**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 March 31, 2007.





or





 ̈  TRANSITION
      REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF
      1934


For
      the
      transition period from  to  .





Commission
      File Number **0-25236**








**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 Identification No.)incorporation
                or organization)








2180
      Fortune Drive, San Jose, CA 95131


(Address
      of principal executive offices) (Zip Code)








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








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





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


See
      definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of
      the Exchange Act.


Large
      accelerated filer  ̈   Accelerated
      filer x Non-accelerated filer  ̈





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











As
      of
      April 30, 2007 there were 77,573,555 shares of common stock, no par value,
      outstanding.











Table
            of Contents








**MICREL,
                INCORPORATED**
              **INDEX
                TO**
              **REPORT
                ON FORM 10-Q**
              **FOR
                THE THREE MONTHS ENDED MARCH 31, 2007**Page**PART
                I.****FINANCIAL
                INFORMATION****Item
                1**.
            Financial
                Statements (Unaudited):Condensed
                Consolidated Balance Sheets - March 31, 2007
                and December 31, 2006
            3Condensed
                Consolidated Statements of Operations - Three
                Months Ended March 31, 2007 and 2006
            4Condensed
                Consolidated Statements of Cash Flows - Three
                Months Ended March 31, 2007 and 2006
            5Notes
                to Condensed Consolidated Financial Statements
            6**Item
                2**
            Management’s
                Discussion and Analysis of Financial Condition
                and Results of Operations
            14**Item
                3.**
            Quantitative
                and Qualitative Disclosures about Market
                Risk
            23**Item
                4.**
            Controls
                and Procedures
            23**PART
                II. OTHER INFORMATION****Item
                1.**
            Legal
                Proceedings
            24**Item
                1A.**
            Risk
                Factors
            24**Item
                2.**
            Unregistered
                Sales of Equity Securities and Use of
                Proceeds and Issuer Repurchases of Equity Securities
            28**Item
                6.**
            Exhibits
            29Signature
            30














2
 
 Table
            of Contents




**ITEM
                1. FINANCIAL STATEMENTS****MICREL,
                INCORPORATED****CONDENSED
                CONSOLIDATED BALANCE SHEETS****(Unaudited)****(In
                thousands, except share amounts)****March
                31,**
            
            **December
                31,****2007**
            
            **2006******ASSETSCURRENT
                ASSETS:Cash
                and cash equivalents
            
            $
            110,176
            
            $
            92,259Restricted
                cash
            
            
            2,629
            
            
            2,629Short
                term investments
            
            
            17,027
            
            
            15,050Accounts
                receivable, net
            
            
            33,781
            
            
            31,092Inventories
            
            
            36,200
            
            
            37,183Prepaid
                expenses and other
            
            
            2,616
            
            
            3,084Deferred
                income taxes
            
            
            24,127
            
            
            23,096Total
                current assets
            
            
            226,556
            
            
            204,393PROPERTY,
                PLANT AND EQUIPMENT, NET
            
            
            77,795
            
            
            78,665DEFERRED
                INCOME TAXES
            
            
            8,091
            
            
            11,158INTANGIBLE
                ASSETS, NET
            
            
            4,301
            
            
            4,714OTHER
                ASSETS
            
            
            1,351
            
            
            1,343TOTAL
            
            $
            318,094
            
            $
            300,273LIABILITIES
                AND SHAREHOLDERS’ EQUITYCURRENT
                LIABILITIES:Accounts
                payable
            
            $
            15,645
            
            $
            17,429Income
                taxes payable
            
            
            4,768
            
            
            --Deferred
                income on shipments to distributors
            
            
            23,257
            
            
            21,705Other
                current liabilities
            
            
            20,671
            
            
            22,564Current
                portion of long-term debt
            
            
            41
            
            
            80Total
                current liabilities
            
            
            64,382
            
            
            61,778LONG-TERM
                INCOME TAXES PAYABLE
            
            
            2,132
            
            
            --OTHER
                LONG-TERM OBLIGATIONS
            
            
            450
            
            
            453SHAREHOLDERS’
                EQUITY:Preferred
                stock, no par value - authorized: 5,000,000 shares;issued
                and outstanding: none
            
            
            --
            
            
            --Common
                stock, no par value - authorized: 250,000,000 shares;issued
                and outstanding: 2007 - 77,556,151 shares; 2006 - 78,078,211
                shares
            
            
            10,804
            
            
            15,585Accumulated
                other comprehensive loss
            
            
            (34
            )
            
            (35
            )Retained
                earnings
            
            
            240,360
            
            
            222,492Total
                shareholders’ equity
            
            
            251,130
            
            
            238,042TOTAL
            
            $
            318,094
            
            $
            300,273The
                accompanying notes are an integral part of these unaudited condensed
                consolidated financial statements.




3
 
 Table
            of Contents








**MICREL,
                INCORPORATED****CONDENSED
                CONSOLIDATED STATEMENTS OF OPERATIONS****(Unaudited)**(In
                thousands, except per share amounts)**Three
                Months Ended****March
                31,****2007**
            
            **2006**NET
                REVENUES
            
            $
            63,113
            
            $
            68,151COST
                OF REVENUES(1)
            
            
            26,426
            
            
            28,257GROSS
                PROFIT
            
            
            36,687
            
            
            39,894OPERATING
                EXPENSES:Research
                and development(1)
            
            
            13,252
            
            
            13,038Selling,
                general and administrative(1)
            
            
            12,137
            
            
            13,411Restructuring
                expense
            
            
            44
            
            
            --Total
                operating expenses
            
            
            25,433
            
            
            26,449INCOME
                FROM OPERATIONS
            
            
            11,254
            
            
            13,445OTHER
                INCOME (EXPENSE):Interest
                income
            
            
            1,501
            
            
            1,411Interest
                expense
            
            
            (152
            )
            
            (163
            )Litigation
                settlement and other income, net (see Note 11)
            
            
            15,514
            
            
            4Total
                other income, net
            
            
            16,863
            
            
            1,252INCOME
                BEFORE INCOME TAXES
            
            
            28,117
            
            
            14,697PROVISION
                FOR INCOME TAXES
            
            
            10,249
            
            
            5,996NET
                INCOME
            
            $
            17,868
            
            $
            8,701NET
                INCOME PER SHARE:Basic
            
            $
            0.23
            
            $
            0.10Diluted
            
            $
            0.23
            
            $
            0.10WEIGHTED
                AVERAGE SHARES USED INCOMPUTING
                PER SHARE AMOUNTS:Basic
            
            
            77,738
            
            
            84,025Diluted
            
            
            78,750
            
            
            85,794(1)
                Stock-based compensation expense included in:Cost
                of revenues
            
            $
            302
            
            $
            182Research
                and development
            
            
            479
            
            
            1,065Selling,
                general and administrative
            
            
            489
            
            
            1,109The
                accompanying notes are an integral part of these unaudited condensed
                consolidated financial statements.





4
 
 Table
            of Contents




**MICREL,
                INCORPORATED****CONDENSED
                CONSOLIDATED STATEMENTS OF CASH FLOWS****(Unaudited)****(In
                thousands)**
            
            **Three
                Months Ended****March
                31,****2007**
            
            **2006**NET
                CASH FLOWS PROVIDED BY OPERATING ACTIVITIES:Net
                income
            
            $
            17,868
            
            $
            8,701Adjustments
                to reconcile net income to net cashprovided
                by operating activities:Depreciation
                and amortization
            
            
            4,614
            
            
            4,235Stock
                based compensation
            
            
            1,270
            
            
            2,356Tax
                benefit on the exercise of employee stock options
            
            
            378
            
            
            391Excess
                tax benefits associated with stock compensation
            
            
            (25
            )
            
            (133
            )Loss
                on disposal of assets
            
            
            --
            
            
            54Deferred
                rent
            
            
            (3
            )
            
            (17
            )Deferred
                income taxes
            
            
            (445
            )
            
            (1,295
            )Changes
                in operating assets and liabilities:Accounts
                receivable
            
            
            (2,689
            )
            
            (4,456
            )Inventories
            
            
            920
            
            
            (2,371
            )Prepaid
                expenses and other assets
            
            
            460
            
            
            (103
            )Accounts
                payable
            
            
            (1,784
            )
            
