

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

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

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


12.   STOCK REPURCHASE PROGRAM

In November, 2005 the Company's Board of Directors authorized the repurchase
of common stock up to a maximum value of $75 million during the period from
January 1, 2006 through December 31, 2006. In August 2006, the Company's
Board of Directors approved an increase to the amount previously approved for
share repurchase in calendar year 2006 to $100 million. Shares of common
stock purchased pursuant to the repurchase program are cancelled upon
repurchase, and are intended to offset dilution from the Company's stock
option plans, employee stock purchase plans and 401(k) plan. During the nine
months ended September 30, 2006, the Company repurchased 5,397,744 shares of
its common stock for $58.0 million.


13.   INCOME TAXES

Deferred tax assets and liabilities result primarily from temporary
differences between book and tax bases of assets and liabilities, and state
research and development credit carryforwards.  The Company had net current
deferred tax assets of $22.0 million and net long-term deferred tax assets of
$11.2 million as of September 30, 2006.  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.

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

The income tax provision for the nine months ended September 30, 2006 is
based on the Company's estimated annual effective tax rate of 40.4% of pretax
income as compared to 35% of pretax income for the comparable period in 2005.
The tax rate increase is due primarily to the effects of nondeductible stock-
based compensation expense and the expiration of the federal research and
development credit at the end of 2005. No federal research and development

                                       15
<PAGE>
                              MICREL, INCORPORATED
              NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
                                  (Unaudited)


credit tax benefit for 2006 may be recorded unless the credit is re-enacted
by Congress, for which there is no assurance as to when or if such credit
would be re-enacted. The income tax provision for such interim periods
differs from taxes computed at the federal statutory rate primarily due to
the effect of nondeductible stock-based compensation expense, state income
taxes, state research and development credits, and federal qualified
production activity deductions.


14.   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)

<TABLE>
                                             Contractual    Other
                                              Facility     Disposal
                                                Costs       Costs      Total
                                             -----------  ---------  ---------
<S>                                         <C>          <C>        <C>
Balance December 31, 2004                     $  3,049    $    360    $  3,409
2005   Uses                                     (1,650)        --       (1,650)
                                              --------    --------    --------
Balance December 31, 2005                        1,399         360       1,759
2006   Additions                                   101         --          101
2006   Uses                                       (259)       (171)       (430)
                                              --------    --------    --------

Balance September 30, 2006                    $  1,241    $    189    $  1,430
                                              ========    ========    ========
</TABLE>

All of the $1.4 million in accrued restructuring costs has been included
within other current liabilities as of September 30, 2006. In February 2006,
the Company terminated the lease under the terms of the lease agreement due to
major vandalism rendering the building unusable.  The Lessor is disputing the
termination of the lease (see Note 11.)  Although the Company is no longer
making payments to the Lessor, the restructuring costs shown above represent
the total potential amount owed under the lease prior to termination.  Other
disposal costs include estimated costs associated with the final closing of
the facility.  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.


15.   PATENT LICENSE AGREEMENT

On September 20, 2006, Micrel entered into a Patent License Agreement with
International Business Machines Corporation ("IBM").  Under the Agreement,
each party licensed to the other all patents issued or issuing on patent
applications entitled to an effective filing date prior to January 1, 2012.
Certain IBM patents are not licensed to Micrel owing to IBM's arrangements
with third parties.  In consideration for the license to IBM's patents, Micrel
paid IBM $2,050,000.

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

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

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

                                       16
<PAGE>


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 hereof, and the Company assumes no obligation to update
any such forward-looking statements. These statements are subject to risks and
uncertainties that could cause actual results and events to differ materially
from those expressed or implied by such forward-looking statements.
Additional factors that may affect operating results are contained within the
Company's Form 10-K for the year ended December 31, 2005.

   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.

   In the first quarter of 2005, demand as measured by order rates, improved
substantially over fourth quarter of 2004 levels.  First quarter bookings
increased by 40% over fourth quarter 2004 levels.  The improvement in order
rates was driven by customers serving the industrial, computing and
communications end markets. Bookings from Micrel's major distributors
increased in the first quarter after falling sharply in the second half of
2004 as distributors adjusted to shorter industry lead times and reduced their
inventory levels.  Despite increased bookings during the first quarter and
lean supply chain inventory levels, order lead times from Micrel's customers
continued to average two to three weeks.  First quarter 2005 gross margin
improved to 50.1%, 3.8 percentage points higher than the fourth quarter of
2004 and more than 5 percentage points above the year ago period on
approximately the same level of revenues.  Operating profit and net income in
the first quarter of 2005 also increased from both the first and fourth
quarters of 2004.

   In the second quarter of 2005, the ongoing short lead time environment
continued to cause customers to order only what was required for their short
term needs.  Second quarter order rates declined from first quarter levels
primarily due to lower order amounts from the Company's distributors and
certain customers serving the wireless handset end market.  Bookings from the
Company's major sell-through distributors declined from strong first quarter
levels and were less than overall resales for the second quarter as
distributors attempted to increase their inventory turns to improve their
return on working capital.  Inventories at the Company's Asia-based stocking
representatives also declined sequentially in the second quarter.  In the
wireless handset market, customers reduced both orders and production levels
in coordination with efforts to reduce channel inventories of handsets.

