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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 June 30, 2002.

or

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from to .

Commission File Number 0-25236


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


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

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


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



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






As of July 31, 2002 there were 92,700,726 shares of common stock, no par value,
outstanding.



MICREL, INCORPORATED
INDEX TO
REPORT ON FORM 10-Q
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2002

Page

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

Condensed Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001 3

Condensed Consolidated Statements of Operations - Three and
Six Months Ended June 30, 2002 and 2001 4

Condensed Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2002 and 2001 5

Notes to Condensed Consolidated Financial Statements 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations 11

Item 3. Quantitative and Qualitative Disclosures about Market Risk 21


PART II. OTHER INFORMATION

Item 1. Legal Proceedings 22

Item 4. Submission of Matters to a Vote of Security Holders 22

Item 6. Exhibits and Reports on Form 8-K 22


Signature 23


2



ITEM 1. FINANCIAL STATEMENTS



MICREL, INCORPORATED

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

June 30, December 31,
2002 2001 (1)
------------ ------------
(Unaudited)

ASSETS
CURRENT ASSETS:
Cash and cash equivalents $ 118,739 $ 130,406
Short-term investments 77 3,093
Accounts receivable, net 29,760 28,209
Inventories 44,093 35,394
Other current assets 4,798 8,754
Deferred income taxes 29,857 27,367
---------- ----------
Total current assets 227,324 233,223

EQUIPMENT AND LEASEHOLD IMPROVEMENTS, NET 107,007 117,571
INTANGIBLE ASSETS, NET 9,832 3,660
OTHER ASSETS 398 359
---------- ----------
TOTAL $ 344,561 $ 354,813
========== ==========

LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable $ 15,175 $ 12,737
Deferred income on shipments to distributors 7,791 9,777
Other current liabilities 9,483 10,154
Current portion of long-term debt 1,975 3,615
---------- ----------
Total current liabilities 34,424 36,283

LONG-TERM DEBT 749 1,299
OTHER LONG-TERM OBLIGATIONS 6,800 3,901

SHAREHOLDERS' EQUITY:
Preferred stock, no par value -
authorized: 5,000,000 shares;
issued and outstanding: none -- --
Common stock, no par value -
authorized: 250,000,000 shares;
issued and outstanding:
2002 - 92,803,920 shares;
2001 - 92,823,677 shares 179,011 194,384
Deferred stock compensation (36,412) (44,755)
Accumulated other comprehensive loss (26) (25)

Retained earnings 160,015 163,726
---------- ----------
Total shareholders' equity 302,588 313,330
---------- ----------
TOTAL $ 344,561 $ 354,813
========== ==========

(1) Derived from the audited balance sheet included in the Annual Report on
Form 10-K of Micrel, Incorporated for the year ended December 31, 2001.

See Notes to Condensed Consolidated Financial Statements.



3




MICREL, INCORPORATED

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


Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------


NET REVENUES $ 55,363 $ 50,774 $ 103,688 $ 125,725

COST OF REVENUES* 34,139 31,247 64,816 67,004
--------- --------- --------- ---------

GROSS PROFIT 21,224 19,527 38,872 58,721
--------- --------- --------- ---------

OPERATING EXPENSES:
Research and development 13,009 12,396 26,371 25,497
Selling, general and
administrative 8,874 7,583 16,869 19,053
Amortization of deferred
stock compensation* 2,459 2,226 5,052 4,294
Non-recurring acquisition
expenses* -- 8,894 -- 8,894
--------- --------- --------- ---------
Total operating expenses 24,342 31,099 48,292 57,738
--------- --------- --------- ---------

INCOME (LOSS) FROM OPERATIONS (3,118) (11,572) (9,420) 983

OTHER INCOME (EXPENSE), NET (476) 1,411 588 3,160
--------- --------- --------- ---------

INCOME (LOSS) BEFORE INCOME TAXES (3,594) (10,161) (8,832) 4,143

PROVISION (BENEFIT) FOR
INCOME TAXES (3,864) (1,522) (5,121) 3,110
--------- --------- --------- ---------

NET INCOME (LOSS) $ 270 $ (8,639) $ (3,711) $ 1,033
========= ========= ========= =========

NET INCOME (LOSS) PER SHARE:
Basic $ 0.00 $ (0.09) $ (0.04) $ 0.01
========= ========= ========= =========
Diluted $ 0.00 $ (0.09) $ (0.04) $ 0.01
========= ========= ========= =========

SHARES USED IN COMPUTING
PER SHARE AMOUNTS:
Basic 92,984 91,888 93,045 91,412
========= ========= ========= =========
Diluted 96,287 91,888 93,045 98,188
========= ========= ========= =========

* Amortization of deferred stock
compensation related to:
Cost of revenues $ 784 $ 782 $ 1,552 $ 1,511
========= ========= ========= =========

Operating expenses:
Research and development $ 1,367 $ 1,163 $ 2,727 $ 2,243
Selling, general and
administrative 1,092 1,063 2,325 2,051
--------- --------- --------- ---------
2,459 2,226 5,052 4,294
Non-recurring acquisition
expenses -- 2,007 -- 2,007
--------- --------- --------- ---------
Total operating expenses $ 2,459 $ 4,233 $ 5,052 $ 6,301
========= ========= ========= =========

See Notes to Condensed Consolidated Financial Statements.



4






MICREL, INCORPORATED

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In thousands)


Six Months Ended
June 30,
---------------------
2002 2001
--------- ---------


NET CASH FLOWS PROVIDED BY OPERATING ACTIVITIES $ 7,952 $ 40,039
--------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of equipment and leasehold improvements (5,698) (23,936)
Purchases of intangible assets (2,054) --
Purchases of short-term investments -- (30,537)
Proceeds from sales and maturities of short-term
investments 3,015 50,685
--------- ---------
Net cash used by investing activities (4,737) (3,788)
--------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Repayments of long-term debt (2,190) (2,872)
Proceeds from the issuance of common stock, net 5,594 5,001
Repurchase of common stock (18,286) --
--------- ---------
Net cash provided (used) by financing activities (14,882) 2,129
--------- ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS (11,667) 38,380

CASH AND CASH EQUIVALENTS - Beginning of period 130,406 86,137
--------- ---------

CASH AND CASH EQUIVALENTS - End of period $ 118,739 $ 124,517
========= =========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Cash paid during the period for:
Interest $ 153 $ 370
========= =========
Income taxes $ 86 $ 8,893
========= =========
Non-cash transactions:
Deferred stock compensation (reversal) $ (1,739) $ 11,519
========= =========
Acquisition of intangible asset under patent
cross license and settlement agreement $ 5,154 $ --
========= =========

See Notes to Condensed Consolidated Financial Statements.