            (1,573
            )Income
                taxes payable
            
            
            9,381
            
            
            4,761Other
                current liabilities
            
            
            (1,893
            )
            
            (1,752
            )Deferred
                income on shipments to distributors
            
            
            1,552
            
            
            3,432Net
                cash provided by operating activities
            
            
            29,604
            
            
            12,230CASH
                FLOWS FROM INVESTING ACTIVITIES:Change
                in restricted cash
            
            
            --
            
            
            (2,629
            )Purchases
                of property, plant and equipment
            
            
            (3,331
            )
            
            (3,322
            )Purchases
                of short-term investments
            
            
            (1,976
            )
            
            (6,080
            )Proceeds
                from the sale of short-term investments
            
            
            --
            
            
            25,000Net
                cash provided by (used in) investing activities
            
            
            (5,307
            )
            
            12,969CASH
                FLOWS FROM FINANCING ACTIVITIES:Repayments
                of long-term debt
            
            
            (39
            )
            
            (34
            )Proceeds
                from the issuance of common stock
            
            
            2,457
            
            
            1,475Repurchase
                of common stock
            
            
            (8,823
            )
            
            (15,322
            )Excess
                tax benefits associated with stock compensation
            
            
            25
            
            
            133Net
                cash used in financing activities
            
            
            (6,380
            )
            
            (13,748
            )NET
                INCREASE IN CASH AND CASH EQUIVALENTS
            
            
            17,917
            
            
            11,451CASH
                AND CASH EQUIVALENTS - Beginning of period
            
            
            92,259
            
            
            88,130CASH
                AND CASH EQUIVALENTS - End of period
            
            $
            110,176
            
            $
            99,581SUPPLEMENTAL
                DISCLOSURE OF CASH FLOW INFORMATION:Cash
                paid during the period for:Interest
            
            $
            3
            
            $
            163Income
                taxes
            
            $
            127
            
            $
            2,143The
                accompanying notes are an integral part of these unaudited condensed
                consolidated financial statements.




5
 
 Table
            of Contents
 **MICREL,
          INCORPORATED**
 **NOTES
          TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**








**1.**  **SIGNIFICANT
      ACCOUNTING POLICIES**









***Interim
      Financial Information -*** ** The
      accompanying condensed consolidated financial statements of Micrel, Incorporated
      and its wholly-owned subsidiaries (“Micrel” or the “Company”) as of March 31,
      2007 and for the three months ended March 31, 2007 and 2006 are unaudited.
      In
      the opinion of management, the condensed consolidated financial statements
      include all adjustments (consisting only of normal recurring accruals except
      for
      the adoption of FIN No. 48 as discussed in Note 13) that management considers
      necessary for a fair statement of its financial position, operating results
      and
      cash flows for the interim periods presented. Operating results and cash flows
      for interim periods are not necessarily indicative of results for the entire
      year. The Condensed Consolidated Balance Sheet as of December 31, 2006, was
      derived from audited financial statements, but does not include all disclosures
      required by accounting principles generally accepted ("GAAP") in the United
      States of America. These financial statements should be read in conjunction
      with
      the audited consolidated financial statements and notes thereto included in
      the
      Company’s Annual Report on Form 10-K for the year ended December 31, 2006. These
      financial statements should also be read in conjunction with the Company's
      critical accounting policies included in the Company’s Annual Report on Form
      10-K for the year ended December 31, 2006.





***Restricted
      Cash*** - During
      the first quarter of 2006, the Company elected to post a surety bond to stay
      payment of potential damages and interest arising from a judgment awarded to
      TRW
      by a jury during 2005 (see 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 and is included in interest
      income.





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





**Three
                Months Ended****March
                31,****2007**
            
            **2006**Weightedaverage common shares outstanding
            
            
            77,738
            
            
            84,025Dilutive
                effect of stock options outstanding using the treasury stock
                method
            
            
            1,012
            
            
            1,769Shares
                used in computing diluted net income per share
            
            
            78,750
            
            
            85,794





For
      the
      three months ended March 31, 2007 and 2006, approximately 6.7 million stock
      options and 4.7 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.





**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". This interpretation prescribes a model for the financial statement
      recognition, measurement, presentation and disclosure of uncertain tax positions
      taken or expected to be taken in income tax returns. See Note 13 for additional
      information, including the effects of adoption on the Company’s Condensed
      Consolidated Financial Statements.








6
 
 Table
            of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**




In
        September 2006, the FASB issued Statement 157, “Fair Value Measurements” (“SFAS
        157”). SFAS 157 establishes a framework for measuring fair value by providing
        a
        standard definition of fair value as it applies to assets and liabilities.
        SFAS
        157, which does not require any new fair value measurements, clarifies the





In
      February 2007, the FASB issued Statement 159, "The Fair Value Option for
      Financial Assets and Financial Liabilities ("SFAS 159"). The new Statement
      allows entities to choose, at specified election dates, to measure eligible
      financial assets and liabilities at fair value in situations in which they
      are
      not otherwise required to be measured at fair value. If a company elects the
      fair value option for an eligible item, changes in that item's fair value in
      subsequent reporting periods must be recognized in current earnings. SFAS 159
      also establishes presentation and disclosure requirements designed to draw
      comparison between entities that elect different measurement attributes for
      similar assets and liabilities. SFAS 159 is effective for fiscal years beginning
      after November 15, 2007. Early adoption is permitted subject to specific
      requirements outlined in the new Statement. The Company is currently evaluating
      the effect that the adoption of SFAS 159 will have on its financial position
      and
      results of operations.








**3.**  **SHARE-BASED
      COMPENSATION**





The
      company accounts for share-based compensation under the provisions of Statement
      of Financial Accounting Standard No. 123 (revised 2004), “Share-Based Payment”
("SFAS No. 123R"). Share-based compensation is measured at the grant date,
      based
      on the fair value of the award and is recognized over the employee's requisite
      service period. For further details regarding the Company's share-based
      compensation arrangements, refer to Note 7 of Notes to Consolidated Financial
      Statements included in the Company’s Annual Report on Form 10-K for the year
      ended December 31, 2006. The following table summarizes total share-based
      compensation included in the Condensed Consolidated Statement of
      Operations:


**Three
                Months Ended****March
                31,****2007**
            
            **2006**Cost
                of revenues
            
            $
            302
            
            $
            182Research
                and development
            
            
            479
            
            
            1,065Selling,
                general and administrative
            
            
            489
            
            
            1,109Pre-tax
                stock-based compensation expense
            
            
            1,270
            
            
            2,356Less
                income tax effect
            
            
            (147
            )
            
            (200
            )Net
                stock-based compensation expense
            
            $
            1,123
            
            $
            2,156





During
      the three months ended March 31, 2007, 694,010 stock options were granted at
      a
      weighted average fair value of $6.46 per share. During the three months ended
      March 31, 2006, 652,700 stock options were granted at a weighted average fair
      value of $8.40 per share. The fair value of the Company’s stock options granted
      under the Option Plans was estimated at the date of grant using the
      Black-Scholes option pricing model with the following weighted-average
      assumptions:


**Three
                Months Ended****March
                31,****2007**
            
            **2006**Expected
                term (years)
            
            
            6.0
            
            
            5.8Stock
                volatility
            
            
            52.4
            %
            
            59.5
            %Risk
                free interest rates
            
            
            4.6
            %
            
            4.8
            %Dividends
                during expected terms
            
            
            none
            
            
            none





As
      of
      March 31, 2007, there was $17.9 million of total unrecognized share-based
      compensation cost related to non-vested stock option awards which is expected
      to
      be recognized over a weighted-average period of 3.8 years. Total
      share-based compensation cost capitalized as part of inventory as of March
      31,
      2007 and December 31, 2006 was $162,000 and $225,000, respectively.





