MICRO LINEAR CORP /CA/ - 10-Q Quarterly Report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


[X]		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the Quarterly Period Ended September 28, 2003


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

For the transition period from to

Commission File Number 0-24758

Micro Linear Corporation

(Exact name of Registrant as specified in its charter)


Delaware		94-2910085
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification Number)

2050 Concourse Drive		95131
San Jose, California		(Zip Code)
(Address of principal executive offices)

Registrant’s telephone number, including area code:
(408) 433-5200

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

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

The number of shares of the Registrant’s Common Stock outstanding as of November 5, 2003, net of shares held in treasury, was 12,266,313.

TABLE OF CONTENTS


PART I. FINANCIAL INFORMATION
	Item 1. Financial Statements
		CONSOLIDATED CONDENSED BALANCE SHEETS
		CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
		CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
		NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures about Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 4. Submission of Matters to a Vote of Security Holders
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
INDEX TO EXHIBITS
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

TABLE OF CONTENTS


			PAGE

PART I		FINANCIAL INFORMATION		3
Item 1.		Financial Statements (Unaudited)		3
		Consolidated Condensed Balance Sheets at September 30, 2003 and December 31, 2002		3
		Consolidated Condensed Statements of Operations for the three and nine months ended September 30, 2003 and 2002		4
		Consolidated Condensed Statements of Cash Flows for the nine months ended September 30, 2003 and 2002		5
		Notes to Consolidated Condensed Financial Statements		6
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		10
Item 3.		Quantitative and Qualitative Disclosures about Market Risk		24
Item 4.		Controls and Procedures		24
PART II		OTHER INFORMATION		25
Item 1.		Legal Proceedings		25
Item 4.		Submission of matters to a vote of Security Holders		25
Item 6.		Exhibits and Reports on Form 8-K		26
SIGNATURES				27
Index to Exhibits				28
	Exhibit 31.1
	Exhibit 31.2
	Exhibit 32.1
	Exhibit 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED BALANCE SHEETS
(IN THOUSANDS)
(Unaudited)


				September 30,			December 31,
				2003			2002

Assets
Current assets:
	Cash and cash equivalents			$	8,757		$	10,801
	Short-term investments				9,865			14,704
	Accounts receivable, less allowance for doubtful accounts of $123 at September 30, 2003 and $58 at December 31, 2002				1,673			1,015
	Inventories				2,138			2,212
	Other current assets				744			2,171

		Total current assets			23,177			30,903
Property, plant and equipment, net					5,995			8,092
Other assets					26			27

			Total assets	$	29,198		$	39,022

Liabilities and Stockholders’ Equity
Current liabilities:
	Accounts payable			$	1,828		$	2,076
	Accrued compensation and benefits				565			834
	Deferred revenue				1,409			2,045
	Accrued commissions				137			163
	Other accrued liabilities				1,150			1,291
	Current portion of long-term debt				279			239

		Total current liabilities			5,368			6,648
Long-term debt					1,829			2,064

			Total liabilities		7,197			8,712

Stockholders’ equity:
	Common stock				15			15
	Additional paid-in capital				60,498			60,352
	Accumulated deficit				(18,281	)		(9,848	)
	Accumulated other comprehensive income				2			24
	Treasury stock				(20,233	)		(20,233	)

		Total stockholders’ equity			22,001			30,310

			Total liabilities and stockholders’ equity	$	29,198		$	39,022

See accompanying notes to unaudited consolidated condensed financial statements.

MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)


				THREE MONTHS ENDED						NINE MONTHS ENDED
				September 30,						September 30,

				2003			2002			2003			2002

Net revenue				$	5,818		$	9,286		$	16,851		$	23,762
Cost of revenue					3,410			4,030			9,418			10,269

	Gross margin				2,408			5,256			7,433			13,493

Operating expenses:
	Research and development				1,712			3,891			7,477			12,160
	Selling, general and administrative				1,567			2,029			5,836			6,115
	Fixed assets impairment and restructuring charges				1,608			—			2,562			—

			Total operating expenses		4,887			5,920			15,875			18,275

	Loss from operations				(2,479	)		(664	)		(8,442	)		(4,782	)
Interest and other income					80			135			237			571
Interest and other expense					(63	)		(65	)		(156	)		(199	)

	Loss before income taxes				(2,462	)		(594	)		(8,361	)		(4,410	)
Provision for (benefits from) income taxes					22			(3,989	)		72			(3,910	)

	Net income (loss)			$	(2,484	)	$	3,395		$	(8,433	)	$	(500	)

Net Income (Loss) Per Share:
Basic
		Net income (loss) per share		$	(0.20	)	$	0.28		$	(0.69	)	$	(0.04	)

		Weighted average number of shares used in per share computation			12,250			12,079			12,220			12,068

Diluted
		Net income (loss) per share		$	(0.20	)	$	0.28		$	(0.69	)	$	(0.04	)

		Weighted average number of shares used in per share computation			12,250			12,239			12,220			12,068

See accompanying notes to unaudited consolidated condensed financial statements.

MICRO LINEAR CORPORATION
CONSOLIDATED CONDENSED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
(UNAUDITED)


			NINE MONTHS ENDED
			September 30,

			2003			2002

Net cash provided by (used in) operating activities			$	(6,329	)	$	1,205
Cash flows from investing activities:
	Purchase of capital equipment			(481	)		(282	)
	Purchases of short-term investments			(9,203	)		(11,082	)
	Sales of short-term investments			14,020			10,702

		Net cash provided by (used in) investing activities		4,336			(662	)
Cash flows from financing activities:
	Principal payments on debt			(195	)		(182	)
	Proceeds from issuance of common stock			144			40

		Net cash used in financing activities		(51	)		(142	)

	Net increase (decrease) in cash and cash equivalents			(2,044	)		401
	Cash and cash equivalents at beginning of period			10,801			14,888

		Cash and cash equivalents at end of period	$	8,757		$	15,289

See accompanying notes to unaudited consolidated condensed financial statements.

