Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Form 10-K

Commission file number 0-24758

Micro Linear Corporation

Registrant’s telephone number, including area code:

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

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

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

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

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

     The aggregate market value of the Common Stock held by non-affiliates of the Company, as of June 27, 2003 (the last business day of the registrant’s most recently completed second fiscal quarter, based upon the closing price on the Nasdaq National Market on such date), was approximately $27,185,991. Shares of Common Stock held by each executive officer and director and shares held by other individuals and entities based on Schedule 13G filings have been excluded, in that such persons may under certain circumstances be deemed to be affiliates. This determination of executive officer or affiliate status is not necessarily a conclusive determination for other purposes.

     The number of shares of the Registrant’s Common Stock outstanding as of March 1, 2004, net of shares held in treasury, was 12,361,986.

TABLE OF CONTENTS

1

Table of Contents

PART I

      When used in this Report, the words “expects”, “anticipates”, “estimates”, “believes”, “plans”, “designed to,” “allows,” “can,” “intend,” “will,” and similar expressions are intended to identify forward-looking statements. These are statements that relate to future periods, and include statements regarding the growth of markets for our digital wireless solutions, types of radios and basebands, our ability to become a leading provider of wireless solutions, our ability to become a major provider of 5.8 GHz transceivers and power amplifiers, our ability to offer a complete semiconductor suite or modular solution to our customer base, our ability to establish strategic relationships with industry leading companies and the benefits, if any, of such relationships, our ability to apply our digital wireless expertise to markets and applications other than digital cordless telephones and our ability to increase the number of customer and design wins based on our expertise, the benefits of our reference designs, including the ability of such designs to reduce engineering costs, the ability of our high volume manufacturing and testing expertise to enhance our competitive strength, our ability to develop RF modules and the benefits and market acceptance of such products, our ability to maintain a competitive market advantage in the delivery of our products, our beliefs that the market for wireless consumer electronics, communications and industrial products is one of the most promising potential growth segments of the wireless semiconductor industry, the potential features and benefits of our products, including our transceivers, new wireless products for the industrial segment, pre-engineered radio solutions in modular form and silicon media conversion devices for Ethernet networks, the sources of our future revenue and concentration of customers, the competitive advantages of our core technologies, including the ability to address overlapping market segments, maximize sales volume, return on investment and market awareness, and our dependence on such technology to succeed, the advantages of our use of outside foundries, our ability to provide the highest performance and most cost effective solutions to our customers, expected expenses, including research and development and selling, general and administrative functions, our ability to compete favorably in new product introduction, innovation, quality, reliability and performance, and the amount and timing of new product shipments, our intention to develop application specific reference designs based on our RF transceivers and other new products to accelerate design wins, support our customers’ engineering teams and address otherwise unreachable market segments and customers, our dependence on our workforce, our potential to meet our customers’ needs, including helping them reduce their time to market, anticipated revenue from our wireless and networking products, our beliefs regarding our accounting policies, our expectation that international revenue will continue to increase and will account for a significant percentage of our revenues for the next 12 months, our expectations regarding trends in our future gross margin, our anticipation that the trend of falling average selling prices for our wireless products will reverse in 2004, our ability to introduce new generations of wireless products throughout 2004 and our expectations that these new products will command higher average selling prices, our expectations that our maturing product shipments will not decline as much in 2004 as in 2003, our expectation that our gross margin will rise in 2004 and that increases in manufacturing yields of certain products will have a positive effect on gross margin in 2004, our anticipation that the ratio of costs to net revenue will remain flat or decrease in 2004, our beliefs that existing cash resources will fund any anticipated operating losses, purchases of capital equipment and provide adequate working capital for the next 12 months, and our expectations regarding our patent and intellectual property costs.

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

2

Table of Contents

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

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

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

      Consumer applications that incorporate our integrated circuits include digital cordless phones, wireless headsets and audio headphones, home theatre speakers, digital baby monitors, video game controllers and computer peripherals. Industrial applications that incorporate our products include lighting controls, home automation products, heating and cooling controls, vending machine controls, automatic meter reading devices, environmental monitoring devices and mesh networking nodes.

      Our products are intended to replace designs that require wires to transfer information. We believe wireless connectivity offers freedom of mobility, flexibility of configuration, and significant infrastructure installation cost savings. We believe that the benefits of these digital wireless solutions, combined with the cost-effectiveness of our proprietary devices, will result in significant market growth for our products as more and more applications adopt digital wireless connections in the unlicensed ISM (Industrial, Scientific and Medical — 900 MHz, 2.4 GHz and 5.8 GHz) frequency bands.

      Many early wireless applications utilize analog radio links, but the deficiencies of analog transmission are becoming apparent, leading to a migration to digital solutions. We believe the deficiencies of analog transmission include lack of security, high power consumption, limited range, interference, and restricted feature sets. Digital wireless links, such as those offered by us, are designed to overcome many of the shortfalls found in analog links.