                                       17
<PAGE>


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

       Second quarter 2005 net revenues increased sequentially by 2% but were
10% less than the net revenues of the year ago period.  The Company continued
to exercise pricing discipline for most of its products in an attempt to
improve gross profit.  Consequently, sales of certain products, such as those
serving the SOHO Ethernet market and the low end personal computer market,
declined resulting in a lower rate of revenue growth for the Company.  Gross
margin continued to improve in the second quarter, increasing to 52% from 49%
in the year ago period and 50% in the first quarter of 2005.  The increase in
gross margin was primarily due to: better pricing discipline, improved sales
mix of higher margin products, ongoing manufacturing cost reductions and lower
depreciation expense as a result of disciplined capital spending.

    Third quarter 2005 order rates increased substantially from second quarter

levels, increasing sequentially in all geographic regions.  Throughout the
third quarter, customers continued to place orders with short delivery
requirements, even as the aggregate order level increased.  Order levels from
the Company's distributors increased in the third quarter, returning to a
level consistent with sales of Micrel's products to their end customers. Third
quarter net revenues increased sequentially by 1% but were 8% below the
revenue level of the year ago period.  Although order rates were strong, third
quarter revenue growth was impacted by product shortages for Ethernet products
due to longer manufacturing cycle times at third party wafer suppliers and
reduced demand for certain commodity products possibly as a result of
continued pricing discipline.   Gross margin improved further in the third
quarter, increasing to 54% from 49% in the year ago period and 52% in the
second quarter.  The increase in gross margin was primarily a result of
ongoing manufacturing cost reductions and an improved sales mix of higher
margin products.

   Continued broad based demand, combined with lean channel inventories and
short lead times, resulted in higher order rates for the Company in the fourth
quarter of 2005.  Order strength in the quarter from customers serving the
industrial and communications end markets, and from the Company's major
distributors, resulted in the second highest quarterly booking level since
calendar year 2000.  Net revenues increased 4% on a sequential basis in the
fourth quarter to $65.1 million and were 10% above the net revenues in the
year ago period.  Gross margin increased by 3.4 percentage points to 57.5%
from the third to the fourth quarter and was 11.2 percentage points higher
than the fourth quarter of 2004 primarily due to a higher mix of sales with
higher gross margins, and increased factory utilization.  The fourth quarter
gross margin was the third highest quarterly gross margin in the Company's
history and has returned to levels recorded in the year 2000.  This is notable
since the net revenues and capacity utilization in the fourth quarter of 2005
were approximately one-third lower than comparable peak levels in 2000.
Despite an increase in legal expenses associated with an atypically high level
of litigation activity, the Company's operating income and operating margin
increased on both a sequential and year-over-year basis in the fourth quarter.
Although order rates increased in the fourth quarter, customer lead times
remained short, averaging three to four weeks.

   In the first quarter of 2006, broad based strength in customer demand,
combined with continued lean channel inventories resulted in the highest
quarterly booking level for Micrel since calendar year 2000.  Orders from
customers serving the communications and industrial end markets strengthened
in the first quarter.  Bookings from Micrel's major sell-through distributors
also increased sequentially in the first quarter.  Increased end customer
demand led these distributors to extend their order backlog with Micrel during
the quarter.  This resulted in a distributor book-to-bill substantially above
one as our distributors attempted to increase their inventories and ensure

availability of supply for the second quarter of 2006.  Bookings from our
direct OEM customers and sell-in stocking representatives also increased on a
sequential basis, despite typical seasonal slowness in the handset and
personal computing end markets.  Net revenues increased 5% on a sequential
basis to $68.2 million and were 12% above the net revenues of the year-ago
period.    The sequential growth in net revenues was primarily the result of
increased demand from customers serving the wireline communications end market
and higher resales of the Company's products through its distributors.  The
first quarter strength in sales to the communications and industrial end
markets was partially offset by seasonal declines in sales to the wireless
handset (primarily in Korea) and computing end markets.

   In the first quarter of 2006, the Company recorded the highest quarterly
gross margin as of that time in its history.  The first quarter gross margin of
58.5% exceeded the previous peak gross margins recorded in the year 2000, when
revenue levels were substantially higher.  The sequential improvement in gross
margin was primarily the result of a richer sales mix driven by increased
sales of higher margin wireline communications products.  Despite an increase
of $2.0 million in equity-based compensation expense as a result of 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

                                       18
<PAGE>


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

competitive lead times to our customers.  The sequential increase in inventory
added approximately one percentage point to first quarter gross margin, about
the same as that experienced in the fourth quarter of 2005.

