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UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission File Number 0-24758

Micro Linear Corporation

(Exact name of Registrant as specified in its charter)

Registrant’s telephone number, including area code:

Securities registered pursuant to Section 12(b) of the Act:

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value per share

(Title of Class)

     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 þ          No o

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

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

      The aggregate market value of the Common Stock held by non-affiliates of the Company, as of June 28, 2002 (the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing price on the Nasdaq National Market on such date), was approximately $32,211,049. Shares of Common Stock held by each executive officer and director and shares held by other individuals and entities based on Schedule 13G filings have been excluded, in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

      The number of shares of the Registrant’s Common Stock outstanding as of March 15, 2003, net of shares held in treasury, was 12,195,298.

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PART I

      When used in this Report, the words “expects”, “anticipates”, “estimates”, “believes”, “plans”, and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods and include statements regarding the growth of markets for our digital wireless solutions, types of radios and basebands, our ability to become a leading provider of wireless solutions, our ability to become a major provider of 5.8 GHz transceivers and power amplifiers, our ability to offer a complete semiconductor suite or modular solution to our customer base, our ability to establish strategic relationships with industry leading companies and the benefits, if any, of such relationships, our ability to develop RF modules and the benefits and market acceptance of such products, our ability to maintain a competitive market advantage in the delivery of our products, our beliefs regarding the growth of the market for wireless consumer electronics, communications and industrial products, the potential features and benefits of our products, including our transceivers, new wireless products for the industrial segment, pre-engineered radio solutions in modular form and silicon media conversion devices for Ethernet networks, the sources of our future revenue and concentration of customers, the competitive advantages of our core technologies and our dependence on such technology to succeed, the advantages of our use of outside foundries, our ability to provide the highest performance and most cost effective solutions to our customers, expected expenses, including research and development and selling, general and administrative functions, our ability to compete favorably in new product introduction, innovation, quality, reliability and performance, our dependence on our workforce, our potential to meet our customers’ needs, including helping them reduce their time to market, anticipated revenue from our wireless and networking products, our beliefs regarding our accounting policies, our expectation that international revenue will continue to increase and will account for a significant percentage of our revenues for the next 12 months, our expectations regarding trends in our future gross margin, our beliefs that existing cash resources will fund any anticipated operating losses, purchases of capital equipment and provide adequate working capital for the next 12 months, and our patent and intellectual property costs. Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited to, those risks discussed below and our dependence on key products and customers, changes in the demand for our products and seasonal factors affecting certain of our products, our ability to attract and retain customers and distribution partners for existing and new products, our ability to develop and introduce new and enhanced products in a timely manner, our dependence on international sales and risks associated with international operations, our dependence on outside foundries and test subcontractors in the manufacturing process and other outside suppliers, our ability to recruit and retain qualified employees, and the strength of competitive offerings and the prices being charged by those competitors, and the risks set forth below under “Factors that May Affect Future Operating Results”.

      These forward-looking statements speak only as of the date hereof. We expressly disclaim any obligation or undertaking to release publicly any updates or revisions to any forward-looking statements contained herein, to reflect any change in our expectations with regard thereto or any change in events, conditions or circumstances on which any such statement is based.

      All references to “Micro Linear”, “we”, “us”, “our” or the “Company” mean Micro Linear Corporation and its subsidiaries, except where it is made clear that the term means only the parent company.

Item 1.     Business

General

      Micro Linear Corporation develops integrated circuits and modules that are designed to enable cost effective, high performance digital wireless communications and connectivity for a broad range of voice and data applications.

      Wireless consumer applications that have designs using our integrated circuits include digital cordless phones, wireless headsets, wireless high fidelity speakers, digital baby monitors, video game controllers and computer peripherals. Wireless industrial applications that have designs using our products include lighting controls, home automation products, heating and cooling controls, vending machine controls, automatic meter

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      Our products are in many cases replacing older designs that required a wired connection to a source of data. Wireless connectivity offers freedom of mobility and significant infrastructure installation cost savings. We believe that the markets for our cost effective, proprietary, digital wireless solutions are growing, as more and more applications adopt digital wireless connections in the unlicensed ISM (Industrial, Scientific and Medical — 900 MHz, 2.4 GHz and 5.8 GHz) frequency bands.

      Many early wireless applications utilized analog radio links, but the deficiencies of analog transmission are becoming apparent, with overcrowding in the ISM spectrums leading to a migration to digital solutions. Digital wireless links correct a number of the shortfalls found in analog links. Notable among these shortfalls are lack of security, high power consumption, limited range, interference, and restricted feature sets.

      We develop, manufacture and sell digital wireless solutions for the ISM bands. As the migration from analog links to digital links continues, we believe the market for the types of radios and basebands that we offer will grow. This market development scenario is not without precedent. All major cellular telephone markets throughout the world have migrated from analog-based systems to digital-based transmission systems, driven primarily by the analog shortfalls listed above.

      Our objective is to become a leading provider of wireless solutions for many large global markets. To meet this objective, we have embarked upon a number of strategic initiatives:

	•	We are focused on becoming a major provider of 5.8 GHz transceivers and power amplifiers. These devices will enable cost effective wireless applications to be realized in the newly opened 5.8 GHz ISM band in both the US and Europe.
	•	We are developing baseband devices for the market segments that we are targeting. By offering base bands as well as transceivers and power amplifiers to our customers, we believe we can offer a complete semiconductor suite or modular solution to our customer base.
	•	We are working on major strategic relationships and partnerships with industry-leading companies in our target market segments. The potential mutual benefits from these relationships include competitive product definitions which will aid in developing commercial success.
	•	We intend to offer not only semiconductor devices, but also will design, characterize and qualify a series of RF modules and complete wireless data link modules. We believe these products will enable companies with limited radio frequency (RF) expertise to cost effectively implement wireless connectivity in their equipment. We believe these modules can also greatly reduce the engineering cost associated with designing a radio link that will meet the requirements of the various international regulatory bodies.
	•	We intend to use our high volume manufacturing and test expertise for broadband RF transceivers to maintain a competitive market advantage in the delivery of cost effective products and plan to work with our foundry partners to achieve the fastest time to market with the most appropriate technology.

Markets and Products

     Wireless Consumer, Communications, and Industrial Products

      We believe the market for wireless consumer electronics, communications, and industrial products is one of the fastest growing segments of the semiconductor industry. The reasons for this growth include user mobility, continued decreases in the cost of wireless components, availability of unlicensed frequency spectrums, and market expectations established by the Bluetooth marketing campaign.

      The Bluetooth industry initiative, led by large companies from the semiconductor, communications, and computer industries, promised a total silicon solution delivering nearly one megabit of connectivity in the unlicensed 2.4 GHz frequency band for less than five dollars. Industry standard communication protocols support interoperability between Bluetooth-compatible devices. While this initiative has yet to deliver on its

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      Digital wireless connectivity requires an RF physical interface and a baseband controller, the complexity of which depends on the specific application. The RF interface typically consists of a power amplifier, low noise amplifier and switch segment, RF transceiver segment, and modem. The controller provides an interface to the digital data source, control of the radio operation, and application support. We currently provide the RF transceiver portion of this solution, while the user selects other vendors for the remaining circuitry. We believe our transceivers provide significant benefits to our customers, including lower cost, smaller form factor, higher data rates, excellent range of operation, and lower bill of material and external component cost.

      During 2002, our wireless RF transceiver products represented approximately 62% of our net revenues, up from 47% in 2001, the first year we sold wireless products. We have delivered over nine million RF transceivers that can now be found in digital cordless telephones sold by Uniden Corporation and other digital cordless phone manufacturers.

      During 2002, many potential customers evaluated our RF transceivers for designs including digital cordless telephones, video game controllers, wireless headsets, and computer peripherals. Many of these products, intended for the US market, use the 900MHz ISM frequency band, available only in North America. Wireless products designed for worldwide distribution and sale are designed for the 2.4GHz unlicensed ISM frequency band. We supply RF transceivers for both frequency bands.