5


MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


1. SIGNIFICANT ACCOUNTING POLICIES

Interim Financial Information - The accompanying condensed consolidated
financial statements of Micrel, Incorporated and its wholly-owned
subsidiaries ("Micrel" or the "Company") as of June 30, 2002 and for the
three and six months ended June 30, 2002 and 2001 are unaudited. In the
opinion of management, the condensed consolidated financial statements
include all adjustments (consisting only of normal recurring accruals) that
management considers necessary for a fair presentation of its financial
position, operating results and cash flows for the interim periods
presented. Operating results and cash flows for interim periods are not
necessarily indicative of results for the entire year.

This financial data should be read in conjunction with the audited
consolidated financial statements and notes thereto included in the
Company's Annual Report on Form 10-K for the year ended December 31, 2001.
This financial data should also be read in conjunction with the Company's
critical accounting policies included in Management's Discussion and Analysis
of Financial Condition and Results of Operations in the Company's Annual
Report on Form 10-K for the year ended December 31, 2001.

Net Income (loss) per Common and Equivalent Share - Basic net income (loss)
per share is computed by dividing net income (loss) by the number of
weighted average common shares outstanding. Diluted net income (loss) per
share reflects potential dilution from outstanding stock options using the
treasury stock method.

Reconciliation of weighted average shares used in computing net income
(loss) per share is as follows (in thousands):



Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------

Weighted average common
shares outstanding 92,984 91,888 93,045 91,412
Dilutive effect of stock
options outstanding using
the treasury stock method 3,303 -- -- 6,776
--------- --------- --------- ---------
Shares used in computing
diluted net income per share 96,287 91,888 93,045 98,188
========= ========= ========= =========



2. RECENTLY ISSUED ACCOUNTING STANDARDS

In June 2002, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities", which addresses accounting
for restructuring and similar costs. SFAS 146 supersedes previous
accounting guidance, principally Emerging Issues Task Force ("EITF") Issue
No. 94-3. The Company will adopt the provisions of SFAS 146 for
restructuring activities initiated after December 31, 2002. SFAS 146
requires that the liability for costs associated with an exit or disposal
activity be recognized when the liability is incurred. Under EITF 94-3, a
liability for an exit cost was recognized at the date of the Company's
commitment to an exit plan. SFAS 146 also establishes that the liability
should initially be measured and recorded at fair value. Accordingly, SFAS
146 may affect the timing of recognizing future restructuring costs as well
as the amounts recognized.


6


MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


3. INVENTORIES

Inventories consist of the following (in thousands):



June 30, December 31,
2002 2001
------------ ------------

Finished goods $ 22,741 $ 16,812
Work in process 19,712 16,506
Raw materials 1,640 2,076
---------- ----------
$ 44,093 $ 35,394
========== ==========



4. BORROWING ARRANGEMENTS

Borrowing agreements consisted of $5 million under a revolving line of
credit. There were no borrowings under this agreement as of June 30, 2002.
The revolving line of credit was scheduled to expire on June 30, 2002 and
has been renewed on a month-to-month basis until terminated by either party
upon 30 days notice. Borrowings under the revolving line of credit bear
interest rates of, at the Company's election, the prime rate (4.75% at June
30, 2002), or the bank's revolving offshore rate, which approximates LIBOR
(1.86% at June 30, 2002) plus 2.0%. In addition the Company had a $10
million non-revolving line of credit agreement which expired on June 30,
2002 and has not been renewed. The agreements contain certain restrictive
covenants that include a restriction on the declaration and payment of
dividends without the lender's consent. The Company was in compliance with
all such covenants at June 30, 2002.

As of June 30, 2002, the Company had $2.7 million outstanding under term
notes borrowed under previously expired borrowing arrangements.


5. SIGNIFICANT CUSTOMERS

During the six months ended June 30, 2002, one customer, an Asian based
stocking representative, accounted for $14.4 million (13.9%) of net revenues,
but no direct O.E.M. customer accounted for more than 10% of net revenues.
During the six months ended June 30, 2001, one customer, a North American
distributor, accounted for $14.7 million (11.7%) of net revenues, but no
direct O.E.M. customer accounted for more than 10% of net revenues.


6. COMPREHENSIVE INCOME (LOSS)

Comprehensive income or loss, which was comprised of the Company's net
income or loss for the periods and changes in unrealized gains or losses on
investments, was a net income of $269,000 and a net loss of $3.7 million
for the three and six months ended June 30, 2002, respectively, and a net
loss of $8.6 million and a net income of $1.0 million for the three and six
months ended June 30, 2001, respectively.


7


MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


7. SEGMENT REPORTING

The Company operates under two reportable segments, standard products and
custom and foundry products.



Net Revenues by Segment
(Dollars in thousands)

Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------

Net Revenues:
Standard Products $ 49,376 $ 40,779 $ 92,408 $ 103,906
Custom and Foundry Products 5,987 9,995 11,280 21,819
--------- --------- --------- ---------
Total net revenues $ 55,363 $ 50,774 $ 103,688 $ 125,725
========= ========= ========= =========

As a Percentage of Total Net Revenues:
Standard Products 89% 80% 89% 83%
Custom and Foundry Products 11% 20% 11% 17%
--------- --------- --------- ---------
Total net revenues 100% 100% 100% 100%
========= ========= ========= =========



8. LITIGATION AND OTHER CONTINGENCIES

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

On July 2, 1999, National Semiconductor Corporation ("National"), a
competitor of the Company, filed a complaint against the Company, entitled
National Semiconductor Corporation v. Micrel Semiconductor, Inc. in the
United States District Court, Northern District of California, in San Jose,
California, alleging that the Company infringed five National Semiconductor
patents. The complaint in the lawsuit sought unspecified compensatory
damages for infringement, and treble damages as well as permanent
injunctive relief against further infringement of the National patents at
issue. On May 23, 2002 the Company entered into a Patent Cross License and
Settlement Agreement with National which resolved all outstanding patent
disputes between the companies. The Court subsequently dismissed the
lawsuit (see Note 9).

On February 26, 1999, the Lemelson Medical, Education & Research Foundation
(the "Lemelson Partnership") filed a complaint which was served on the
Company on June 15, 1999, entitled Lemelson Medical, Education & Research
Foundation, Limited Partnership v. Lucent Technologies Inc., et al. in the
United States District Court in Phoenix, Arizona, against eighty-eight
defendants, including the Company, alleging infringement of Lemelson
Foundation patents. The complaint in the lawsuit seeks unspecified
compensatory damages, treble damages and attorneys' fees, as well as
injunctive relief against further infringement of the Lemelson patents at
issue. The Company intends to continue to defend itself against these
claims. The case is currently in the motion and discovery phase and no
trial date has been set.


8


MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


On May 9, 1994, Linear Technology Corporation ("Linear" or "LTC"), a
competitor of the Company, filed a complaint against the Company, entitled
Linear Technology Corporation v. Micrel, Incorporated, in the United States
District Court in San Jose, California, alleging patent and copyright
infringement and unfair competition. All claims, except the patent
infringement claim, have been settled or dismissed. In this lawsuit,
Linear claimed that two of the Company's products infringed one of Linear's
patents. The complaint in the lawsuit sought unspecified compensatory
damages, treble damages and attorneys' fees as well as preliminary and
permanent injunctive relief against infringement of the Linear patent at
issue. On August 20, 1999, the United States District Court in San Jose
adjudicated in favor of the Company in this patent infringement suit
brought by the plaintiff. The plaintiff alleged in the suit that the
Company had infringed upon U.S. Patent No. 4,755,741, which covers design
techniques used to increase the efficiency of switching regulators. The
United States District Court in San Jose found the patent to be invalid
under the "on sale bar" defense as the plaintiff had placed integrated
circuits containing the alleged invention on sale more than a year before
filing its patent application. The United States District Court in San
Jose dismissed the plaintiff's complaint on the merits of the case and
awarded the Company its legal costs. A notice of appeal of the Judgment
was filed by Linear with the United States Court of Appeal for the Federal
Circuit ("CAFC") on September 17, 1999. After briefing and oral argument
by both companies, on December 28, 2001 the CAFC reversed the District
Court's judgment of invalidity and remanded the case to the District Court.
On January 11, 2002 the Company filed a Petition for Rehearing En Banc with
the Court of Appeal, which was subsequently denied. On July 3, 2002, the
Company filed a Petition for Writ of Certiorari with the Supreme Court of
the Unites States. Linear's opposition to the Petition is due on September
6, 2002. The Company intends to continue to vigorously defend itself
against the claims set forth in the lawsuit.

On May 23, 2002, the Company filed a complaint against Nortel Networks
("Nortel") entitled Micrel, Incorporated v. Nortel Networks Corporation, in the
Superior Court of the State of California, alleging various causes of action
relating to breach of a relationship surrounding the sale of certain custom
products by Micrel to Nortel. In this lawsuit, Micrel is alleging that Nortel
reneged on its obligation to purchase substantial quantities of a custom
product from Micrel, leaving Micrel with excess inventory, which was written
down to fair market value in 2000. The complaint seeks compensatory damages,
attorneys' fees and costs. On July 11, 2002, Nortel filed for removal of the
case to the United States District Court in San Jose, which removal was
approved. Nortel filed a Motion to Dismiss on August 6, 2002. The Company's
response to this motion is due on August 26, 2002. The Court has scheduled a
Case Management Conference for November 18, 2002.

The Company believes that the ultimate outcome of the legal actions
discussed above will not result in a material adverse effect on the
Company's financial condition, results of operation or cash flows.
However, litigation is subject to inherent uncertainties, and no assurance
can be given that the Company will prevail in these lawsuits. Accordingly,
the pending lawsuits, as well as potential future litigation with other
companies, could result in substantial costs and diversion of resources and
could have a material adverse effect on the Company's financial condition,
results of operations or cash flows.

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

In the event of an adverse ruling in any intellectual property litigation
that now exists or might arise in the future, the Company might be required
to discontinue the use of certain processes, cease the manufacture, use and
sale of infringing products, expend significant resources to develop non-
infringing technology or obtain licenses to the infringing technology.
There can be no assurance, however, that under such circumstances, a
license would be available under reasonable terms or at all. In the event
of a successful claim against the Company and the Company's failure to
develop or license substitute technology on commercially reasonable terms,
the Company's financial condition, results of operations, or cash flows
could be adversely affected.


9


MICREL, INCORPORATED
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)


9. PATENT CROSS LICENSE AND SETTLEMENT AGREEMENT

On May 23, 2002 the Company entered into a Patent Cross License and Settlement
Agreement with National Semiconductor which settled all outstanding patent
disputes between the companies and cross licensed the entire patent portfolio
of each company. Some of the National patents within certain field of use
areas are licensed for the life of the patents, all other patents of both
companies are licensed through May 22, 2009. Under the terms of the agreement
Micrel agreed to pay National $9.0 million of which $3.0 million was paid on
May 23, 2002 and the remaining $6.0 million balance will be paid in $2.0
million annual installments over the next three years.

Based on the estimated historical and future benefits of the Patent Cross
License and Settlement Agreement, the Company has allocated the present
value of the payments as follows (in thousands):

Settlement of patent disputes $ 947
Patent license 7,207
--------
Present value of payments $ 8,154
========

The $947,000 valuation of the settlement of patent disputes has been expensed
to other income (expense), net in the current period. The patent license
valuation of $7.2 million has been recorded as an intangible asset and will be
amortized over a 7 year period using straight-line basis amortization.


10. SUBSEQUENT EVENT

On July 10, 2002 the Company completed the purchase of a 57,000 square foot
facility and an adjacent 63,000 square foot facility, located in San Jose,
California, for $18.0 million in cash. The Company previously leased these
same facilities, which house the majority of the Company's manufacturing
operations.


10


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS


Overview

Micrel designs, develops, manufactures and markets a range of high performance
standard analog integrated circuits and high-speed mixed-signal and digital
integrated circuits. These circuits are used in a wide variety of electronics
products, including those in the computer, telecommunications, industrial and
networking markets. In addition to standard products, the Company manufactures
custom analog and mixed-signal circuits and provides wafer foundry services.

The Company derives a substantial portion of its net revenues from standard
products. Standard products sales represented 89% of net revenues for the
three and six months ended June 30, 2002 as compared to 80% and 83% for the
similar periods in the prior year. The Company believes that a substantial
portion of its net revenues in the future will depend upon standard products
sales, although such sales as a proportion of net revenues may vary as the
Company adjusts product output levels to correspond with varying economic
conditions and demand levels in the markets which it serves. The standard
products business is characterized by short-term orders and shipment schedules,
and customer orders typically can be canceled or rescheduled without
significant penalty to the customer. Since most standard products backlog is
cancelable without significant penalty, the Company typically plans its
production and inventory levels based on internal forecasts of customer demand,
which is highly unpredictable and can fluctuate substantially. In addition,
the Company is limited in its ability to reduce costs quickly in response to
any revenue shortfalls.

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


Results of Operations

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



Three Months Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
2002 2001 2002 2001
--------- --------- --------- ---------

Net revenues 100.0% 100.0% 100.0% 100.0%
Cost of revenues 61.7 61.5 62.5 53.3
--------- --------- --------- ---------
Gross profit 38.3 38.5 37.5 46.7

Operating expenses:
Research and development 23.5 24.4 25.4 20.3
Selling, general and
administrative 16.0 14.9 16.3 15.1
Amortization of deferred
stock compensation 4.4 4.4 4.9 3.4
Non-recurring acquisition
expenses -- 17.6 -- 7.1
--------- --------- --------- ---------
Total operating expenses 43.9 61.3 46.6 45.9
--------- --------- --------- ---------
Income(loss) from operations (5.6) (22.8) (9.1) 0.8
Other income, net (0.9) 2.8 0.6 2.5
--------- --------- --------- ---------
Income(loss) before income taxes (6.5) (20.0) (8.5) 3.3
Provision (benefit) for income
taxes (7.0) (3.0) (4.9) 2.5
--------- --------- --------- ---------
Net income(loss) 0.5% (17.0)% (3.6)% 0.8%
========= ========= ========= =========


11



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


Net Revenues. For the three months ended June 30, 2002, net revenues increased
9% to $55.4 million from $50.8 million for the same period in the prior year.
This increase was due to increased standard products revenues which were
partially offset by lower custom and foundry products revenues. For the six
months ended June 30, 2002, net revenues decreased 18% to $103.7 million from
$125.7 million for the same period in the prior year. This decrease was due to
decreased standard products revenues combined with lower custom and foundry
products revenues. The Company derives a substantial portion of its net
revenues from standard products. Standard products sales represented 89% of net
revenues for the three and six months ended June 30, 2002, as compared to 80%
and 83%, respectively, for the similar periods in the prior year. For the
three months ended June 30, 2002, standard products revenues increased 21% to
$49.4 million from $40.8 million for the same period in the prior year. Such
increases resulted from increased unit shipments of computer, industrial,
Ethernet communications and telecommunications products, which were partially
offset by decreased unit shipments of high bandwidth communications products
combined with decreased average selling prices across all product lines. Sales
of standard products by the Company during the three months ended June 30, 2002
were led by low dropout regulators, Ethernet communications products and
computer peripheral products. Such products were sold primarily to
manufacturers within the computer, network communications, telecommunications,
and industrial markets. For the six months ended June 30, 2002, standard
products revenues decreased 11% to $92.4 million from $103.9 million for the
same period in the prior year. Such decreases resulted primarily from
decreased unit shipments of high bandwidth communications and
telecommunications products combined with decreased average selling prices
across all product lines, which were partially offset by increased unit
shipments of Ethernet communications and computer products. For the three
months ended June 30, 2002, custom and foundry products revenues decreased 40%
to $6.0 million representing 11% of net revenues from $10.0 million or 20% of
net revenues for the same period in the prior year. For the six months ended
June 30, 2002, custom and foundry products revenues decreased 48% to $11.3
million representing 11% of net revenues from $21.8 million or 17% of net
revenues for the same period in the prior year. Such decreases for the three
and six months ended June 30, 2002 were primarily due to decreased unit
shipments of foundry products.

Customer demand for semiconductors can change quickly and unexpectedly. As a
result of the slowing global economy, a rapid build-up of semiconductor
inventories in global sales channels occurred during 2001, causing lead times
for components to fall precipitously.

The short lead time environment has continued from the middle of 2001 through
the end of the second quarter of 2002. Customers perceive that semiconductor
components are readily available and continue to order only for their
short-term needs. New order rates have improved in the first and second
quarters of 2002 compared to the fourth quarter of 2001, however there is not
sufficient backlog for the Company to predict future revenue levels with
certainty. The Company's revenue levels are highly dependent on the amount of
new orders that are received for which product can be delivered to the customer
within the same period. Within the semiconductor industry these orders that
are booked and shipped within the period are called "turns fill" orders.
Currently, the uncertainty of customer demand, the high turns fill requirement,
and associated uncertainty of product mix and pricing, make it difficult to
predict future levels of sales and profitability.

International sales represented 70% and 61% of net revenues for the quarters
ended June 30, 2002 and 2001, respectively. On a dollar basis, international
sales increased 24% to $38.5 million for the quarter ended June 30, 2002 from
$31.0 million for the comparable period in 2001. For the six months ended
June 30, 2002 and 2001, international sales represented 70% and 55% of net
revenues, respectively. On a dollar basis, international sales increased 5% to
$72.4 million for the six months ended June 30, 2002 from $68.8 million for
the comparable period in 2001. The dollar basis increase in international
sales for the three and six months ended June 30, 2002 resulted primarily from
increased shipments of personal computer and Ethernet communications products,
primarily in Asia, offset in part by decreased shipments of high bandwidth
communications products, primarily in Europe. The weak economic conditions in
North America and Europe coupled with reduced demand from customers serving the
communications infrastructure market has resulted in a revenue shift to Asian
based customers that serve more consumer related end-markets. The consumer
related end-market tends to be more price competitive than the communications
end-market.

12



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


The Company's international sales are denominated in U.S. currency.
Consequently, changes in exchange rates that strengthen the U.S. dollar could
increase the price in local currencies of the Company's products in foreign
markets and make the Company's products relatively more expensive than
competitors' products that are denominated in local currencies, leading to a
reduction in sales or profitability in those foreign markets.

The Company defers recognition of revenue derived from sales to domestic,
Canadian, and certain other international distributors until such distributors
resell the Company's products to their customers. Sales to stocking
representatives and O.E.M. customers are recognized upon shipment. The
Company estimates returns and warranty costs and provides an allowance as
revenue is recognized.

Gross Profit. Gross profit is affected by a variety of factors including the
volume of product sales, product mix, manufacturing utilization, product yields
and average selling prices. The Company's gross margin was 38% and 39% for the
three months ended June 30, 2002 and 2001, respectively. For the six months
ended June 30, 2002, gross margin decreased to 37% from 47% for the comparable
period in the prior year. The decrease in gross margin resulted primarily from
decreased capacity utilization, a greater mix of lower margin products and
decreased average selling prices as compared to the same periods in 2001. The
Company believes pricing pressure will continue to effect gross profit until
order lead times extend significantly beyond current levels.

Manufacturing yields, which affect gross margin, may from time to time decline
because the fabrication of integrated circuits is a highly complex and precise
process. Factors such as minute impurities and difficulties in the fabrication
process can cause a substantial percentage of wafers to be rejected or numerous
die on each wafer to be nonfunctional. There can be no assurance that the
Company in general will be able to maintain acceptable manufacturing yields in
the future.

Research and Development Expenses. Research and development expenses include
costs associated with the development of new processes and the definition,
design and development of new products. The Company also expenses prototype
wafers and new production mask sets related to new products as research and
development costs until products based on new designs are fully characterized
by the Company and are demonstrated to support published data sheets and
satisfy reliability tests.

As a percentage of net revenues, research and development expenses represented
24% for the quarters ended June 30, 2002 and 2001. On a dollar basis, research
and development expenses increased $613,000 or 5% to $13.0 million for the
quarter ended June 30, 2002 from $12.4 million for the comparable period in
2001. For the six months ended June 30, 2002 and 2001, research and
development expenses represented 25% and 20% of net revenues, respectively. On
a dollar basis, research and development expenses increased $874,000 or 3% to
$26.4 million for the six months ended June 30, 2002 from $25.5 million for the
comparable period in 2001. The dollar increase was primarily due to increased
prototype fabrication and new process development costs. The Company believes
that the development and introduction of new products is critical to its future
success and expects to continue its investment in research and development
activities in the future.

Selling, General and Administrative Expenses. As a percentage of net revenues,
selling, general and administrative expenses represented 16% and 15% for the
quarters ended June 30, 2002 and 2001, respectively. On a dollar basis,
selling, general and administrative expenses increased $1.3 million or 17% to
$8.9 million for the quarter ended June 30, 2002 from $7.6 million for the
comparable period in 2001. The dollar increases were principally attributable
to increased legal costs, which were partially offset by decreased staffing
expenses. For the six months ended June 30, 2002 and 2001, selling, general
and administrative expenses represented 16% and 15% of net revenues,
respectively. On a dollar basis, selling, general and administrative expenses
decreased $2.2 million or 12% to $16.9 million for the six months ended June
30, 2002 from $19.1 million for the comparable period in 2001. The dollar
decreases were principally attributable to decreased sales commissions,
decreased staffing expenses and decreased profit sharing accruals, which were
partially offset by increased legal costs.

13



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


Amortization of deferred stock compensation. The Company accounts for stock-
based awards to employees using the intrinsic value method in accordance with
Accounting Principles Board Opinion No. 25 ("APB 25"), "Accounting for Stock
Issued to Employees". The Company's practices in effect through December 2001
related to employee stock option pricing resulted in stock compensation expense
under APB 25. For the quarter ended June 30, 2002 total amortization of
deferred stock compensation was $3.2 million of which $784,000 was included in
cost of revenues and $2.5 million was included in amortization of deferred
stock compensation. For the quarter ended June 30, 2001 total amortization of
deferred stock compensation was $5.0 million of which $782,000 was included in
cost of revenues, $2.2 million was included in amortization of deferred stock
compensation and $2.0 million was included in non-recurring acquisition
expenses. For the six months ended June 30 2002 total amortization of deferred
stock compensation was $6.6 million of which $1.6 million was included in cost
of revenues and $5.0 million was included in amortization of deferred stock
compensation. For the six months ended June 30, 2001 total amortization of
deferred stock compensation was $7.8 million of which $1.5 million was included
in cost of revenues, $4.3 million was included in amortization of deferred
stock compensation and $2.0 million was included in non-recurring acquisition
expenses.

The Company does not presently intend to change its accounting practices with
respect to accounting for stock options unless new rules are established by
the FASB, SEC or other regulatory body. If the Company were to expense stock
options pursuant to SFAS No. 123 "Accounting for Stock-Based Compensation",
the incremental expense would be somewhat mitigated to the extent that stock
option compensation is already being recognized in the Company's financial
statements pursuant to APB 25, as described above. The Company's Annual Report
on Form 10-K for the year ended December 31, 2001 discloses the proforma effect
on net income if the Company were recording stock compensation pursuant to
SFAS No. 123.

Other Income (Expense), Net. Other income (expense), net reflects interest
income from investments in short-term, investment-grade, securities offset by
interest expense incurred on term notes, combined with other non-operating
income or expenses. Other income (expense), net decreased $1.9 million to a
net expense of $476,000 for the quarter ended June 30, 2002 from a net income
of $1.4 million for the comparable period in 2001. The decrease was primarily
due to decreased rates of return on short-term investments combined with a non-
recurring expense of $947,000 for the settlement of a patent dispute (see
Note 9 of Notes to Condensed Consolidated Financial Statements). For the six
months ended June 30, 2002, other income (expense), net decreased $2.6 million
to $588,000 from $3.2 million for the comparable period in 2001. The decrease
was primarily due to decreased rates of return on short-term investments
combined with a non-recurring expense of $947,000 for the settlement of a
patent dispute, partially offset by $490,000 in non-recurring other income
combined with a reduction in interest expense resulting from decreased average
term note balances.

Provision for Income Taxes. For the three and six months ended June 30, 2002,
the provision for income taxes was a benefit of $3.9 million and $5.1 million,
respectively. The income tax amounts reflect the Company's revised year 2002
estimated annual effective tax rate of 58% of income (loss) before tax,
compared to 70% of income (loss) before tax recorded for the same period in
2001. During the quarter ended June 30, 2002 the Company revised its 2002
estimated annual effective tax rate to 58% from 24% of income (loss) before
tax, primarily due to the impact of state research and development credits in
relation to revised estimated annual income (loss) before tax. Included in the
$3.9 million benefit for income taxes for the three months ended June 30, 2002
is a benefit of $1.8 million resulting from the year-to-date effect of the
revision to the annual effective tax rate. The estimated provision for income
taxes differs from taxes computed at the federal statutory rate primarily due
to the effect of state income taxes, federal and state research and development
credits, and state manufacturing credits.

Liquidity and Capital Resources

Since inception, the Company's principal sources of funding have been its cash
from operations, bank borrowings and sales of common stock. Principal sources
of liquidity at June 30, 2002 consisted of cash and short-term investments of
$119 million and bank borrowing arrangements. Borrowing agreements consisted
of $5 million under a revolving line of credit. There were no borrowings under
this agreement as of June 30, 2002. The revolving line of credit was scheduled
to expire on June 30, 2002 and has been renewed on a month-to-month basis until
terminated by either party upon 30 days notice. Borrowings under the revolving
line of credit bear interest rates of, at the Company's election, the prime
rate (4.75% at June 30, 2002), or the bank's revolving offshore rate, which
approximates LIBOR (1.86% at June 30, 2002) plus 2.0%. In addition the Company
had a $10 million non-revolving line of credit agreement which expired on June

14



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


30, 2002 and has not been renewed. The agreements contain certain restrictive
covenants that include a restriction on the declaration and payment of
dividends without the lender's consent. The Company was in compliance with all
such covenants at June 30, 2002.

As of June 30, 2002, the Company had $2.7 million outstanding under term notes
borrowed under previously expired borrowing arrangements.

The Company's working capital decreased by $4.0 million to $192.9 million as
of June 30, 2002 from $196.9 million as of December 31, 2001. The decrease
was primarily attributable to a $14.7 million decrease in cash and short-term
investments combined with a $4.0 million decrease in other current assets,
which were partially offset by a $8.7 million increase in inventories, a $2.5
million increase in deferred income taxes and a $1.6 million increase in
accounts receivable combined with a $1.9 million decrease in total current
liabilities.

The Company's cash flows from operating activities were $8.0 million for the
six months ended June 30, 2002 as compared to $40.0 million for the same
period in the prior year. This cash flow decrease resulted primarily from an
increase in accounts receivables balances of $1.6 million for the six months
ended June 30, 2002 as compared to a decrease of $33.0 million for the same
period in 2001, which resulted from declining revenue levels in 2001. The
cash flows from operating activities generated by the Company in the six months
ended June 30, 2002 were primarily attributable to a net loss of $3.7 million
plus additions for non-cash activities of $20.7 million which were partially
offset by a $9.1 million use in cash from changes in current assets and
liabilities. Cash flow used by changes in current assets and liabilities
consisted of an increase in inventories of $8.7 million, an increase in
accounts receivables of $1.6 million combined with a decrease in deferred
income on shipments to distributors of $2.0 million and a decrease in other
current liabilities of $2.3 million, which were partially offset by a
decrease in other current assets of $4.0 million and an increase in accounts
payable of $2.4 million.

The Company's investing activities during the six months ended June 30, 2002
used cash of $4.7 million as compared to $3.8 million of cash used during the
comparable period in the prior year. This increase in cash used resulted
primarily from a $17.1 million decrease in net sales of short-term investments
combined with the purchase of $2.1 million in intangible assets, which were
partially offset by a $18.2 million decrease in net purchases of property,
plant and equipment. Cash used by investing activities during the six months
ended June 30, 2002 resulted from the purchase of $2.1 million in intangible
assets and $5.7 million in net purchases of property, plant and equipment,
which was partially offset by $3.0 million in net sales of short-term
investments.

The Company's financing activities during the six months ended June 30, 2002
used cash of $14.9 million as compared to cash provided of $2.1 million during
the comparable period in the prior year. Cash used by financing activities
during the six months ended June 30, 2002 was the result of $18.3 million to
repurchase 916,100 shares of common stock and $2.2 million in repayments of
long-term debt, which was partially offset by proceeds from the issuance of
common stock through the employee stock transactions of $5.6 million.

Subsequent to June 30, 2002, the Company completed the purchased of a 57,000
square foot facility and an adjacent 63,000 square foot facility, located in
San Jose, California, for $18.0 million in cash. The Company previously leased
these same facilities, which house the majority of the Company's manufacturing
operations.

The Company currently estimates its capital equipment purchases, which exclude
the above mentioned $18 million purchase of land and buildings, to be
approximately $15 million for year 2002, of which $5.7 million was expended in
the first six months. The Company expects to purchase primarily additional
research and development, wafer and test manufacturing equipment and building
improvements. The Company expects that its cash requirements through 2002 will
be met by its cash from operations, existing cash balances and short-term
investments, and its credit facility.


15



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

Factors That May Affect Operating Results

The statements contained in this Report on Form 10-Q that are not purely
historical are forward-looking statements within the meaning of Section 27A of
the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including statements regarding the Company's expectations, hopes,
intentions or strategies regarding the future. Forward-looking statements
include: statements regarding future products or product development;
statements regarding future research and development spending and the Company's
product development strategy; statements regarding the levels of international
sales; statements regarding future expansion or utilization of manufacturing
capacity; statements regarding future expenditures; and statements regarding
current or future acquisitions. All forward-looking statements included in
this document are based on information available to the Company on the date
hereof, and the Company assumes no obligation to update any such forward-
looking statements. It is important to note that the Company's actual results

could differ materially from those in such forward-looking statements. Some of
the factors that could cause actual results to differ materially are set forth
below. Additional factors that may affect operating results are contained
within the Company's Form 10-K for the year ended December 31, 2001.


The Company is exposed to risks because of the uncertain rate of growth in the
global economy.

Although the global economy appears to have grown in the first half of 2002
after shrinking for a period in 2001, recent events have cast doubt on the
sustainability of future economic growth. Consumer confidence is waning due
in part to the recent sharp decline in global equity markets. Reduced
corporate profits and weak capital spending, especially for technology related
end markets that the Company serves such as the high-speed communications,
enterprise computing and telecommunications markets, continue to dampen demand
for the Company's products. If economic conditions in the global economy
worsen, or if a wider global economic recession materializes, the Company's
business, financial condition and results of operations may be materially and
adversely affected.


The Company's operating results may fluctuate because of a number of factors,
many of which are beyond its control.

If the Company's operating results are below the expectations of public market
analysts or investors, then the market price of its Common Stock could decline.
Some of the factors that affect the Company's quarterly and annual results, but
which are difficult for the Company to control or predict are:

- - the volume and timing of orders received
- - changes in the mix of products sold
- - market acceptance of the Company's products and its customers' products
- - competitive pricing pressures
- - cyclical semiconductor industry conditions
- - dependence on third party suppliers
- - the ability to introduce new products on a timely basis
- - the timing of new product announcements and introductions by the Company or
its competitors
- - the timing and extent of research and development expenses
- - fluctuations in manufacturing yields
- - the ability to hire and retain key technical and management personnel
- - access to advanced process technologies
- - the timing and extent of process development costs
- - the uncertain supply of energy in California


16



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


Customer demand for the Company's products is volatile and difficult to predict

The Company's customers continuously adjust their inventories in response to
changes in end market demand for their products and the availability of
semiconductor components. This results in frequent changes in demand for the
Company's products. The volatility of customer demand limits the Company's
ability to predict future levels of sales and profitability. The supply of
semiconductors can quickly and unexpectedly match or exceed demand because end
customer demand can change very quickly. Also, semiconductor suppliers can
rapidly increase production output. This can lead to a sudden oversupply
situation and a subsequent reduction in order rates and revenues as customers
adjust their inventories to true demand rates.

The current weakness in the global economy has caused the end markets that the
Company's customers serve to grow less rapidly, or in some cases, contract.
The resulting uncertainty of demand has caused most of the Company's customers
to err on the side of caution until they see signs of order strength for their
end products. In addition, many customers are continuing to deplete excess
inventories, particularly contract manufacturers and high bandwidth
communication OEM's. Semiconductors are perceived to be readily available and
supplier lead times are at or near historic lows. In this environment
customers are not making large purchase commitments, only ordering small

quantities to fill known short-term requirements, greatly reducing our
visibility into customer demand. As a result, the Company's revenues are
highly dependent upon turns fill orders (orders booked and shipped in the same
quarter). The reduced level of order backlog coupled with the short-term
nature of customer demand makes it extremely difficult to predict near term
revenues and profits.


The cyclical nature of the semiconductor industry can result in downturns that
can negatively effect the Company's operating results.

The semiconductor industry has historically been cyclical and periodically
subject to significant economic downturns. These downturns have been
characterized by diminished product demand, accelerated erosion of selling
prices and over capacity levels as well as rapidly changing technology and
evolving industry standards. The Company's net revenues may continue to be
adversely affected if this downturn continues. In general, the Company may
experience future substantial period-to-period fluctuations in its business and
operating results due to general semiconductor industry conditions, overall
economic conditions or other factors.


The semiconductor industry is highly competitive.

The semiconductor industry is highly competitive and subject to rapid
technological change, price-erosion and increased international competition.
Significant competitive factors include:

- - product features
- - performance
- - price
- - timing of product introductions
- - emergence of new computer and communications standards
- - quality and customer support

In times of weak economic conditions, such as the semiconductor industry is
now experiencing and due to uncertain customer demand and under-utilization of
semiconductor fabrication capacity, price competition becomes more prevalent.
Both the semiconductor industry and the Company have experienced significant
price erosion since the beginning of 2001. If this price erosion continues it
will have the effect of reducing revenue levels and gross margins in future
periods.

Because the standard products market for integrated circuits is diverse and
highly fragmented, the Company encounters different competitors in various
market areas. Most of these competitors have substantially greater technical,
financial and marketing resources and greater name recognition than the Company
has. Increased competition could adversely affect the Company's financial
condition or results of operations. There can be no assurance that the Company


17



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


will be able to compete successfully in either the standard products or custom
and foundry products business in the future or that competitive pressures will
not adversely affect the Company's financial condition, results of operations,
or cash flows.


The Company's gross margin is dependent upon a number of factors, including
the level of capacity utilization.

Semiconductor manufacturing is a capital-intensive business resulting in high
fixed costs. If the Company is unable to utilize its installed wafer
fabrication or test capacity at a high level, the costs associated with these
facilities and equipment is not fully absorbed, resulting in higher average
unit costs and lower sales margins. The decline in new customer order rates
has resulted in reduced capacity utilization of the Company's factories as it
has attempted to match production with anticipated customer demand. The
Company's gross margins have declined as a result of this reduced utilization
of production capacity. Gross margins may deteriorate further should
production activity be curtailed in response to lower customer demand in the
future.


The Company may not be able to protect its intellectual property adequately, or
could be harmed by litigation involving its patents and proprietary rights.

The Company's future success depends in part upon its intellectual property,
including patents, trade secrets, know-how and continuing technology
innovation. There can be no assurance that the steps taken by the Company to
protect its intellectual property will be adequate to prevent misappropriation
or that others will not develop competitive technologies or products. There
can be no assurance that any patent owned by the Company will not be
invalidated, circumvented or challenged, that the rights granted thereunder
will provide competitive advantages or that any of its pending or future patent
applications will be issued with the scope of the claims sought, if at all.
Furthermore, there can be no assurance that others will not develop
technologies that are similar or superior to the Company's technology,
duplicate technology or design around the patents owned by the Company.
Additionally, the semiconductor industry is characterized by frequent
litigation regarding patent and other intellectual property rights. There can
be no assurance that existing claims or any other assertions or claims for
indemnity resulting from infringement claims will not adversely affect the
Company's business, financial condition, results of operations, or cash flows.


Dependence on third-party manufacturing and supply relationships increases the
risk that the Company will not have an adequate supply of products to meet
demand or that its cost of materials will be higher than expected.

The Company faces many risks associated with its dependence upon third parties
that manufacture, assemble or package certain of our products. These risks
include:

- - reduced control over delivery schedules and quality
- - risks of inadequate manufacturing yields and excessive costs
- - the potential lack of adequate capacity during periods of excess demand
- - difficulties selecting and integrating new subcontractors
- - limited warranties on wafers or products supplied to the Company
- - potential increases in prices
- - potential misappropriation of the Company's intellectual property

Any of these risks may lead to increased costs or delay delivery of the
Company's products, which would harm its profitability and customer
relationships.

Additionally, the Company's wafer and product requirements typically represent
a relatively small portion of the total production of the third-party foundries
and outside assembly, testing and packaging contractors. As a result, Micrel
is subject to the risk that a foundry will provide delivery or capacity
priority to other larger customers at the expense of Micrel, resulting in an
inadequate supply to meet customer demand or higher costs to obtain the

18



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


necessary product supply. Also, there is a risk that third party manufacturer
will cease production on an older or lower volume process that it uses to
produce the Company's products. The Company cannot be certain that its outside
manufacturers will continue to devote resources to the production of its
products or continue to advance the process design technologies on which the
manufacturing of its products are based. Each of these events could increase
the Company's costs and harm its ability to deliver our products on time.


The Company's product offering, while diversified, is highly dependent on
certain select end markets.

The Company currently sells a significant portion of its products in the high-
speed communications, computer, networking and wireless handset markets. These
markets are characterized by short product life cycles, rapidly changing
customer demand, evolving and competing industry standards and seasonal demand
trends. Additionally, there can be no assurance that these markets will
continue to grow. If the markets for high speed communications, computers,
networking or wireless handsets that the Company serves fail to grow, or grows
more slowly than it currently anticipates, or if there is increased competition
in these markets, the Company's business, results of operations and financial
condition could be adversely affected.

The Company currently derives the majority of its product revenues from sales
of standard analog and mixed-signal integrated circuits and expects these
products to continue to account for the majority of its revenues for the
foreseeable future. As a result, factors adversely affecting the pricing of or
demand for standard analog integrated and mixed-signal circuits, such as
competition, product performance or technological change, could have a material
adverse effect on the Company's business and consolidated results of operations
and financial condition.

A significant portion of the Company's revenues in recent periods has been
derived from sales of products based on SONET, SDH and ATM transmission
standards. If the communications market evolves to new standards, the Company
may not be able to successfully design and manufacture new products that
address the needs of its customers or gain substantial market acceptance.
Although the Company has developed products for the Gigabit Ethernet and Fibre
Channel communications standards, volume sales of these products are modest,
and it may not be successful in addressing other market opportunities for
products based on these standards.

An important part of the Company's strategy is to continue to focus on the
market for high-speed communications integrated circuits, or ICs. If the
Company is unable to penetrate this market further, the Company's revenues
could stop growing and may decline.

The Company's Ethernet products have become an important portion of the
Company's revenues with the acquisition of Kendin. If the Company fails to
develop new products to serve this market in a timely manner, or if a
competitor's products unfavorably effect pricing or demand for the Company's
products, the Company's revenues and results of operations could be adversely
effected.

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


The Company encounters risks associated with its international operations.

The Company has generated a substantial portion of its net revenues from export
sales. The Company believes that a substantial portion of its future net
revenues will depend on export sales to customers in international markets,
including Asia. International markets are subject to a variety of risks,
including changes in policy by foreign governments, social conditions such as
civil unrest, and economic conditions including high levels of inflation,

19



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


fluctuation in the value of foreign currencies and currency exchange rates and
trade restrictions or prohibitions. In addition, the Company sells to domestic
customers that do business worldwide and cannot predict how the businesses of
these customers may be affected by economic conditions in Asia or elsewhere.
Such factors could adversely affect the Company's future revenues, financial
condition, results of operations or cash flows.


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

The Company's international sales are primarily denominated in U.S. currency.
Consequently, changes in exchange rates that strengthen the U.S. dollar could
increase the price of the Company's products in the local currencies of the
foreign markets it serves. This would result in making the Company's products
relatively more expensive than its competitors' products that are denominated
in local currencies, leading to a reduction in sales or profitability in those
foreign markets. The Company has not taken any protective measures against
exchange rate fluctuations, such as purchasing hedging instruments.


The Company is subject to the risk of litigation and regulatory action in
connection with the restatement of its financial statements, and the potential
liability from any such litigation or regulatory action could harm its
business.

On January 28, 2002, the Company announced that it would restate its
consolidated financial statements for the fiscal years ended December 31, 1998,
1999, and 2000, and the fiscal quarters ended March 31, 2001, June 30, 2001,
and September 30, 2001. As a result of this restatement, the Company could
become subject to litigation or regulatory proceedings, or both. As of the
date hereof, the Company is not aware of any litigation having been commenced
against it related to this restatement. However, such litigation could be
commenced against the Company in the future and, if so, the Company cannot
predict the outcome of any such action at this time. However, if an
unfavorable result occurred in any such action, the Company's business and
financial condition could be harmed. In addition, regulatory agencies, such as
the Securities and Exchange Commission, could commence a formal investigation
of the Company's restatement. At this time management cannot predict whether
or not any regulatory investigation related to the restatement will be
commenced or, if it is, the outcome of any such investigation. However, if any
such investigation were to result in a regulatory proceeding or action against
the Company, its business and financial condition could be harmed. The
restatement also involves certain tax issues that need to be resolved with the
appropriate taxing authorities. The Company has recorded a liability in its
financial statements with respect to these tax issues. The Company can not
predict the results of its discussions with the appropriate tax authorities
regarding the tax implications of its restatement and accordingly, the amount
of actual financial impact may differ from the amount recorded in the Company's
financial statements.


The Company's operating results substantially depend on manufacturing output
and yields, which may not meet expectations.

The Company manufactures most of its semiconductors at its San Jose and Santa
Clara, California fabrication facilities. Manufacturing semiconductors
requires manufacturing tools that are unique to each product being produced.
If one of these unique manufacturing tools was damaged or destroyed, then the
Company's ability to manufacture the related product would be impaired and its
business would suffer until the tool was repaired or replaced. Additionally,
the fabrication of integrated circuits is a highly complex and precise process.
Small impurities, contaminants in the manufacturing environment, difficulties
in the fabrication process, defects in the masks used to print circuits on a
wafer, manufacturing equipment failures, wafer breakage or other factors can
cause a substantial percentage of wafers to be rejected or numerous die on each
wafer to be nonfunctional.

20



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



The Company faces risks associated with acquisitions it has completed and will
face risks associated with any future acquisitions.

The Company has made acquisitions in the past and may make acquisitions in the
future. The risks involved with acquisitions include:

- - diversion of management's attention
- - failure to retain key personnel
- - amortization of acquired intangible assets
- - customer dissatisfaction or performance problems with the acquired company
- - the cost associated with acquisitions and the integration of acquired
operations
- - assumption of unknown liabilities

Any of these risks could materially harm the Company's business, financial
condition and results of operations. Additionally, any acquisition involves a
significant amount of integration of two companies that have previously
operated independently. No assurance can be given that difficulties will not
be encountered in integrating certain products, technologies or operations of
the acquired companies or that the benefits expected from such integration will
be realized. There can be no assurance that any of the acquired companies will
retain its key personnel, that the engineering teams of Micrel and the acquired
companies will successfully cooperate and realize any technological benefits or
that Micrel or the acquired companies will realize any of the other anticipated
benefits of the acquisitions. In addition, the consummation of an acquisition
could result in the cancellation, termination or non-renewal of arrangements
with the acquired company by suppliers, distributors or customers, or the
termination of negotiations or delays in ordering by prospective customers as a
result of uncertainties that may be perceived as a result of the acquisition.
Any significant amount of cancellations, terminations, delays or non-renewals
of arrangements with the acquired company or loss of key employees or
termination of negotiations or delays in ordering could have a material adverse
effect on the business, operating results or financial condition of the
acquired company and Micrel after the acquisition.

In addition, some of the past acquisitions have been accounted for using the
pooling-of-interests method of accounting which means the acquisitions are
subject to rules established by the Financial Accounting Standards Board and
the Securities and Exchange Commission. These rules are complex and the
interpretation of them is subject to change. Additionally, the availability of
pooling of interests accounting treatment for a business combination depends in
part upon circumstances and events occurring after the acquisition. The
failure of a past business combination that has been accounted for under the
pooling of interests accounting method to qualify for this accounting treatment
would materially harm the Company's reported and future earnings and likely,
the price of its Common Stock.


The Company's future success depends in part on the continued service of its
key design engineering, sales, marketing and executive personnel and its
ability to identify, hire and retain additional personnel.

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


ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

The Company's market risk disclosures set forth in the 2001 Form 10-K have not
changed significantly during the six months ended June 30, 2002.

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PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

The information included in Note 8 of Notes to Condensed Consolidated
Financial Statements under the caption "Litigation and Other Contingencies" in
Item 1 of Part I is incorporated herein by reference.


ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

The Company's Annual Meeting of Shareholders (the "Annual Meeting") was held on
May 23, 2002 at 12:00 p.m. local time, at its corporate offices located at 2180
Fortune Drive, San Jose, California. The Annual Meeting was held for the
purpose of (a) electing four members of the Board of Directors, (b) transacting
such other business as may properly come before the Annual Meeting. The
following proposal was voted upon and approved:

Proposal No. 1 - Election of four members of the Board of Directors:

The following persons were duly elected to the Board by the shareholders for a
one year term and until their successors are elected and qualified:



NOMINATION FOR ABSTAINED
---------- --- ---------

Raymond D. Zinn 87,535,154 513,138
Warren H. Muller 87,535,820 512,472
Larry L. Hansen 87,550,754 497,538
George Kelly 87,550,743 497,549



ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits.

10.1 Patent Cross License Agreement between Micrel, Incorporated and
National Semiconductor Corporation, dated May 23, 2002.

(b) Reports on Form 8-K. During the quarter ended June 30, 2002, the
Company filed a Report on Form 8-K/A, dated April 1, 2002, restating
its financial statements which were previously issued on Form 8-K
dated October 3, 2001. Also during the quarter ended June 30, 2002,
the Company filed a Report on Form 8-K, dated June 3, 2002, disclosing
that Raymond D. Zinn, the Chairman of the Board, President and Chief
Executive Officer of Micrel has entered into a trading plan in
accordance with Rule 10b5-1 of the Securities Exchange Act of 1934.


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SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.



MICREL, INCORPORATED
--------------------
(Registrant)



Date: August 14, 2002 By /s/ Richard D. Crowley, Jr.
---------------------------
Richard D. Crowley, Jr.
Vice President, Finance and
Chief Financial Officer
(Authorized Officer and
Principal Financial Officer)



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