   In the second quarter of 2006, overall order rates moderated from the high
levels experienced in the first quarter.  Although orders from the Company's
sell-through distributors declined from the first quarter, the total dollar
amount of orders remained higher than the distributors' sales of Micrel's
products in the second quarter.  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, partially offset by continued weakness in demand
from Korean-based customers serving the wireless handset end market continued
weak in the second quarter 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% sequentially but
was up from 51.8% in the year ago period.  The sequential decline in gross
margin was primarily the result of normal fluctuations in sales mix and
changes in inventory combined with a greater unfavorable impact from stock
compensation expense.  Operating margin of 19.7% was flat on a sequential
basis and up from 1.3% in the second quarter of 2005. Operating income for the
second quarters of 2006 and 2005 includes $935,000 and $9.3 million,
respectively, in accrued litigation expense (see Note 11 of Notes to 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 material for Ethernet products
driven by increased customer demand coupled with long 3rd party foundry cycle
times.  Micrel's channel inventories at both Asia-based stocking
representatives and sell-through distributors increased on a sequential basis
in the second quarter.  Resales of the Company's products through the
distribution channel increased by approximately 10% in the second quarter of
2006, while sales through Asian-based stocking representatives were roughly

flat in the second quarter.  Overall inventory turns for Micrel's sell-through
distributors and Asian-based stocking representatives remained within
historical average levels at the end of the second quarter of 2006.

   In the third quarter of 2006, overall order rates declined on a sequential
basis, primarily because the Company's sell-through distributors placed orders
primarily to meet previously unanticipated requirements 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 the licensing of an intellectual property 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 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.

   Third quarter net income was $11.8 million, or $0.15 per diluted share,
compared with net income of $9.0 million, or $0.11 per diluted share, in the
previous quarter and net income of $7.7 million, or $0.09 per diluted share,
in the year-ago period.  Third quarter 2006 earnings per share was the highest
quarterly earnings per share for the Company since the fourth quarter of 2000.
Third quarter net income per diluted share increased 38% from the second
quarter and was up 67% from the third quarter of 2005.  The settlement of

                                       19
<PAGE>


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


intellectual property matters, and related licensing revenues and expenses,
resulted in $2.2 million of net pre-tax operating income in the third quarter,
increasing third quarter 2006 net income by $0.02 per diluted share.

    The Company derives a substantial portion of its net revenues from standard
products.  For the three and nine month periods ended September 30, 2006 the
Company's standard products sales accounted for 90% and 94%, respectively, of
the Company's net revenues.  For the three and nine month periods ended
September 30, 2005 the Company's standard products sales accounted for 95% and
96%, respectively, of the Company's net revenues. The Company believes that a
substantial portion of its net revenues in the future will depend upon
standard products sales, although such sales as a proportion of net revenues
may vary as the Company adjusts product output levels to correspond with
varying economic conditions and demand levels in the markets which it serves.
The standard products business is characterized by short-term orders and
shipment schedules, and customer orders typically can be canceled or
rescheduled without significant penalty to the customer. Since most standard
products backlog is cancelable without significant penalty, the Company
typically plans its production and inventory levels based on internal
forecasts of customer demand, which is highly unpredictable and can fluctuate
substantially. In addition, the Company is limited in its ability to reduce
costs quickly in response to any revenue shortfalls.

   The Company may experience significant fluctuations in its results of
operations.  Factors that affect the Company's results of operations include
the volume and timing of orders received, changes in the mix of products sold,
the utilization level of manufacturing capacity, competitive pricing pressures
and the successful development of new products.  These and other factors are
described in further detail later in this discussion.  As a result of the
foregoing or other factors, the Company may 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, 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, 2005.

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

   Micrel allows certain distributors, primarily located in North America and
Europe, and in certain countries in Asia, significant return rights, price
protection and pricing adjustments subsequent to the initial product shipment.
As these returns and price concessions have historically been significant, and
future returns and price concessions are difficult to reliably estimate, the
Company defers recognition of revenue and related cost of sales (in the
balance sheet line item "deferred income on shipments to distributors")
derived from sales to these distributors until they have resold the Company's
products to their customers. Although revenue recognition and related cost of

                                       20
<PAGE>


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

sales are deferred, the Company records an accounts receivable and relieves
inventory at the time of initial product shipment.  As standard terms are FOB
shipping point, payment terms are enforced from shipment date and legal title
and risk of inventory loss passes to the distributor upon shipment. In
addition, where revenue is deferred upon shipment and recognized on a sell-
through basis, the Company may offer price adjustments to its distributors to
allow the distributor to price the Company's products competitively for
specific resale opportunities. The Company estimates and records an allowance
for distributor price adjustments for which the specific resale transaction
has been completed, but the price adjustment claim has not yet been received
and recorded by the Company.

   Sales to OEM customers and Asian based stocking representatives are
recognized upon shipment.  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 a reserve is established, it is maintained
until the product to which it relates is sold or otherwise disposed of. This
treatment is in accordance with Accounting Research Bulletin 43 and SEC Staff
Accounting Bulletin 100 "Restructuring and Impairment Charges."