      We are designing new wireless products for the industrial segment, that will automate data collection and improve inventory management. The cost of RF solutions has fallen sufficiently to enable applications in residential gas, water, and power utility meters that provide real time data and eliminate the need for manual meter reading. Vending machines are also being equipped with RF transmitters to provide real time inventory and cash receipt management. Our 900MHz radios have secured design wins in automated utility meter applications and other industrial products.

      As an increasing number of appliances and applications feature wireless connectivity, a growing number of customers have emerged who do not have the capability to design a wireless link starting at the integrated circuit level. To achieve design wins and win new business with these emerging customers, we intend to offer a series of pre-engineered radio solutions in modular form. These modules will be able to interface directly to microprocessors and antennas in the customers’ applications. Some of these solutions will be pre-scanned for compliance to the FCC rules for use in the unlicensed frequency bands.

     Media Conversion Products

      We offer media conversion products that enable implementation of cost effective fiber to the home (FTTH) systems. Two existing industry standards define Ethernet protocols over twisted pair copper media: 10Base-T for 10Mbps and 100Base-TX for 100Mbps. A low-cost silicon solution called a media converter provides required signal conversion at each point where twisted pair copper media interfaces to fiber media.

      We believe we have been successful in providing silicon media conversion devices for Ethernet networks. We believe this is one of only a few product families in the market that provides full auto-negotiation on both the twisted pair and fiber optic sides, to automatically configure the highest speed mode of operation on a link and select either half or full duplex operation. Additional benefits of our devices include providing the user a very small footprint package, low power dissipation, and low component cost.

Sales and Distribution

      Our focus is on engaging large customers to supply key radio technologies into products targeted at high volume markets. To enable us to win business at these large accounts, our direct sales force focuses on key accounts. We address smaller customers via a network of domestic and international representatives and distributors who specialize in RF components.

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      In 2002, our domestic sales represented approximately 11% of net revenues, compared to 19% and 53% in 2001 and 2000, respectively. We offer our domestic distributors product return privileges and, in the event we lower the prices of products sold to distributors, we guarantee price protection on unsold inventory. We defer recognition of revenue and gross margin derived from sales to our distributors until the distributors resell our products to their customers.

      Outside the United States, our products are sold both directly to international customers and through distributors. International sales accounted for approximately 89%, 81% and 47% of our net revenues in 2002, 2001 and 2000, respectively. We expect international sales to continue to represent a significant portion of product sales, as more and more electronics manufacturing is concentrated in the Pacific Rim. On a portion of our sales to international distributors, we offer product return privileges and, if we lower the prices of our products, we guarantee price protection on unsold inventory, which is typical in the semiconductor industry. We defer revenue from this portion of shipments to international distributors until these distributors notify us of product sales to their customers. Some sales to international distributors are below contract pricing and are not guaranteed price protection or return privileges. On these sales, we do not defer revenue.

      During 2002, sales to original equipment manufacturers (OEMs) represented 82% of our total revenues, and sales through our distribution channel represented 18% of net revenues. While sales to our largest customer pass through an international distributor, these sales are classified here as OEM sales since the distributor does not fulfill a traditional distributor stocking role for this customer.

      A relatively small number of customers have accounted for a significant portion of our net revenues in each of the past several years. During 2002, 2001 and 2000, our top ten customers, excluding domestic distributors, accounted for approximately 79%, 75% and 51% of net revenues, respectively. During 2002 one customer, Uniden Corporation, accounted for 56% of our total sales. Seasonal demand characterizes the consumer electronics market, including Uniden’s digital cordless telephones, which incorporate our transceivers. We expect Uniden to continue to account for a significant portion of sales in 2003, subject to the same seasonality of demand and to all of the inherent variability of the consumer electronics market.

      During 2002, all of our revenue was derived from sales of products for the wireless communications market and the computer networking market. In 2002, wireless shipments accounted for 62 % of net sales. In 2001, our initial year of product shipments to the wireless communications market, sales to this market represented 47% of net revenues. Sales of our products to network equipment manufacturers accounted for approximately 38%, 53% and 41% of our net revenues in 2002, 2001 and 2000, respectively. The balance of our revenues in 2000 were in certain product lines that were sold to Fairchild Semiconductor Corporation in September, 2000.

Backlog

      At December 31, 2002, our backlog was approximately $4.3 million, as compared to approximately $5.8 million at December 31, 2001. This decrease in backlog resulted from lower orders, in the fourth quarter of 2002 as compared to the fourth quarter of 2001, for both our wireless communications and networking products, and in part reflects the increasing seasonality of our product sales, as more of our revenue is concentrated in the consumer electronics market.

      Customers who purchase standard products may generally cancel or reschedule orders for delivery outside a thirty-day period, without significant penalty to the customer. As a result, customers frequently revise the quantities of our products to be delivered, and their delivery schedules.

Technology

      We believe our success and sustainable competitive advantages depend on the acceptance and continued development of our core technologies. Technologies that we believe give us a competitive advantage include:

	•	Direct conversion RF transceivers that provide cost effective, high performance, easy-to-use solutions for minimal component count RF systems.

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	•	Self-aligning and auto calibrating circuits that lower the cost and complexity of manufacturing test and result in high yielding products.
	•	Advanced, cost effective, proprietary, wireless, communication systems algorithms and the advanced baseband architectures required to optimize their performance in silicon.
	•	High performance RF, analog mixed signal, and digital circuit designs using standard BiCMOS, silicon germanium (SiGe), and CMOS technologies.
	•	Advanced packaging to reduce the cost and enhance the performance and functionality of our radio solutions.

      We use standard process technologies available from leading semiconductor foundries. Silicon technologies currently used or being implemented in new designs include:

	•	0.6 micron BiCMOS for low cost 900 MHz RF transceivers, 2.4GHz RF transceivers and media converters.
	•	0.18 micron CMOS for advanced wireless baseband controllers.
	•	0.25 and 0.35 micron SiGe for advanced 5.8 GHz RF transceivers.

Manufacturing

      We utilize outside foundries for all of our silicon wafer requirements, outside suppliers for both wafer sort and final product test, and outside assembly services to package our products. After assembly, the packaged units are final tested and final inspected by subcontractors prior to shipment to customers. Extensive electrical testing is individually performed on all circuits, using advanced, automated test equipment capable of high volume production, to ensure that the circuits satisfy specified performance levels.

      We believe that using outside foundries and other manufacturing services enable us to focus on our design strengths, minimize fixed costs and capital expenditures, and access diverse manufacturing technologies. We depend on silicon foundries located in the United States, Singapore, and Taiwan for products currently in production as well as those currently being planned.

Research and Development

      We have engineering design centers involved in the development of advanced communications circuits and systems for wireless and wired networking markets in San Jose, California, Cambridge England, and Salt Lake City, Utah. The San Jose and Cambridge design centers focus on designing RF chips, while the Salt Lake City design center is responsible for device validation testing, evaluation kits, reference designs, module products, and baseband and modem development.

      We employ state of the art integrated circuit development tools in order to shorten development cycles and accurately simulate the performance of our designs before committing to costly and time-consuming silicon fabrication. These tools represent a significant portion of the research and development tool budget. Our product development strategy focuses on highly integrated silicon solutions employing a modular design that allows high levels of reuse to enable us to address multiple markets quickly with common platforms. Often a common base mask set can be used for multiple products, so that base wafers can be staged and product identity determined during final silicon processing. This reduces lead time and inventory levels.

      As silicon technology advances, new processes enable higher levels of performance while existing processes become more cost effective. We watch these trends closely in order to provide the highest performance and most cost effective solutions to our customers.