MICRO LINEAR CORPORATION

NOTES TO UNAUDITED CONSOLIDATED CONDENSED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization

Micro Linear is a fabless semiconductor company specializing in high data rate wireless integrated circuit solutions. These transceivers can be used in streaming wireless applications such as cordless phones, wireless speakers and headphones, security cameras, game controllers, headsets and other personal electronic appliances.

Micro Linear is headquartered in San Jose, CA with sales offices and authorized representatives and distributors worldwide.

Fiscal Year

We report results of operations on the basis of fifty-two or fifty-three week periods, ending on the Sunday closest to December 31. Fiscal year 2002 ended on December 29, 2002. The third quarter of 2002 ended on September 29, 2002. The third quarter of 2003 ended on September 28, 2003. For presentation purposes, the accompanying financial statements refer to the calendar year end and month end of each respective period.

Principles of Consolidation

The consolidated financial statements include the accounts of Micro Linear Corporation and our subsidiary in the United Kingdom. All significant inter-company accounts and transactions have been eliminated.

The Company has designated the U.S. dollar as the functional currency for its United Kingdom subsidiary since that subsidiary is dependent on the parent company’s economic environment. The gains and losses resulting from the translation of the United Kingdom subsidiary are recorded as other income and expense. For the first three quarters of 2003 and 2002, translation gains and losses were not significant.

Basis of Presentation

The consolidated financial statements included herein have been prepared by us in accordance with accounting principles generally accepted in the United States of America and reflect all adjustments, consisting of normal recurring adjustments, which in the opinion of management are necessary to state fairly our financial position, results of operations, and cash flows for the periods presented. Certain prior period adjustments in the condensed financial statements have been reclassified where necessary to conform to the quarter ended September 30, 2003.

The accompanying unaudited consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited consolidated condensed financial statements and notes should be read in conjunction with the consolidated financial statements and notes in the Annual Report on Form 10-K for the year ended December 29, 2002, filed with the Securities and Exchange Commission on March 27, 2003.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates, and such differences may be material to the financial statements.

Net Income (Loss) Per Share

Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share excludes potential common stock

if the effect is anti-dilutive. Diluted net earnings (loss) per share includes the effect of all potentially dilutive common stock outstanding during the period. We compute diluted earnings (loss) per share using the treasury stock method for stock options outstanding.

A total of 3,810,595 and 4,457,396 shares of potential common stock were not included in the dilutive net loss per share calculations for the periods ending September 30, 2003 and 2002, because to include them would be anti-dilutive.

Following is a reconciliation of the basic and diluted income (loss) per share computations (in thousands, except per share amounts):


			Three Months Ended					Nine Months Ended
			September 30					September 30

			2003			2002		2003			2002

Basic:
	Net income (loss)		$	(2,484	)	$	3,395	$	(8,433	)	$	(500	)

	Weighted average common shares outstanding			12,250			12,079		12,220			12,068

	Basic income (loss) per share		$	(0.20	)	$	0.28	$	(0.69	)	$	(0.04	)

Diluted:
	Net income (loss)		$	(2,484	)	$	3,395	$	(8,433	)	$	(500	)

	Weighted average common shares outstanding			12,250			12,079		12,220			12,068
	Dilutive stock options			—			160		—			—

	Weighted average common shares outstanding			12,250			12,239		12,220			12,068

		Diluted income (loss) per share	$	(0.20	)	$	0.28	$	(0.69	)	$	(0.04	)

Stock-Based Compensation

We account for our employee stock option plans in accordance with Accounting Principles Board No. (“APB”) 25, “Accounting for Stock Issued to Employees.” Under APB No. 25, compensation cost is measured as the excess, if any, of the quoted market price of our stock at the date of grant over the exercise price of the option granted. Compensation cost for stock options, if any, is recognized ratably over the vesting period. We provide additional pro forma disclosures as required under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation, Transition and Disclosure” in Note 1: Pro Forma Net Income (Loss) Per Share.

We account for stock issued to non-employees in accordance with the provisions of SFAS No. 123. Stock option awards issued to non-employees are accounted for at fair value using the Black-Scholes option pricing model. The fair value of each non-employee stock award is re-measured at each period end until a commitment date is reached, which is generally the vesting date.

Pro Forma Net Income (Loss) Per Share

As required by SFAS No. 123, we disclose our pro forma net income (loss) as if we had accounted for our employee stock purchase plan, employee stock options and director stock options under the fair value method as prescribed in SFAS No. 123. We estimate the fair value for these options at the date of grant using the Black-Scholes option pricing model and the multiple option approach with the following weighted-average assumptions:


	Employee Stock
	Purchase Plan						Stock Option Plans

	Nine Months Ended						Three Months Ended						Nine Months Ended
	September 30,						September 30,						September 30,

	2003			2002			2003			2002			2003			2002

Expected life (in years)		0.5			0.5			2.6			2.87			2.64			1.77
Risk-free interest rate		1.19	%		1.73	%		2.98	%		2.24	%		2.78	%		3.12	%
Volatility		74	%		81	%		52	%		85	%		61	%		85	%
Dividend yield		—			—			—			—			—			—

The Black-Scholes option valuation model was intended for use in estimating the fair value of publicly traded options that have no vesting restrictions and are fully transferable, which differs significantly from the terms of our stock option awards. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and the expected life of the options before exercise, which greatly affect the calculated grant date fair value. There were no shares valued under the Employee Stock Purchase Plan during the three months ended September 30, 2003 and 2002. The weighted average estimated fair values of shares at the date of grant that were issued under the Employee Stock Purchase Plan during the nine months ended September 30, 2003 and 2002 were $1.10 and $1.09, respectively. The weighted average fair values at the date of grant of options which were granted under the employee and directors’ stock option plans during the three months ended September 30, 2003 and 2002 were $1.04 and $1.47 respectively. The weighted average fair values at the date of grant of options that were granted under the employee and director stock option plans during the nine months ended September 30, 2003 and 2002 were $1.24 and $1.31, respectively.