   Share-Based Compensation. Prior to fiscal 2006, the Company accounted for
stock-based compensation plans under the recognition and measurement
provisions of APB Opinion No. 25. Effective January 1, 2006, Micrel adopted
the provisions of SFAS No. 123R using the modified-prospective transition
method. Under SFAS No. 123R share-based compensation cost is measured at the
grant date based on the fair value of the award and is recognized as expense
in the statement of operations. To determine fair value, the Company uses the
Black-Scholes valuation model which requires input factors such as expected
term, stock price volatility, dividend rate and risk free interest rate. In
addition, SFAS No. 123R requires an estimate of expected forfeiture rates of
stock grants and stock-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, 2006, the Company believes that
future taxable income levels will be sufficient to realize the tax benefits of
these deferred tax assets and has not established a valuation allowance.
Should the Company determine that future realization of these tax benefits is
not more likely than not, a valuation allowance would be established, which
would increase the Company's tax provision in the period of such
determination.

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

                                       21
<PAGE>


         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 is currently involved in such intellectual property litigation and has
recently settled one other case involving intellectual property claims (see
Note 11 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:

<TABLE>
                                       Three Months Ended   Nine Months Ended
                                          September 30,        September 30,
                                       ------------------   ------------------
                                         2006      2005       2006      2005
                                       --------  --------   --------  --------
<S>                                    <C>       <C>        <C>       <C>
Net revenues                             100.0%    100.0%     100.0%    100.0%
Cost of revenues                          41.4      45.9       41.8      48.0
                                       --------  --------   --------  --------
  Gross profit                            58.6      54.1       58.2      52.0
                                       --------  --------   --------  --------
Operating expenses:
  Research and development                17.8      18.2       18.6      18.4
  Selling, general and administrative     16.2      18.6       17.8      17.3
  Other operating expense (income)         -         -          0.4       5.0
  Restructuring expense                    -         -          -         -
                                       --------  --------   --------  --------
    Total operating expenses              34.0      36.8       36.8      40.7
                                       --------  --------   --------  --------
Income from operations                    24.6      17.3       21.4      11.3
Other income, net                          2.1       1.7        2.0       1.6
                                       --------  --------   --------  --------
Income before income taxes                26.7      19.0       23.4      12.9
Provision for income taxes                10.6       6.6        9.5       4.5
                                       --------  --------   --------  --------
Net income                                16.1%     12.4%      13.9%      8.4%
                                       ========  ========   ========  ========
</TABLE>

   Net Revenues.  For the three months ended September 30, 2006, net revenues
increased 18% to $73.5 million from $62.5 million for the same period in the
prior year.  For the nine months ended September 30, 2006, net revenues
increased 14% to $211.8 million from $185.2 million for the same period in the
prior year. These increases were due to increased standard products revenues
and increased other products revenues.

    Standard products revenues for the three months ended September 30, 2006
increased 12% to $66.5 million from $59.5 million for the same period in the
prior year.  For the nine months ended September 30, 2006, standard products
revenues increased 12% to $198.4 million from $177.7 million for the same
period in the prior year. These increases resulted primarily from increased
unit shipments of standard products to the industrial, networking and high-
speed communications end markets.

    Other products revenues consist primarily of custom and foundry products
revenues and revenues from the license of intellectual property (see Note 11
of Notes to Condensed Consolidated Financial Statements). For the three months
ended September 30, 2006, other product revenues increased 138% to $7.0
million from $2.9 million for the same period in the prior year.  For the nine
months ended September 30, 2006, other products revenues increased 78% to
$13.4 million from $7.5 million for the same period in the prior year. These
increases resulted from a $2.9 million sale of intellectual property included
in 2006 combined with increased unit shipments of custom and foundry products.

   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.  The Company averaged
approximately 55% to 60% turns fill per quarter during 2005.  During the first

                                       22
<PAGE>


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

nine months of 2006, the turns fill rate for OEM and stocking representatives
averaged approximately 50 to 55%.

   Throughout 2005 customers maintained a focus on inventory control,
continuing the trend that began in the second half of 2004.  Overall
semiconductor industry channel inventories remained near historical low levels
throughout 2005.  Nevertheless, customers were cautious about committing new
orders, relying instead on short lead times and the willingness of
semiconductor manufacturers to hold inventory and react quickly to supply
their short term needs.  As a result, order lead times from the Company's
customers stayed relatively short throughout 2005.  When demand for the
Company's products increased in the third and fourth quarter, order backlog
increased and lead times from the Company's customers grew modestly to three
to four weeks, from approximately two to three weeks in the first nine months
of 2005.  In the first quarter of 2006, the order lead time once again
increased to approximately five to six weeks as a result of increased demand
from the Company's distributors and from customers serving the wireline
communications end market. In the second quarter of 2006, lead times decreased
to approximately four to five weeks as OEM customers, stocking representatives
and distributors became more comfortable with the Company's ability to supply
products on a timely basis.  During the third quarter of 2006, customers
placed new orders primarily to fill previously unanticipated needs and lead
times remained relatively stable at four to six weeks.  Customers appear to be
controlling inventories closely and, similar to 2005, seem to be relying on
very short lead times to buffer changes in their build schedules. Shorter lead
times reduce visibility into end demand and increase the reliance on turns
fill orders.  Shorter lead times when taken together with the uncertain growth
rate of the world economy and uncertainty how the typical seasonal strength in
demand from customers serving the wireless handset and computing end markets
will materialize in the fourth quarter of 2006, make it difficult to precisely
predict future levels of sales and profitability.  In this environment the
Company, its stocking representatives and distributors may have to carry
higher levels of inventory to service uncertain customer demand.