7
 
 Table
            of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**




**4.**  **INVESTMENTS**





Short-term
      investments consist primarily of liquid corporate debt instruments and are
      classified as available-for-sale securities and are stated at market value
      with
      unrealized gains and losses included in shareholders’ equity. Unrealized losses
      are charged against income when a decline in the fair market value of an
      individual security is determined to be other than temporary. Realized gains
      and
      losses on investments are included in other income or expense. Investments
      purchased with remaining maturity dates of greater than three months and less
      than 12 months are classified as short-term. Investments purchased with
      remaining maturity dates of 12 months or greater are classified either as
      short-term or as long-term based on maturities and the Company's intent with
      regards to those securities (expectations of sales and redemptions). A summary
      of investments at March 31, 2007 is as follows (in thousands):


**Amortized**
              **Cost**
            
            **Market**
              ******Value**
            
            **Unrealized**
              **Holding**
              **Gains**
            
            **Unrealized**
              **Holding**
              **Losses**Short-term
                investments
            
            $
            17,061
            
            $
            17,027
            
            $
            --
            
            $
            34




**5.**  **INVENTORIES**





Inventories
      consist of the following (in thousands):


**March
                31,**
            
            **December
                31,****2007**
            
            **2006**Finished
                goods
            
            $
            14,631
            
            $
            16,062Work
                in process
            
            
            19,571
            
            
            19,430Raw
                materials
            
            
            1,998
            
            
            1,691$
            36,200
            
            $
            37,183




**6.**  **OTHER
      CURRENT LIABILITES**





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


**March
                31,**
            
            **December
                31,****2007**
            
            **2006**Accrued
                current restructuring expenses
            
            $
            1,618
            
            $
            1,574Accrued
                workers compensation and health insurance
            
            
            1,456
            
            
            1,339Accrued
                litigation and related interest expense
            
            
            10,251
            
            
            10,101Accrued
                compensation
            
            
            5,336
            
            
            7,587Accrued
                commissions
            
            
            1,457
            
            
            1,435All
                other current accrued liabilities
            
            
            553
            
            
            528Total
                other current liabilities
            
            $
            20,671
            
            $
            22,564








**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 borrowings under the revolving line of credit
      at March 31, 2007 and December 31, 2006, and there were $875,000 in standby
      letters of credit outstanding. Borrowings under the revolving line of credit
      bear interest rates of, at the Company's election, the prime rate (8.25% at
      March 31, 2007), or the bank's revolving offshore rate, which approximates
      LIBOR (5.4% at March 31, 2007) plus 2.0%. The agreement contains certain
      restrictive covenants. The Company was in compliance with all such covenants
      at
      March 31, 2007. On April 24, 2007, the revolving line of credit agreement was
      renewed and has been extended through June 30, 2009.





8
 
 Table
            of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**











**8.**  **SIGNIFICANT
      CUSTOMERS**





During
      the three months ended March 31, 2007, two customers, both worldwide
      distributors, accounted for $12.0 million (19%) and $7.8 million (12%) of net
      revenues, respectively. During the three months ended March 31, 2006, two
      customers, an Asian based stocking representative and a worldwide distributor,
      accounted for $8.6 million (13%) and $8.3 million (12%) of net revenues,
      respectively.





As
      of
      March 31, 2007, three customers, two worldwide distributors and an
      Asian-based stocking representative accounted for 17%, 13% and 11%,
      respectively, of total accounts receivable. As of December 31, 2006, the
      same three customers accounted for 13%, 20% and 12%, respectively, of total
      accounts receivable.








**9.**  **COMPREHENSIVE
      INCOME**





Comprehensive
      income, which was comprised of the Company's net income for the periods and
      changes in unrealized gains or losses on investments, net of income taxes,
      was
      $17.9 million and $8.7 million for the three months ended March 31, 2007 and
      2006, respectively.








**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. SFAS No. 131 also
      establishes standards for related disclosures about products and services and
      geographic areas. Operating segments are identified as components of an
      enterprise about which separate discrete financial information is available
      for
      evaluation by the chief operating decision maker. The Company has two reportable
      segments: standard products and other product revenues, which consist primarily
      of custom and foundry products revenues and revenues from the license of
      patents. The chief operating decision maker evaluates segment performance based
      on revenue. Accordingly, all expenses are considered corporate level activities
      and are not allocated to segments. Therefore, it is not practical to show profit
      or loss by reportable segments. Also, the chief operating decision maker does
      not assign assets to these segments. Consequently, it is not practical to show
      assets by reportable segments.





**Net
                Revenues by Segment**(dollars
                in thousands)
            
            **Three
                Months Ended****March
                31,****2007**
            
            **2006**Net
                Revenues:Standard
                Products
            
            $
            58,283
            
            $
            65,007Other
                Products
            
            
            4,830
            
            
            3,144Total
                net revenues
            
            $
            63,113
            
            $
            68,151As
                a
                Percentage of Total Net Revenues:Standard
                Products
            
            
            92
            %
            
            95
            %Other
                Products
            
            
            8
            
            
            5Total
                net revenues
            
            
            100
            %
            
            100
            %








9
 
 Table
            of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**








**11.**  **LITIGATION
      AND OTHER CONTINGENCIES**





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





On
      February 26, 1999, the Lemelson Medical, Education & Research Foundation
      (the “Lemelson Partnership”) filed a complaint which was served on the Company
      on June 15, 1999, entitled Lemelson Medical, Education & Research
      Foundation, Limited Partnership v. Lucent Technologies Inc., et al. in the
      United States District Court in Phoenix, Arizona, against eighty-eight
      defendants, including the Company, alleging infringement of a number of Lemelson
      Foundation patents. The complaint in the lawsuit sought unspecified compensatory
      damages, treble damages and attorneys' fees, as well as injunctive relief
      against further infringement of the Lemelson patents at issue. In defense of
      this action, the Company was part of a Joint Defense Group consisting of a
      number of companies who were opposing the law suit together (the "Joint Defense
      Group"). On January 17, 2007, the parties entered into an agreement to settle
      the litigation for payment of a mutually agreeable sum, as a result of which
      the
      four companies in the Joint Defense Group have acquired a package license under
      the Lemelson patents. During the fourth quarter of 2006, Micrel accrued $120,000
      to other operating expense for the Company's portion of the liability under
      this
      settlement agreement. This amount was paid prior to March 31, 2007.





On
      December 27, 2002, the Company filed a complaint against TRW, Inc. (“TRW”)
      entitled Micrel, Incorporated v. TRW, Inc., dba TRW Automotive Electronics
      Group, in the United States District Court, Northern District of Ohio, Eastern
      Division, alleging various causes of action relating to breach of a relationship
      surrounding the development of certain custom products by Micrel for TRW. In
      this lawsuit, Micrel alleged that TRW breached various agreements to assist
      in
      Micrel’s development of, and to purchase, certain Application Specific
      Integrated Circuits. The complaint sought compensatory damages, attorneys’ fees
      and costs 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 other current liabilities in the
      Company’s second quarter 2005 financial statements. On January 13, 2006, the
      Company filed a notice of its intent to appeal the jury’s verdict. On February
      23, 2006, the Company posted a surety bond in the amount of $10.5 million in
      the
      United States District Court, Northern District of Ohio, to stay payment of
      damages and potential interest awarded to TRW (see Notes 1 and 7). On April
      24,
      2007, a hearing was held in the United States Court of Appeals for the Sixth
      Circuit, at which time the Court heard oral argument on the Appeal. On May
      4,
      2007, the Court of Appeals issued its ruling affirming the jury’s verdict. The
      Company expects to make payment on the award during the second quarter of
      2007.










10
 
 Table
            of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**





On
      April
      21, 2003, the Company filed a complaint against its former independent public
      accountants Deloitte & Touche LLP (“Deloitte”) entitled Micrel, Incorporated
      v. Deloitte & Touche LLP in the Superior Court of the State of California,
      County of Santa Clara, alleging various causes of action relating to certain
      professional advice received by Micrel from Deloitte. In this lawsuit, Micrel
      alleged that Deloitte negligently rendered services as accountants to Micrel,
      breached certain agreements with Micrel by failing to perform services using
      ordinary skill and competence and in conformance with generally accepted
      principles for such work and made certain false representations upon which
      Micrel justifiably relied. Deloitte has denied all allegations in the complaint.
      The complaint sought compensatory damages, costs of suit and such other relief
      that the court may deem just and proper. On February 23, 2007, the parties
      entered into a Settlement Agreement and Mutual Releases. Under the terms of
      the
      Agreement, the parties agreed to dismiss with prejudice the pending litigation and
      Deloitte paid to Micrel a settlement amount of $15.5 million. The Company
      recorded the $15.5 million settlement amount as other income in the quarter
      ended March 31, 2007.