      Research and development expenses were $15.7 million, $16.0 million, and $13.5 million in 2002, 2001, and 2000, respectively. We expect to continue spending substantial funds on research and development activities.

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Competition

      The semiconductor industry is characterized by price erosion, rapid technological change, short product life cycles, cyclical market patterns and heightened international and domestic competition. The market segments in which we participate are intensely competitive, and many semiconductor companies presently compete, or could compete, in one or more of our target markets. Our principal competitors are National Semiconductor, Infineon, Philips, Texas Instruments, DSP Group, and Atmel. Many of our competitors offer broader product lines and have substantially greater financial, technical, manufacturing, marketing and other resources. In addition, many of our competitors maintain their own wafer fabrication facilities, which provide them with a competitive advantage.

      We believe that product innovation, quality, reliability, performance and the ability to introduce products rapidly are important competitive factors. We believe that, by virtue of our product application knowledge and design expertise coupled with a rigorous design methodology, we can compete favorably in the areas of rapid new product introduction, product innovation, quality, reliability and performance. However, we may be at a disadvantage in comparison to larger companies with broader product lines, greater technical and financial resources, and greater service and support capabilities.

      The acceptance of future products designed in compliance with industry communication standards will depend on competitive advantages our products deliver in addition to meeting the minimum requirements of the standard. Larger competitors with larger development staffs, larger research and development budgets, and access to more technologies could deliver competitive products with improved feature sets or more products with different feature sets, establishing a distinct competitive advantage.

Patents and Licenses

      Our success depends, in part, on our ability to obtain patents and licenses and to preserve other intellectual property rights covering our products, procedures, development tools and testing tools. To that end, we own certain patents and intend to continue to seek patents on our inventions when appropriate. We own 12 U.S. patents, and have 5 U.S. patent applications and 10 foreign patent applications pending. Through a sale of a portion of our assets, we maintain a royalty-free license to 45 U.S. patents, 3 foreign patents, 7 U.S. patent applications, and 3 foreign patent applications. We believe that although the patents described above may have value, given the rapidly changing nature of the semiconductor industry, we depend primarily on the technical competence and creativity of our technical workforce.

      We currently do not have any third parties that have been granted license rights to manufacture and sell any of our products. We have no current plans to grant product licenses with respect to any products; however, we may find it necessary to enter into product licenses in the future in order to secure foundry capacity. We have granted nontransferable, limited process licenses to each of our foundries to utilize our proprietary processes to manufacture and sell wafers to other customers.

Employees

      As of December 31, 2002, we had 85 full-time employees, 9 of whom were engaged in manufacturing (including test development, quality and materials functions), 48 in research and development, 18 in marketing, applications and sales, and 10 in finance and administration. Our employees are not represented by any collective bargaining agreements and we have never experienced a work stoppage. We believe that our employee relations are good.

Available Information

      Micro Linear’s Web site is http://www.microlinear.com. Micro Linear makes available free of charge, on or through its Web site, its annual, quarterly and current reports, and any amendments to those reports, as soon as reasonably practicable after electronically filing such reports with the Securities and Exchange Commission (SEC). Information contained on Micro Linear’s Web site is not part of this report.

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Item 2.     Properties

      Our headquarters, located in San Jose, California, consist of two buildings comprising approximately 93,000 square feet, 16,000 square feet of which was leased to a tenant through February 2002. We acquired this property in October 1990 at a cost of $7.5 million. It is used for product design and development, manufacturing, marketing, sales and administration. We refinanced the note on the buildings in September 1999 with a $3.0 million note payable over five years with principal amortized on a ten-year basis. The note has a balloon payment of approximately $1.8 million due November 1, 2004. We listed our headquarter facility for sale in June 2002. As of January 2003, the property had an appraised value of $8.2 million. We lease engineering development center offices in Salt Lake City, Utah and Cambridge, England. We believe our existing facilities are adequate to meet our current and projected space requirements for at least the next 24 months.

Item 3.     Legal Proceedings

      In December 1995, Pioneer Magnetics, Inc. (“Pioneer”) filed a complaint in the Federal District Court for the Central District of California alleging that certain of our integrated circuits violate a Pioneer patent. Pioneer sought monetary damages and an injunction against the alleged patent violation. The District Court concluded that Micro Linear did not infringe on Pioneer’s patent. Pioneer then appealed the District Court’s decision to the Court of Appeals for the Federal Circuit, which affirmed the District Court judgment. In May 2001, Pioneer filed a petition for appeal with the Supreme Court. On June 3, 2002, the Supreme Court granted the petition, vacated the judgment, and remanded the case to the Court of Appeals for further consideration, in light of the recently decided case of Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki. The Court of Appeals has not yet determined what further action to take with respect to this case. Although we believe that this claim is unwarranted and without merit, we cannot provide any assurance as to the outcome of this proceeding. We cannot estimate the possible loss or range of loss, if any, that may result from this claim and therefore have not recorded any related accruals, other than accruals for legal fees expected to be incurred in defense of this claim.

      On December 16, 1998, Accton Technology Corporation (“Accton”) filed a complaint relating to Micro Linear’s sale of part ML6692 to Accton, in the Superior Court of California, County of Santa Clara, alleging causes of action for: (1) breach of contract, (2) breach of express warranty, (3) breach of implied warranty of merchantability, (4) breach of implied warranty of fitness for particular purpose, (5) fraud and deceit-concealment, (6) negligent misrepresentation, (7) negligent interference with economic advantage, and (8) declaratory relief to establish the right to implied contractual indemnity. An out of court settlement of this action was reached in June 2000. The terms of this settlement are confidential; however, we took a $7.0 million charge in 2000 related to this settlement and the action has been dismissed.

      From time to time we receive correspondence from vendors, distributors, customers or end-users of our products regarding disputes with respect to contract rights, product performance or other matters that occur in the ordinary course of business. Some of these disputes may involve us in costly litigation or other actions, the outcome of which cannot be determined in advance and may adversely affect our business. The defense of lawsuits or other actions could divert our management’s attention away from running our business. In addition, negative developments with respect to litigation could cause the price of our common stock to decline significantly.

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      None.

Executive Officers of the Registrant

      The executive officers of the Company, and their ages as of December 31, 2002 are as follows:

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PART II

      The following table sets forth the highest and lowest sale prices of our Common Stock over the last eight quarters, as reported in the Nasdaq National Market. Our Common Stock is listed on the Nasdaq National Market under the symbol “MLIN.”

Common Stock Prices

(1)	The number of stockholders of record treats all of the beneficial holders of shares held in one “nominee” or “street name” as a unit.

     Dividend Policy

      We have not paid or declared cash dividends on our Common Stock within the past five years and do not anticipate paying any cash dividends in the foreseeable future.

Item 6.     Selected Consolidated Financial Data

      The following selected consolidated financial data for the five-year period ended December 31, 2002, should be read together with our Consolidated Financial Statements and notes thereto included in Item 8 of

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      The statements in this report or incorporated by reference which are not historical are forward-looking statements and include, without limitation, statements under the caption, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” Terms such as “may,” “will,” “could,” “should,” “project,” “believe,” “anticipate,” “expect,” “plan,” “estimate,” “forecast,” “potential,” “intend,” “continue” and variations of these words or similar expressions are intended to identify forward-looking statements.