   International sales represented 68% and 74% of net revenues for the three
months ended September 30, 2006 and 2005, respectively. On a dollar basis
international sales increased $4.1 million, or 9% to $50.3 million for the
three months ended September 30, 2006 from $46.2 million for the same period
in the prior year. For the nine months ended September 30, 2006 and 2005,
international sales represented 71% and 75% of net revenues, respectively.  On
a dollar basis international sales increased $10.2 million, or 7% to $149.8
million for the nine months ended September 30, 2006 from $139.5 million for
the same period in the prior year. These increases resulted primarily from
increased shipments of standard products to the industrial and communications
end markets in Europe and Asia.

   The trend for the Company's customers to move their electronics
manufacturing to Asian countries has brought increased pricing pressure for
Micrel and other semiconductor manufacturers.  Asian based manufacturers are
typically more concerned about cost and less concerned about the capability of
the integrated circuits they purchase. This can make it more difficult for
United States based companies to differentiate themselves except by price. The

increased concentration of electronics procurement and manufacturing in the
Asia Pacific region has led, and may continue to lead, to continued price
pressure for the Company's products in the future.

   Stock-Based Compensation. Effective January 1, 2006, the Company adopted
the fair value recognition provisions of SFAS No. 123R using the modified
prospective transition method and therefore has not restated results for prior
periods. The Company's results of operations for the three and nine months
ended September 30, 2006 were impacted by the recognition of non-cash expense
related to the fair value of stock-based compensation awards. During the three
months ended September 30, 2006, Micrel recorded $2.0 million in pre-tax
stock-based compensation expense, of which $485,000 is included in cost of
revenues, $733,000 is included in research and development expense and
$792,000 is included in sales, general and administrative expense. Total
impact of stock-based compensation expense, net of tax, for the three months
ended September 30, 2006 was $1.8 million.  For the nine months ended
September 30, 2006, Micrel recorded $7.0 million in pre-tax stock-based
compensation expense, of which $1.2 million is included in cost of revenues,
$2.8 million is included in research and development expense and $2.9 million
is included in sales, general and administrative expense. Total impact of
stock-based compensation expense, net of tax, for the nine months ended
September 30, 2006 was $6.4 million.

                                       23
<PAGE>


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

    Gross Profit.  Gross profit is affected by a variety of factors including
the volume of product sales, product mix, manufacturing utilization, product
yields and average selling prices.  The Company's gross margin increased to
58.6% for the three months ended September 30, 2006 from 54.1% for the
comparable period in 2005. For the nine months ended September 30, 2006, gross
margin increased to 58.2% from 52.0% for the comparable period in 2005. The
increases in gross margin resulted primarily from a greater sales mix of
higher margin products combined with decreased depreciation, decreased wafer
fabrication costs and decreased external assembly and test costs.
Depreciation and amortization as a percent of sales declined to 5.8% and 6.0%
for the three and nine months ended September 30, 2006 as compared to 7.8% and
8.3% for the same periods in 2005. This reduction in depreciation was
primarily due to existing equipment becoming fully depreciated, which was
partially offset by additional depreciation on new equipment purchases. In
addition, included in gross profit for the three and nine months ended
September 30, 2006 is $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 17.8% and 18.2%, for the three months
ended September 30, 2006 and 2005, respectively.  On a dollar basis, research
and development expenses increased $1.7 million or 15% to $13.1 million for
the three months ended September 30, 2006 from $11.4 million for the
comparable period in 2005. For the nine months ended September 30, 2006 and
2005, research and development expenses as a percentage of net revenues
represented 18.6% and 18.4%, respectively.  On a dollar basis, research and
development expenses increased $5.1 million or 15% to $39.3 million for the
nine months ended September 30, 2006 from $34.1 million for the comparable
period in 2005. These increases were primarily due to increased stock-based
compensation costs due to the adoption of SFAS No. 123R (See Note 3 of Notes
to Condensed Consolidated Financial Statements) 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.

    Selling, General and Administrative Expenses.  As a percentage of net
revenues, selling, general and administrative expenses represented 16.2% and
18.6% for the three months ended September 30, 2006 and 2005, respectively.
On a dollar basis, selling, general and administrative expenses increased
$255,000 or 2% to $11.9 million for the three months ended September 30, 2006
from $11.6 million for the comparable period in 2005.  For the nine months
ended September 30, 2006 and 2005, selling, general and administrative
expenses as a percentage of net revenues represented 17.8% and 17.3%,
respectively.  On a dollar basis, selling, general and administrative expenses
increased $5.6 million or 17% to $37.5 million for the nine months ended
September 30, 2006 from $31.9 million for the comparable period in 2005.
These increases were primarily due to increased outside legal costs in the
first two quarters of 2006 combined with increased stock-based compensation
costs due to the adoption of SFAS No. 123R (See Note 3 of Notes to Condensed
Consolidated Financial Statements) and increased staffing costs, including
salaries, sales commissions and profit sharing accruals.

