UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Form 10-Q

(Mark One)

For the Quarterly Period Ended September 26, 2004

OR

For the transition period from            to

Commission File Number 0-24758

Micro Linear Corporation

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

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

     The number of shares of the Registrant’s Common Stock outstanding as of November 1, 2004, net of shares held in treasury, was 12,442,970.

TABLE OF CONTENTS

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PART I. FINANCIAL INFORMATIONS

Item 1. Financial Statements

MICRO LINEAR CORPORATION

See accompanying notes to unaudited consolidated condensed financial statements.

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MICRO LINEAR CORPORATION

See accompanying notes to unaudited consolidated condensed financial statements.

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MICRO LINEAR CORPORATION

See accompanying notes to unaudited consolidated condensed financial statements.

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MICRO LINEAR CORPORATION

1. Organization and Summary of Significant Accounting Policies

Organization

     Micro Linear Corporation is a fabless semiconductor company specializing in wireless integrated circuit solutions, which enable a variety of wireless products serving a global market. These transceivers can be used in many streaming wireless applications such as cordless phones, PHS handsets, wireless speakers and headphones, security cameras, game controllers, cordless headsets and other personal electronic appliances.

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

Fiscal Year

     We report results of operations on the basis of fifty-two or fifty-three week periods, ending on the Sunday closest to December 31. Fiscal year 2003 ended on December 28, 2003. The third quarter of 2003 ended on September 28, 2003. The third quarter of 2004 ended on September 26, 2004. For presentation purposes, the accompanying financial statements refer to the calendar year end and month end of each respective period.

Principles of Consolidation

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

     The Company has designated the U.S. dollar as the functional currency for its United Kingdom subsidiary since that subsidiary is dependent on the parent company’s economic environment. The gains and losses resulting from the transactions of the United Kingdom subsidiary are recorded as other income and expense. For the third quarters of 2004 and 2003, transaction gains and losses were not significant.

Basis of Presentation

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

     The accompanying unaudited consolidated condensed financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited consolidated condensed financial statements and notes should be read in conjunction with the consolidated financial statements and notes in the Annual Report on Form 10-K for the year ended December 28, 2003, filed with the Securities and Exchange Commission on March 29, 2004.

Use of Estimates

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

Earnings (Loss) Per Share

     Basic earnings (loss) per share is computed by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per share includes the effect of all potentially dilutive common stock outstanding during the period. Diluted earnings (loss) per share excludes potential common stock if the effect is anti-dilutive. We compute diluted earnings (loss) per share using the treasury stock method for stock options outstanding.

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     A total of 2,606,081 and 3,810,595 shares of potential common stock were not included in the dilutive net loss per share calculations for the three months ending September 30, 2004 and 2003, respectively, because their effect would be anti-dilutive. A total of 3,880,236 and 3,810,595 shares of potential common stock were not included in the dilutive net loss per share calculations for the nine months ended September 30, 2004 and 2003, respectively, because their effect would be anti-dilutive.

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

Stock-Based Compensation

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

     We account for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and Emerging Task Force Issue No. 96-18, “Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Good or Services” (EITF 96-18).

Pro Forma Net Income (Loss)

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

     The Black-Scholes option valuation model was intended for use in estimating the fair value of publicly traded options that have no vesting restrictions and are fully transferable, which differs significantly from the terms of our stock option awards. In addition, option valuation models require the input of highly subjective assumptions, including the expected stock price volatility and the expected life of the options before exercise, which greatly affect the calculated grant date fair value. The weighted average estimated fair values of shares at the date of grant that were issued under the Employee Stock Purchase Plan during the three months ended September 30, 2004 and 2003 were $1.77 and $0.86 respectively. The weighted average estimated fair values of shares at the date of grant that were issued under the Employee Stock Purchase Plan during the nine months ended September 30, 2004 and 2003 were $1.65 and $1.10

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respectively. The weighted average fair values at the date of grant of options which were granted under the employee and directors’ stock option plans during the three months ended September 30, 2004 and 2003 were $2.27 and $1.04 respectively. The weighted average fair values at the date of grant of options which were granted under the employee and directors’ stock option plans during the nine months ended September 30, 2004 and 2003 were $2.46 and $1.24 respectively.

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

2. Financial Statement Details

Inventories consist of the following (in thousands):

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

* The sale of our San Jose facilities was completed on July 28, 2004.

Provision for Income Taxes

The provision for income taxes for the three months and nine months ended September 30, 2004 consists mainly of state taxes. The provision for the three months and nine months ended September 30, 2003 consists mainly of taxes incurred by our subsidiary in the United Kingdom and minimum state tax obligations. We did not record a benefit for income taxes related to our net losses in the U.S., as we believe that the available objective evidence creates sufficient uncertainty regarding the realization of the deferred tax assets such that we have recorded a full valuation allowance. The effective tax rate for the three months ended September 30, 2004 was 2.3% and for the nine months ended September 30, 2004 was 0.8%. The effective tax rate for both the three months and nine months ended September 30, 2003 was 0.9%.

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Comprehensive Income

     For the three months and nine months ended September 30, 2004 and 2003, comprehensive loss, which consists of the net loss for the periods and unrealized gain or loss on short-term marketable securities, is as follows (in thousands):

3. Recent Accounting Pronouncements

     At its March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115 and investments accounted for under the cost method or the equity method. The recognition and measurement guidance for which the consensus was reached in the March 2004 meeting is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. We do not believe that this consensus on the recognition and measurement guidance will have an impact on our financial position and results of operations.

4. Operations by Geographic Regions

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

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

5. Fixed Assets Impairment and Restructuring Charges

     In the third quarter of 2003, we reviewed our real estate assets due to the continuing deterioration in the commercial real estate market and determined that our carrying value exceeded the current estimated fair market value. Accordingly, we recorded an impairment charge of $1.5 million during the third quarter of 2003

     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. The current year’s net loss includes a $166,000 charge in connection with the recognition of the remaining lease obligation, net of a sublease, on a facility vacated during the second quarter as part of this restructuring. As of September 30, 2004 the restructuring had been substantially completed. The restructuring charges recorded in the first nine months of 2003 were approximately $1.1 million, consisting primarily of employee severance and related termination costs of $0.7 million and a fixed asset impairment charge of $0.4 million for assets idled due to headcount reductions and the vacating of facilities.

6. Sale of Land and Buildings

     On July 28, 2004, we sold our San Jose facilities for approximately $7.0 million. During the third quarter of 2004, we recognized a gain on the sale of approximately $1.1 million and the sale generated cash of approximately $4.6 million, net of a $1.9 million mortgage payoff and $0.5 million of closing costs. We will lease back a portion of the current facility for the next several months as we search for a new location for our headquarters. This asset was not classified as held for sale in the accompanying financial statements, as it did not meet the criteria for such classification under SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets”.

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

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

     These forward-looking statements include, but are not limited to, statements regarding: our expectations as to some deterioration in our gross margin over the next two quarters but that we do not expect gross margin to fall below historical levels our beliefs regarding deferred tax assets, including our beliefs that the available objective evidence creates sufficient uncertainty regarding the realization of the deferred tax assets such that we have recorded a full valuation allowance against our deferred tax assets, our expectation that international revenue will account for a significant percentage of our revenue for the foreseeable future, our expectation that our capital expenditures for the foreseeable future will be in line with historical expenditures, and our belief that existing cash resources are sufficient to fund any anticipated operating losses and purchases of capital equipment, provide adequate working capital for the next 12 months.

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

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

Critical Accounting Policies

     Management’s Discussion and Analysis of Financial Condition and Results of Operations is based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, revenue and expenses, and related disclosure of contingent assets and liabilities. Management bases its estimates on historical experience and other assumptions that are believed to be reasonable under the circumstances. These results form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Senior management has discussed the development, selection and disclosure of these estimates with the Audit Committee of Micro Linear’s Board of Directors. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies reflect its more significant estimates and assumptions used in the preparation of its consolidated financial statements. They include those regarding (1) revenue recognition, (2) estimating accrued liabilities and allowance for doubtful accounts, (3) inventory and related allowance for obsolete and excess inventory, (4) accounting for income taxes, and (5) valuation of long-lived and intangible assets.

     The critical accounting policies are described in Item 7, “Management Discussion and Analysis of Financial Condition and Results of Operations,” of our Annual Report on Form 10-K for the year ended December 28, 2003.

Overview

     Micro Linear Corporation is a fabless semiconductor company specializing in wireless integrated circuit solutions, which enable a variety of wireless products serving a global market. These transceivers can be used in many streaming wireless applications such as cordless phones, PHS handsets, wireless speakers and headphones, security cameras, game controllers, cordless headsets and other personal electronic appliances.

     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.

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Wireless product revenue represented 82% of net revenue for the third quarter of 2004 compared to 72% of net revenue for the third quarter of 2003.

     On July 28, 2004, we sold our San Jose facilities for approximately $7.0 million. During the third quarter of 2004 we recognized a gain on the sale of approximately $1.1 million and the sale generated cash of approximately $4.6 million, net of a $1.9 million mortgage payoff and $0.5 million of closing costs. We will lease back a portion of the current facility for the next several months as we search for a new location for our headquarters.

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Results of Operations

Three Months and Nine Months Ended September 30, 2004 Compared with Three Months and Nine Months Ended September 30, 2003

     The following tables present certain consolidated statements of operations data for the periods indicated (unaudited):

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Net Revenue

     Net revenue during the third quarter of 2004 increased $0.1 million from the comparable third quarter of 2003. Our wireless net revenue grew $0.6 million, 14%, in the third quarter of 2004 compared to the third quarter of 2003. The increase in wireless product revenue was mainly due to the 52% increase in our average selling prices compared to the year ago period, driven mainly by the higher average selling price of our 5.8GHz product, the ML5800, as compared to the average selling price of our ML2724, our 2.4GHz product that was shipping in volume during the third quarter of 2003. Also, during the third quarter of 2004, we began shipping our transverter, the ML5824, in volume. Net revenue from our networking products decreased $0.5 million in the third quarter of 2004, a 33% decrease from the third quarter of 2003. The decrease in networking product revenues is due mainly to the continuing erosion in the demand for our legacy networking products as they approach end-of-life.

     Net revenue for the first nine months of 2004 decreased 4% from the first nine months of 2003. Our wireless product net revenue increased 6% from the prior year, primarily due to a 38% increase in average selling prices, which was driven by an increase in sales of our ML5800. Networking product net revenue decreased 23% in the first nine months of 2004 as compared to the first nine months of 2003, primarily due to the decrease in demand for our legacy networking products as they approach end-of-life.

     In the third quarter of 2004, sales to Uniden Corporation and Vtech each accounted for more than 10% of our net revenue. In the third quarter of 2003, sales to Uniden Corporation accounted for more than 10% of our net revenue.

     International revenue for the third quarter of 2004 totaled $5.6 million, or 96% of net revenue compared to $5.4 million, or 93% of net revenue for the third quarter of 2003. International revenue for the first nine months of 2004 totaled $15.5 million, or 95% of net revenue compared to $15.5 million or 92% of net revenue for the first nine months of 2003. Domestic revenue was approximately 4% of net revenue for the third quarter of 2004 compared to 7% for the third quarter of 2003. Domestic revenue was approximately 5% of net revenue for the first nine months of 2004 compared to 8% for the first nine months of 2003. We expect that international revenue will account for the substantial majority of our total net revenue for the foreseeable future.

Gross Margin

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

     Gross margin during the third quarter of 2004 was 58%, as compared to 41% in the third quarter of 2003. Wireless product gross margin was 54% during the third quarter of 2004 as compared to 29% in the third quarter of 2003 and networking product gross margin was 75% during the third quarter of 2004 compared to 73% in the third quarter of 2003. Gross margin was negatively impacted in the third quarter of 2004 due to a $0.2 million charge for a write-down in inventories related to excess quantities of certain of our legacy networking products and certain wireless products.

     The increase in wireless product gross margin was primarily due to the 52% increase in average selling prices and a 16% decrease in direct unit product costs. The growth in our average selling prices was driven primarily by sales of our ML5800, which began shipping in volume during the second quarter of 2004. The decrease in our direct unit product costs in the third quarter of 2004 was primarily due to our ability to maintain high yields in the manufacture of our ML5800 product and to achieve high yields on our ML5824, which we began producing in volume during the third quarter of 2004. Comparatively, during the third quarter of 2003,

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wireless product gross margin was negatively impacted by continued significant erosions in average selling prices and higher unit product costs due to the low yields on the ML2724, our 2.4 GHz wireless product that was shipping in high volumes.

     While networking product gross margin during the third quarter of 2004 was relatively flat with the third quarter of 2003, average selling prices decreased 15% during the third quarter of 2004 as compared to the third quarter of 2003 and average direct unit product costs decreased 48%. The decrease in average selling prices and in average direct product unit costs was mainly due to a shift in product mix.

     Gross margin for the first nine months of 2004 increased to 55% from 44% in the first nine months of 2003. The comparative increase was due to a combination of a 24% increase in average selling prices and a 33% decrease in direct unit product costs. Wireless product average selling prices increases 38% during the first nine months of 2004 compared to the first nine months of 2003 while networking product average selling prices decreased 14% during this period. The higher wireless product average selling prices during the first nine months of 2004 was due mainly to the higher selling prices of our ML5800 as compared to the ML2724 that was shipping in volume during the first nine months of 2003. For the first nine months of 2004 compared to the first nine months of 2003, wireless gross margins were also positively impacted by a 16% decrease in the average direct unit product costs, due mainly to the high yields obtained on our ML5800 and ML5824 products shipping the first nine months of 2004 as compared to the average direct unit product costs of wireless products shipping during the first nine months of 2003, which was negatively impacted by low yields on our ML2724. Networking average selling prices decreased 14% in the first nine months of 2004 compared to the first nine months of 2003 due mainly to changes in the product mix. Average direct unit product cost of our networking products decreased 5% in the first nine months of 2004 as compared to the first nine months of 2003. The cost decrease in 2004 was also due mainly to changes in product mix.

     Sales of product that we had previously written down, due to inventory on-hand in excess of foreseeable demand and inventory obsolescence, were not significant during the three and nine months ended September 30, 2004 and 2003. These sales did not have a significant impact on gross margin in any of these periods.

Research and Development Expenses (R&D)

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

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

     Research and development costs will vary from quarter to quarter depending on the stage of products in development. Research and development expenses increased $0.5 million from the third quarter of 2003. The increase in costs during the third quarter of 2004 is due to a combination of $0.1 million in increased costs related to outside engineering and other consulting services related to the development of new products, the absence of a one time refund of $0.2 million received in the third quarter of 2003 related to sales tax paid on engineering development tools in prior quarters and an increase of $0.1 million in employee related costs.

     Research and development costs decreased slightly in the first nine months of 2004 compared to the first nine months of 2003. A decrease of $0.2 million in employee costs relating to the Company’s restructuring undertaken in the second quarter of 2003 and a $0.2 million decrease in the cost of our engineering development tools were offset by an increase of $0.4 million in material costs and outside services related to the development of new products.

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Selling, General and Administrative Expenses (SG&A)

     The increase in selling, general and administrative expenses for the third quarter of 2004 compared to the third quarter of 2003 was mainly due to a $165,000 increase in our bad debt reserve. We record changes to our required bad debt reserve as an SG&A expense. The reserve is intended to provide for specific receivables which have become over sixty days past due as well as a provision based on the remaining balances in accounts receivable. During the third quarter of 2004 we increased the reserve to provide for a large customer receivable outstanding for over 90 days and the overall increase in our accounts receivable balance.

     The decrease in selling general and administrative expenses for the first nine months of 2004 compared to the first nine months of 2003 was due mainly to a $0.5 million reduction in employee related expenses resulting from the restructuring that the Company undertook in the second quarter of 2003. The reduction in these expenses was partially offset by the increase in our bad debt reserves of $173,000 during the first nine months of 2004.

Interest and Other Income and Interest and Other Expense

     The decrease in interest and other income for the nine months of 2004 as compared to the nine months of 2003 was primarily due to the decrease in cash balances. Interest and other expense is primarily attributable to the mortgage on our San Jose facility. The decrease in interest and other expenses in the first nine months of 2004 as compared to the first nine months of 2003 is mainly due to the repayment of the mortgage on our San Jose facility, which was repaid in July 2004 when the property was sold.

Provision for Income Taxes

     The provision for income taxes for the three months and nine months ended September 30, 2004 consists mainly of state taxes. The provision for the three months and nine months ended September 30, 2003 consists mainly of taxes incurred by our subsidiary in the United Kingdom and minimum state tax obligations. We did not record a benefit for income taxes related to our net losses in the U.S., as we believe that the available objective evidence creates sufficient uncertainty regarding the realization of the deferred tax assets such that we have recorded a full valuation allowance. The effective tax rate for the three months ended September 30, 2004 was 2.3% and for the nine months ended September 30, 2004 was 0.8%. The effective tax rate for both the three months and nine months ended September 30, 2003 was 0.9%.

Liquidity and Capital Resources

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     Net cash used in operating activities during the first nine months of 2004 was $5.9 million. During the quarter we collected $13.7 million from the sale of goods. Our accounts receivable increased by $2.5 million from December 31, 2003. We did not have any significant change in our credit policies; however, we sold $2.9 million of products in September 2004, and the resulting accounts receivable was not due as of the end of the quarter. Our major uses of cash are operating expenses and cost of product manufactured. Our operating expenses during the first nine months of 2004 were $13.1 million before the gain on sale of our land and buildings of $1.1 million and our cost to manufacture products was $6.1 million, after a decrease in our inventory balance excluding changes in our inventory valuation reserves, of $1.1 million. Our costs to manufacture products consist primarily of purchases of materials and subcontractor services. They also included $0.6 million in operating overhead; consisting mainly of employee expenses, cost of outside services, and materials and expenses related to the transitioning of new products from development to volume manufacturing. Our use of cash for operating expenses and cost of product manufactured was partially offset by an increase in our accounts payable of $0.7 million during the first nine months of 2004.

     Net cash provided by investing activities was due primarily to the sale of our San Jose facilities for approximately $7.0 million during the third quarter. We recognized a net gain on the sale of approximately $1.1 million and the sale generated net cash of approximately $4.6 million, after a $1.9 million mortgage payoff and $0.5 million of closing costs. Other investing activities during these periods consisted primarily of net sales of short-term investments, which totaled $4.2 million for the first nine months of 2004, and $4.8 million for the first nine months of 2003. Capital expenditures consist mainly of the purchase of engineering laboratory equipment and were $0.4 million for the first nine months of 2004, and $0.5 million in the comparable period of 2003. We do not have any major capital projects planned and expect that we will be able to fund our capital needs through the use of our existing cash balances.

     Net cash used in financing activities consists of principal payments on our debt, offset partially by proceeds from the issuance of common stock in connection with the exercise of employee stock options. The mortgage on our San Jose facilities was paid off when the buildings were sold during the third quarter of 2004. Principal mortgage payments on our debt were $2.0 million for the first nine months of 2004 and $0.2 million for the same period of 2003. The use of cash for the principal payments on our debt was partially offset by proceeds from the issuance of common stock in the amount of $0.6 million during the first nine months of 2004 and $0.1 million for the first nine months of 2003.

     Working capital was $16.4 million as of September 30, 2004, compared to $14.2 million as of December 31, 2003. Working capital at September 30, 2004 includes cash and cash equivalents of $11.7 million and short-term investments of $4.8 million.

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

Recent Accounting Pronouncements

     At its March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarifies the meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or held-to-maturity under SFAS No. 115 and investments accounted for under the cost method or the equity method. The recognition and measurement guidance for which the consensus was reached in the March 2004 meeting is to be applied to other-than-temporary impairment evaluations in reporting periods beginning after June 15, 2004. We do not believe that this consensus on the recognition and measurement guidance will have an impact on our financial position and results of operations.

Factors That May Affect Future Operating Results

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

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

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

	•		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;
	•		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.

The markets in which we operate are intensely competitive, and many competitors are larger and more established. If we do not compete successfully, our business could be harmed.

     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

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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.

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

     Rapidly changing technology, frequent product introductions and evolving industry standards make it difficult to accurately predict the wireless product 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.

We need to develop and introduce new and enhanced products in a timely manner to successfully compete in our industry.

     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.

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     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 revenue 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 June 2004, except for a profit in the third quarter of 2002, which was attributable to an income tax refund. We had a net profit for the third quarter of 2004, including a $1.1 million gain from the sale of our San Jose facilities. Because of those losses, we had an accumulated deficit of $23.2 million as of September 30, 2004.

     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 maturity, and revenue from this product line has declined and is expected to decline further over the next 12 months. We expect to incur losses in the future and may not achieve our goals of positive net income and cash flow.

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 certain periods, new orders slowed, customers cancelled or placed holds on existing orders, and new order levels fluctuated, due to developments in the general economy and capital markets. This situation could recur in the future. Because the majority of our revenue comes from sales to a few customers, a delay in orders from one customer could have a significant negative effect on future revenue.

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

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

     A significant majority of our net revenue comes from sales to relatively few customers. Sales to our ten largest customers, excluding domestic distributors, accounted for approximately 89% and 83% of net revenue for the three months and nine months ended September 30, 2004, respectively, and approximately 88% and 81% of net revenue for the comparable periods in 2003. Two customers, Uniden Corporation and VTech, together accounted for 69% of our net revenue for the third quarter of 2004. Sales to domestic distributors accounted for approximately 4% of net revenue for the three months and nine months ended September 30, 2004, respectively, and approximately 5% for both of the comparable periods in 2003. 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 quantities of products to be delivered, to reflect changes in their needs. Since backlog can be canceled or rescheduled, our backlog at any time is not necessarily indicative of future revenue.

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

     Sales to customers outside of the United States represented 96% and 95% of net revenue for the three months and nine months ended September 30, 2004, respectively, and 93% and 92% of net revenue for the comparable periods in 2003. 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, a recurrence of global health scares and any related conflicts or similar events worldwide.

     Substantially the Office of Export Administration of the U.S. Department of Commerce must license all of our international sales. 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

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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.

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

     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.

     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.

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

     Complex products such as ours frequently contain errors, defects, and bugs upon release. Despite thorough testing by Micro Linear, our test subcontractors 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.

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

     The semiconductor industry experiences significant downturns and wide fluctuations in supply and demand. The industry also experiences significant fluctuations in anticipation of changes in general economic conditions. This causes significant variances in product demand and production capacity, and aggravates 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.

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

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

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

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

     The manufacture of integrated circuits is a highly complex and technically demanding process. We have diversified our sources of wafer supply and have worked closely with our foundries to minimize the likelihood of reduced manufacturing yields. However, our foundries have sometimes experienced lower than anticipated manufacturing yields, particularly in connection with the introduction of new products and the installation and start-up of new processes. Reduced yields have, at times, negatively affected our operating results, a situation which may recur in the future.

     Dependence on foundries located outside of the United States subjects us to numerous risks, including exchange rate fluctuations, export and import restrictions, trade sanctions, political 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, which exposes us to the risks described above, including risks associated with capacity, dependence upon a limited number of test service subcontractors and disruptions in service.

     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.

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

     Our wafer suppliers and test and assembly subcontractors are subject to a variety of U.S. and foreign government regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in their manufacturing processes. Failure

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by our suppliers or subcontractors to comply with environmental regulations could result in fines, suspension of production or cessation of operations. Environmental regulations could also require our suppliers or subcontractors to acquire equipment or incur other expenses to comply with environmental regulations. If our suppliers or subcontractors incur substantial additional expenses, product costs could significantly increase, adversely affecting our results of operations.

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

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

     Our future success will depend to a significant extent on our ability to attract, retain and motivate 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.

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

     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.

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

     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.

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

     Our stock price has been and is likely to continue to be highly volatile. Between January 1, 2004 and September 26, 2004, our stock price has traded as high as $7.95 on January 28, 2004, and as low as $4.65 on May 11, 2004. 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 including new rules on equity based compensation; 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.

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

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

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

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

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

     Recently enacted and proposed changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules adopted by the SEC and NASDAQ, could cause us to incur increased costs as we evaluate the

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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.

Changes to financial accounting standards may affect our results of operations and cause us to change our business practices

     We prepare our financial statements to conform with generally accepted accounting principles, or GAAP, in the United States. These accounting principles are subject to interpretation by the American Institute of Certified Public Accountants, the Securities and Exchange Commission and various bodies formed to interpret and create appropriate accounting policies. A change in those policies can have a significant effect on our reported results and may affect our reporting of transactions completed before a change is announced. Changes to those rules or the questioning of current practices may adversely affect our reported financial results or the way we conduct our business. For example, accounting policies affecting many aspects of our business, including rules relating to employee stock option grants, have recently been revised or are under review. There has been ongoing public debate whether employee stock option and employee stock purchase plans’ shares should be treated as a compensation expense and, if so, how to properly value these charges. If we elected or were required to record an expense for our stock-based compensation plans using the fair value method, we could have significant accounting charges. Although standards have not been finalized, and the timing of a final statement has not been established, the Financial Accounting Standards Board has announced its support for recording expense for the fair value of stock options granted.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

     As of September 30, 2004, our investment portfolio consisted of U.S. government obligations, commercial paper and money market funds, typically with maturities of less than 12 months. Some of these securities are subject to interest rate risk, and will decline in value if market interest rates increase. We intend to hold our fixed income investments until maturity and, therefore, do not expect to recognize an adverse impact from interest rate changes on income or cash flows. If market interest rates were to increase immediately and uniformly by 10% as of September 30, 2004 and September 30, 2003, the decline in the fair value of the portfolio would not be material.

Foreign Currency Exchange Risk

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

Item 4. Controls and Procedures

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

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

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

     We are in the process of documenting and evaluating our internals controls as required by Section 404 of the Sarbanes-Oxley Act of 2002. We are not required to be in compliance with Section 404 until December 2005.

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PART II. OTHER INFORMATION

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

     The registrant’s Annual Meeting of Stockholders was held on August 4, 2004.

     The following actions were taken at the annual meeting:

     1. The following Directors were elected

     2. The ratification of the appointment of PricewaterhouseCoopers LLP as our independent auditors for the year ending December 31, 2004 was approved.

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Item 6. Exhibits

     Exhibits:

* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 and Exhibit 32.2 are deemed to accompany this Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

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SIGNATURES

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

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INDEX TO EXHIBITS

* In accordance with Item 601(b)(32)(ii) of Regulation S-K and SEC Release Nos. 33-8238 and 34-47986, Final Rule: Management’s Reports on Internal Control Over Financial Reporting and Certification of Disclosure in Exchange Act Periodic Reports, the certifications furnished in Exhibit 32.1 and Exhibit 32.2 are deemed to accompany this Form 10-Q and will not be deemed “filed” for purpose of Section 18 of the Exchange Act. Such certifications will not be deemed to be incorporated by reference into any filing under the Securities Act or the Exchange Act, except to the extent that the registrant specifically incorporates it by reference.

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