      An increasing number of products that were traditionally wired are now becoming wireless, such as cell phone headsets, video game controllers, audio headphones and speakers, and computer peripherals. As this wireless connectivity becomes commonplace, we believe the market for digital wireless integrated circuits such as those developed and manufactured by us will grow.

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

	•	We are focused on becoming a major provider of wireless semiconductors in all three major ISM bands, including 900 MHz, 2.4 GHz, and 5.8 GHz. These transceivers can be used in many streaming wireless applications such as wireless speakers and headphones, security cameras, game controllers, cordless headsets and cordless telephones.
	•	We plan on developing new products that draw heavily on existing intellectual property (IP), which reduces technical risk and development cycle time. These products are specifically defined, where possible, to address overlapping market segments to maximize sales volume, return on investment and market awareness.
	•	We plan on developing customer partnerships and major strategic relationships with industry-leading companies in our target market segments. We believe engaging with committed customers early in product development results in competitive product definitions, accelerated production ramps, and higher probability of commercial success.
	•	By applying our digital wireless expertise to markets and applications other than digital cordless telephones, we believe we are increasing the number of potential customers and potential design wins for both current and future Micro Linear products.

3

Table of Contents

	•	We have developed user-friendly evaluation tools and numerous production-ready reference designs that we believe will enable companies with limited radio frequency design expertise to quickly and efficiently implement wireless connectivity in their products using our wireless integrated circuits. We believe these reference designs can also reduce the engineering costs associated with designing a wireless product that will meet the requirements of various international regulatory bodies.
	•	We intend to use our high volume manufacturing and testing expertise to enhance our competitive strength in delivering cost effective products with rapid time to market in the appropriate process technology.

Markets and Products

      We believe the market for wireless cable replacement in consumer electronics, communications, and industrial products is one of the most promising potential growth segments of the wireless semiconductor industry. The desirability of untethered communications in consumer products is high. Consumer awareness and interest in wireless connectivity has been stimulated by the market expectations created by wireless standards such as Bluetooth^TM. However, market penetration of wireless solutions in the consumer space remains low due to relatively higher cost and complex design implementation associated with wireless links.

      Bluetooth’s stated goal of providing a complete radio solution which delivers one megabit per second (raw data rate) of wireless connectivity in the unlicensed 2.4 GHz band for less than five dollars per node has generated significant interest across a broad market segment. Bluetooth devices are expected to offer interoperability between Bluetooth-compatible devices in an ad-hoc wireless networking environment, and while this initiative has yet to deliver on these ambitious goals, it has opened a large segment of the market to the potential advantages of incorporating low-cost wireless connectivity into previously wired products.

      Digital wireless connectivity requires a radio frequency (RF) physical interface and a baseband controller, the complexity of which depends on the specific application. The RF interface typically consists of an RF front end (power amplifier, low noise amplifier and switch), RF transceiver, and modem. The baseband controller provides an interface to the digital data source, control of the radio operation, and application support. We currently provide the RF transceiver and in some cases, portions of the RF front end, with the balance of the solution provided by other vendors, which in many cases have formed strategic marketing relationships with us. We believe our transceivers provide significant benefits to our customers, including lower cost, smaller form factor, higher data rates, enhanced range of operation, and lower bill of material and external component costs.

      During 2003, our wireless RF transceiver products represented approximately 64% of our net revenues, compared to 62% in 2002 and 47% in 2001. We have delivered almost twenty million RF transceivers that can now be found in digital cordless telephones, cordless headsets, video game controllers, and other digital wireless products.

      During 2003, we expanded our customer base for RF transceivers to include digital cordless telephone vendors other than Uniden (our largest customer), video game controller suppliers, wireless headset manufacturers, and computer peripherals vendors. Products intended for the U.S. market use the unlicensed 900MHz frequency band, while wireless products designed for worldwide use operate at 2.4GHz. Newer cordless telephones and other products are currently using the 5.8GHz unlicensed spectrum available in the U.S.

      As more applications request wireless connectivity, a growing number of manufacturers have emerged who do not have the capability, or the desire, to design a wireless link starting at the component level. To achieve design wins with these emerging manufacturers, we have significantly increased our customer support tools through the creation of production-ready reference designs. Currently, we offer four distinct reference designs that customers can copy or modify to allow them to easily integrate digital wireless connectivity into their products. Two designs operate at 900MHz: a less expensive low power (0dBm output power) radio, and a higher power (18dBm) version. The other two operate at 2.4GHz, again with one design intended for shorter

4

Table of Contents

      Our efforts in designing and testing these reference designs have afforded our engineers a good insight into the design issues confronted by our prospective customers, which we believe should assist us in making our new products more convenient and valuable to our customers. We believe a significant percentage of our future design wins will be facilitated by the availability of these pre-engineered solutions. We intend to continue to develop application-specific reference designs based on our RF transceivers and other new products to support our customers’ engineering teams and address otherwise unreachable market segments and customers.

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

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

Sales and Distribution

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

      In 2003, our domestic sales represented approximately 9% of net revenue, compared to 11% and 19% in 2002 and 2001, respectively. We offer our domestic distributors product return privileges and, in the event we lower the prices of products sold to distributors, we guarantee price protection on unsold inventory. We defer recognition of revenue and gross margin derived from sales to our distributors until the distributors resell our products to their customers.

      Outside the United States, our products are sold both directly to international customers and through distributors. International sales accounted for approximately 91%, 89% and 81% of our net revenue in 2003, 2002 and 2001, respectively. We expect international sales to continue to represent a significant portion of product sales for the foreseeable future, as more and more electronics manufacturing is concentrated in the Pacific Rim. On a portion of our sales to international distributors, we offer product return privileges and, if we lower the prices of our products, we guarantee price protection on unsold inventory, which is standard in the semiconductor industry. We defer revenue from this portion of shipments to international distributors until these distributors notify us of product sales to their customers. Some sales to international distributors are below contract pricing and are not guaranteed price protection or return privileges. On these sales, we do not defer revenue.

      During 2003, sales to original equipment manufacturers (OEMs) represented 80% of our net revenue, and sales through our distribution channel represented 20% of net revenue. While sales to our largest customer pass through an international distributor, we classify these sales as OEM sales since the distributor does not fulfill a traditional distributor stocking role for this customer.

      A relatively small number of customers have accounted for a significant portion of our net revenue in each of the past several years. During 2003, 2002 and 2001, our top ten customers, excluding domestic

5

Table of Contents

      During 2003, all of our net revenue was derived from sales of products for the wireless communications market and the computer networking market. During 2003, 2002 and 2001 wireless shipments accounted for 64%, 62% and 47% of net revenue. Sales of our products to network equipment manufacturers accounted for approximately 36%, 38% and 53% of our net revenue in 2003, 2002 and 2001, respectively.

Backlog

      We define backlog as orders received for products that are scheduled to be shipped within the next six months. At December 31, 2003, our backlog was approximately $6.0 million, as compared to approximately $4.3 million at December 31, 2002. The increase in backlog resulted primarily from orders received for our ML5800 product, our 5.8 GHz radio transceiver. We began taking orders for the ML5800 in the fourth quarter of 2003 and it carries a higher average selling price than our 900MHz and 2.8GHz product lines. These transceivers have been designed to be used in streaming wireless applications such as cordless phones, wireless speakers and headphones, security cameras, game controllers, cordless headsets and other personal electronic appliances.

      Customers who purchase standard products may generally cancel or reschedule orders for delivery outside a thirty-day period, without significant penalty to the customer. As a result, customers frequently revise the quantities of our products to be delivered, and their delivery schedules, and there can be no guarantee that all of the backlog will be shipped as scheduled within the first two quarters of 2004, if at all.

      Although we are providing backlog statistics as of December 31, 2003 and 2002, we believe that backlog is not a meaningful indicator of our future business prospects, due to the wide variety of our product offerings, the significant percentage of orders received and shipped within the same quarter and the ability of our customers to cancel or reschedule orders outside a thirty-day period without significant penalty. We do not believe that backlog information is material to an understanding of our overall business.

Technology

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

	•	Design expertise and experience at 5.8GHz frequencies;
	•	Low Intermediate Frequency (IF) radio transceivers, which offer cost-effective, high integration, programmable radio solutions with minimal external components;
	•	Automatically calibrated active circuits that lower manufacturing cost and complexity and result in higher production yields;
	•	High performance RF, analog mixed signal, and digital circuit designs using standard BiCMOS and silicon germanium (SiGe), technologies; and
	•	Advanced packaging to reduce the cost and enhance the performance and functionality of our radio solutions.

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

	•	0.6 micron BiCMOS for low cost 900 MHz RF transceivers, 2.4GHz RF transceivers and media converters; and
	•	0.35 micron SiGe for advanced 5.8 GHz RF transceivers.

6

Table of Contents

Manufacturing

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

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

Research and Development

      We employ state of the art integrated circuit development software tools in order to shorten development cycles and accurately simulate the performance of our designs before committing to costly and time-consuming silicon fabrication. These tools represent a significant portion of our research and development tool budget. Our product development strategy focuses on highly integrated silicon solutions, employing a modular design to allow for use in a broad range of applications, enabling us to address multiple markets quickly with similar platforms.

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

      In May 2003, we undertook a restructuring that consolidated most of our design activities into our San Jose, California headquarters. Our engineering design center in San Jose is involved in the development of advanced communications circuits and systems for wireless markets. Device validation, characterization, reliability testing, and automatic test equipment (ATE) test development activities are also located in San Jose. In addition to our San Jose design group we also have a small design group in Salt Lake City, Utah.

      Research and development expenses were $10.0 million, $16.1 million, and $16.0 million in 2003, 2002, and 2001, respectively. We reduced engineering headcount as part of our overall restructuring efforts in 2003. In planning these reductions, we carefully reviewed and focused our product roadmap. We expect to continue spending significant funds on research and development activities to deliver leading edge products that have a promise of volume shipments within a short time following their introduction.

Competition

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

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

7

Table of Contents

      In 2003, we developed and announced a product development partnership with Oki Electric Industry Co., Ltd. We believe that this relationship, as well as other less formal development partnerships that we have recently engaged in, will result in more optimized and complete application-specific radio solutions. The availability of such solutions should result in greater acceptance of our digital wireless products as well as shorter development cycle times for our customers.

      The acceptance of future products will depend on their direct applicability to the intended market, their cost-effectiveness, and the availability of easily implemented systems-level solutions based on these products. Larger competitors with larger development staffs, larger research and development budgets, and access to more technologies could deliver competitive products with improved feature sets, more products with differentiated feature sets and/or complete chipsets or system solutions, thus establishing a distinct competitive advantage.

Patents and Licenses

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

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

Employees

      As of December 31, 2003, we had 59 full-time employees, eight of whom were engaged in manufacturing (including test development, quality and materials functions), 32 in research and development, 12 in marketing, applications and sales, and seven in finance and administration. Our employees are not represented by any collective bargaining agreements, and we have never experienced a work stoppage. We believe that our employee relations are good.

Available Information

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

      Our headquarters, located in San Jose, California, consist of two buildings comprising approximately 93,000 square feet. We acquired this property in October 1990 at a cost of $7.5 million. It is used for product design and development, manufacturing, marketing, sales and administration. We refinanced the note on the buildings in September 1999 with a $3.0 million note payable over five years with principal amortized on a ten-year basis. The note has a balloon payment of approximately $1.8 million due November 1, 2004. We listed these facilities for sale in June 2002. During the third quarter of 2003, we reviewed our real estate assets and determined that their carrying value exceeded the current estimated fair market value. Accordingly, we recorded an impairment charge of $1.5 million. In January 2004, the property was taken off the market. We lease engineering development office space in Salt Lake City, Utah. We believe our existing facilities are adequate to meet our current and projected space requirements for at least the next 12 months.

8

Table of Contents

      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 we 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’s only right of appeal was to the Supreme Court through a Writ of Certiorari. Pioneer did not exercise their right of appeal within the statutory time limit and therefore, this case has now been concluded in our favor.

      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.

      None.

PART II

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

Common Stock Prices

9

Table of Contents

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

      We have not paid or declared cash dividends on our Common Stock within the past five years and do not anticipate paying any cash dividends in the foreseeable future. Any determination with respect to the payment of dividends will be at the discretion of our board of directors.

      The following selected consolidated financial data for the five-year period ended December 31, 2003 should be read together with our Consolidated Financial Statements and notes thereto included in Item 8 of this report and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 of this report.

      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.” When used in this Report, the words “expects”, “anticipates”, “estimates”, “believes”, “plans”, “designed to,” “allows,” “can,” “intend,” “will,” and similar

10

Table of Contents

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

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

11

Table of Contents

Overview

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

      We were founded in 1983, and until 2000 we were a supplier of advanced analog and mixed signal integrated circuits to the computer, communications, telecommunications, consumer and industrial markets. During 2000, we divested our manufacturing test operation and our non-communication product lines and focused our marketing, engineering and product development on new communications products, including some wired networking products, but most notably wireless integrated circuits. During 2001, we established ourselves as a volume supplier of RF transceivers to the digital cordless telephone segment of the communications market. Wireless product revenues represented 64% of net revenues for 2003 compared to 62% of net revenues for 2002. We expect the revenue contribution from wireless products to continue to increase as a percentage of total revenues.

      On October 8, 2002 we announced that in order to better align our product development activities with our revenue-producing markets, we would stop development of 802.11a broadband wireless products. The realignment process included redirecting certain engineering activities, and reorganizing sales, marketing and applications to strengthen major account support. As part of the realignment, we reduced our workforce by 39 employees. Expenses related to the discontinuance of the 802.11a development efforts were $0.7 million, consisting of severance costs and asset impairment charges. On May 19, 2003 we undertook a restructuring effort that eliminated approximately 37 additional positions in all operational segments of the Company, and consolidated some functions at our San Jose headquarters.

Opportunities and Challenges

      Our operating results are likely to continue to fluctuate as a result of many factors, including, but not limited to: the level, timing, cancellation or rescheduling of customer orders, changes in market demand, fluctuations in manufacturing yields and cost, market acceptance of our products, economic conditions specific to the networking and wireless industries and markets, and general economic conditions.

      As a result of competitive pricing pressures we have experienced lower margins in our wireless products, and we expect these pricing pressures to continue. In addition, the wireless and computer networking markets have undergone a period of rapid growth and consolidation in recent years. We expect our dependence on sales to computer network equipment manufacturers to continue. As a result, our business would suffer in the event of a significant slowdown in the networking equipment market. We intend to try to offset these pricing pressures by continuing to introduce new wireless products commanding higher average selling prices. In addition, we operate in a turnkey manufacturing environment. Consequently our manufacturing infrastructure is scalable, and we would expect some margin improvement by driving higher shipment volumes.

      The wireless and computer equipment networking markets in which we compete are characterized by continuing technological advancement, changes in customer requirements, and evolving industry standards. To address these challenges, we must design, develop, manufacture and sell new or enhanced products that provide increasingly higher levels of performance and reliability, are cost effective, and brought to market in a timely manner.

      Successful engineering development and market penetration in the product areas we have chosen require high levels of engineering and product development expense. We have sometimes experienced delays in completing the development of new products. As we do not currently manufacture our own semiconductor wafers, we are vulnerable to process technology advances competitors use to manufacture products offering higher performance and lower cost.

      To address these challenges, we intend to pursue various opportunities. For example, we intend to continue to spend significant amounts of resources on new product and technology development, including wireless semiconductors in the three major ISM bands, including 900 MHz, 2.4 GHz, and 5.8 GHz. We intend to broaden our markets into many streaming wireless applications such as wireless speakers and headphones, security cameras, game controllers, cordless headsets and cordless telephones. We also intend to

12

Table of Contents

Critical Accounting Policies

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

      Our critical accounting policies are as follows:

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

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

      We record estimated reductions to revenue for expected product returns. In determining the amount of the allowance, we analyze historical returns, current economic trends and changes in customer demand and acceptance of our products. There were no allowances for returns recorded at December 31, 2003.

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

      We perform ongoing credit evaluations of our customers based on a number of factors, including past transaction history and the creditworthiness of the customer, as determined by an evaluation of the customer’s financial statements, credit rating, bank and credit references. We do not generally require collateral from the customer. For certain international customers, we obtain letters of credit or cash payments in advance of shipment. Allowances for potential credit losses are established based on management’s review of individual accounts. The accounts receivable balance was $0.9 million, net of allowance for doubtful accounts of $30,000, as of December 31, 2003. An unexpected change in a major customer’s ability to meet its obligation could have an adverse material effect on our financial position and results of operations.

13

Table of Contents

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

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

      Significant management judgment is required in determining the provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. We have recorded a full valuation allowance of $14.3 million as of December 31, 2003, due to uncertainties related to the ability to utilize our deferred tax assets, primarily consisting of certain net operating losses carried forward and foreign tax credits, before they expire. The valuation allowance is based on estimates of taxable income by jurisdiction in which we operate and the period over which deferred tax assets will be recoverable. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish an additional valuation allowance or release existing allowances, which could materially impact our financial position and results of operations.

      We evaluate the carrying value of long-lived assets in accordance with Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS 144”). SFAS 144 retained the fundamental provisions of SFAS 121, which required that long-lived assets be reviewed for impairment whenever events or changes in circumstances indicate that the book value of the asset may not be recoverable. In the third quarter of 2003, we completed an impairment review of our land and buildings. The review was undertaken due to an unsolicited offer to purchase our facilities, 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 cash flows. Accordingly, we recorded an impairment loss of $1.5 million to write down the assets to their current estimated market value. In fiscal year 2002, we wrote down $0.4 of impaired capitalized software primarily due to the discontinuation our 802.11a broadband wireless program.

Results of Operations

      We recognize revenue from product shipped directly to OEM customers at the time of shipment. During 2003, our top ten OEM customers collectively accounted for approximately 73% of net revenues. We defer recognition of revenues and costs of our products to distributors until the distributor resells the product to its customers. Sales to Uniden pass through an international distributor, and are recognized as revenue upon the distributor’s resale to the end customer. However, these sales are classified as OEM in percent of net revenue presentation, since the distributor does not fulfill a traditional distributor-stocking role for this customer. In

14

Table of Contents

      The following table presents certain consolidated statements of operations data for the periods indicated:

      Wireless product revenues decreased in 2003 despite a 9% increase in unit shipments compared to 2002. The decrease is due to price erosion on wireless products offset only slightly by the increase in volume shipments. We would normally expect to offset the price erosion on mature products by introducing new generations of wireless products that command higher prices and generate higher gross margins. However, our engineering efforts for 2001 and most of 2002 were centered on our 802.11a broadband wireless project that was cancelled in October 2002. There were very few new wireless products introduced during this time and prices on existing wireless products continued to decline due to competitive pressures in the consumer markets we serve. We anticipate that the trend of falling average selling prices for our wireless products will begin to reverse in 2004 with the introduction and ramp up in unit shipment volumes of our 5.8Ghz products. Although we expect that prices on these new products will fall as the product matures, we intend to continue to introduce new generations of wireless products throughout 2004 that will again command higher average selling prices and offset the cycle of price erosion that we expect will continue as our wireless products mature.

15

Table of Contents

      Our networking product revenues continued to decrease as demand for our legacy products tapered off. Unit shipments of our networking products decreased 23% in 2003 compared to 2002. The decrease in shipment volumes combined with a decrease in average selling prices of 11%, due mainly to a shift in product mix, resulted in a decrease in net revenues of 28% in 2003 compared to 2002. Although there may be some continued decline in unit volume shipments we do not expect to experience the same dramatic decline in 2004 that we experienced in 2003.

      International revenues for 2003 totaled $18.9 million, or 91% of net revenues, compared to $25.4 million, or 89% of net revenues, for 2002, and $17.8 million, or 81% of net revenues, for 2001. Domestic revenues were approximately 9% of net revenues for 2003, compared to 11% for 2002 and 19% for 2001. The increase in international revenues as a percentage of total net revenues was primarily due to sales of our wireless products to Uniden Corporation. We expect that international revenues will continue to account for the substantial majority of our total revenues in the next twelve months.

      In fiscal 2003 and 2002, Uniden Corporation accounted for 56% of net revenues. In fiscal 2001, Uniden Corporation and Allied Telesyn International accounted for 46% and 11% of net revenues, respectively. Although our strategy is to engage large customers for new design wins, we expect that Uniden Corporation will continue to be our largest customer during the next twelve months.

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

      The decrease in gross margin in 2003, compared to 2002, stems mainly from the decrease in the average selling prices of our wireless products and to a lesser extent the shift in product mix of our networking products. The margin decreases were slightly offset by decreases in manufacturing subcontract costs realized through a combination of a decrease in the costs of our silicon wafers and efficiencies realized in the costs to test our products. In addition, gross margin was negatively impacted in 2003 by low yields on one of our wireless products that was shipping in volume in the second and third quarters. We have now identified and fixed the manufacturing problems that caused the low yields on this product and we have already realized an improvement in yields and gross margin in the fourth quarter of 2003.

      Fixed manufacturing overhead spending decreased by $0.6 million in 2003 to $2.0 million; however, it remained at 9% of net revenues due to the overall decrease in revenue in 2003. We expect these fixed costs to increase in 2004 due to costs associated with the introduction of our new products; however, we anticipate that the overall ratio of these costs to net revenue will remain relatively flat, or decrease slightly in 2004.

      The higher gross margin percentage in 2002 compared to 2001 was primarily due to a $0.7 million reduction of fixed manufacturing overhead spending, to $2.6 million, or 9% of net revenues in 2002, from $3.3 million, or 15% of net revenues, in 2001. The reduced costs and higher revenue base over which these costs are spread had a positive 6% margin impact in 2002 compared to 2001. This positive margin impact, resulting from lower overhead costs, was partially offset by an increase in the overall weighting of wireless revenues in our revenue mix in 2002 compared to 2001. Average gross margins on our wireless products are lower than those of our networking products.

16

Table of Contents

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

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

      The decrease in our 2003 expenses was mainly due to our restructuring efforts implemented in May 2003. We reduced engineering headcount as part of these restructuring efforts and consolidated most of the design and testing activities in our San Jose headquarters. We also maintain a small design group located in Salt Lake City, Utah. In planning our headcount reductions, we carefully reviewed and focused our product roadmap. We expect to continue spending significant funds on research and development activities to deliver leading edge products that have a promise of high volume shipments within a short time following their introduction.

      The decrease of $1.3 million, or 15%, in 2003 was primarily a result of the restructuring efforts we undertook in May 2003 and the associated headcount reductions across all selling, general and administrative functions. These cost reductions were offset somewhat by the increase in costs associated with marketing prototypes for new products. The decrease of $1.0 million, or 10.1% in 2002 compared to 2001, was primarily due to lower spending for supplies, outside services, consulting, legal and facilities. We believe that selling, general and administrative expenses could rise in the future, due mainly to higher marketing and selling expenses incurred in connection with the introduction of new products.

      In the third quarter of 2003, we completed an impairment review of our land and buildings. The review was undertaken due to an unsolicited offer to purchase our facilities, 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 cash flows. Accordingly, we recorded an impairment loss of $1.5 million to write down the assets to their current estimated market value. In fiscal year 2002, we wrote down $0.4 of impaired capitalized software primarily due to the discontinuation of the 802.11a broadband wireless program

17

Table of Contents

      In the second quarter of 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. Restructuring charges and related utilization for the fiscal year ended December 31, 2003 were as follows:

      The restructuring charge in the second quarter of 2003 was approximately $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 aprroximately $0.1 million, consisting primarily of employee termination and relocation expenses.

      The decrease in interest and other income from 2002 to 2003 was primarily due to the reduction in interest income affected by changes in our cash balances. The decrease in interest and other income from 2001 to 2002 was primarily due to the reduction in interest income affected by changes in our cash balances as well as the decline in prevailing interest rates. The decrease in interest and other expense from 2001 to 2002 was due primarily to a $1.0 million charge in 2001 for a discount granted to accelerate the payment of a note receivable that was issued to us by the purchaser of our test operations in April 2000.

      Our effective tax rate was 1% for 2003, 64% for 2002 and 25% for 2001. The 1% effective tax rate for 2003 is primarily due to the recording of a valuation allowance against our deferred tax assets as of December 31, 2003 and taxes associated with our UK operations. The 64% effective rate for 2002 is primarily due to tax refunds resulting from a tax law change in 2002 that allowed us to carryback net operating losses to prior years. The 25% effective rate for 2001 is due primarily to the recording of a valuation allowance against our deferred tax assets as of December 31, 2001.

18

Table of Contents

Liquidity and Capital Resources

      Cash used in operating activities during 2003 was primarily due to our $10.4 million net loss, offset by a non-recurring non-cash charge of $1.5 million recorded for impairment in the value of our San Jose facilities and non-cash depreciation and amortization charges of $1.3 million. In addition, during 2003 we collected $1.4 million in income tax refunds due to net operating loss carrybacks that were recorded in 2002. Cash used in operating activities during 2003 also included cash provided by an increase in our accounts payable balances of $0.6 million, $0.4 million of which related to a customer refund due for products which were returned in December. These favorable cash items were offset by a decrease in deferred revenue of $1.4 million and a $0.4 million decrease in accrued liabilities due in large part to a decrease in a legal accrual related to the successful outcome of the Pioneer litigation. The net loss in 2002 included a $5.1 million tax benefit primarily due to the carryback of net operating losses to profitable years, $4.0 million of which was received in tax refunds in 2002. The $2.8 million net loss, decrease in accrued liabilities of $1.6 million, and decrease in deferred revenue of $0.8 million were the primary components of cash used in 2002. These were offset by $2.1 million of non-cash depreciation and amortization and a $1.4 million reduction in inventories. The $8.8 million of cash used in operating activities in 2001 was due primarily to the net loss of $16.2 million, an increase in inventories of $2.2 million and a $1.4 million decrease in accrued liabilities. These uses of cash were somewhat offset by the favorable cash impact in 2001 from non-cash charges of $3.5 million resulting from an increase in valuation reserves related to deferred tax assets, and $2.1 million of non-cash depreciation and amortization. In addition, during 2001 we collected receivables and purchased inventories on behalf of Fairchild Semiconductor Corporation related to certain product lines sold to them in September 2000. The net effect of these transactions, in addition to the change in our other current assets, had a $5.9 million positive cash impact.

      Net cash provided during 2003 consisted primarily of net proceeds from sales of short-term investments. In 2003, cash used for capital expenditures increased to $0.5 million compared to $0.3 million in 2002 as we continued to purchase mostly R&D related equipment. Net cash provided by investing activities in 2001 was primarily due to $2.7 million in cash received on the note receivable from Artest Corporation for test equipment sold to them in 2000 and $5.1 million in net sales of short-term investments, offset by $1.9 million in purchases of property and equipment.

      The net cash provided by financing activities in 2003, 2002 and 2001 was primarily from proceeds on issuance of the Company’s common stock. This was offset by principal paydowns of approximately $250,000 each year on the Company’s note payable, secured by its building located in San Jose, California.

19

Table of Contents

(1)	Long-term debt includes principal and interest.

      Working capital was $14.2 million at December 31, 2003, including cash and cash equivalents of $8.7 million and short-term investments of $9.0 million.

      Cash flows for 2003 were impacted by $1.0 million in costs for the restructuring we completed in the first half of 2003. Cash utilization in the second half of 2003, subsequent to the restructuring, totaled $1.3 million. Compared to 2002, spending is now approximately $2.0 million lower per quarter, significantly reducing our breakeven point. We anticipate that existing cash resources will fund any anticipated operating losses, purchases of capital equipment, and provide adequate working capital for at least the next 12 months. Our liquidity is affected by many factors, including, among others, the extent to which we pursue additional wafer fabrication capacity from existing foundry suppliers or new suppliers, capital expenditures, the level of our product development efforts, and other factors related to the uncertainties of the industry and global economies. Accordingly, there can be no assurance that events in the future will not require us to seek additional capital sooner or, if so required, that such capital will be available on terms acceptable to us.

Factors That May Affect Future Operating Results

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

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

	•	the level and timing of spending by our customers, both in the U.S. and in foreign markets;
	•	changes in market demand, including seasonal and cyclical fluctuations;
	•	timing, amount, cancellation or rescheduling of customer orders;
	•	fluctuations in manufacturing yields;
	•	timing of revenue recognition from contracts, which may span several quarters;
	•	competitive market conditions;
	•	the announcement or introduction of new or enhanced products by us, or competitors, or both;
	•	any delay in the introduction of new or enhanced products by us;
	•	market acceptance of our new products and continuing demand for our existing products;

20

Table of Contents

	•	cost and availability of wafers, other components and testing services;
	•	mix of products sold;
	•	fluctuations in end user demand for wireless products manufactured by our customers which incorporate our technology;
	•	economic conditions specific to the networking and wireless industries and markets, as well as general economic conditions;
	•	ability to hire and retain qualified technical and other personnel;
	•	development of new industry standard communication protocols; and
	•	availability and performance of advanced silicon process technologies from foundry sources.

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

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

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

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

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

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

21

Table of Contents

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

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

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

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

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

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

      Customers typically take a long time to evaluate our new products. It takes 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 revenues from new products. Delays inherent in such a long sales cycle raise additional risks that customers may decide 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 December 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 $20,255,000 as of December 31, 2003.

      Successful engineering development and market penetration in the product areas we have chosen to compete in require high levels of engineering and product development expense. We intend to continue to spend significant amounts on new product and technology development. Our networking products are reaching

22

Table of Contents

                  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 or 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 or results of operations 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 our 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 to us 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 2001 and 2002 and 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 revenues.

      Relatively short product life cycles characterize the computer network equipment and digital cordless telephone markets. If one or more of our significant customers were to select circuits manufactured by a competitor for future products, our business would 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.

                  Our customer base is concentrated. The loss of one or more key customers or distributors would harm our business.

      A significant majority of our revenue comes from sales to relatively few customers. Sales to the ten largest customers, excluding domestic distributors, in 2003, 2002, and 2001 accounted for approximately 77%, 79%, and 75% of net revenue, respectively. Sales to domestic distributors in 2003, 2002, and 2001 accounted for approximately 5%, 7%, and 13% of net revenue. We anticipate that a limited number of key customers 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 adversely affected if one or more of our major customers were to develop other sources for the products we now supply them.

      Generally, customers may cancel or reschedule orders to purchase standard products without significant penalty until 30 days prior to requested shipment. Customers frequently revise delivery schedules, and the

23

Table of Contents

      Sales to customers outside of the United States in 2003, 2002, and 2001 represented 91%, 89%, and 81% of net revenue, 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 regulations and laws of foreign governments 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 managing foreign operations;
	•	loss of one or more international distributors;
	•	geopolitical risks, changes in diplomatic and trade relationships and economic instability; and
	•	the effects of the terrorist attacks on the United States, the war in Iraq, the United States’ war on international terrorism and any related conflicts or similar events worldwide.

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

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

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

      Average selling prices for products in the 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.

24

Table of Contents

      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 margins, harming our business, financial condition, and results of operations.

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

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

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

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

25

Table of Contents

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

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

      We rely on four 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 would 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 and 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, which would harm our business and results of operations.

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

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

26

Table of Contents

      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.

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

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

      We own twelve U.S. patents, and have five U.S. patent applications and ten foreign patent applications pending. Through a sale of a portion of our assets, we maintain a royalty-free license to forty-five 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 the 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.

      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.

27

Table of Contents

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

      Our stock price has been and is likely to continue to be highly volatile. Between January 1, 2003 and December 31, 2003, our stock price has closed as high as $6.70 on December 2, 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 objects of securities class action litigation. If we were the objects 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.

      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

28

Table of Contents

      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.

      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 by the SEC and NASDAQ, 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.

Interest Rate Risk

      As of December 31, 2003, our investment portfolio consisted of U.S. government obligations, commercial paper and money market funds, typically with maturities of less than 12 months (see Note 1 of Notes to the Consolidated Financial Statements). Some of these securities are subject to interest rate risk, and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels at December 31, 2003 and December 31, 2002, the fair market value of these investments would decline by an immaterial amount. We intend to hold our fixed income investments until maturity and, therefore, do not expect to recognize an adverse impact from interest rate changes on income or cash flows.

Foreign Currency Exchange Risk

      Our international sales are significant in relation to our total sales and are, therefore, subject to foreign currency rate exposure. We limit our foreign currency risks principally by maintaining minimal foreign currency balances. To date, our exposure related to exchange rate volatility has not been significant.

29

Table of Contents

INDEX TO FINANCIAL STATEMENTS

30

Table of Contents

REPORT OF INDEPENDENT AUDITORS

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

      In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Micro Linear Corporation and its subsidiary at December 31, 2003 and 2002, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2003 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the accompanying index presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

/s/ PRICEWATERHOUSECOOPERS LLP

San Jose, California

31

Table of Contents

MICRO LINEAR CORPORATION