On
      November 11, 2004, the Company filed a complaint against Monolithic Power
      Systems (“MPS”), entitled Micrel, Inc. v. Monolithic Power Systems, in the
      United States District Court, Northern District of California (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 added causes of action for
      statutory and common law misappropriation of Micrel’s trade secrets, breach of
      confidentiality agreements by Hsing and Moyer, and violation of California’s
      Unfair Competition Law. On September 21, 2006, the Company and MPS entered
      into
      a Settlement Agreement, agreeing to dismiss all claims and counterclaims in
      the
      litigation with prejudice. Micrel also agreed to release MPS and its chief
      executive officer Michael Hsing and its chief design engineer James Moyer from
      all claims for any alleged trade secret claims based on any confidential
      information. In addition, Micrel licensed U.S. Patent Nos. 5,517,046 and
      5,556,796 to MPS. Under the terms of the agreement MPS agreed to pay a license
      fee of $3.0 million of which $1.0 million was paid in September 2006, $1.0
      million was paid in December 2006 and the remaining $1.0 million balance will
      be
      paid by January 2008. In the third quarter of 2006 the Company recorded $2.9
      million in net revenues representing the present value of the license payments
      from MPS.





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





With
      the
      exception of the previously recorded operating expenses, the Company believes
      that the ultimate outcome of the legal actions discussed will not result in
      a
      material adverse effect on the Company's financial condition, results of
      operation or cash flows, and the Company believes it is not reasonably possible
      that a material loss has been incurred. However, litigation is subject to
      inherent uncertainties, and no assurance can be given that the Company will
      prevail in these lawsuits. Accordingly, the pending lawsuits, as well as
      potential future litigation with other companies, could result in substantial
      costs and diversion of resources and could have a material adverse effect on
      the
      Company’s financial condition, results of operations or cash flows.











11
 
 Table
            of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**




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 2006, the Company's Board of Directors approved a $50 million share
      repurchase program for calendar year 2007. Shares of common stock purchased
      pursuant to the repurchase program are cancelled from outstanding shares upon
      repurchase and credited to an authorized and un-issued reserve account, and
      are
      intended to reduce the number of outstanding shares of Common Stock to increase
      shareholder value and offset dilution from the Company's stock option plans,
      employee stock purchase plan and 401(k) plan. During the three months ended
      March 31, 2007, the Company repurchased 830,100 shares of its common stock
      for
      $8.8 million.








**13.**  **INCOME
      TAXES**





The
      income tax provision for the three months ended March 31, 2007 and 2006 was
      based on the Company’s estimated annual effective tax rate of 36.5% and 40.8%,
      respectively, of pretax income. This decrease in the estimated annual effective
      tax rate results from an estimated decrease in non-deductible share-based
      compensation expense combined with estimated increased tax benefits from the
      federal research and development credit and federal qualified production
      activity deductions. The income tax provision for such interim periods differs
      from taxes computed at the federal statutory rate primarily due to the effect
      of
      non-deductible share-based compensation expense, state income taxes, federal
      and
      state research and development credits and federal qualified production activity
      deductions.





Effective
      January 1, 2007, the Company adopted the provisions of FIN No. 48. The adoption
      of FIN No. 48 did not result in a cumulative effect adjustment to retained
      earnings as of January 1, 2007. Consistent with the provisions of FIN No. 48,
      the company reclassified $4.4 million of current income tax liabilities
      (classified net of income tax receivable as of December 31, 2006 and included
      in
      prepaid expenses and other in the Condensed Consolidated Balance Sheet) as
      follows: $1.9 million increase to non-current income taxes payable and $2.5
      million decrease to non-current deferred tax assets. Upon adoption, the gross
      liability for income taxes associated with uncertain tax positions at January
      1,
      2007 was $6.6 million. This gross liability can be reduced by $2.2 million
      of
      offsetting tax benefits primarily associated with the federal effects of
      potential state tax exposures.





As
      of
      March 31, 2007, the gross liability for uncertain tax positions was $7.0 million
      and the net liability, reduced for the federal effects of potential state tax
      exposures, was $4.6 million. If these uncertain tax positions are sustained
      upon
      tax authority audit, or otherwise become certain, the net $4.6 million would
      favorably affect the company’s tax provision in such future periods. The company
      does not anticipate a significant change to the net liability for uncertain
      income tax positions within the next 12 months.





The
      Company continues to recognize interest and penalties related to income tax
      matters as part of the income tax provision. As of January 1, 2007 and March
      31,
      2007, the Company had $140,000 and $164,000, respectively, accrued for interest
      and $0 accrued for penalties for both periods. These accruals are included
      as a
      component of the of non-current income taxes payable.








12
 
 Table
            of Contents
 **MICREL,
            INCORPORATED**
 **NOTES
            TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**
 **(Unaudited)**




The
        Company is required to file U.S. federal income tax returns as well as income
        tax returns in various states and foreign jurisdictions. The Company may
        be
        subject to examination by the Internal Revenue Service (“IRS”) for calendar
        years 2002 and forward. Significant state tax jurisdictions include California,
        New York and Texas, and generally, the Company is subject to routine examination
        for years 2001 and forward in these jurisdictions. In addition, any research
        and
        development credit carryforwards that were generated in prior years and utilized
        in these years may also be subject to examination by respective state taxing
        authorities. Generally, the Company is subject to routine examination for
        years
        2000 and forward in various immaterial foreign tax jurisdictions in which
        it
        operates.
 
 Deferred
        tax assets and liabilities result primarily from temporary differences between
        book and tax bases of assets and liabilities, state and federal research
        and
        development credit carryforwards and state manufacturers credit carryforwards.
        The Company had net current deferred tax assets of $24.1 million and net
        long-term








**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)





ContractualFacility
                Costs
            
            Other
              Disposal
              Costs
            
            TotalBalance
                December 31, 2005
            
            
            1,399
            
            
            360
            
            
            1,7592006Charges
            
            
            117
            
            
            152
            
            
            2692006Uses
            
            
            (259
            )
            
            (195
            )
            
            (454
            )Balance
                December 31, 2006
            
            
            1,257
            
            
            317
            
            
            1,5742007Charges
            
            
            44
            
            
            --
            
            
            442007Uses
            
            
            --
            
            
            --
            
            
            --Balance
                March 31, 2007
            
            $
            1,301
            
            $
            317
            
            $
            1,618


All
      of
      the $1.6 million in accrued restructuring costs has been included within other
      current liabilities as of March 31, 2007. Actual future costs may be different
      than these estimates and could require an adjustment to the restructuring
      accrual in the period such determination is made.








**15.**  **SUBSEQUENT
      EVENTS**





On
      April
      24, 2007, the Company's Board of Directors declared a $0.03 per common share
      cash dividend, payable May 30, 2007 to shareholders of record on May 8, 2007.
      The cash dividend payout by the Company on May 8, 2007 is expected to be
      approximately $2.3 million.





On
      April
      24, 2007, the Company renewed its $6 million revolving line of credit from
      a
      commercial bank, extending it through June 30, 2009 (see Note 7.)





On
      May 4,
      2007, the United States Court of Appeals issued its ruling affirming the jury’s
      verdict in the lawsuit entitled Micrel, Incorporated v. TRW (see Note 11),
      which
      previously awarded damages for the benefit of TRW in the amount of $9.3 million.
      These damages have been previously accrued by the Company in its second quarter
      2005 financial statements. The Company expects to make payment on the award
      during the second quarter of 2007.







13
 
 Table
            of Contents
 **ITEM
                2.**  **MANAGEMENT'S
                DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**
 **RESULTS
                OF OPERATIONS**








**Overview**





*The
      statements contained
      in this Report on Form 10-Q that are not purely historical are forward-looking
      statements within the meaning of Section 27A of the Securities Act of 1933
      and
      Section 21E of the Securities Exchange Act of 1934, as amended,*  *including
      statements regarding the Company’s expectations, hopes, intentions or strategies
      regarding the future. Forward-looking statements include, but are not limited
      to
      statements regarding: future revenues and dependence on standard products sales
      and international sales; the levels of international sales; future products
      or
      product development; statements regarding fluctuations in the Company’s results
      of operations; future returns and price adjustments and allowance; future
      uncollectible amounts and doubtful accounts allowance; future products or
      product development; future research and development spending and the Company’s
      product development strategy; the Company’s markets, product features and
      performance; product demand and inventory to service such demand; competitive
      threats and pricing pressure; the effect of dependence on third parties; the
      Company’s future use and protection of its intellectual property; future
      expansion or utilization of manufacturing capacity; future expenditures; current
      or future acquisitions; the ability to meet anticipated short term and long
      term
      cash requirements; effect of changes in market interest rates on investments;
      the Company’s need and ability to attract and retain certain personnel; the cost
      and outcome of litigation and its effect on the Company; the future realization
      of tax benefits; and share based incentive awards and expectations regarding
      future stock based compensation expense and estimates made under SFAS No. 123R.
      In some cases, forward-looking statements can be identified by the use of
      forward-looking terminology such as "believe," "estimate," "may," "can," "will,"
      "could," "would," "intend," "objective," "plan," "expect," "likely,"
      "potential," "possible" or "anticipate" or the negative of these terms or other
      comparable terminology. All forward-looking statements included in this document
      are based on information available to the Company on the date of this report,
      and the Company assumes no obligation to update any such forward-looking
      statements. These statements are subject to risks and uncertainties that could
      cause actual results and events to differ materially from those expressed or
      implied by such forward-looking statements. Additional factors that may affect
      operating results are contained within the Company's Form 10-K for the year
      ended December 31, 2006.*




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




To
      enhance the
      readers' understanding of the Company's performance, the following chronological
      overview of the Company's results for the quarterly periods from January 1,
      2006
      through March 31, 2007 have been provided.




In
      the first quarter
      of 2006, broad based strength in customer demand, combined with continued lean
      channel inventories resulted in the highest quarterly booking level for Micrel
      since calendar year 2000. 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.













14
 
 Table
            of Contents
 **MANAGEMENT'S
          DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**
 **RESULTS
          OF OPERATIONS (CONTINUED)**








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 competitive lead times to our customers. The sequential
      increase in production capacity utilization added approximately one percentage
      point to first quarter gross margin.





In
      the
      second quarter of 2006, overall order rates moderated from the levels
      experienced in the first quarter. Orders from the Company’s sell-through
      distributors declined in the second quarter of 2006 as compared to levels in
      the
      first quarter of 2006. Orders from direct OEM customers in the second quarter
      increased sequentially in both North America and Europe, while bookings from
      Asia-based OEM’s decreased from the first quarter of 2006, primarily due to
      lower demand from customers serving the computing and handset end markets.
      Second quarter 2006 net revenues of $70.2 million increased by 3% sequentially
      and were 13% above the prior year period. The growth in net revenues continued
      to be led by demand from customers serving the wireline communications end
      market. This growth was partially offset by continued weakness in demand from
      Korean-based customers serving the wireless handset end market as they
      experienced a sequential decline in handset shipments during the second
      quarter.





Second
      quarter 2006 gross margin of 57.3% declined by 1.2 percentage points as compared
      to the first quarter of 2006 but was up 5.5 percentage points from the 51.8%
      reported for the comparable period in 2005. The sequential decline in gross
      margin was primarily the result of normal fluctuations in sales mix and changes
      in inventory combined with a greater unfavorable impact from stock compensation
      expense. Operating margin of 19.7% was flat on a sequential basis and up from
      1.3% in the second quarter of 2005. Operating income for the second quarters
      of
      2006 and 2005 includes $935,000 and $9.3 million, respectively, in accrued
      litigation expense (see Note 11 of Notes to Consolidated Financial Statements.)
      The Company’s on-hand inventories increased by $1.5 million on a sequential
      basis. The majority of the second quarter inventory growth was for purchased
      Ethernet product materials driven by increased customer demand coupled with
      long
      third party foundry cycle times. Micrel’s channel inventories at both Asia-based
      stocking representatives and sell-through distributors increased on a sequential
      basis in the second quarter. Resales of the Company’s products through the
      distribution channel increased by approximately 10% in the second quarter of
      2006, while sales through Asian-based stocking representatives were roughly
      flat
      in the second quarter. Overall inventory turns for Micrel’s sell-through
      distributors and Asian-based stocking representatives remained within historical
      average levels at the end of the second quarter of 2006.





In
      the
      third quarter of 2006, overall order rates declined on a sequential basis,
      primarily because the Company’s sell-through distributors reduced orders and
      consumed backlog in an attempt to control inventory levels. Orders from direct
      OEM customers increased slightly on a sequential basis in the third quarter
      primarily due to higher bookings from customers serving the wireless handset
      and
      computing end markets, and increased foundry orders. Third quarter 2006 net
      revenues of $73.5 million increased by 5% sequentially and were 18% above the
      prior year period. Continued strength from the industrial end market, combined
      with a rebound in the Company’s wireless handset business, led the product
      revenue growth in the third quarter. Third quarter resales of the Company’s
      products through the distribution channel increased slightly in what is
      traditionally a seasonally slow period for North American and European
      distributors. Sales to the wireline communications markets slowed in the quarter
      after rapid growth in the first half of 2006. Third quarter net revenues
      included $2.9 million associated with a patent license that was previously
      under
      litigation.










15
 
 Table
            of Contents
 **MANAGEMENT'S
            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**
 **RESULTS
            OF OPERATIONS (CONTINUED)**





Third
      quarter
      2006 gross margin of 58.6% matched the highest level in the Company’s history.
      Operating profit was $18.1 million and operating margin improved to 24.6% of
      sales. The settlement of intellectual property matters, and related licensing
      revenues and expenses, resulted in $2.2 million of net pre-tax operating income
      in the third quarter, increasing third quarter 2006 net income by $0.02 per
      diluted share. The Company’s September ending on-hand inventory increased $2.6
      million from the second quarter. The majority of the inventory growth was for
      purchased material for Ethernet products, as manufacturing cycle times at the
      foundries that manufacture Ethernet products declined during the third quarter
      while end demand for certain Ethernet products decreased. Channel inventories
      at
      Micrel’s Asia-based stocking representatives remained flat from the end of the
      second quarter, while channel inventories at the Company’s sell-through
      distributors decreased on a sequential basis after growing in the previous
      three
      quarters.





During
      the fourth quarter of 2006 customers reduced inventory levels, which management
      believes was caused by uncertain demand for their end products and the
      perception that semiconductor components were readily available. Order rates
      were slightly lower than the third quarter, and remained below fourth quarter
      2006 revenues. Bookings from the Company’s sell-through distributors rebounded
      during the fourth quarter, which the Company believes is an indication that
      distributors inventories are in balance with end demand. Fourth quarter net
      revenues were $64.5 million, a decrease of 12% from third quarter revenues
      of
      $73.5 million and 1% lower than revenues of $65.1 million recorded in the
      year-ago period. The sequential decline in sales resulted primarily from reduced
      demand from wireless handset manufacturers combined with lower distribution
      revenues and the absence of patent license revenue. Gross margin of 57.2%
      declined from the previous quarter primarily due to lower revenues and the
      impact of reduced manufacturing volumes leading to less absorption of fixed
      cost. Fourth quarter operating profit was $12.4 million or 19.2% of sales.
      The
      Company’s inventory was flat on a sequential basis as the Company reduced
      manufacturing activity in response to reduced demand. Channel inventories also
      remained roughly flat from third quarter levels.





During
      the first quarter of 2007, customers continued to control their inventories
      closely. However, the order rates the Company experienced during the quarter
      suggest that customer and channel inventories have fallen to levels consistent
      with current end demand. Micrel’s first quarter bookings increased in all major
      geographic regions resulting in a 18% growth in orders compared with fourth
      quarter 2006 levels. The
      total
      overall amount of new orders booked in the first quarter exceeded revenues.
      The
      sequential improvement in bookings was driven by higher order levels from
      customers serving the high speed communications, wireless handset and industrial
      end markets. Order
      rates increased for both OEM customers and sell-through distributors, while
      bookings from Micrel’s Asian-based sell-in distributors were flat from Q4
      levels. First quarter revenues were $63.1 million, 2% less than the $64.5
      million recorded in the fourth quarter 2006, and 7% lower than the $68.2 million
      posted in the first quarter of 2006. Seasonal declines in sales to customers
      serving the computing, wireless handset and consumer end markets were partially
      offset by higher resales through the Company’s sell-through distributors. Gross
      margin increased sequentially to 58.1% despite lower revenues and inventory
      reduction due to a combination of lower manufacturing costs and a higher gross
      margin sales mix. First quarter operating profit was $11.3 million, or 18%
      of
      sales. The Company’s on-hand inventory declined on a sequential basis. Overall
      channel inventories remained relatively flat from the end of 2006, with
      increases at the Company’s sell-through distributors offset by lower inventory
      levels at Micrel’s sell-in distributors.