SFAS No. 148 amended SFAS No. 123 in December 2002 to require that disclosures of the pro forma effect of using the fair value method of accounting for stock-based employee compensation be displayed more prominently and in a tabular format. The following table illustrates the effect on our net income (loss) and net income (loss) per share if we had recorded compensation costs based on the estimated grant date fair value as defined by SFAS No. 123 for all granted stock-based awards.


		Three Months Ended September 30						Nine Months Ended September 30

		2003			2002			2003			2002

Net income (loss), as reported		$	(2,484	)	$	3,395		$	(8,433	)	$	(500	)
Add: Stock-based employee compensation expense included in reported net loss, net of tax			—			5			2			117
Deduct: Stock-based compensation expense determined under fair value based method for all awards			(267	)		(532	)		(632	)		(2,128	)

Pro forma net income (loss)		$	(2,751	)	$	2,868		$	(9,063	)	$	(2,511	)

Reported net income (loss) per share:
	Basic	$	(0.20	)	$	0.28		$	(0.69	)	$	(0.04	)
	Diluted	$	(0.20	)	$	0.28		$	(0.69	)	$	(0.04	)
Pro forma net income (loss) per share:
	Basic	$	(0.22	)	$	0.24		$	(0.74	)	$	(0.21	)
	Diluted	$	(0.22	)	$	0.23		$	(0.74	)	$	(0.21	)

2. Financial Statement Details

Inventories consist of the following (in thousands):


	September 30,		December 31,
	2003		2002

Work-in-process	$	442	$	755
Finished goods		998		933
Inventory held by distributors		698		524

Total inventories	$	2,138	$	2,212

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


	September 30,			December 31,
	2003			2002

Land	$	2,250		$	2,850
Buildings and improvements		7,990			8,889
Machinery and equipment		11,648			11,815

Property, plant and equipment		21,888			23,554
Accumulated depreciation and amortization		(15,893	)		(15,462	)

Net property, plant and equipment	$	5,995		$	8,092

Provision for Income Taxes

The provision for income taxes for the three months and nine months ended September 30, 2003 and three and nine months ended September 30, 2002 consists of taxes incurred by our subsidiary in the United Kingdom and minimum state tax obligations. We did not record a benefit for income taxes related to our net losses in the U.S., as we believe that the available objective evidence creates sufficient uncertainty regarding the realization of the deferred tax assets such that we have recorded a full valuation allowance against our deferred tax assets. The effective tax rate for the three months and nine months ended September 30, 2003 was 1%. The effective tax rate for the three months ended September 30, 2002 was impacted by a one time benefit of $3.9 million in tax refunds generated by the carryback of federal tax losses to prior years.

Comprehensive Income

For the three and nine months ended September 30, 2003 and 2002, comprehensive income (loss), which consists of the net income (loss) for the periods and unrealized gain or loss on short-term marketable securities, is as follows (in thousands):


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

Net income (loss)		$	(2,484	)	$	3,395		$	(8,433	)	$	(500	)
Accumulated Other Comprehensive Loss:
	Unrealized loss on marketable securities, net		(8	)		(5	)		(22	)		(65	)

Comprehensive Loss		$	(2,492	)	$	3,390		$	(8,455	)	$	(565	)

3. Recent Accounting Pronouncements

In November 2002, the FASB issued FASB Interpretation (“FIN”) No. 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others”. FIN No. 45 requires that a liability be recorded at fair value in the guarantor’s balance sheet upon issuance of a guarantee. In addition, FIN No. 45 requires disclosures about the guarantees that an entity has issued, including a reconciliation of changes in the entity’s product warranty liabilities. The initial recognition and initial measurement provisions of FIN No. 45 are applicable on a prospective basis to guarantees issued or modified after December 31, 2002, irrespective of the guarantor’s fiscal year-end. We did not have significant warranty expense for the three months and nine months ended September 30, 2003.

In November 2002 the EITF reached a consensus on EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF Issue No. 00-21”). EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. The adoption of the provisions of EITF Issue No. 00-21 did not have a material impact on our financial position and results of operations.

4. Operations by Geographic Regions

The following is a summary of operations by geographical regions (in thousands):


		Three Months Ended				Nine Months Ended
		September 30,				September 30,

		2003		2002		2003		2002

Net revenue:
	United States	$	408	$	680	$	1,369	$	2,701
	Asia		4,850		7,915		13,028		18,691
	Europe		503		659		2,315		2,214
	Other		57		32		139		156

Consolidated		$	5,818	$	9,286	$	16,851	$	23,762


		Three Months Ended						Nine Months Ended
		September 30,						September 30,

		2003			2002			2003			2002

Loss from operations:
	United States	$	(54	)	$	33		$	(389	)	$	(311	)
	Asia		(2,352	)		(730	)		(7,292	)		(4,190	)
	Europe		(66	)		32			(728	)		(264	)
	Other		(7	)		1			(33	)		(17	)

Consolidated		$	(2,479	)	$	(664	)	$	(8,442	)	$	(4,782	)

Capital expenditures:
	United States	$	10		$	187		$	481		$	259
	Europe		—			—			—			23

Consolidated		$	10		$	187		$	481		$	282

Depreciation and amortization:
	United States	$	203		$	497		$	1,032		$	1,522
	Europe					83			46			135

Consolidated		$	203		$	580		$	1,078		$	1,657

Identifiable assets by geographic region are as follows (in thousands):


		September 30,		December 31,
		2003		2002

Identifiable assets:
	United States	$	29,032		38,865
	Asia		41		41
	Europe		125		116

Consolidated		$	29,198	$	39,022

5. Fixed Assets Impairment and Restructuring Charges

In the third quarter of 2003, we completed an impairment review of our land and buildings. The review was undertaken due to continued weakness in the commercial real estate markets, local vacancy rates and recent real estate transactions in our local market. Upon completion of our review, we determined that the carrying values of these assets exceeded their future undiscounted cashflows. Accordingly, we recorded an impairment loss of $1.5 million to write down the assets to their current estimated market value.

On May 19, 2003, we announced a restructuring plan to better align our organizational structure with current business conditions. This realignment process included workforce reductions across all functions of the Company’s operations and a consolidation of our design centers into our San Jose facility. The restructuring charge in the second quarter of 2003 was $1.0 million, consisting primarily of employee severance and related termination costs of $0.6 million and a fixed asset impairment charge of $0.4 million for assets to be disposed of due to headcount reductions and vacating facilities. Additional charges in the third quarter of 2003 were $0.1 million, consisting primarily of employee severance and relocation costs. During the third quarter ended September 30, 2003, we paid out $0.2 million related to the restructuring charges. Our restructuring accrual was $0.1 million at September 30, 2003.

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

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: anticipated revenue from our wireless and networking products, our beliefs regarding future research and development and selling, general and administrative expenses and that the level of spending on research and development to remain near their current levels over the next quarter, our intentions to continue to focus significant resources on development of new products and may increase spending as necessary, our beliefs regarding the impact of our recent corporate restructuring, our beliefs regarding our accounting policies, our beliefs regarding deferred tax assets, including our beliefs that the available objective evidence creates sufficient uncertainty regarding the realization of the deferred tax assets such that we have recorded a full valuation allowance against our deferred tax assets, our expectation that international revenue will account for a significant percentage of our revenue for the next 12 months, our belief that existing cash

resources are sufficient to fund any anticipated operating losses and purchases of capital equipment, provide adequate working capital for the next 12 months, and our beliefs regarding certain litigation matters pending against us.

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. These results 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. They include those regarding (1) revenue recognition, (2) estimating accrued liabilities and allowance for doubtful accounts, (3) inventory and related allowance for obsolete and excess inventory, (4) accounting for income taxes, and (5) valuation of long-lived and intangible assets.

The critical accounting policies are described in Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 29, 2002.

Overview

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 revenue represented 72% of net revenue for the third quarter of 2003 compared to 80% of net revenue for the third quarter of 2002.

On May 19, 2003, we announced a restructuring plan to better align our organizational structure. This realignment process included workforce reductions across all functions of the Company’s operations and a consolidation of our design centers into our San Jose facility. The restructuring charge in the second quarter of 2003 was $1.0 million, consisting primarily of employee severance and related termination costs of $0.6 million and a fixed asset impairment charge of $0.4 million for assets to be disposed of due to headcount reductions and vacating facilities. Additional charges in the third quarter of 2003 were $0.1 million, consisting primarily of employee severance and relocation costs. During the third quarter ended September 30, 2003, we paid out $0.2 million related to the restructuring charges. Our restructuring accrual was $0.1 million at September 30, 2003.

Results of Operations

Three Months Ended and Nine Months Ended September 30, 2003 Compared with Three Months and Nine Months Ended September 30, 2002

Net Revenue

Net revenue for the third quarter of 2003 was $5.8 million, a decrease of 37% from $9.3 million for the third quarter of 2002. Net revenue for the first nine months of 2003 decreased 29% to $16.8 million from $23.8 million for the first nine months of 2002. The decrease in net revenue from the comparable third quarter of 2002 was primarily due to decreasing selling prices of our wireless products and a decrease in overall unit sales volume of those products. Unit volume shipments of our wireless products decreased 13% from the comparable third quarter of 2002, however unit shipment volumes for the first nine months of 2003 were 7% greater than the first nine months of 2002. Our average selling prices for the third quarter of 2003 decreased by 35% from the third quarter of 2002 primarily due to continued competitive pressures in the wireless chipset market. The decrease in net revenue for the first nine months of 2003 as compared to the first nine months of 2002 was primarily due to decreasing demand for our legacy network products, decreases in average selling prices and continued competitive pressures in the wireless chipset market.

Revenue from wireless products totaled $4.2 million, or 72% of net revenue for the third quarter of 2003, compared to $7.4 million, or 80% of net revenue for the third quarter of 2002. Revenue from the sales of wireless products totaled $11.3 million for the first nine months of 2003 and $16.0 million for the first nine months of 2002. Revenue from wireless products comprised 67% of net revenue in the first nine months of 2003 and the first nine months of 2002. Revenue from networking products for the third quarter of 2003 totaled $1.6 million, or 28% of net revenue compared to $1.9 million, or 20% of net revenue for the third quarter of 2002. Revenue from sales of networking products for the first nine months of 2003 totaled $5.5 million compared to $7.8 million of net revenue for the first nine months of 2002. Revenue from networking products accounted for 33% of net revenue in the first nine months of 2003 and the first nine months of 2002.