      These forward-looking statements include, but are not limited to, statements regarding: the growth of markets for our digital wireless solutions, types of radios and basebands, our ability to become a leading provider of wireless solutions, our ability to become a major provider of 5.8 GHz transceivers and power amplifiers, our ability to offer a complete semiconductor suite or modular solution to our customer base, our ability to establish strategic relationships with industry leading companies and the benefits, if any, of such relationships, our ability to develop RF modules and the benefits and market acceptance of such products, our ability to maintain a competitive market advantage in the delivery of our products, our beliefs regarding the growth of the market for wireless consumer electronics, communications and industrial products, the potential features and benefits of our products, including our transceivers, new wireless products for the industrial segment, pre-engineered radio solutions in modular form and silicon media conversion devices for Ethernet networks, the sources of our future revenue and concentration of customers, the competitive advantages of our core technologies and our dependence on such technology to succeed, the advantages of our use of outside foundries, our ability to provide the highest performance and most cost effective solutions to our customers, expected expenses, including those related to research and development and selling, general and administrative, our ability to compete favorably in new product introduction, innovation, quality, reliability and performance, our dependence on our workforce, our potential to meet our customers’ needs, including helping

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      Forward-looking statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. These risks and uncertainties include, but are not limited, to our dependence on key products and customers, changes in the demand for our products and seasonal factors affecting certain of our products, our ability to attract and retain customers and distribution partners for existing and new products, our ability to develop and introduce new and enhanced products in a timely manner, our dependence on international sales and risks associated with international operations, our dependence on outside foundries and test subcontractors in the manufacturing process and other outside suppliers, our ability to recruit and retain qualified employees, and the strength of competitive offerings and the prices being charged by those competitors, and the risks set forth below under “Factors that May Affect Future Operating Results”.

      These forward-looking statements are made only as of the date of this report. We do not undertake to update or revise the forward-looking statements, whether as a result of new information, future events or otherwise. We caution you not to give undue weight to any of the forward-looking statements. You should not regard the inclusion of forward-looking information as a representation by us or any other person that we will achieve our objectives or plans.

Critical Accounting Policies

      Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances, the results which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of Micro Linear’s Board of Directors. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of its consolidated financial statements.

      Our critical accounting policies are as follows:

	•	Revenue recognition;
	•	Estimating accrued liabilities and allowance for doubtful accounts;
	•	Inventory and related allowance for obsolete and excess inventory;
	•	Accounting for income taxes; and
	•	Valuation of long-lived and intangible assets

      We recognize revenue of product shipped directly to OEM customers at the time of shipment, provided that we have received a signed purchase order, the price is fixed, title has transferred, and collection of the resulting receivable is reasonably assured. We defer recognition of revenue from sales of our products to distributors under agreements which allow certain rights of return and price adjustments on unsold inventory. The associated cost of product on these sales to distributors is also deferred and included in our inventory balances. Revenue and cost of product is recognized when the distributor resells the product to its customers.

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      We record estimated reductions to revenue for expected product returns. In determining the amount of the allowance, we analyze historical returns, current economic trends and changes in customer demand and acceptance of our products. There were no allowances for returns recorded at December 31, 2002.

      The preparation of financial statements requires us to make estimates and assumptions that affect the reported amount of liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period.

      We perform ongoing credit evaluations of our customers based on a number of factors, including past transaction history and the creditworthiness of the customer, as determined by an evaluation of the customer’s financial statements, credit rating, bank and credit references. We do not generally require collateral from the customer. For certain international customers, we obtain letters of credit or cash payments in advance of shipment. Allowances for potential credit losses are established based on management’s review of individual accounts. The accounts receivable balance was $1.0 million, net of allowance for doubtful accounts of $58,000, as of December 31, 2002. An unexpected change in a major customer’s ability to meet its obligation could have an adverse material effect on our financial position and results of operations.

      We value inventories at the lower of standard cost or market. Standard costs are periodically adjusted to approximate actual costs on a first-in, first-out basis. The value of inventories is reduced by an estimated allowance for excess and obsolete inventories. This allowance for excess and obsolete inventories is based upon our review of demand for our products in light of projected sales, current market conditions, and market trends. If a significant, unanticipated decrease in demand of our products or technological developments occurs, we may deem it necessary to provide for additional inventory reserves, which may have a material adverse impact on our gross margin.

      As part of the process of preparing the consolidated financial statements, we are required to estimate income taxes in each of the jurisdictions in which we operate. This process involves estimating actual current tax exposure together with assessing temporary differences resulting from differing treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the consolidated balance sheet. We must then assess the likelihood that deferred tax assets will be recovered from future taxable income or tax planning strategies and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, it is reflected as an expense within the tax provision in the statement of operations.

      Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. We have recorded a valuation allowance of $9.9 million as of December 31, 2002, due to uncertainties related to the ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which we operate and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance or release existing allowances, which could materially impact our financial position and results of operations.

      We assess the impairment of identifiable intangibles and long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. We evaluate at each balance sheet date whether events and circumstances have occurred that indicate possible impairment. We use an estimate of

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Results of Operations

      Micro Linear develops integrated circuits and modules that enable cost effective, high performance digital wireless communications and connectivity for a broad range of voice and data applications.

      We were founded in 1983 and until 2000, we were a supplier of advanced analog and mixed signal integrated circuits to the computer, communications, telecommunications, consumer and industrial markets. During 2000, we divested our manufacturing test operation and our non-communication product lines and focused our marketing, engineering and product development on new communications products, including some wired networking products, but most notably wireless integrated circuits. During 2001, we established ourselves as a volume supplier of RF transceivers to the digital cordless telephone segment of the communications market. Wireless product revenues represented 62% of net revenues for 2002 compared to 47% of net revenues for 2001. We expect the revenue contribution from wireless products to continue to increase as a percentage of total revenues.

      On October 8, 2002 we announced that in order to better align our product development activities with our revenue-producing markets, we would stop development of 802.11a broadband wireless products. The realignment process included redirecting certain engineering activities, and reorganizing sales, marketing and applications to strengthen major account support. As part of the realignment, we reduced our workforce by 39 employees. Expenses related to the discontinuance of the 802.11a development efforts were $0.7 million consisting of severance costs and asset impairment charges.

      We recognize revenue from product shipped directly to OEM customers at the time of shipment. During 2002, our top ten OEM customers collectively accounted for approximately 79% of net revenues. We defer recognition of revenues and costs of our products to distributors until the distributor resells the product to its customers. Sales to Uniden pass through an international distributor, and are recognized as revenue upon the distributor’s resale to the end customer. However, these sales are classified as OEM in percent of net revenue presentation, since the distributor does not fulfill a traditional distributor stocking role for this customer. In 2002, sales through domestic distributors represented 7% of net revenues. Total international sales through international distributors, exclusive of sales to Uniden, represented 11% of net revenues.

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

      Net revenues were $28.7 million for 2002, $22.1 million for 2001, and $37.7 million for 2000. Net revenues in 2002 increased 30% from net revenues in 2001, and net revenues in 2001 decreased 41% from net revenues in 2000. The increase in net revenues in 2002 was due to the first full year of volume shipments of RF transceivers, primarily to Uniden, our largest customer. We sold certain products lines to Fairchild in September 2000. The sale of these product lines, combined with a continued decline in demand for our older networking products, were the primary factors behind the 2001 revenue decline. This was partially offset by our first shipments of wireless RF transceivers. Net revenues from the shipment of RF transceivers totaled $17.9 million, or 62% of net revenues for 2002 and $10.3 million or 47% of net revenues in 2001. Revenues from networking products for 2002 totaled $10.8 million, or 38% of net revenues, compared to $11.8 million, or 53% of net revenues for 2001 and $15.3 million, or 41% of net revenues for 2000. In 2000, our revenues were derived from networking products and from certain other product lines that were sold to Fairchild Semiconductor Corporation in September 2000. We anticipate that revenues from our older networking products will continue to decline both in absolute dollars and as a percent of revenues.

      International revenues for 2002 totaled $25.4 million, or 89% of net revenues, compared to $17.8 million, or 81% of net revenues, for 2001, and $17.6 million, or 47% of net revenues, for 2000. Domestic revenues were approximately 11% of net revenues for 2002, compared to 19% for 2001 and 53% for 2000. The increase in international revenues as a percentage of total net revenues was primarily due to sales of our RF transceiver wireless products to Uniden Corporation. We expect that international revenues will continue to increase and will account for a significant percentage of total revenues over the next 12 months.