The
      Company derives a substantial portion of its net revenues from standard
      products. For the three month periods ended March 31, 2007 and 2006 the
      Company's standard products sales accounted for 92% and 95% of the Company's
      net
      revenues, respectively. The Company believes that a substantial portion of
      its
      net revenues in the future will depend upon standard products sales, although
      such sales as a proportion of net revenues may vary as the Company adjusts
      product output levels to correspond with varying economic conditions and demand
      levels in the markets which it serves. The standard products business is
      characterized by short-term orders and shipment schedules, and customer orders
      typically can be canceled or rescheduled without significant penalty to the
      customer. Since most standard products backlog is cancelable without significant
      penalty, the Company typically plans its production and inventory levels based
      on internal forecasts of customer demand, which is highly unpredictable and
      can
      fluctuate substantially. In addition, the Company is limited in its ability
      to
      reduce costs quickly in response to any revenue shortfalls.













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            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**
 **RESULTS
            OF OPERATIONS (CONTINUED)**





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





**Critical
      Accounting Policies and Estimates**





The
      financial statements included in this Form 10-Q and discussed within this
      Management's Discussion and Analysis of Financial Condition and Results of
      Operations have been prepared in accordance with accounting principles generally
      accepted in the United States of America. Preparation of these financial
      statements requires management to make estimates and assumptions that affect
      the
      reported amounts of assets and liabilities at the date of the financial
      statements and the reported amounts of revenues and expenses during the
      reporting period. On an on-going basis, management evaluates its estimates
      and
      judgments. Management bases its estimates and judgments on historical experience
      and on various other assumptions that are believed to be reasonable under the
      circumstances, the results of which form the basis for making judgments about
      the carrying values of assets and liabilities that are not readily apparent
      from
      other sources. Actual results may differ from these estimates under different
      assumptions or conditions. The Company considers certain accounting policies
      related to revenue recognition and valuation of receivables, inventory
      valuation, share-based compensation, income taxes, and litigation to be critical
      to the fair presentation of its financial statements. For a detailed discussion
      of the Company's significant accounting policies, see Note 1 of Notes to
      Consolidated Financial Statements in Item 14 of the Company's Annual Report
      on
      Form 10 K for the year ended December 31, 2006.





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





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








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            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**
 **RESULTS
            OF OPERATIONS (CONTINUED)**





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


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





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





*Income
      Taxes.* Deferred
      tax assets and liabilities result primarily from temporary timing differences
      between book and tax valuation of assets and liabilities, and state research
      and
      development credit carryforwards. The Company must regularly assess the
      likelihood that future taxable income levels will be sufficient to ultimately
      realize the tax benefits of these deferred tax assets. As of March 31, 2007,
      the
      Company believes that future taxable income levels will be sufficient to realize
      the tax benefits of these deferred tax assets and has not established a
      valuation allowance. Should the Company determine that future realization of
      these tax benefits is not more likely than not, a valuation allowance would
      be
      established, which would increase the Company's tax provision in the period
      of
      such determination.





Effective
      January 1, 2007, the Company adopted the provisions of FASB Interpretation
      (FIN)
      No. 48, Accounting for Uncertainty in Income Taxes - an interpretation of FASB
      Statement No. 109. FIN No. 48 contains a two-step approach to recognizing and
      measuring uncertain tax positions accounted for in accordance with SFAS No.
      109.
      The first step is to evaluate the tax position for recognition by determining
      if
      the weight of available evidence indicates it is more likely than not that
      the
      position will be sustained on audit, including resolution of related appeals
      or
      litigation processes, if any. The second step is to measure the tax benefit
      as
      the largest amount which is more than 50% likely of being realized upon ultimate
      settlement. The Company considers many factors when evaluating and estimating
      its tax positions and tax benefits, which may require periodic adjustments
      and
      which may not accurately anticipate actual outcomes. See Note 13 of Notes to
      Condensed Consolidated Financial Statements for additional information regarding
      the adoption of FIN No. 48.





*Litigation.* The
      semiconductor industry is characterized by frequent litigation regarding patent
      and other intellectual property rights. The Company has recently settled cases
      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.








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            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**
 **RESULTS
            OF OPERATIONS (CONTINUED)**




**Results
      of Operations**





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


**Three
                Months Ended****March
                31,****2007**
            
            **2006**Net
                revenues
            
            
            100.0
            %
            
            100.0
            %Cost
                of revenues
            
            
            41.9
            
            
            41.5Gross
                profit
            
            
            58.1
            
            
            58.5Operating
                expenses:Research
                and development
            
            
            21.0
            
            
            19.1Selling,
                general and administrative
            
            
            19.3
            
            
            19.7Restructuring
                expense
            
            
            --
            
            
            --Total
                operating expenses
            
            
            40.3
            
            
            38.8Income
                from operations
            
            
            17.8
            
            
            19.7Other
                income (expense):Interest
                income
            
            
            2.4
            
            
            2.1Interest
                expense
            
            
            (0.3
            )
            
            (0.2
            )Litigation
                settlement and other income, net
            
            
            24.6
            
            
            --Total
                other income (expense)
            
            
            26.7
            
            
            1.9Income
                before income taxes
            
            
            44.5
            
            
            21.6Provision
                for income taxes
            
            
            16.2
            
            
            8.8Net
                income
            
            
            28.3
            %
            
            12.8
            %





*Net
      Revenues.* For the
      three months ended March 31, 2007, net revenues decreased 7% to $63.1 million
      from $68.2 million for the same period in the prior year. This decrease was
      due
      to decreased standard products revenues, which was partially offset by increased
      other products revenues.




Standard
      products revenues for the three months ended March 31, 2007 decreased 10% to
      $58.3 million from $65.0 million for the same period in the prior year. This
      decrease resulted primarily from decreased unit shipments of standard products
      to the computer products and networking communications end markets.




Other
      products, which consist primarily of custom and foundry products revenues and
      revenues from the license of patents, for the three months ended March 31,
      2007
      increased 54% to $4.8 million from $3.1 million for the same period in the
      prior
      year. This increase resulted primarily from increased unit shipments of 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. During 2006, the Company averaged approximately 50% to 55% turns
      fill per quarter. The first quarter 2007 turns fill rate for OEM and stocking
      representatives remained in this same range.





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





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            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**
 **RESULTS
            OF OPERATIONS (CONTINUED)**









International
      sales represented
      68% and 73% of net revenues for the three months ended March 31, 2007 and 2006,
      respectively. On a dollar basis, international sales decreased 14% to
      $42.7 million for the three months ended March 31, 2007 from $49.6
      million for the comparable period in 2006. This decrease resulted primarily
      from
      decreased shipments of standard products to the networking communications and
      computer products end markets, primarily in Asia.





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





*Share-Based
      Compensation* .
      Effective January 1, 2006, the Company adopted the fair value recognition
      provisions of SFAS No. 123R using the modified prospective transition method.
      The Company's results of operations for the three month periods ended March
      31,
      2007 and 2006 include $1.3 million and $2.4 million, respectively, of non-cash
      expense related to the fair value of share-based compensation awards (see Note
      3
      of Notes to Condensed Consolidated Financial Statements.)




*Gross
      Profit* .
      Gross
      profit is affected by a variety of factors including the volume of product
      sales, product mix, manufacturing capacity utilization, product yields and
      average selling prices. The Company's gross margin decreased to 58.1% for the
      three months ended March 31, 2007 from 58.5% for the comparable period in 2006.
      The decrease in gross margin resulted primarily from a decreased manufacturing
      capacity utilization.




*Research
      and Development
      Expenses.* Research
      and development expenses as a percentage of net revenues represented 21.0%
      and
      19.1%, for the three months ended March 31, 2007 and 2006, respectively. On
      a dollar basis, research and development expenses increased $214,000 or 2%
      to
      $13.3 million for the three months ended March 31, 2007 from $13.0 million
      for the comparable period in 2006. This increase was primarily due to increased
      prototype fabrication costs. The Company believes that the development and
      introduction of new products is critical to its future success and expects
      to
      continue its investment in research and development activities in the
      future.





*Selling,
      General and
      Administrative Expenses.* As
      a
      percentage of net revenues, selling, general and administrative expenses
      represented 19.3% and 19.7% for the three months ended March 31, 2007 and
      2006, respectively. On a dollar basis, selling, general and administrative
      expenses decreased $1.3 million or 9% to $12.1 million for the three months
      ended March 31, 2007 from $13.4 million for the comparable period in 2006.
      This decrease was primarily due to a decrease in outside legal fees as a result
      of the settlement of certain litigation (see Note 11 of Notes to Condensed
      Consolidated Financial Statements.)





*Other
      Income (Expense)* .
      Other
      income (expense) reflects interest income from investments in short-term
      investment grade securities and money market funds and other non-operating
      income, offset by interest expense incurred on term notes and accrued interest
      related to accrued litigation liabilities. For the three months ended
      March 31, 2007, other income includes $15.5 million in non-operating income
      resulting from the settlement of litigation (see Note 11 of Notes to Condensed
      Consolidated Financial Statements).





*Provision
      for Income Taxes.* The
      income tax provision for the three months ended March 31, 2007 and 2006 was
      based on the Company’s estimated annual effective tax rate of 36.5% and 40.8%,
      respectively, of pretax income. This decrease in the estimated annual effective
      tax rate results from an estimated decrease in non-deductible share-based
      compensation expense combined with estimated increased tax benefits from the
      federal research and development credit and federal qualified production
      activity deductions. The income tax provision for such interim periods differs
      from taxes computed at the federal statutory rate primarily due to the effect
      of
      non-deductible share-based compensation expense, state income taxes, federal
      and
      state research and development credits and federal qualified production activity
      deductions.





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








**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 March 31, 2007, consisted of cash and short-term investments
      of $127.2 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 $29.6 million in cash flows from operating activities for
      the
      three months ended March 31, 2007, primarily attributable to net income of
      $17.9 million plus additions for non-cash activities of $5.8 million (consisting
      primarily of $4.6 million in depreciation and amortization and $1.3 million
      in
      share-based compensation) combined with a $9.3 million increase in income taxes
      payable and a $1.6 million increase in deferred income on shipments to
      distributors, which was partially offset by a $2.7 million increase in accounts
      receivables, a $1.9 million decrease in other current liabilities and a $1.8
      million decrease in accounts payables.





For
      the
      three months ended March 31, 2006, the Company generated $12.2 million in
      cash flows from operating activities, primarily attributable to net income
      of
      $8.7 million plus additions for non-cash activities of $5.6 million (consisting
      primarily of $4.2 million in depreciation and amortization and $2.4 million
      in
      share-based compensation, partially offset by a $1.3 decrease in deferred income
      taxes) combined with $4.8 million increase in income taxes payable and a $3.4
      million increase in deferred income on shipments to distributors, which was
      partially offset by a $4.5 million increase in accounts receivables, a $2.4
      million increase in inventories, a $1.8 million decrease in other current
      liabilities and a $1.6 million decrease in accounts payables.





The
      Company used $5.3 million of cash in investing activities during the three
      months ended March 31, 2007, comprised of $3.3 million in purchases of property,
      plant and equipment and $2.0 million in purchases of short-term
      investments.





For
      the
      three months ended March 31, 2006, the Company generated $13.0 million of
      cash from investing activities, comprised of $18.9 million in proceeds from
      the
      sales of short-term investments which was partially offset by $3.3 million
      in
      purchases of property, plant and equipment and $2.6 million increase in
      restricted cash.





The
      Company used $6.4 million of cash in financing activities during the three
      months ended March 31, 2007 primarily for the repurchase of $8.8 million of
      the
      Company's common stock, which was partially offset by $2.5 million in proceeds
      from employee stock transactions.





For
      the
      three months ended March 31, 2006, the Company used $13.7 million of cash in
      financing activities primarily for the repurchase of $15.3 million of the
      Company's common stock, which was partially offset by $1.5 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 remainder
      of 2007 primarily for wafer fabrication and product testing and additional
      research and development related software and equipment. The Company is
      currently authorized by its Board of Directors to repurchase an additional
      $41
      million of its common stock through December 31, 2007. In addition, on April
      24,
      2007, the Company's Board of Directors declared a $0.03 per common share cash
      dividend, payable May 30, 2007 to shareholders of record on May 8, 2007. The
      cash dividend payout by the Company on May 8, 2007 is expected to be
      approximately $2.3 million. Since inception, the Company's principal sources
      of
      funding have been its cash from operations, bank borrowings and sales of common
      stock. The Company believes that its cash from operations, existing cash
      balances and short-term investments, and its credit facility will be sufficient
      to meet its cash requirements for 2007. In the longer term, the Company believes
      future cash requirements will continue to be met by its cash from operations,
      credit arrangements and future debt or equity financings as
      required.








**Recently
      Issued Accounting Standards**





Please
      refer to Note 2 of Notes to Condensed Consolidated Financial Statements for
      a
      discussion of the expected impact of recently issued accounting
      standards.





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            DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND**
 **RESULTS
            OF OPERATIONS (CONTINUED)**











**Contractual
      Obligations and Commitments**





As
      of
      March 31, 2007, the Company had the following contractual obligations and
      commitments (in thousands):




**Payments
                  Due By Period****Total**
              
              **Less
                  than**
                **1
                  Year**
              
              **1-3**
                **Years**
              
              **4-5**
                **Years**
              
              **After
                  5**
                **Years**Long-term
                  debt
              
              $
              41
              
              $
              41
              
              $
              —
              
              $
              —
              
              $
              —Operating
                  leases
              
              
              5,953
              
              
              1,830
              
              
              2,835
              
              
              1,288
              
              
              —Accrued
                  litigation liability
              
              
              10,251
              
              
              10,251
              
              
              —
              
              
              —
              
              
              —Open
                  purchase orders
              
              
              23,700
              
              
              23,700
              
              
              —
              
              
              —
              
              
              —Total
              
              $
              39,945
              
              $
              35,822
              
              $
              2,835
              
              $
              1,288
              
              $
              —




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





Borrowing
      agreements consisted of a $6.0 million revolving line of credit from a
      commercial bank. The revolving line of credit agreement includes a provision
      for
      the issuance of commercial or standby letters of credit by the bank on behalf
      of
      the Company. The value of all letters of credit outstanding reduces the total
      line of credit available. There were no borrowings under the revolving line
      of
      credit at March 31, 2007 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. On April 24, 2007, the revolving line
      of
      credit agreement was renewed and has been extended through June 30,
      2009.





Effective
      January 1, 2007, the Company adopted the provisions of FIN No. 48 (see Note
      13
      of Notes to Condensed Consolidated Financial Statements.) As of March 31, 2007,
      the liability for uncertain tax positions, net of federal impacts on state
      tax
      issues was $4.6 million, of which, none is expected to be paid within one year.
      Included in the $4.6 million is approximately $2.5 million which has not yet
      reduced income tax payments, and, therefore, has been netted against non-current
      deferred tax assets. For the remaining liability, the company is unable to
      make
      a reasonably reliable estimate when cash settlement with a taxing authority
      may
      occur.





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














22
 
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            of Contents





**ITEM
      3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
      RISK**





At
      March
      31, 2007, the Company held $17.0 million in short-term investments. Short-term
      investments consist primarily of liquid debt instruments and are classified
      as
      available-for-sale securities. Investments purchased with remaining maturity
      dates of greater than three months and less than 12 months are classified as
      short-term. Investments purchased with remaining maturity dates of 12 months
      or
      greater are classified as long-term. The short-term investments held at March
      31, 2007 are primarily fixed rate securities. These available-for-sale
      securities are subject to interest rate risk and will fall in value if market
      interest rates increase. If market interest rates were to increase immediately
      and uniformly by 10 percent from levels at March 31, 2007, the fair value of
      the
      short-term investments would decline by an immaterial amount. The Company
      generally expects to have the ability to hold its fixed income investments
      until
      maturity and therefore would not expect operating results or cash flows to
      be
      affected to any significant degree by the effect of a sudden change in market
      interest rates on short-term investments.