In the third quarter of 2003 and 2002, Uniden Corporation accounted for more than 10% of our net revenue. Similarly, for the first nine months of 2003 and 2002, Uniden Corporation accounted for more than 10% of net revenue.

International revenue for the third quarter of 2003 totaled $5.4 million, or 93% of net revenue compared to $8.6 million, or 92% of net revenue for the third quarter of 2002. International revenue for the first nine months of 2003 totaled $15.5 million, or 92% of net revenue compared to $21.1 million, or 89% of net revenue for the first nine months of 2002. Domestic revenue was approximately 7% of net revenue for the third quarter of 2003 compared to 8% for the third quarter of 2002. Domestic revenue was approximately 8% of net revenue for the nine months of 2003 compared to 11% for the first nine months of 2002.

Gross Margin

Gross margin is affected by the unit 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.

Gross margin as a percentage of net revenue for the third quarter of 2003 was 41% compared to 57% in the third quarter of 2002. Gross margin percentage for the first nine months of 2003 was 44% compared to 57% for the first nine months of 2003. The decrease in gross margin for both the three and nine months ended September 30, 2003 was primarily due to low yields from the introduction of a new wireless transceiver that began shipping in high volumes during the second quarter of 2003 and a decrease in average selling prices on our wireless products.

Research and Development Expenses

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 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 for the third quarter of 2003 was $1.7 million, a decrease of $2.2 million or 56% from $3.9 million in the third quarter of 2002. Research and development expenses for the first nine months of 2003 was $7.5 million, a decrease of $4.7 million or 39% from $12.2 million in the first nine months of 2002. The decrease in research and development expenses for both the three and nine months ended September 30, 2003 was primarily due to the cancellation of our 802.11a broadband wireless product development effort in October 2002 and our restructuring efforts in the second quarter of 2003. The Company remains committed to funding new product development and while we expect the level of spending on research and development to remain near their current levels over the next quarter, we intend to continue to focus significant resources on development of new products and may increase spending as necessary.

Selling, General and Administrative Expenses

Selling, general and administrative (SG&A) expenses for the third quarter of 2003 decreased 23% to $1.6 million from $2.0 million for the third quarter of 2002. SG&A expenses for the first nine months of 2003 decreased 5% to $5.8 million from $6.1 million in the first nine months of 2002. The decrease in SG&A expenses for the third quarter of 2003 compared to the third quarter of 2002 was primarily due to the workforce reductions that occurred in the fourth quarter of 2002 and the second quarter of 2003. The decrease in SG&A expenses for the first nine months of 2003 compared with the first nine months of 2002 was primarily due to the two workforce reductions, offset somewhat by increases in consulting expenses as well as increases in marketing and prototype expenses associated with the introduction of new products.

Fixed Assets Impairment and Restructuring Charges

Interest and Other Income and Interest and Other Expense

Interest and other income was $0.1 million for the third quarter of 2003 and 2002. Interest and other income was $0.2 million and $0.6 million in the first nine months of 2003 and 2002, respectively. The decrease in interest and other income for the first nine months of 2003 as compared to the nine months of 2002 was primarily due to the changes in cash balances as well as lower prevailing interest rates.

Interest and other expense, primarily attributable to a mortgage on our facilities, was less than $0.1 million in the third quarter of 2003 and 2002. Interest and other expense was $0.2 million in the first nine months of 2003 and 2002, respectively.

Provision for Income Taxes

Liquidity and Capital Resources

Net cash used in operating activities was $6.3 million for the first nine months of 2003. Net cash provided by operating activities was $1.2 million in the first nine months of 2002. Net cash used in operating activities during the first nine months of 2003 was due primarily to a net operating loss of $8.4 million, an increase in accounts receivable of $0.6 million, and decreases in deferred revenue of $0.6 million and accrued liabilities of $0.4 million. These were partially offset by a non-cash asset impairment charge of $1.5 million, a decrease in other current assets of $1.4 million and non-cash charges for depreciation and amortization of $1.0 million .

Net cash provided by investing activities was $4.3 million in the first nine months of 2003 and net cash used in investing activities was $0.7 million in the comparable period of 2002. Investing activities during these periods consisted primarily of net sales of short-term investments, which totaled $4.8 million for the nine months of 2003, and net purchases of short-term investments of $0.7 million for the first nine months of 2002. Capital expenditures were $0.5 million for the first nine months of 2003 and $0.3 million in the comparable period of 2002.

Cash used in financing activities, consisting of principal payments on our long-term debt, was $0.1 million in the first nine months of both 2003 and 2002. These principal payments were partially offset by proceeds from the issuance of common stock.

Working capital amounted to $17.8 million as of September 30, 2003, compared to $24.3 million as of December 31, 2002. Working capital at September 30, 2003 includes cash and cash equivalents of $8.8 million and short-term investments of $9.9 million.

We anticipate that existing cash resources are sufficient to 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.

Recent Accounting Pronouncements

In November 2002 the EITF reached a consensus on EITF Issue No. 00-21, “Accounting for Revenue Arrangements with Multiple Deliverables” (“EITF Issue No. 00-21”). EITF Issue No. 00-21 provides guidance on how to account for arrangements that involve the delivery or performance of multiple products, services and/or rights to use assets. The provisions of EITF Issue No. 00-21 will apply to revenue arrangements entered into in fiscal periods beginning after June 15, 2003. We do not anticipate that adoption of this statement will have a material impact on our financial position or results of operations.

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 are likely to fluctuate significantly. They may fail to meet or exceed the expectations of securities analysts or investors, causing our stock price to decline.

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, but are not limited to, those listed below and those identified throughout this “Factors That May Affect Future Operating Results” section:

• 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;

• the gain or loss of a key customer, design win or order;

• fluctuations in manufacturing yields;

• timing of revenue from contracts, which may span several quarters;

• competitive market conditions and their effect on average selling prices and gross margins;

• competitive market conditions;

• new product introductions;

• market acceptance of new or existing products;

• decline in revenue from products that are reaching or have been announced as reaching the end of their respective product lives;

• the timely development, introduction, marketing, and transition to volume production of new products and technologies;

• mix of products sold;

• 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;

• availability and performance of advanced silicon process technologies from foundry sources;

• ability to transition the manufacture of products among foundry suppliers or between foundries operated by the same supplier;

• international conflicts and acts of terrorism and economic and political conditions worldwide; and

• major health concerns, such as the recurrence of severe acute respiratory syndrome (“SARS”).

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.

The markets in which we operate are intensely competitive, and many competitors are larger and more established. If we do not compete successfully, we will be unable to gain market share or enter into new markets.

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. These competitors may be able to adapt more quickly to new or emerging technologies and changes in customer requirements. 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. If we fail to compete successfully, we will be unable to gain market share or enter into new markets.

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 gross margin 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 gross margin 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.

The market for wireless applications is characterized by rapid technological change. Our future success depends on our ability to respond to these changes.

Rapidly changing technology, frequent product introductions and evolving industry standards make it difficult to accurately predict the future growth rate, size or technological direction of the market for wireless applications. 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. We have, in the past, invested substantial resources in emerging technologies that did not achieve the market acceptance that we had expected. If new markets do not develop as we anticipate, or if our products do not gain acceptance in these markets, our business and operating results will suffer.

If we are unable to develop and introduce new products successfully, and in a cost-effective and timely manner, or achieve market acceptance of new products, our business and operating results could suffer.

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 and introduction of new products. Successful product development and introduction depends on many factors, including:

• ability to predict market requirements and evolving industry standards;

• 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 the fourth quarter of 2002, we

discontinued product development activities for our 802.11a products because of competitive pressures in the 802.11a product market. In connection with the discontinuance, we redirected certain engineering activities to focus on a variety of wireless products. If we are unable to successfully compete in the wireless product market, our business and operating results will suffer. 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 could be harmed.

Customers typically take a long time to evaluate our new products. It typically takes three to six months or more for customers to test new products, and at least an additional three 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 revenue 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 a history of losses and, because of continued investment in product development, expect to incur losses in the future. We may not become profitable.

We have incurred quarterly net losses from June 2000 through September 2003, 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 approximately $18.3 million as of September 30, 2003.

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. If revenue does not correspondingly increase, our operating results and financial condition could be harmed. 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. As a result, we may not be able to retain employees, or new product and technology development or sales and marketing programs to successfully compete against our competitors. For example, in the fourth quarter of 2002 and in the second quarter of 2003, we consolidated certain business operations and completed a reduction in our work force to balance the size of our employee base with our anticipated revenue levels. There can be no assurance that we will not be required to further reduce our work force. If we do not achieve or increase profitability in the future at a level expected by securities analysts or investors, the market price of our common stock will likely decline.

We recently announced two restructurings of our operations which included discontinuing certain of our product lines and reductions in force, which could harm our operating results

In October 2002, we announced the discontinuation of development of our 802.11a products in order to better align our product development activities. As a part of the restructuring, we reduced our workforce by approximately 39 employees and redirected certain of our engineering activities and reorganized our sales, marketing and applications functions. In addition, in May 2003, we announced a corporate restructuring which included the consolidation of some functions at our headquarters in San Jose, California and included a workforce reduction of approximately 37 employees. Many factors, such as the reallocation of responsibilities among remaining personnel, the planned consolidation of our facilities and employee morale issues, may adversely impact our ability to deliver our products in accordance with our current plans or customer expectations, cause delays in the delivery of our products, or lead us to change our product plans, which in turn may have a negative impact on our revenues and customer relationships. In addition, the implementation of the restructurings may itself result in customer concerns regarding our future performance and our ability to meet their expectations for our products, the diversion of efforts of our executive management team and other key employees, and higher than anticipated costs, any of which may harm our operating results.

To the extent that our existing resources and cash generated from operations are insufficient to fund our future activities, we may need to raise additional capital. If funds are not available on acceptable terms, we may not be able to hire and retain employees, fund our operations or compete effectively.

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.

We depend on networking, wireless, and telecommunications spending for our revenue. Any decrease or delay in spending in these industries would negatively impact future operating results and financial condition.

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 2002 and in the first nine months of 2003, 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 revenue comes from sales to a few customers, a delay in orders from one customer could have a significant negative effect on future revenue.

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 could harm our business and operating results.

We have relied and expect to continue to rely on a limited number of customers for a significant portion of our revenue. Our revenue could decline due to the delay of customer orders or if we are unable to maintain or develop relationships with current or new customers.

A significant majority of our revenue comes from sales to relatively few customers. Sales to our ten largest customers, excluding domestic distributors, accounted for approximately 88% and 81% of net revenue for the three months and nine months ended September 30, 2003 and approximately 90% and 84% of net revenue for the three and nine months ended September 30, 2002, respectively. One customer, Uniden Corporation, accounted for 63% of our net revenue for the third quarter of 2003. Sales to domestic distributors for the three months and nine months ended September 30, 2003 accounted for approximately 7% and 8% of net revenue and 4% and 7% of net revenue for the three and nine months ended September 30, 2002, respectively. We anticipate that a limited number of key customers, including Uniden Corporation, and distributors will continue to provide a significant portion of our net revenue 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 harm our operating results. In addition, our operating results could be harmed if one or more of our major customers were to develop other sources for the products we now supply them.

Because many of our current competitors have pre-existing relationships with our current and potential new customers, we might not be able to achieve sufficient market penetration to achieve or sustain profitability. Many of our competitors have established relationships with our current and potential customers and can devote substantial resources aimed at preventing us from establishing or enhancing our customer relationships. If we are unable to gain additional market share or enter new markets due to these pre-existing relationships with potential customers, our operating results could be harmed.

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.

We depend on international sales and are subject to the risks associated with international operations, which may negatively affect our business.

Sales to customers outside of the United States represented approximately 93% and 92% of net revenue for the three months and nine months ended September 30, 2003 and 92% and 89% of net revenue for the three and nine months ended September 30, 2002, respectively. We expect that international sales will continue to generate a substantial proportion of net revenue 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;

• 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; and

• major health concerns, such as the recurrence of SARS.

Substantially all of our international sales must be licensed by the Office of Export Administration of the U.S. Department of Commerce. If we experience any significant difficulties in obtaining export licenses, it could harm out business.

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 harm 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 harmed.

Selling prices for networking and wireless products typically decrease, which could lead to lower operating results.

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

• 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 revenue and gross margin, harming our business, financial condition, and results of operations.

Revenue from our networking products, most of which are reaching or have been announced as reaching the end of their respective product lives, could continue to decline and harm our business.

Most of out networking products are reaching or have been announced as reaching the end of their respective product lives and revenue from these products will continue to decline and we will eventually stop shipping these products. If we are not successful in increasing demand for our current network products or in introducing and gaining acceptance of new products our overall revenue could continue to decline, which would harm our business and operating results.

Defects in our products, product returns and product liability could result in a decrease in customers and revenue, unexpected expenses and loss of market share, any of which could harm our business.

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, any of which could harm our business and operating results.

We depend on the health of the semiconductor industry, which is highly cyclical. The decline in demand in the semiconductor industry could harm our financial condition and results of operations.

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.

If we fail to adequately forecast demand for our products, we may incur product shortages or excess product inventory.

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 could be harmed.

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 revenue.

We depend on a limited number of outside foundries and test subcontractors in the manufacturing process, and any failure to obtain sufficient foundry or testing capacity could significantly delay our ability to ship our products, damage our customer relationships, and result in reduced revenue.

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 of reduced manufacturing yields. However, our foundries have sometimes experienced lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start-up of new processes. Reduced yields have, at times, negatively affected our operating results, a situation which may recur in the future.

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 and labor instability and tariff increases. Our main foundries are located in Singapore and Hong Kong, which presents specific risks, including political instability and health concerns related to the recent outbreak of cases of SARS.

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 could be materially harmed.

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 be harmed.

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, harming our business and results of operations.

Changes in technology and in available foundry capacity sometimes require us to migrate products between foundry suppliers or among foundries operated by the same supplier. In addition, our current foundry suppliers may choose to open new foundries or close existing foundries and this may require us to migrate the manufacture of our products among their foundries. If we are unable to find new foundries for our products or experience difficulties in the manufacture of our products as a result of migrating products between foundry suppliers, our business and operating results may be harmed.

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.

We and the independent foundries and subcontractors we use to manufacture and test our products are subject to environmental laws. Failure to comply with these laws could delay manufacturing of our products and result in unexpected expenses.

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 regulations could also require our suppliers or subcontractors to acquire equipment or incur other expenses to comply with environmental regulations. If our suppliers or subcontractors incur substantial additional expenses, product costs could significantly increase, harming our results of operations.

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 harm our business and operating results.

Because competition for qualified personnel is intense, we may not be successful in attracting and retaining personnel, which could have an impact upon the development or sales of our products.

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. In the fourth quarter of 2002 and in the second quarter of 2003, we consolidated certain business operations and completed a reduction in our work force to balance the size of our employee base with our anticipated revenue levels. Reductions in our workforce could make it difficult to motivate and retain remaining employees or attract needed new employees, and provide distractions affecting our ability to develop new products and technologies and deliver products in a timely fashion.

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.

Our success depends on our ability to protect our intellectual property and proprietary rights.

We currently own 11 U.S. patents, and have six U.S. patent applications and 17 foreign patent applications pending. Through a sale of a portion of our assets, we maintain a royalty-free license to 45 U.S. patents, three foreign patents, seven U.S. patent applications, and three 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 harmed.

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.

We have in the past, and may in the future, be parties to legal proceedings that could have a negative financial impact on us.

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. On June 2, 2003, the Court of Appeals for the Federal Circuit affirmed the District Court’s judgment. Pioneer may petition the Supreme Court for a writ of certiorari to review the Federal Circuit’s judgment. Although we believe that this claim is unwarranted and without merit, we cannot provide any assurance as to the outcome of this proceeding.

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 harm 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.

Recently enacted and proposed regulatory changes may cause us to incur increased costs.

Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted and proposed by the Securities and Exchange Commission and the Nasdaq Stock Market could cause us to incur increased costs as we evaluate the implications of new rules and respond to new requirements. The new rules could make it more difficult for us to obtain certain types of insurance, including director and officer liability insurance, and we may be forced to accept reduced policy limits and coverage or incur substantially higher costs to obtain the same or similar coverage. The impact of these events could also make it more difficult for us to attract and retain qualified persons to serve on our board of directors, or as executive officers. We are presently evaluating and monitoring developments with respect to these new and proposed rules, and we cannot predict or estimate the amount of additional costs we may incur or the timing of such costs.

Our stock price has been and will likely continue to be volatile because of stock market fluctuations that affect the price of technology stocks. A decline in our stock price could result in securities class action litigation against us, which could divert management’s attention and harm our business.

Our stock price has been and is likely to continue to be highly volatile. Between January 1, 2003 and September 30, 2003, our stock price has traded as high as $4.00 on February 20, 2003, and as low as $2.47 on June 9, 2003. 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.

Our Certificate of Incorporation and Bylaws, Stockholder Rights Plan and Delaware law contain provisions that could discourage a change in control, even if the change in control would be beneficial to our stockholders.

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 acquirer. 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 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As September 30, 2003, our investment portfolio consisted of U.S. government obligations, commercial paper and money market funds, typically with maturities of less than 12 months. 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. If market interest rates were to increase immediately and uniformly by 10% as of September 30, 2003 and September 30, 2002, the decline in the fair value of the portfolio would not be material.

Foreign Currency Exchange Risk

We have international facilities and are, therefore, subject to foreign currency rate exposure. We limit our foreign currency risks principally by maintaining minimal foreign currency balances. Since our exposure related to exchange rate volatility has not been significant, we do not currently hedge this exposure.

Item 4. Controls and Procedures

(a) Evaluation of disclosure controls and procedures. We maintain “disclosure controls and procedures,” as such term is defined in Rule 13a-15(e) under the Securities Exchange Act of 1934 (the “Exchange Act”), that are designed to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in Securities and Exchange Commission rules and forms, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure. In designing and evaluating our disclosure controls and procedures, management recognized that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

Based on their evaluation as of the end of the period covered by this Quarterly Report on Form 10-Q, our Chief Executive Officer and Chief Financial Officer have concluded that, subject to the limitations noted above, our disclosure controls and procedures were effective to ensure that material information relating to us, including our consolidated subsidiaries, is made known to them by others within those entities, particularly during the period in which this Quarterly Report on Form 10-Q was being prepared.

(b) Changes in internal control over financial reporting. There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) under the Exchange Act) identified in connection with the evaluation described in Item 4(a) above that occurred during our last fiscal quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. 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. On June 2, 2003, the Court of Appeals for the Federal Circuit affirmed the District Court’s judgment. Pioneer may petition the Supreme Court for a writ of certiorari to review the Federal Circuit’s judgment. Although we believe that this claim is unwarranted and without merit, we cannot provide any assurance as to the outcome of this proceeding.

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.

Item 4. Submission of Matters to a Vote of Security Holders

The registrant’s Annual Meeting of Stockholders was held on August 6, 2003.

The following actions were taken at the annual meeting:

1. The following Directors were elected


	For		Withheld

Timothy Richardson		11,181,148		431,889
David Gellatly		11,163,471		449,566
William Pohlman		11,530,005		83,032
Joseph Rizzi		11,513,582		99,455
A. Thampy Thomas		11,530,005		83,032

2. The ratification of the appointment of PricewaterhouseCoopers LLP as our independent auditors for the year ending December 31, 2003 was approved.


For	Against		Abstain

11,604,372		6,265		2,400

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:


Exhibit
Number		Description of Document

31.1		Rule 13a-14(a) Certification by the Chief Executive Officer
31.2		Rule 13a-14(a) Certification by the Chief Financial Officer
32.1		Section 1350 Certification by the Chief Executive Officer
32.2		Section 1350 Certification by the Chief Financial Officer.

(b) Reports on Form 8-K

On July 24, 2003, the Company filed a Current Report on Form 8-K furnishing under item 12 the Company’s press release relating to its financial results for the quarter ended June 30, 2003.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.


	MICRO LINEAR CORPORATION

Date: November 12, 2003	By	/s/ TIMOTHY A. RICHARDSON

		Timothy A. Richardson
		President and Chief Executive Officer
		(Principal Executive Officer)

Date: November 12, 2003	By	/s/ MICHAEL W. SCHRADLE

		Michael W. Schradle
		Chief Financial Officer
		(Principal Financial and Accounting Officer)

INDEX TO EXHIBITS


Exhibit
Number		Description of Document

31.1		Rule 13a-14(a) Certification by the Chief Executive Officer
31.2		Rule 13a-14(a) Certification by the Chief Financial Officer
32.1		Section 1350 Certification by the Chief Executive Officer
32.2		Section 1350 Certification by the Chief Financial Officer.

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•		changes in market demand, including seasonal and cyclical fluctuations;

•		timing, amount, cancellation or rescheduling of customer orders;

•		the gain or loss of a key customer, design win or order;

•		fluctuations in manufacturing yields;

•		timing of revenue from contracts, which may span several quarters;

•		competitive market conditions and their effect on average selling prices and gross margins;

•		competitive market conditions;

•		new product introductions;

•		market acceptance of new or existing products;

•		decline in revenue from products that are reaching or have been announced as reaching the end of their respective product lives;

•		the timely development, introduction, marketing, and transition to volume production of new products and technologies;

•		mix of products sold;

•		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;

•		availability and performance of advanced silicon process technologies from foundry sources;

•		ability to transition the manufacture of products among foundry suppliers or between foundries operated by the same supplier;

•		international conflicts and acts of terrorism and economic and political conditions worldwide; and

•		major health concerns, such as the recurrence of severe acute respiratory syndrome (“SARS”).

•		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.

•		ability to predict market requirements and evolving industry standards;

•		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.

•		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;

•		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; and

•		major health concerns, such as the recurrence of SARS.

•		rapidly changing technologies;

•		price-performance enhancements;

•		product introductions by competitors;

•		price pressure from significant customers; and

•		product maturity and obsolescence.

•		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.