      In fiscal 2002, Uniden Corporation accounted for 56% of net revenues. In fiscal 2001, Uniden Corporation and Allied Telesyn International accounted for 46% and 11% of net revenues, respectively. In fiscal 2000, Insight Electronics accounted for 23% of net revenues. We anticipate that sales to Uniden will continue to account for the majority of our revenue over the next 12 months.

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      Our gross margin percentage was 57% in 2002, 54% in 2001, and 49% in 2000. The higher gross margin percentage in 2002 was primarily due to a $0.7 million reduction of fixed manufacturing overhead spending, to $2.6 million, or 9% of net revenues in 2002, from $3.3 million, or 15% of net revenues, in 2001. The reduced costs and higher revenue base over which these costs are spread had a positive 6% margin impact in 2002 compared to 2001. This positive margin impact, resulting from lower overhead costs, was partially offset by an increase in the overall weighting of wireless revenues in our revenue mix in 2002 compared to 2001. Average gross margins on our wireless products are lower than our networking products. The higher gross margin percentage in 2001 compared to 2000 was primarily the result of lower subcontractor test and assembly costs, lower semiconductor fabrication costs and reduced overhead expenses achieved after the sale of certain product lines to Fairchild Semiconductor Corporation in September 2000. We anticipate that revenue from our wireless products will continue to grow as a percentage of total revenue and we expect that the general trend in gross margins in the future will be downward, as we expand our sales base in competitive, consumer-oriented markets for digital cordless telephones and other wireless applications, and as the percentage of our revenue derived from our wireless products continues to increase.

      Gross margins are affected by the volume of product shipments, selling prices, product mix, manufacturing subcontract costs, manufacturing utilization, and product yields. It is also periodically affected by costs incurred in connection with start-up and installation of new process technologies at outside manufacturing foundries.

      Research and development expenses include costs associated with the definition, design and development of new products. In addition, research and development expenses include test development and prototype costs associated with new product development.

      We expense wafers and new production mask sets related to new products as research and development costs until products based on new designs are fully characterized, support published data sheets and satisfy reliability tests.

      Research and development expenses were $15.7 million for 2002, or 55% of net revenues, compared to $16.0 million, or 72% of net revenues, in 2001, and $13.5 million, or 36% of net revenues, in 2000. The decrease in research and development expenses from 2001 to 2002 was primarily due to lower expenses for outside consulting services and personnel. The increase in expenses from 2000 to 2001 was primarily the result of increased spending on our development programs for highly integrated, high performance RF transceivers, baseband processors, and embedded software for broadband wireless market applications.

     Selling, General and Administrative

      Selling, general and administrative expenses were $8.7 million for 2002, or 30% of net revenues, compared to $9.6 million, or 43% of net revenues, in 2001, and $10.0 million, or 27% of net revenues, in 2000. The decrease of $0.9 million or 9%, in 2002 compared to 2001 was primarily due to lower spending for supplies, outside services, consulting, legal and facilities. The expense decrease of $0.4 million, or 4%, in 2001 compared to 2000 was primarily due to lower administrative headcount and expenses, and lower variable sales costs due to lower revenue. We believe that selling, general and administrative expenses could rise moderately in the future, due mainly to higher marketing and selling expenses incurred in connection with the introduction of new products.

     Legal Settlement and Related Costs

      The financial results in 2000 include a pre-tax charge of $8.1 million for legal costs, of which $7.0 million was for the out of court settlement of a legal claim in conjunction with the sale of a certain product line, filed against us in December 1998 by Accton Technology Corporation.

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     Interest and Other Income and Interest Expense

      Interest and other income was $0.7 million for 2002, $2.2 million for 2001 and $2.1 million for 2000. The decrease in interest and other income from 2001 to 2002 was primarily due to the reduction in interest income affected by changes in our cash balances as well as the decline in prevailing interest rates. Interest and other expense was $0.6 million in 2002, $1.4 million in 2001, and $0.5 million in 2000. The decrease in interest and other expense from 2001 to 2002 was due primarily to a $1.0 million charge in 2001 for a discount granted to accelerate the payment of a note receivable that was issued to us by the purchaser of our test operations in April of 2000.

     Provision for Income Taxes

      Our effective tax rate was positive 64% for 2002, negative 25% for 2001 and negative 0.5% for 2000. The positive 64% effective rate for 2002 is primarily due to tax refunds resulting from a tax law change in 2002 that allowed us to carryback net operating losses to prior years. The negative 25% effective rate for 2001 is due primarily to the recording of a valuation allowance against our deferred tax assets as of December 31, 2001.

Liquidity and Capital Resources

      Net cash used in operating activities was $2.1 million in 2002, $8.8 million in 2001, and $8.0 million in 2000. Net cash used by operating activities dropped significantly in 2002 primarily due to the decrease in net loss as compared to 2001 and 2000. The net loss in 2002 included a $5.1 million tax benefit resulting from the carryback of net operating losses to profitable years, $4.0 million of which was received in tax refunds in 2002. The $2.8 million net loss, decrease in accrued liabilities of $1.6 million, and decrease in deferred revenue of $0.8 million were the primary components of cash used in 2002. These were offset by $2.1 million of non-cash depreciation and amortization and a $1.4 million reduction in inventories. The $8.8 million of cash used in operating activities in 2001 was due primarily to the net loss of $16.2 million, an increase in inventories of $2.2 million and a $1.4 million decrease in accrued liabilities. These uses of cash were somewhat offset by the favorable cash impact in 2001 from non-cash charges of $3.5 million resulting from an increase in valuation reserves related to deferred tax assets, and $2.1 million of non-cash depreciation and amortization. In addition, during 2001 we collected receivables and purchased inventories on behalf of Fairchild Semiconductor Corporation related to certain product lines sold to them in September 2000. The net effect of these transactions, in addition to the change in our other current assets, had a $5.9 million positive cash impact. The cash used by operating activities in 2000 of $8.0 million was primarily due to the net loss of $11.8 million, an increase in inventories of $3.7 million, an increase in other assets of $3.6 million, and a decrease in accounts payable of $1.1 million. These uses of cash were offset by a decrease of $5.0 million in accounts receivable, $3.5 million of non-cash depreciation and amortization, a $1.9 million non-cash loss on the disposal of property and equipment and an increase in accrued liabilities of $1.9 million.

      Net cash used in investing activities was $2.0 million during 2002. Net cash provided by investing activities was $5.9 million and $15.0 million in 2001 and 2000, respectively. Net cash used during 2002 consisted primarily of net purchases of short-term investments. In 2002, cash used for capital expenditures decreased to $0.3 million compared to $1.9 million in 2001. Net cash provided by investing activities in 2001 was primarily due to $2.7 million in cash received on the note receivable from Artest Corporation for test equipment sold to them in 2000 and $5.1 million in net sales of short-term investments, offset by $1.9 million in purchases of property and equipment. Net cash provided by investment activities in 2000 was primarily due to cash proceeds of approximately $11.0 million from the sale of certain product lines to Fairchild Semiconductor Corporation in September 2000 and $6.1 million in net sales of short-term investments, offset by $3.2 million in purchases of property and equipment.

      Net cash provided by financing activities was $48,000, $0.1 million and $3.3 million in 2002, 2001 and 2000, respectively. The net cash provided by financing activities in each of these years was primarily from proceeds on issuance of the Company’s common stock offset by principal paydowns of approximately $200,000 each year on the Company’s note payable, secured by it’s building located in San Jose, California.

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Contractual Obligations by Year

(1)	long-term debt includes principal and interest

      Working capital was $24.3 million at December 31, 2002, which includes cash and cash equivalents of $10.8 million and short-term investments of $14.7 million.