At
      March
      31, 2007, 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, as such term is defined
      under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934,
      as
      amended (the Exchange Act). In designing and evaluating the disclosure controls
      and procedures, management recognizes that any disclosure controls and
      procedures, no matter how well designed and operated, can provide only
      reasonable assurance of achieving the desired control objectives, and management
      necessarily is required to apply its judgment in evaluating the cost-benefit
      relationship of possible controls and procedures.





Under
      the
      supervision and with the participation of the Company's management, including
      its principal executive officer and principal financial officer, the Company
      conducted an evaluation of the effectiveness of its disclosure controls and
      procedures as of the end of the period covered by this report. Based on this
      evaluation, the Company's principal executive officer and principal financial
      officer have concluded that the Company's disclosure controls and procedures
      were effective at the reasonable assurance level as of March 31, 2007.




There
      has
      been no change in the Company’s internal control over financial reporting during
      the Company’s most recent fiscal quarter that has materially affected, or is
      reasonably likely to materially affect, the Company’s internal control over
      financial reporting.








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**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.





**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.




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




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




*The
      Company is reliant on
      certain key suppliers for wafer fabrication, circuit assembly and testing
      services.* Most of
      these suppliers are based outside of the U.S. The Company's supply could be
      interrupted as a result of any of the previously mentioned risk factors relating
      to international markets.





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**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 semiconductor suppliers, stocking representatives and
      distributors to carry inventory to meet short term requirements and minimize
      their investment in on-hand inventory.* Over
      the
      past several years, customers have worked to minimize the amount of inventory
      of
      semiconductors they hold. Original equipment manufacturers, distributors and
      contract manufacturers within the electronics industry have reduced their
      semiconductor component days of inventory on hand by approximately 20% over
      the
      past five years. Over the same five years, the industry average for
      semiconductor manufacturers inventory days on hand has increased by
      approximately 25%. As a consequence customers are generally providing less
      order
      backlog to the Company and other semiconductor suppliers, resulting in short
      order lead times and reduced visibility into customer demand. As a consequence
      of the short lead time environment and corresponding unpredictability of
      customer demand, the Company has increased its inventories approximately 20%
      over the past five years to maintain reliable service levels. If actual customer
      demand for the Company’s products is different from the Company’s estimated
      demand, product inventory may have to be scrapped, or the carrying value
      reduced, which could adversely affect the Company's business, financial
      condition, results of operations, or cash flows. In addition, the Company
      maintains a network of stocking representatives and distributors that carry
      inventory to service the volatile short-term demand of the end customer. Should
      the relationship with a distributor or stocking representative be terminated,
      the future level of product returns could be higher than the returns allowance
      established, which could negatively affect the Company’s revenues and results of
      operations.





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





*Many
      semiconductor companies face risks associated with a dependence upon third
      parties that manufacture, assemble or package certain of its
      products.* These
      risks include reduced control over delivery schedules and quality; inadequate
      manufacturing yields and excessive costs; the potential lack of adequate
      capacity during periods of excess demand; difficulties selecting and integrating
      new subcontractors; potential increases in prices; disruption in supply due
      to
      civil unrest, terrorism or other events which may occur in the countries in
      which the subcontractors operate; and potential misappropriation of the
      Company's intellectual property. The occurrence of any of these events may
      lead
      to increased costs or delay delivery of the Company's products, which would
      harm
      its profitability and customer relationships. Additionally, the Company's wafer
      and product requirements typically represent a relatively small portion of
      the
      total production of the third-party foundries and outside assembly, testing
      and
      packaging contractors. As a result, Micrel is subject to the risk that a foundry
      will provide delivery or capacity priority to other larger customers at the
      expense of Micrel, resulting in an inadequate supply to meet customer demand
      or
      higher costs to obtain the necessary product supply.





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





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





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





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





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





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





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*The
      Statement
      of Financial Accounting Standards No.123R, "Share-Based Payment” requires the
      Company to recognize the cost of employee services received in exchange for
      awards of equity instruments, based on the grant date fair value of those
      awards, in the financial statements.* As
      discussed in Note 3 of the Notes to Condensed Consolidated Financial Statements,
      the effect of the adoption of this accounting standard in 2006 has significantly
      increased stock based compensation expense in the current period and such
      expense is expected to continue in future periods. The requirement to recognize
      the cost of stock option awards as an expense in the financial statements has
      and will continue to reduce net income and earnings per share and may have
      an
      adverse affect on the value of the Company’s common stock. If the Company
      reduces the number of stock option grants to employees to minimize the cost
      associated with share based incentive awards, it will most likely be more
      difficult for the Company to hire and retain employees.





**Company-Specific
      Risks**





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





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





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




*An
      important part of the
      Company's strategy is to continue to focus on the market for high-speed
      communications ICs.* During
      the first six months of 2006, orders and revenues for the Company’s high-speed
      communications products increased. In the second half of 2006 and the first
      quarter of 2007, order rates declined and revenues moderated for these products.
      If weakness from the telecommunications infrastructure and wire line networking
      markets continues, resulting in further reduction in demand for the Company’s
      high bandwidth products, the Company's future revenue growth and profitability
      could be adversely affected.





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





*The
      Company
      is involved in litigation* .
      The
      Company is currently involved in one lawsuit where Micrel is the defendant.
       Litigation is by its nature unpredictable and costly. If the level of
      effort required to prosecute or defend the Company’s position in any lawsuit
      increases significantly, or if a judgment is entered against the Company, the
      resulting expense could adversely affect the Company’s financial condition,
      results of operations and cash flows.





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










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





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








**ITEM
      2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF
      PROCEEDS AND ISSUER REPURCHASES OF EQUITY SECURITIES**





**Dividend
      Policy**




On
      April 24, 2007, the
      Company's Board of Directors declared a $0.03 per common share cash dividend,
      payable May 30, 2007 to shareholders of record on May 8, 2007.





**Issuer
      Repurchases of Equity Securities**




In
      November 2006, the
      Company's Board of Directors approved a $50 million share repurchase program
      for
      calendar year 2007. Shares of common stock purchased pursuant to the repurchase
      program are cancelled from outstanding shares upon repurchase and credited
      to an
      authorized and un-issued reserve account, and are intended to reduce the number
      of outstanding shares of Common Stock to increase shareholder value and offset
      dilution from the Company's stock option plans, employee stock purchase plan
      and
      401(k) plan. Repurchases of the Company's common stock during 2007 were as
      follows:


Period
            
            Total
                Number ofShares Purchased
            
            Average
                Price
              Paid
                Per Share
            
            Total
                Number of Shares Purchased as Part of Publicly Announced
              Plans
                or Programs
            
            Maximum
                Dollar Value of Shares that May Yet be Repurchased Under the Plans
                orPrograms
                ($000)January
                2007
            
            
            380,300
            
            $
            10.22
            
            
            380,300
            
            $
            46,112February
                2007
            
            
            261,800
            
            $
            10.61
            
            
            261,800
            
            $
            43,334March
                2007
            
            
            188,000
            
            $
            11.47
            
            
            188,000
            
            $
            41,177Total
            
            
            830,100
            
            $
            10.63
            
            
            830,100








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**ITEM
      6. EXHIBITS**





Exhibit
                No.
            Description31
            Certifications
                of the Company’s Chief Executive Officer and Chief Financial Officer
                pursuant to Section 302 of the Sarbanes-Oxley Act of 200232
            Certifications
                of the Company’s Chief Executive Officer and Chief Financial Officer
                pursuant to Section 906 of the Sarbanes-Oxley Act of
                2002








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**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:
                May 9, 2007
            By/s/ Richard D. Crowley, Jr.Richard
                D. Crowley, Jr.Vice
                President, Finance andChief
                Financial Officer(*Authorized
                Officer and**Principal
                Financial Officer)*














30