   Other Operating Expense (Income).  As a result of an unfavorable ruling in
the second quarter of 2006 in a patent infringement lawsuit (see Note 11 of
Notes to Condensed Consolidated Financial Statements) the Company recorded
$913,000 in other operating expense in 2006. In 2005, a jury ruled against
Micrel in its suit against TRW Automotive and for TRW automotive in its
counter-claim against Micrel.  The claims were related to a contract dispute
between the two companies.  As a result of the jury's verdict, Micrel recorded
$9.3 million in other operating expense in the second quarter 2005 financial
statements (see Note 11 of Notes to Condensed Consolidated Financial
Statements).

   Other Income, Net.  Other income, net reflects interest income from
investments in short-term and long-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 accrued litigation
liabilities.  Other income, net increased $481,000 to $1.5 million for the
three months ended September 30, 2006 from $1.1 million for the comparable
period in 2005.  For the nine months ended September 30, 2006, other income,
net increased $1.2 million to $4.1 million from $2.9 million for the
comparable period in 2005.  These increases were primarily due to an increase
in average interest rates and returns on investment balances, which was
partially offset by increased accrued interest expense related to accrued
litigation liabilities.

                                       24
<PAGE>


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

    Provision for Income Taxes. The income tax provision for the nine months
ended September 30, 2006 is based on the Company's estimated annual effective
tax rate of 40.4% of pretax income as compared to 35% of pretax income for the
comparable period in 2005. The tax rate increase is due primarily to the
effects of nondeductible stock-based compensation expense and the expiration
of the federal research and development credit at the end of 2005. No federal
research and development credit tax benefit for 2006 may be recorded unless
the credit is re-enacted by Congress, for which there is no assurance as to
when or if such credit would be re-enacted. The income tax provision for such
interim periods differs from taxes computed at the federal statutory rate
primarily due to the effect of nondeductible stock-based compensation expense,
state income taxes, state research and development credits, and federal
qualified production activity deductions.


Liquidity and Capital Resources

   Since inception, the Company's principal sources of funding have been its
cash from operations, bank borrowings and sales of common stock. Principal
sources of liquidity at September 30, 2006, consisted of cash and short-term
investments of $105.6 million and a $6 million revolving line of credit from a
commercial bank (see Note 7 of Notes to Condensed Consolidated Financial
Statements).

   The Company generated $39.7 million in cash flows from operating activities
for the nine months ended September 30, 2006, primarily attributable to net
income of $29.5 million plus additions for non-cash activities of $19.4

million 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.

   For the nine months ended September 30, 2005, Company generated $38.0
million in cash flows from operating activities, primarily attributable to net
income of $15.5 million plus additions for non-cash activities of $14.4
million and a $7.0 million decrease in inventories combined with a $7.0
million increase in other accrued liabilities, which were partially offset by
a $3.9 million increase in accounts receivable.

   The Company generated $20.9 million of cash from investing activities
during the nine months ended September 30, 2006 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
(see Note 1 of Notes to Condensed Consolidated Financial Statements).

   For the nine months ended September 30, 2005, the Company generated $1.6
million of cash from investing activities comprised of $12.1 million in
proceeds from net sales of short-term investments that were partially offset
by $10.5 million in purchases of property, plant and equipment.

   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.

   For the nine months ended September 30, 2005, the Company used $36.6
million of cash in financing activities primarily for the repurchase of $42.8
million of the Company's common stock, which was partially offset by $6.3
million in proceeds from employee stock transactions.

   The Company currently intends to spend approximately $18 million to $25
million to purchase capital equipment and make facility improvements during
the next twelve months primarily for manufacturing equipment for wafer
fabrication and product testing and additional research and development
related software and equipment. The Company is currently authorized by its
Board of Directors to repurchase an additional $42 million of its common stock
through December 31, 2006. Since inception, the Company's principal sources of
funding have been its cash from operations, bank borrowings and sales of
common stock. The Company believes that its cash from operations, existing
cash balances and short-term investments, and its credit facility will be
sufficient to meet its cash requirements for the next twelve months. In the
longer term, the Company believes future cash requirements will continue to be
met by its cash from operations, credit arrangements and future debt or equity
financings as required.

                                       25
<PAGE>


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

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

<TABLE>
                                           Payments Due By Period
                               ------------------------------------------------
                                        Less than    1-3       4-5      After 5
                                Total     1 Year    Years     Years      Years
                               --------  --------  --------  --------  --------
<S>                            <C>       <C>       <C>       <C>       <C>
Long-term debt                 $     77  $     77  $    -    $    -    $    -
Operating leases                  6,090     1,703     2,553     1,834       -
Open purchase orders             18,000    18,000       -         -         -
                               --------  --------  --------  --------  --------
Total                          $ 24,167  $ 19,780  $  2,553  $  1,834  $    -
                               ========  ========  ========  ========  ========
</TABLE>

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

   Borrowing agreements consisted of a $6 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 direct borrowings
under the revolving line of credit at September 30, 2006 and there were
$875,000 in standby letters of credit outstanding.  The letters of credit are
issued to guarantee payments for the Company's workers compensation program.

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

                                       26
<PAGE>




ITEM 3.  QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

   At September 30, 2006, the Company held $12.0 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 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). The
short-term investments held at September 30, 2006 are primarily fixed rate
securities. These available-for-sale securities are subject to interest rate
risk and will fall in value if market interest rates increase. If market
interest rates were to increase immediately and uniformly by 100 basis points
from levels at September 30, 2006, the fair value of the short-term
investments would decline by an immaterial amount. The Company generally
expects to have the ability to hold its fixed income investments until
maturity and therefore would not expect operating results or cash flows to be
affected to any significant degree by the effect of a sudden change in market
interest rates on short-term investments.

   At September 30, 2006, the Company held an insignificant amount of fixed-
rate long-term debt subject to interest rate risk.


ITEM 4:   CONTROLS AND PROCEDURES

     The Company maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed in the Company's reports
under the Securities Exchange Act of 1934 is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the
Securities and Exchange Commission, and that such information is accumulated
and communicated to the Company's management, including its chief executive
officer and chief financial officer, as appropriate, to allow timely decisions
regarding required disclosure.  In designing and evaluating the disclosure
controls and procedures, management recognizes that any 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.

     As required by Securities and Exchange Commission Rule 13a-15(b), the
Company carried out an evaluation, under the supervision and with the
participation of the Company's management, including the Company's chief
executive officer and chief financial officer, of the effectiveness of the
design and operation of the Company's disclosure controls and procedures as of
the end of the period covered by this report.  Based on the foregoing, the
Company's chief executive officer and chief financial officer have concluded
that the Company's disclosure controls and procedures are effective at the
reasonable assurance level as of September 30, 2006.

   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.

                                       27
<PAGE>



                          PART II.  OTHER INFORMATION

ITEM 1.  LEGAL PROCEEDINGS

   The information included in Note 11 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.
Additional factors that may affect the Company and its operating results are
contained within the Company's Form 10-K for the year ended December 31, 2005.

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. For the nine months ended September 30, 2006 and 2005,
international sales represented 71% and 75% of net revenues, respectively. In
addition, Company's revenues derived from export shipments to customers in Asia
were 59% and 66% of net revenues for the nine months ended September 30, 2006
and 2005, respectively.  International markets are subject to a variety of
risks, including changes in policy by the U.S. or foreign governments, acts of
terrorism, foreign government instability, social conditions such as civil
unrest, economic conditions including high levels of inflation, fluctuation in
the value of foreign currencies and currency exchange rates and trade
restrictions or prohibitions. Changes in exchange rates that strengthen the
U.S. dollar could increase the price of the Company's products in the local
currencies of the foreign markets it serves. This would result in making the
Company's products relatively more expensive than its competitors' products
that are denominated in local currencies, leading to a reduction in sales or
profitability in those foreign markets. The Company has not taken any
protective measures against exchange rate fluctuations, such as purchasing
hedging instruments. In addition, the Company sells to domestic customers that
do business worldwide and cannot predict how the businesses of these customers
may be affected by economic or political conditions elsewhere in the world.
Such factors could adversely affect the Company's future revenues, financial
condition, results of operations or cash flows.

   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.

                                       28
<PAGE>



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.

   The short lead time environment in the semiconductor industry has allowed
many end consumers to rely on stocking representatives and distributors to
carry inventory to meet short term requirements and minimize their investment
in on-hand inventory.  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.

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

   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.

   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.

   During a period when economic growth and customer demand have been less
certain, both the semiconductor industry and the Company have experienced
significant price erosion since the beginning of 2001.  If price erosion
continues, 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

                                       29
<PAGE>



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. 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. Existing claims or other assertions or claims for
indemnity resulting from infringement claims 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.

The Statement of 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 pro forma effect to net income and earnings
per share had the Company applied the fair value method to stock-based awards
has been disclosed in the Company's previous Form 10-K and 10-Q filings and is
contained in Note 3 of the Notes to Condensed Consolidated Financial Statements
of this form 10-Q.  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

                                       30
<PAGE>



based incentive awards, it will most likely be more difficult for the Company
to hire and retain employees.

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

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

   The cellular telephone (wireless handset) market comprises a significant
portion of the Company's standard product revenues.  The proportion of the
Company's annual net revenues from customers serving the cellular telephone
market has been increasing over the last four years, growing from less than 20%
of worldwide sales in 2001 to approximately 25% in 2004 and 26% in 2005. 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 lose market share, or accumulate too much
inventory of completed handsets, the demand for the Company's products can
decline sharply which could adversely affect the Company's revenues and results
of operations.