      We anticipate that existing cash resources will fund any anticipated operating losses, purchases of capital equipment, and provide adequate working capital for at least the next 12 months. Our liquidity is affected by many factors, including, among others, the extent to which we pursue additional wafer fabrication capacity from existing foundry suppliers or new suppliers, capital expenditures, the level of our product development efforts, and other factors related to the uncertainties of the industry and global economies. Accordingly, there can be no assurance that events in the future will not require us to seek additional capital sooner or, if so required, that such capital will be available on terms acceptable to us.

Factors That May Affect Future Operating Results

      The risks and uncertainties described below are not the only ones we face. If any of the following risks actually occurs, our business, financial condition or results of operations could be materially and adversely affected:

      Our operating results are difficult to predict and have fluctuated significantly in the past. They are likely to continue to fluctuate in the future as a result of many factors, some of which are outside of our control. Some of the factors that may cause these fluctuations include:

	•	the level and timing of spending by our customers, both in the U.S. and in foreign markets;
	•	changes in market demand, including seasonal and cyclical fluctuations;
	•	timing, amount, cancellation or rescheduling of customer orders;
	•	fluctuations in manufacturing yields;
	•	timing of revenue from contracts, which may span several quarters;
	•	competitive market conditions;
	•	new product introductions;
	•	market acceptance of new or existing products;
	•	cost and availability of wafers, other components and testing services;
	•	mix of products sold;

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	•	economic conditions specific to the networking and wireless industries and markets, as well as general economic conditions;
	•	ability to hire and retain qualified technical and other personnel;
	•	development of new industry standard communication protocols; and
	•	availability and performance of advanced silicon process technologies from foundry sources.

      We believe that period-to-period comparisons of our operating results will not necessarily be meaningful. You should not rely on these comparisons as an indication of our future performance. If our operating results in one or more future periods fail to meet or exceed the expectations of securities analysts or investors, the trading price of our common stock may decline, possibly by a significant amount.

      Intense international and domestic competition, decreasing selling prices, rapid technological change, short product life cycles and cyclical patterns characterize the markets for our products. Competitors include significantly larger corporations. New entrants in these markets could provide additional competition. Most of our competitors are substantially larger and have greater financial, technical, marketing and other resources than we do. Many of these large organizations are in a better position to withstand any significant reduction in spending by customers in these markets. They often have broader product lines and market focus, and will therefore not be as susceptible to downturns in a particular market. In addition, many competitors have focused on the wireless market for longer than we have, and therefore have more long-standing and established relationships with domestic and foreign customers.

      The computer networking equipment and wireless markets have undergone a period of rapid growth and consolidation in recent years. We expect our dependence on sales to network equipment manufacturers to continue. Our business and results of operations would be materially and adversely affected in the event of a significant slowdown in the computer networking equipment market. In addition, as a result of competitive pricing pressures, we have experienced lower margins in some of our products. Such pricing pressures will continue to have an adverse effect on our results of operations, and our business could suffer unless they can be offset by higher margins on other products or lower operating expenses.

      We do not currently manufacture our own semiconductor wafers. As a result, we are vulnerable to process technology advances competitors use to manufacture products offering higher performance and lower cost. Larger companies with wafer manufacturing facilities, broader product lines, greater technical and financial resources and greater service and support capabilities have an advantage in this market.

      In addition, our products are generally sole-sourced to our customers. If our customers were to develop other sources for our products, our operating results would suffer.

      Rapidly changing technology, frequent product introductions and evolving industry standards make it difficult to accurately predict the market’s future growth rate, size or technological direction. In view of the evolving nature of this market, suppliers of wireless products may decide to adopt alternative standards or technologies that are incompatible with our products. If we are unable to design, develop, manufacture and sell products that are compatible with these new standards or technologies, our business and operating results will suffer.

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      Continuing technological advancement, changes in customer requirements and evolving industry standards characterize the wireless and computer equipment networking markets. To compete successfully, we must design, develop, manufacture and sell new or enhanced products that:

	•	provide increasingly higher levels of performance and reliability;
	•	meet performance or other objective specified parameters;
	•	are cost effective;
	•	are brought to market in a timely manner;
	•	are in accordance with existing or evolving industry standards; and
	•	achieve market acceptance.

      The development of these new circuits is highly complex. We have sometimes experienced delays in completing the development of new products. Successful product development and introduction depends on many factors, including:

	•	proper new product definition;
	•	timely completion and introduction of new product designs;
	•	availability of foundry capacity;
	•	acceptable manufacturing yields; and
	•	market acceptance of our products and our customers’ products.

      We must be able to adjust to changing market conditions quickly and cost-effectively to compete successfully. Furthermore, we must introduce new products in a timely manner, and achieve market acceptance for these products. In addition, our customers’ products which incorporate our products must be introduced in a timely manner and achieve market acceptance. If we, or our customers, fail to develop and introduce new products successfully, our business and operating results will suffer.

      To successfully develop and market certain of our planned products, we may need to enter into technology development or licensing agreements with third parties. If we cannot enter into such agreements on acceptable terms, our ability to develop and market new products could suffer, and our business and operating results would be adversely affected.

      Customers typically take a long time to evaluate our new products. It takes 3 to 6 months or more for customers to test new products, and at least an additional 3 to 12 months until customers begin significant production of products incorporating our products.

      We may therefore experience a lengthy delay between product development and the generation of revenues from new products. Delays inherent in such a long sales cycle raise additional risks of customer decisions to cancel or change their product plans. Such changes could result in the loss of anticipated sales. Our business, financial condition, and results of operations would suffer if customers reduce or delay orders, or choose not to release products incorporating our products.

      We have incurred quarterly net losses from June 2000 through December 2002, except for a profit in the third quarter of 2002 which was attributable to an income tax refund. Because of those losses, we had an accumulated deficit of $9,848,000 as of December 31, 2002.

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      Successful engineering development and market penetration in the product areas we have chosen require high levels of engineering and product development expense. We intend to continue to spend significant amounts on new product and technology development. Our networking products are reaching maturity, and revenue from this product line has declined and is expected to decline further over the next twelve months. We anticipate that our existing cash will fund any anticipated operating losses, purchases of capital equipment, and provide adequate working capital for at least the next 12 months. We expect to incur losses in the future and may not achieve our additional goals of positive net income and cash flow.

      We believe that our existing capital resources and cash generated from operations will enable us to maintain our operations for at least the next 12 months. However, if our capital requirements vary materially from those currently planned, we may require additional financing sooner than anticipated. If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the terms of this debt could impose restrictions on our operations. The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders. We cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all. If adequate funds are not available, or are not available on acceptable terms, our ability to hire, train or retain employees, to fund our operations and sales and marketing efforts, take advantage of unanticipated opportunities, develop or enhance services or products, or respond to competitive pressures would be significantly limited, which could harm our business, financial condition and operating results.

      Demand for our products in the future will depend on the amount and timing of spending by network providers, manufacturers of wireless consumer products, and telecommunications equipment suppliers. Spending in these areas depends upon a variety of factors, including competitive pressures, discretionary consumer spending patterns, and general economic conditions.

      During 2001 and 2002, new orders slowed, customers cancelled or placed holds on existing orders, and orders dropped from prior periods, due to developments in the general economy and capital markets. This situation could recur in the future. Because the majority of our revenues come from sales to a few customers, a delay in orders from one customer could have a significant negative effect on future revenues.

      Relatively short product life cycles characterize the computer network equipment and digital cordless telephone markets. If one or more of our significant customers were to select circuits manufactured by a competitor for future products, our business will suffer. The loss of one or more of our current customers, failure to attract new customers, or disruption of our sales and distribution channels would adversely affect our business and operating results.

      A significant majority of our revenues come from sales to relatively few customers. Sales to the ten largest customers, excluding domestic distributors, in 2002, 2001, and 2000 accounted for approximately 79%, 75%, and 51% of net revenues, respectively. Sales to domestic distributors in 2002, 2001, and 2000 accounted for approximately 7%, 13%, and 29% of net revenues. We anticipate that a limited number of key customers and distributors will continue to provide a significant portion of our net revenues for the foreseeable future. Our future success depends on our ability to retain our current customers and attract new customers. A reduction, delay or cancellation of orders from one or more significant customers could materially and adversely affect our operating results. In addition, our operating results could be adversely affected if one or more of our major customers were to develop other sources for the products we now supply them.

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      Customers may generally cancel or reschedule orders to purchase standard products without significant penalty until 30 days prior to shipping. Customers frequently revise delivery schedules, and the quantities of products to be delivered, to reflect changes in their needs. Since backlog can be canceled or rescheduled, our backlog at any time is not necessarily indicative of future revenue.

      Sales to customers outside of the United States in 2002, 2001, and 2000 represented 89%, 81%, and 47% of net revenues, respectively. We expect that international sales will continue to generate a substantial proportion of net revenues for the foreseeable future. Our international operations are subject to a number of risks, including:

	•	changes in foreign government regulations and telecommunications standards;
	•	import and export legislation and license requirements, tariffs, taxes, quotas and other trade barriers;
	•	compliance with foreign laws, treaties and technical standards;
	•	delays resulting from difficulty in obtaining export licenses for certain technology;
	•	fluctuations in currency exchange rates;
	•	difficulty in collecting accounts receivable;
	•	difficulty in staffing and managing foreign operations;
	•	loss of one or more international distributors;
	•	geopolitical risks, changes in diplomatic and trade relationships and economic instability; and
	•	the effects of the terrorist attacks on the United States, the United States’ war on international terrorism and any related conflicts or similar events worldwide.

      Substantially all of our international sales must be licensed by the Office of Export Administration of the U.S. Department of Commerce. To date, we have not experienced any material difficulties in obtaining export licenses.

      Our international sales are typically denominated in U.S. dollars. Fluctuations in currency exchange rates could cause our products to become relatively more expensive to customers in a particular country, while competitors’ products denominated in local currencies become less expensive. This may lead to a reduction in sales or profitability in that country, which could adversely affect our business.

      Gains and losses on the conversion to U.S. dollars of accounts receivable, accounts payable and other international assets and liabilities may contribute to fluctuations in operating results. In addition, international customers typically take longer to pay for purchases than customers in the United States. If foreign markets do not continue to develop, or foreign sales cycles prove unpredictable, our revenue and business may be adversely affected.

      Average selling prices for products in the networking and wireless markets have rapidly declined due to many factors, including:

	•	rapidly changing technologies;
	•	price-performance enhancements;
	•	product introductions by competitors;
	•	price pressure from significant customers; and

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	•	product maturity and obsolescence.

      The decline in the average selling prices of our products may cause substantial fluctuations in our operating results. We continue to develop and market new products that incorporate valued new features and sell at higher prices. Failure to deliver new products offering increased value would result in a decline in both revenues and margins, harming our business, financial condition, and results of operations.

      Complex products such as ours frequently contain errors, defects, and bugs upon release. Despite thorough testing by Micro Linear, our test houses and customers, these errors, defects and bugs are sometimes discovered after we begin to ship products. We expend significant resources to remedy these problems, but occasionally have faced legal claims by customers and others. Product defects can also cause interruptions, delays or cancellations of sales to customers, in addition to claims against us, all of which could adversely affect our operating results.

      The semiconductor industry experiences significant downturns and wide fluctuations in supply and demand. The industry also experiences significant fluctuations in anticipation of changes in general economic conditions. This causes significant variances in product demand and production capacity, and aggravates selling price fluctuations. These cyclical patterns, which we expect to continue, may substantially harm our business, financial condition, and results of operations.

      We regularly request indications from customers as to their future plans and requirements, to ensure that we will be prepared to meet production demand for our products. However, we may not receive anticipated purchase orders for our products. We must be able to effectively manage the expenses and inventory risks associated with meeting potential demand. If we fail to meet customers’ supply expectations, we may lose business from such customers. If we expend resources and purchase materials, or enter into commitments to acquire materials and manufacture products, and customers do not purchase these products, our business and operating results will suffer.

      Design wins, which require significant expenditures, often precede the generation of volume sales by a year or more. The value of any design win will largely depend upon the commercial success of the customer’s product, and on the extent to which the design of the customer’s product accommodates components manufactured by our competitors. We cannot assure that we will achieve design wins, or that any design win will result in significant future revenues.

      We utilize outside foundries for all wafer production. We believe that utilizing outside foundries enable us to focus on our design strengths, minimize fixed costs and capital expenditures and access diverse manufacturing technologies. We currently intend to continue to rely exclusively upon our outside foundries for our wafer fabrication requirements. However, there are significant risks associated with the reliance on outside foundries, including the lack of assured wafer supply and control over delivery schedules, delays in obtaining access to key process technologies, and limited control over manufacturing yields and production costs.

      The manufacture of integrated circuits is a highly complex and technically demanding process. We have diversified our sources of wafer supply and have worked closely with our foundries to minimize the likelihood

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      Dependence on foundries located outside of the United States subjects us to numerous risks, including exchange rate fluctuations, export and import restrictions, trade sanctions, political instability and tariff increases. Our main foundries are located in Taiwan and Singapore, which involve specific risks due to political instability in that region.

      We purchase wafers from outside foundries pursuant to customers’ purchase orders. We generally do not have a guaranteed level of wafer capacity or wafer costs at our foundries. Our wafer suppliers could prioritize capacity for other uses, or reduce or eliminate deliveries to us on short notice. In addition, we depend upon a limited number of foundries for our wafer requirements. Any sudden demand for an increased amount of wafers, or sudden reduction or elimination of any source of wafers, could result in a material delay in the shipment of products. Disruptions in supply, which have occurred in the past, may occur in the future. If such a disruption occurred, and we were unable to qualify alternative manufacturing sources for our products in a timely manner, or if such sources were unable to produce wafers with acceptable manufacturing yields, our business and operating results would be materially and adversely affected.

      We rely on two outside test service subcontractors to test our products. The same risks described in the paragraphs above, concerning guaranteed capacity, dependence upon a limited number of test service subcontractors, and disruptions in service, also apply to our test and assembly subcontractors.

      Rapid technological change and frequent new product introductions characterize the markets for our products. To remain competitive, we must develop or obtain access to new semiconductor process technologies in order to reduce die size, increase die performance and functional complexity, and improve manufacturing yields. If we are unable to obtain access to advanced wafer processing technologies, limiting our ability to introduce competitive products on a timely basis, our future operating results may suffer.

      Minute levels of contaminants in the semiconductor manufacturing environment, defects in the masks used to print circuits on a wafer, difficulties in the fabrication process and other factors can cause a substantial percentage of wafers to be rejected or a significant number of die on each wafer to be nonfunctional. Many of these manufacturing problems are difficult to diagnose and time consuming and expensive to remedy. Our foundries have, at times, experienced lower than anticipated yields, which have adversely affected production and operating results.

      The manufacturing processes utilized by our foundries are continuously being improved in order to increase yield and product performance. Process changes can, however, result in interruptions in production or significantly reduced yields. New process technologies or new products are especially susceptible to wide variations in manufacturing yields and efficiency. Irregularities, adverse yield fluctuations or other manufacturing problems at our foundries could result in production interruption or delivery delays, adversely affecting our business and results of operations.

      We have granted nontransferable, limited process licenses to some of our foundries to utilize our processes to manufacture and sell wafers to other customers. We protect our proprietary technology, particularly our design methodology, but may not be able to prevent its misappropriation by our foundries or others.