   An important part of the Company's strategy is to continue to focus on the
market for high-speed communications ICs.  During the first six months of 2006,
orders and revenues for the Company's high-speed communications products
increased.  In the third quarter of 2006, order rates and revenues declined for
these products.  If weakness from the telecommunications infrastructure and
wire line networking markets continues, resulting in further reduction in
demand for the Company's high bandwidth products, the Company's future revenue
growth and profitability could be adversely affected.

   The Company derives a significant portion of its net revenues from customers
located in certain geographic regions or countries.   A significant portion of
the Company's net revenues come from customers located in South Korea. In the
event that political tensions surrounding North Korea evolve into military or
social conflict, or other factors disrupt the Korean economy, the Company's
revenues, results of operations, cash flow and financial condition could be
adversely affected.  A significant portion of the Company's net revenues come
from customers located in Taiwan and China.  In the event that economic
activity in these two countries declines, or is disrupted by geopolitical
events, the Company's revenues and results of operations could be adversely
affected.

   The Company is involved in litigation.  The Company is involved in one
significant lawsuit and one appeal...  In September 2006, the Company resolved
a major litigation with Monolithic Power Systems; as a result, Micrel does not
anticipate any additional legal expense associated with this litigation.  The
Company has one significant lawsuit  pending, in which Micrel is the plaintiff
in an action against its former accounting firm, Deloitte & Touche.  We expect
legal expenses for this action to increase significantly over the next six
months as the trial date approaches in March 2007.  In another action where
Micrel is a plaintiff and TRW is the defendant, Micrel is appealing a judgment
entered against the Company.  The judgment in the TRW case has been previously
recorded in Micrel's financial statements.  Micrel is involved in other minor
lawsuits where Micrel is the defendant, but the Company does not expect
significant legal costs with respect to these actions. Litigation is by its
nature unpredictable and costly.  If the level of effort required to prosecute
or defend the Company's position in any of the lawsuits increases
significantly, or if a judgment is entered against the Company, the resulting
expense could adversely affect the Company's financial condition, results of
operations and cash flows.

   The Company manufactures most of its semiconductors at its San Jose,
California fabrication facilities.  The Company's existing wafer fabrication
facility, located in Northern California, may be subject to natural disasters
such as earthquakes.  A significant natural disaster, such as an earthquake or
prolonged drought, could have a material adverse impact on the Company's
business, financial condition and operating results.  Furthermore,
manufacturing semiconductors requires manufacturing tools that are unique to
each product being produced.  If one of these unique manufacturing tools was
damaged or destroyed, the Company's ability to manufacture the related product

                                       31
<PAGE>



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 Payment Restrictions

The Company has entered into borrowing agreements that contain restrictions on
the declaration and payment of dividends without the lender's consent.  In
addition, the Company currently intends to retain future earnings to fund
operations, and does not anticipate paying dividends on its common stock in the
foreseeable future.

Issuer Purchases of Equity Securities

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


<TABLE>
   Repurchases of the Company's common stock during 2006 were as follows:

                                                                Maximum Dollar
                                            Total Number of    Value of Shares
                      Total                Shares Purchased    that May Yet be
                     Number     Average       as Part of      Repurchased Under
                   of Shares  Price Paid  Publicly Announced     the Plans or
Period             Purchased   Per Share   Plans or Programs   Programs ($000)
-----------------  ---------  ----------  ------------------  -----------------
<S>                <C>        <C>         <C>                 <C>
January 2006         570,800   $ 11.63           570,800           $  68,360
February 2006        297,500   $ 13.76           297,500           $  64,267
March 2006           334,600   $ 13.71           334,600           $  59,678
                   ---------                   ---------
  Total Q1 2006    1,202,900   $ 12.74         1,202,900
April 2006           178,900   $ 15.04           178,900           $  56,987
May 2006             441,544   $ 11.94           441,544           $  51,715
June 2006            661,000   $ 10.45           661,000           $  44,806
                   ---------                   ---------
  Total Q2 2006    1,281,444   $ 11.61         1,281,444
July 2006            946,400   $  9.11           946,400           $  36,158
August 2006        1,265,500   $  9.58         1,265,500           $  49,037
September 2006       698,500   $ 10.01           698,500           $  42,048
                   ---------                   ---------
  Total Q3 2006    2,913,400   $  9.53         2,913,400
                   ---------                   ---------
  Total 2006       5,397,744   $ 10.74         5,397,744
                   =========                   =========
</TABLE>


ITEM 6.  EXHIBITS

Exhibit No.                    Description
-----------                    -----------
    3.3       Amended and Restated Bylaws of the Registrant, as amended

   10.17      Micrel/IBM Patent License Agreement, dated September 26, 2006
    31        Certifications of the Company's Chief Executive Officer and
              Chief Financial Officer pursuant to Section 302 of the
              Sarbanes-Oxley Act of 2002
    32        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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                                   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, 2006   By /s/ Richard D. Crowley, Jr.
                            ---------------------------
                            Richard D. Crowley, Jr.
                            Vice President, Finance and
                            Chief Financial Officer
                            (Authorized Officer and
                            Principal Financial Officer)

                                       33
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