      Our wafer suppliers and test and assembly subcontractors are subject to a variety of U.S. and foreign government regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in their manufacturing processes. Failure by our suppliers or subcontractors to comply with environmental regulations could result in fines, suspension of production or cessation of operations. Environmental

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      We are also subject to a variety of environmental regulations relating to our operations. If we fail to comply with present and future regulations, the government could impose fines on us, or compel us to suspend or cease operations. If we or our suppliers or subcontractors fail to control the use or discharge of hazardous substances, we could be subject to civil or criminal liabilities, which could have a material adverse effect on our business and operating results.

      Our future success will depend to a significant extent on our ability to attract, retain and motivate personnel, especially those with engineering design experience and expertise. We may not be successful in attracting and retaining such personnel.

      Competitors may attempt to recruit our employees. While employees are required to sign standard agreements concerning confidentiality and ownership of inventions, we do not have employment contracts or non-competition agreements with most of our personnel. The loss of the services of key employees, the inability to attract or retain qualified personnel, or delays in hiring personnel, particularly engineers and other technical personnel, could negatively affect our business and prevent us from achieving our business goals.

      We own 12 U.S. patents, and have 5 U.S. patent applications and 10 foreign patent applications pending. Through a sale of a portion of our assets, we maintain a royalty-free license to 45 U.S. patents, 3 foreign patents, 7 U.S. patent applications, and 3 foreign patent applications.

      We attempt to protect our intellectual property rights through patents, trademarks, copyrights, licensing arrangements, maintaining certain technology as trade secrets and other measures. However, any patent, trademark, copyright or other intellectual property rights we own may be invalidated, circumvented or challenged. We cannot be certain that our intellectual property rights will provide competitive advantages, or that any pending or future patent applications will be issued with the scope of the claims sought by us. Competitors may develop technologies that are similar or superior to our technology, duplicate our technology or design around the patents that we own. In addition, effective patent, copyright and trade secret protection may be unavailable or limited in certain foreign countries in which we do business.

      We believe that the future success of our business will depend on our ability to translate technological expertise and innovation into new and enhanced products. We enter into confidentiality or license agreements with our employees, consultants, vendors and customers, and limit access to and distribution of our proprietary information. Nevertheless, we may not be able to prevent misappropriation of our technology.

      In addition, we have taken legal action to enforce our patents and other intellectual property rights, protect our trade secrets, determine the validity and scope of the proprietary rights of others, and defend against claims of infringement or invalidity. If a third party makes a valid claim, and we cannot obtain a license to the technology on reasonable terms, our operations could be adversely affected.

      We may be subject to legal proceedings and claims from time to time in the ordinary course of our business, including claims of alleged infringement of the proprietary rights and other intellectual property rights of third parties. Intellectual property litigation is expensive and time-consuming, and could divert our management’s attention away from running our business.

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      In December 1995, Pioneer Magnetics, Inc. (“Pioneer”) filed a complaint in the Federal District Court for the Central District of California alleging that certain of our integrated circuits violate a Pioneer patent. Pioneer sought monetary damages and an injunction against the alleged patent violation. The District Court concluded that Micro Linear did not infringe on Pioneer’s patent. Pioneer then appealed the District Court’s decision to the Court of Appeals for the Federal Circuit, which affirmed the District Court’s Judgment. In May 2001, Pioneer filed a petition for appeal with the Supreme Court. On June 3, 2002, the Supreme Court granted the petition, vacated the judgment, and remanded the case to the Court of Appeals for further consideration, in light of the recently decided case of Festo Corp. v. Shoketsu Kinzoku Kogyo Kabushiki. The Court of Appeals has not yet determined what further action to take with respect to this case. Although we believe that this claim is unwarranted and without merit, we cannot provide any assurance as to the outcome of this proceeding. We cannot estimate the possible loss or range of loss, if any, that may result from this claim and therefore have not recorded any related accruals, other than accruals for legal fees expected to be incurred in defense of this claim.

      From time to time we have received correspondence from vendors, distributors, customers or end-users of our products regarding disputes with respect to contract rights, product performance or other matters that occur in the ordinary course of business. Some of these disputes may involve us in costly litigation or other actions, the outcome of which cannot be determined in advance and may adversely affect our business. The defense of lawsuits or other actions could divert our management’s attention away from running our business. In addition, negative developments with respect to litigation could cause the price of our common stock to decline significantly.

      Our stock price has been and is likely to continue to be highly volatile. Between January 1, 2002 and December 31, 2002, our stock price has traded as high as $4.09 on May 16, 2002, and as low as $2.05 on March 6, 2002. Our stock price could fluctuate significantly due to a number of factors, including:

	•	variations in our actual or anticipated operating results;
	•	sales of substantial amounts of our stock;
	•	announcements about us or about our competitors, including technological innovation or new products;
	•	litigation and other developments relating to our patents or other proprietary rights or those of our competitors;
	•	conditions in the computer networking equipment and wireless markets;
	•	governmental regulation and legislation; and
	•	changes in securities analysts’ estimates of our performance, or our failure to meet analysts’ expectations.

      Many of these factors are beyond our control. In addition, the stock markets in general, and the Nasdaq National Market and the market for technology companies in particular, have experienced extreme price and volume fluctuations recently. These fluctuations often have been unrelated or disproportionate to the operating performance of these companies. These broad market and industry factors may decrease the market price of our common stock, regardless of our actual operating performance. In the past, companies that have experienced volatility in the market prices of their stock have been the object of securities class action litigation. If we were the object of securities class action litigation, it could result in substantial costs and a diversion of management’s attention and resources, which could harm our business.

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      Provisions of our Amended and Restated Certificate of Incorporation, Bylaws, the 1998 Shareholder Rights Plan, our stock option plans and Delaware law could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These provisions could limit the price that investors might be willing to pay in the future for shares of our common stock.

      Under the Shareholder Rights Plan, adopted in August 1998, each share of our outstanding common stock carries one Right to purchase 1/1000 of a share of Series A Participating Preferred Stock at an exercise price of $30.00 per Right. If someone acquires 15% or more of our common stock, each Right not owned by a holder of 15% or more of our common stock entitles the holder, upon payment of the $30.00 exercise price, to receive common stock having a current market value of $60.00. This issuance of additional common stock would significantly reduce the percentage of common stock held by a potential acquiror. The Rights expire in August 2008.

      In addition, Section 203 of the Delaware General Corporation Law and the terms of our stock option plans may discourage, delay or prevent a change in control of Micro Linear. Specifically, Section 203 prohibits a Delaware corporation from engaging in any business combination with an interested stockholder for three years after the date the stockholder became an interested stockholder unless specific conditions are met. Also, in the event outstanding options granted pursuant to certain of our stock option plans are not assumed by an acquiring corporation, the unvested portion of such options may be accelerated upon a change of control. In addition, some individual stock option grants provide for the partial or complete acceleration of vesting upon a change of control.

Item 7A.     Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

      As of December 31, 2002, our investment portfolio consisted of U.S. government obligations, commercial paper and money market funds, typically with maturities of less than 12 months (see Note 1 of Notes to the Consolidated Financial Statements). Some of these securities are subject to interest rate risk, and will decline in value if market interest rates increase. We intend to hold our fixed income investments until maturity and, therefore, do not expect to recognize an adverse impact from interest rate changes on income or cash flows.

Foreign Currency Exchange Risk

      We have international sales and research and development facilities and are, therefore, subject to foreign currency rate exposure. We limit our foreign currency risks principally by maintaining minimal foreign currency balances. To date, our exposure related to exchange rate volatility has not been significant.

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INDEX TO FINANCIAL STATEMENTS

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REPORT OF INDEPENDENT ACCOUNTANTS

To the Board of Directors and Stockholders of Micro Linear Corporation:

      In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Micro Linear Corporation and its subsidiary at December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/S/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

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MICRO LINEAR CORPORATION

CONSOLIDATED BALANCE SHEETS

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

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MICRO LINEAR CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

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

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MICRO LINEAR CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY