UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

Form 10-Q

(Mark One)


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


		For the Quarterly Period Ended July 3, 2005


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

For the transition period from to

Commission File Number 0-24758

Micro Linear Corporation

(Exact name of Registrant as specified in its charter)


Delaware		94-2910085
(State or other jurisdiction of		(I.R.S. Employer
incorporation or organization)		Identification No.)

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

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

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ 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 þ

The number of shares of the Registrant’s Common Stock outstanding as of August 10, 2005, net of shares held in treasury, was 12,927,321.

TABLE OF CONTENTS


	PAGE
PART I FINANCIAL INFORMATION		3
Item 1. Financial Statements (Unaudited except for Condensed Consolidated Balance Sheet at December 31, 2004)		3
Condensed Consolidated Balance Sheets at June 30, 2005 and December 31, 2004		3
Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2005 and 2004		4
Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2005 and 2004		5
Notes to Unaudited Condensed Consolidated Financial Statements		6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		11
Item 3. Quantitative and Qualitative Disclosures about Market Risk		28
Item 4. Controls and Procedures		28
PART II OTHER INFORMATION		28
Item 6. Exhibits		28
SIGNATURES		29
Index to Exhibits
EXHIBIT 3.(ii)
EXHIBIT 10.1
EXHIBIT 31.1
EXHIBIT 31.2
EXHIBIT 32.1
EXHIBIT 32.2

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

MICRO LINEAR CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS
(In Thousands)


	June 30,			December 31,
	2005			2004
	(Unaudited)
Assets
Current Assets:
Cash and cash equivalents	$	8,571		$	10,920
Short-term investments		5,174			4,660
Accounts receivable, net of allowance for doubtful accounts of $129 at June 30, 2005 and $139 at December 31, 2004		3,675			2,878
Inventories		2,519			1,770
Other current assets		298			210

Total current assets		20,237			20,438
Property and equipment, net		531			459
Other assets		28			28

Total assets	$	20,796		$	20,925

Liabilities and Stockholders’ Equity
Current liabilities:
Accounts payable	$	2,503		$	1,500
Accrued compensation and benefits		1,221			988
Deferred revenue		308			494
Other accrued liabilities		1,154			1,121

Total current liabilities		5,186			4,103
Stockholders’ equity:
Common stock		16			15
Additional paid-in capital		62,514			61,368
Accumulated deficit		(26,682	)		(24,320	)
Accumulated other comprehensive loss		(5	)		(8	)
Treasury stock		(20,233	)		(20,233	)

Total stockholders’ equity		15,610			16,822

Total liabilities and stockholders’ equity	$	20,796		$	20,925

See accompanying notes to unaudited condensed consolidated financial statements.

MICRO LINEAR CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(In Thousands, Except Per Share Amounts)
(Unaudited)


	THREE MONTHS ENDED						SIX MONTHS ENDED
	June 30,						June 30,
	2005			2004			2005			2004
Net revenue	$	5,964		$	6,508		$	10,210		$	10,348
Cost of goods sold		2,330			2,683			4,373			4,776

Gross margin		3,634			3,825			5,837			5,572

Operating expenses:
Research and development		2,467			2,612			4,663			5,253
Selling, general and administrative		2,112			1,856			3,718			3,702
Restructuring charges		—			166			—			166

Total operating expenses		4,579			4,634			8,381			9,121

Loss from operations		(945	)		(809	)		(2,544	)		(3,549	)
Interest and other income		103			47			196			109
Interest and other expense		(2	)		(49	)		(7	)		(86	)

Loss before income taxes		(844	)		(811	)		(2,355	)		(3,526	)
Provision for income taxes		6			6			7			10

Net loss	$	(850	)	$	(817	)	$	(2,362	)	$	(3,536	)

Net loss per share (basic and diluted):
Net loss per share	$	(0.07	)	$	(0.07	)	$	(0.19	)	$	(0.29	)

Weighted average number of shares used in per share computation		12,589			12,377			12,524			12,356

See accompanying notes to unaudited condensed consolidated financial statements.

MICRO LINEAR CORPORATION

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


	SIX MONTHS ENDED
	JUNE 30,
	2005			2004
Net cash used in operating activities	$	(2,622	)	$	(4,267	)

Cash flows from investing activities:
Purchase of capital equipment		(221	)		(354	)
Purchases of short-term investments		(4,192	)		(4,917	)
Proceeds from sale and maturity of short-term investments		3,681			9,198

Net cash (used in) provided by investing activities		(732	)		3,927

Cash flows from financing activities:
Principal payments on debt		—			(139	)
Proceeds from issuance of common stock		1,005			465

Net cash provided by financing activities		1,005			326

Net decrease in cash and cash equivalents		(2,349	)		(14	)
Cash and cash equivalents at beginning of period		10,920			8,703

Cash and cash equivalents at end of period	$	8,571		$	8,689

See accompanying notes to unaudited condensed consolidated financial statements.

MICRO LINEAR CORPORATION

NOTES TO UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

1. Organization and Summary of Significant Accounting Policies

Organization

Micro Linear Corporation is a fabless semiconductor company specializing in wireless integrated circuits. In addition to its PHS products, the Company offers a full line of high data-rate ISM-band transceivers for consumer applications such as cordless phones, wireless speakers and headphones, game controllers, voice headsets and other electronic appliances. Micro Linear offers a uniquely broad line of transceivers that address the most popular unlicensed bands: 900 MHz, 2.4 GHz, and 5.8 GHz. Headquartered in San Jose, California, Micro Linear’s products are available through its 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 2004 ended on January 2, 2005. The second quarter of 2005 ended on July 3, 2005 and the second quarter of 2004 ended on June 27, 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 wholly-owned 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 second quarter of 2005 and 2004, 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 condensed consolidated financial statements have been prepared in accordance with the instructions to Form 10-Q, and therefore do not include all information and footnotes necessary for a fair presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. The unaudited condensed consolidated 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 January 2, 2005, filed with the Securities and Exchange Commission on April 4, 2005.

Use of Estimates

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

Net Loss Per Share

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

A total of 4,305,160 and 3,893,420 shares of potential common stock related to stock options were not included in the dilutive net loss per share calculations for the three and six months ending June 30, 2005 and 2004, respectively, because their effect would be anti-dilutive.

Stock-Based Compensation

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

We account for stock issued to non-employees in accordance with the provisions of SFAS 123. Stock option awards issued to non-employees are accounted for at fair value using the Black-Scholes option-pricing model. The fair value of each non-employee stock award is remeasured at each period end until a commitment date is reached, which is generally the vesting date.

Pro Forma Net Loss

As required by SFAS No. 123 and SFAS No. 148, we disclose our pro forma net loss as if we had accounted for our employee stock purchase plan, employee stock options and director stock options subsequent to December 31, 1994 under the fair value method of SFAS No. 123. We estimate the fair value for these options at the date of grant using the Black-Scholes option pricing model and the multiple option approach with the following weighted-average assumptions:


	Employee Stock
	Purchase Plan												Stock Option Plans
	Three Months Ended						Six Months Ended						Three Months Ended						Six Months Ended
	June 30						June 30						June 30						June 30
	2005			2004			2005			2004			2005			2004			2005			2004
Expected life (in years)		0.5			0.5			0.5			0.5			2.93			2.7			2.6			2.7
Risk-free interest rate		2.88	%		1.03	%		2.88	%		1.03	%		3.62	%		2.23	%		3.60	%		2.08	%
Volatility		51	%		49	%		51	%		49	%		44	%		66	%		46	%		59	%
Dividend yield		—			—			—			—			—			—			—			—

The Black-Scholes option valuation model is 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 issued under the Employee Stock Purchase Plan granted during the six months ended June 30, 2005 and 2004 were $1.44 and $1.52 respectively. The weighted average fair values at the date of grant of options granted under the employee and directors’ stock option plans during the three months ended June 30, 2005 and 2004 were $1.59 and $2.74 respectively. The weighted average fair values at the date of grant of options granted under the employee and directors’ stock option plans during the six months ended June 30, 2005 and 2004 were $1.53 and $2.50 respectively.

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.


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
	(In thousands, except						(In thousands, except
	per share amounts)						per share amounts)
Net loss, as reported	$	(850	)	$	(817	)	$	(2,362	)	$	(3,536	)
Add: Stock-based employee compensation expense reported in net loss, net of related tax effects		88			—			88			—
Deduct: Stock-based compensation expense determined under fair value based method for employee awards, net of related tax effects		(357	)		(255	)		(581	)		(561	)

Pro forma net loss	$	(1,119	)	$	(1,072	)	$	(2,855	)	$	(4,097	)

Pro forma net loss per share:
Basic and diluted	$	(0.09	)	$	(0.09	)	$	(0.23	)	$	(0.33	)
Reported net loss per share:
Basic and diluted	$	(0.07	)	$	(0.07	)	$	(0.19	)	$	(0.29	)

2. Financial Statement Details

Inventories consist of the following (in thousands):


	June 30,		December 31,
	2005		2004
Work-in-process	$	1,456	$	677
Finished goods		997		954
Inventory held by distributors		66		139

Total inventories	$	2,519	$	1,770

Provision for Income Taxes

The provision for income taxes for the three months and six months ended June 30, 2005 consists mainly of state taxes and some minor taxes incurred by our branch office in Japan. The provision for income taxes for the three months and six months ended June 30, 2004 consists mainly of state taxes. 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 June 30, 2005 and 2004 was 0.7% and the effective tax rate for the six months ended June 30, 2005 and 2004 was 0.3%.

Comprehensive Loss

For the three months and six months ended June 30, 2005 and 2004, comprehensive loss, which consists of the net loss for the periods and unrealized gain or loss on short-term marketable securities, was as follows (in thousands):


	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2005			2004			2005			2004
Net loss	$	(850	)	$	(817	)	$	(2,362	)	$	(3,536	)
Accumulated other comprehensive gain (loss):
Unrealized gain (loss) on marketable securities, net		2			(14	)		3			(13	)

Comprehensive loss	$	(848	)	$	(831	)	$	(2,359	)	$	(3,549	)

3. Recent Accounting Pronouncements

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 123R (“SFAS No. 123R”), “Share-Based Payment,” an amendment to Statement of Financial Accounting Standards No. 123 (“SFAS No. 123”), “Accounting for Stock-Based Compensation” and Statement on Financial Accounting Standards No. 95, “Statement of Cash Flows.” The revised standard addresses the accounting for share-based payment transactions in which a company receives employee services in exchange for either equity instruments of the company or liabilities that are based on the fair value of the company’s equity instruments or that may be settled by the issuance of such equity instruments. Under the new standard, companies will no longer be able to account for share-based compensation transactions using the intrinsic method in accordance with APB 25. Instead, companies will be required to account for such transactions using a fair-value method and recognize the expense in the consolidated statement of income. In addition, the adoption of SFAS 123R will require additional accounting related to the income tax effects and additional disclosure regarding the cash flow effects resulting from share-based payment arrangements. On March 29, 2005, the Securities and Exchange Commission (SEC) issued Staff Accounting Bulletin 107 (SAB 107). This Bulletin summarizes the views of the SEC staff regarding the interaction between SFAS 123R, Share-Based Payment, and certain SEC rules and regulations and provides the SEC staff’s views regarding the valuation of share-based payment arrangements for public companies. In April 2005, the SEC postponed the implementation date of SFAS 123R to the fiscal year beginning after June 15, 2005. The Company has not yet determined which fair-value method and transitional provision it will follow. Currently, we disclose the pro forma net income (loss) and related pro forma income (loss) per share information in accordance with SFAS 123 and Statement on Financial Accounting Standards No. 148, “Accounting for Stock-Based Compensation Costs — Transition and Disclosure.” We believe that adoption of the new standard will have an adverse impact on our results of operations.

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (“SFAS No. 151”), “Inventory Costs, an amendment of ARB No. 43, Chapter 4”. SFAS No. 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be recognized as current period charges. SFAS No. 151 will be effective in fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material effect on our financial position or results of operations.

In December 2004, the FASB issued Statement of Financial Accounting Standards No. 153 (“SFAS No. 153”), “Exchange of Nonmonetary Assets, an amendment of APB Opinion No. 29”. SFAS No. 153 addresses the measurement of exchanges of nonmonetary assets and redefines the scope of transactions that should be measured based on the fair value of the assets exchanged. SFAS No. 153 will be effective for nonmonetary transactions in fiscal years beginning after June 15, 2005. The adoption of SFAS No. 153 is not expected to have a material effect on our financial position or results of operations.

In May 2005, as part of a broader attempt to eliminate differences with the International Accounting Standards Board, the FASB issued Statement of Financial Accounting Standards No. 154 (“SFAS No. 154”), Accounting Changes and Error Corrections,” which replaces Accounting Principles Board Opinion No. 20 (“APB No. 20”), “Accounting Changes,” and FASB Statement of Financial Accounting Standards No. 3, “Reporting Accounting Changes in Interim Financial Statements.” Opinion No. 20 had required that changes in accounting principles be recognized by including the cumulative effect of the change in the period in which the new accounting principle was adopted. SFAS No. 154 requires retrospective application of the change to prior periods’ financial statements, unless it is impracticable to determine the period-specific effects of the change. The Statement is effective for fiscal years beginning after December 15, 2005. The adoption of this statement is not expected to have a material effect on the Company’s financial statements.

4. Operations by Geographic Regions

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


	Three Months Ended				Sis Months Ended
	June 30,				June 30,
	2005		2004		2005		2004
Net revenue:
United States	$	192	$	229	$	456	$	481
Japan		2,799		4,094		5,000		5,940
Hong Kong		2,126		1,291		3,420		2,018
Other Asia		530		269		587		521
Europe		317		625		661		1,388
Other		—		—		86		—

Consolidated	$	5,964	$	6,508	$	10,210	$	10,348

5. Restructuring Charges

In the second quarter of 2004 we provided $0.2 million for our remaining lease obligations, net of expected sublease payments, on our Utah facility which we vacated in the first quarter of 2004 when we entered into a sublease agreement for these premises. As of June 30, 2005, the remaining balance of our restructuring reserve relates to our continuing obligations for costs of the Utah facility in excess of expected sublease payments.


	($in
	thousands)
	Excess
	Facilities
Balance, December 31, 2004	$	149
Cash payments		(30	)

Balance, June 30, 2005	$	119

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 expectation that wireless product revenue will continue to increase as a percentage of our total revenues as our legacy products near end-of-life, our expectation that average selling prices will fluctuate in future quarters, our expectation that the gross margin realized on certain of our legacy products will fluctuate from period to period, our expectations that manufacturing overhead costs will increase in the future, 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, our expectation that international revenue will account for the substantial majority of our total net revenue for the foreseeable future, our intention to expend significant resources in the development of new products during the foreseeable future, our expectation that our research and development costs may fluctuate in the coming quarters, our anticipation of a strong third quarter, our expectation regarding trade variables and accrued liability balances, our expectation that our capital expenditures will stay near second quarter levels in the coming quarter and that we will be able to provide for these expenditures without any additional sources of financing and our belief that existing cash resources are sufficient to fund any anticipated operating losses and purchases of capital equipment and 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 are 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 January 2, 2005.

Overview

Micro Linear was 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, 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. In 2005, we completed the development of a transceiver for use in Personal Handyphone Systems (PHS). We began shipping this transceiver in production volumes in the second quarter of 2005.

Currently, in addition to our transceivers designed for the digital cordless telephone PHS products, we offer a full line of high data-rate ISM-band transceivers for applications such as wireless speakers and headphones, game controllers, voice headsets and other electronic appliances. Micro Linear offers a uniquely broad line of transceivers that address the most popular unlicensed bands: 900 MHz, 2.4 GHz, and 5.8 GHz. To simplify system design and decrease time to market, we also offer starter kits and reference designs.

Wireless product revenue represented 84% of net revenue for the second quarter of 2005 compared to 77% of net revenue for the second quarter of 2004. We expect that wireless product revenue will continue to increase as a percentage of our total revenues as our legacy networking products near end-of-life.

Results of Operations

Three Months and Six Months Ended June 30, 2005 Compared with Three Months and Six Months Ended June 30, 2004

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


	For the Three Months Ended June 30
	2005						2004
				($ in thousands)
				% of Net						% of Net
				Revenue						Revenue
Net revenue
Wireless	$	4,997			83.8	%	$	5,023			77.2	%
Networking		967			16.2			1,485			22.8

Total net revenue		5,964			100.0			6,508			100.0
Cost of goods sold		2,330			39.1			2,683			41.2

Gross margin		3,634			60.9			3,825			58.8
Operating expenses:
Research and development		2,467			41.3			2,612			40.1
Selling, general and administrative		2,112			35.4			1,856			28.5
Restructuring charges		—			—			166			2.6

Total operating expenses		4,579			76.7			4,634			71.2

Loss from operations		(945	)		(15.8	)		(809	)		(12.4	)
Interest and other income		103			1.7			47			0.7
Interest and other expense		(2	)		(0.1	)		(49	)		(0.8	)

Loss before income taxes		(844	)		(14.2	)		(811	)		(12.5	)
Provision for taxes		6			0.1			6			0.1

Net loss	$	(850	)		(14.3	)%	$	(817	)		(12.6	)%


	For the Six Months Ended June 30
	2005						2004
				($ in thousands)
				% of Net						% of Net
				Revenue						Revenue
Net revenue
Wireless	$	8,142			79.7	%	$	7,172			69.3	%
Networking		2,068			20.3			3,176			30.7

Total net revenue		10,210			100.0			10,348			100.0
Cost of goods sold		4,373			42.8			4,776			46.2

Gross margin		5,837			57.2			5,572			53.8
Operating expenses:
Research and development		4,663			45.7			5,253			50.8
Selling, general and administrative		3,718			36.4			3,702			35.8
Restructuring		—			—			166			1.6

Total operating expenses		8,381			82.1			9,121			88.2

Loss from operations		(2,544	)		(24.9	)		(3,549	)		(34.4	)
Interest and other income		196			2.0			109			1.1
Interest and other expense		(7	)		(0.1	)		(86	)		(0.8	)

Loss before income taxes		(2,355	)		(23.0	)		(3,526	)		(34.1	)
Provision for taxes		7			0.1			10			0.1

Net loss	$	(2,362	)		(23.1	)%	$	(3,536	)		(34.2	)%

Net Revenue


	Three months ended		% Change			Three months ended		Six months ended		% Change			Six months ended
	June 30, 2005		2004 to 2005			June 30, 2004		June 30, 2005		2004 to 2005			June 30, 2004
	($ in thousands)							($ in thousands)
Wireless	$	4,997		(0.5	)%	$	5,023	$	8,142		13.5	%	$	7,172
Networking		967		(34.9	)%		1,485		2,068		(34.9	)%		3,176

Total	$	5,964		(8.4	)%	$	6,508	$	10,210		(1.3	)%	$	10,348

Net revenue during the second quarter of 2005 decreased $0.5 million from the comparable second quarter of 2004. The decrease was almost entirely due to the expected decline in revenue from our legacy networking products as they neared end-of-life. Unit volume shipments of our wireless products increased 54% over the second quarter of 2004. Unit shipments to Uniden Corporation and Giant Electronics, Ltd. were at record levels. Demand for our 5.8 GHz products, used in digital cordless telephones, and our 900 MHz products, used mainly in wireless headsets, were at record levels. However, the increase in unit volume shipments was offset by a decrease in the average selling prices of our wireless products. During the second quarter of 2005 we began shipping our ML1900, the first product in our family of Personal Handyphone System (PHS) transceivers. Sales of the ML1900 accounted for less than 10% of total net revenue in the second quarter of 2005. Our average selling prices will fluctuate from quarter to quarter as we introduce new products at higher selling prices and reduce the prices on products that are maturing.

Net revenue for the first six months of 2005 decreased slightly as compared to the first six months of 2004. Our wireless product net revenue increased $1.0 million, a 14% increase over the comparable period for 2004, while net revenue from our networking products decreased $1.1 million, a 35% decline. The increase in wireless product net revenue was due mainly to a 41% increase in unit volume shipments, offset by a 20% decrease in the average selling prices for these products. The decrease in networking product net revenue during the first six months of 2005, as compared to the first six months of 2004, was due to the decline in shipments of our legacy networking products as they neared end-of-life.

In the second quarter of 2005 and the comparable period for 2004, sales to Uniden Corporation and Giant Electronics, Ltd., a subcontract manufacturer for Plantronics Inc., each accounted for more than 10% of our net revenue.

International revenue for the second quarter of 2005 totaled $5.8 million compared to $6.3 million for the second quarter of 2004. International revenue accounted for 97% of total net revenue in both these periods. International revenue for the first six months of 2005 totaled $9.8 million, or 96% of net revenue compared to $9.9 million, or 95% of net revenue for the first six months of 2004. Domestic revenue was approximately 3% of net revenue for the second quarter of 2005 and for the comparable period of 2004. Domestic revenue was approximately 4% of net revenue for the first six months of 2005 and 5% of net revenue for the first six months of 2004. We expect that international revenue will account for the substantial majority of our total net revenue for the foreseeable future.

Gross Margin


	Three months ended			% Change			Three months ended			Six months ended			% Change			Six months ended
	June 30, 2005			2004 to 2005			June 30, 2004			June 30, 2005			2004 to 2005			June 30, 2004
	($ in thousands)									($ in thousands)
Gross Margin	$	3,634			(5.0	)%	$	3,825		$	5,837			4.8	%	$	5,572
%		61	%					59	%		57	%					54	%

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

Gross margin increased to 61% in the second quarter of 2005, as compared to 59% in the second quarter of 2004. This increase was primarily due to reductions in manufacturing overhead costs of $0.2 million in the second quarter of 2005 as compared to the second quarter of 2004. The reduction in manufacturing overhead stemmed mainly from headcount reductions in our operations group and receipt of rebates from certain test and assembly subcontractors. During the second quarter of 2005, we sold approximately $65,000 of excess inventory that was previously written down as compared to approximately $11,000 of excess inventory that was sold in the second quarter of 2004. We recognized charges of approximately $54,000 for reserves for additional excess products in the second quarter of 2005 as compared to approximately $23,000 in additional reserves for excess products in the second quarter of 2004.

Wireless product gross margin was 57% during the second quarter of 2005, essentially flat with the comparable year ago quarter. The average selling prices of our wireless products declined during the second quarter of 2005 due to a combination of price reductions on our maturing high volume wireless products and a shift in product mix. The decline in average selling prices was offset by reductions in the average direct unit costs for our wireless products as well as reductions in manufacturing overhead.

Networking product gross margin increased to 82% in the second quarter of 2005 from 64% for the comparable second quarter of 2004. The increase in gross margin is due to a shift in product mix in sales of our legacy networking products as well as a reduction in manufacturing overhead costs. We expect that the gross margin realized from these legacy products will continue to fluctuate from period to period due to changes in product mix resulting from changes in customer demand as well as product availability for those products that have been declared to be end-of-life.

Gross margin for the first six months of 2005 increased to 57% from 54% in the first six months of 2004. This increase was mainly due to a decrease in manufacturing overhead costs of $0.3 million due to receipt of rebates from certain of our test and assembly subcontractors in the first six months of 2005 and a decrease in other outside services costs related to the introduction of new products. We expect manufacturing overhead costs to increase in the future as we continue to prepare for the introduction of new products. During the first six months of 2005, we sold approximately $105,000 of excess product inventory that was previously written down as compared to approximately $50,000 of excess inventory that was sold in the comparable year ago period. We recognized charges of approximately $100,000 to provide additional reserves for excess inventory in the first six months of 2005 as compared to approximately $162,000 in the first six months of 2004.

Wireless product gross margin increased to 52% for the first six months of 2005 from 49% for the first six months of 2004. Networking product gross margin increased to 76% for the first six months of 2005 as compared to 64% for the first six months of 2004.

Research and Development Expenses (R&D)


	Three months ended		% Change			Three months ended		Six months ended		% Change			Six months ended
	June 30, 2005		2004 to 2005			June 30, 2004		June 30, 2005		2004 to 2005			June 30, 2004
	($ in thousands)							($ in thousands)
R&D	$	2,467		(5.6	)%	$	2,612	$	4,663		(11.2	)%	$	5,253

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 products prior to their release to manufacturing.

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 decreased $0.1 million and $0.6 million, during the second quarter and first half of 2005 from the comparable second quarter and first half of 2004.

Increases in employee related costs of approximately $0.3 million in the second quarter of 2005 over the comparable quarter in 2004, were offset by decreases in outside services costs of approximately $0.2 million and prototype and equipment costs and other costs associated with the development and introduction of new products of approximately $0.2 million.

Increases in employee related costs of approximately $0.5 million in the first six months of 2005 over the first six months of 2004, were offset by decreases in outside services costs of approximately $0.4 million, prototype, equipment and other costs associated with the development and introduction of new products of approximately $0.6 million and a reduction of facility costs of approximately $0.1 million.

We intend to expend significant resources in the development of new products during the foreseeable future and expect that our research and development costs may increase in the coming quarters as we near the completion of development efforts for several of our new products.

Selling, General and Administrative Expenses (SG&A)


	Three months ended		% Change			Three months ended		Six months ended		% Change			Six months ended
	June 30, 2005		2004 to 2005			June 30, 2004		June 30, 2005		2004 to 2005			June 30, 2004
	($ in thousands)							($ in thousands)
SG&A	$	2,112		13.8	%	$	1,856	$	3,718		0.4	%	$	3,702

During the first quarter of 2005, we began the realignment of our sales and marketing functions in order to increase the focus on the introduction of our new products, including our new PHS transceiver, expand the development of new markets within Asia, and concentrate on developing major accounts. As a result of these efforts we realized an interim savings in sales and marketing costs as we began to redirect our efforts from projects and activities that were of a lower priority and began to concentrate our resources on these new products, markets and customers.

During the second quarter of 2005, we incurred approximately $0.3 million in employee termination costs, including approximately $88,000 in non-cash charges related to the modification of certain employee option grants, due to our realignment of sales and marketing activities. We also incurred approximately $0.1 million in increased costs in the second quarter of 2005, as compared to the second quarter of 2004, related to our efforts to implement controls required by Section 404 of The Sarbanes Oxley Act. However, selling, general and administrative expenses for the first six months of 2005 remained essentially flat with the comparable period of 2004, as the additional costs incurred during the second quarter of 2005 were offset by the reduced expenses in employee related costs and consulting expenses related to our realignment efforts during the first quarter of 2005.

Interest and Other Income and Interest and Other Expense


	Three months ended			% Change			Three months ended			Six months ended			% Change			Six months ended
	June 30, 2005			2004 to 2005			June 30, 2004			June 30, 2005			2004 to 2005			June 30, 2004
	($ in thousands)									($ in thousands)
Interest and other income	$	103			119	%	$	47		$	196			79.8	%	$	109
Interest and other expense	$	(2	)		95.9	%	$	(49	)	$	(7	)		91.9	%	$	(86	)

The increase in interest and other income for the first six months of 2005, as compared to the first six months of 2004, was primarily due to higher short-term interest rates in 2005. Interest and other expense incurred during 2004 consisted primarily of interest payments attributable to the mortgage on our San Jose facility. The decrease in interest and other expenses for the first six months of 2005, as compared to the first six months of 2004, was mainly due to the repayment of that mortgage in July 2004 when the property was sold.

Provision for Income Taxes


	Three months ended		% Change			Three months ended		Six months ended		% Change			Six months ended
	June 30, 2005		2004 to 2005			June 30, 2004		June 30, 2005		2004 to 2005			June 30, 2004
	($ in thousands)							($ in thousands)
Provision for income taxes	$	6		0.0	%	$	6	$	7		30.0	%	$	10

Liquidity and Capital Resources


	For the Six Months Ended
	June 30,
	2005			2004
	(in thousands)
Net cash used in operating activities	$	(2,622	)	$	(4,267	)
Net cash (used in) provided by investing activities		(732	)		3,927
Net cash provided by financing activities		1,005			326

Net decrease in cash and cash equivalents	$	(2,349	)	$	(14	)

Net cash used by operating activities during the first six months of 2005 was mainly due to our net operating loss of $2.4 million. Our major uses of cash during the quarter were operating expenses and our cost of manufacturing products. Our inventory balances increased by $0.7 million in anticipation of the seasonally strong third quarter in the digital cordless phone market and an initial production ramp of our PHS products. In addition, our accounts receivable balance increased by $0.8 million because of a heavy sales volume in the third month of the second quarter of 2005. Other major sources of cash during the second quarter of 2005 included $1.0 million from an increase in our accounts payable balance and $0.3 million from an increase in our accrued liabilities. We expect trade payables and our accrued liability balances to continue to fluctuate from period to period due to variations in our production cycle and timing of other operating expenses. In addition, non-cash depreciation and amortization charges were $0.1 million for the first six months of 2005, as compared to $0.3 million for the six months of 2004. The higher depreciation in 2004 was due to the depreciation associated with our San Jose property that was sold in July 2004. Net cash used by operating activities during the first six months of 2004 was mainly due to our net operating loss of $3.5 million.

Net cash used in investing activities during the first six months of 2005 was primarily due to net purchases of short-term investments of $0.5 million and purchases of capital equipment of $0.2 million. The capital equipment purchased consisted mainly of engineering equipment and software design tools used in research development projects. Capital expenditures for this type of equipment are expected to stay at or near the second quarter levels in the coming quarter and we anticipate that we will be able to provide for these expenditures without any additional sources of financing. Net cash provided by investing activities during the first six months of 2004 was primarily due to net sales of short-term investments and maturities of $4.3 million. This was partially offset by capital expenditures of $0.4 million.

Net cash provided by financing activities consists mainly of proceeds from the issuance of common stock in connection with the exercise of employee stock options. Proceeds from common stock issuances were $1.0 million for the first six months of 2005 and $0.5 million for the comparable period of 2004. In the first six months of 2004 principal payments on the mortgage for our San Jose property was $0.1 million. The mortgage was fully repaid when the property was sold during the third quarter of 2004.

Working capital was $15.1 million as of June 30, 2005, compared to $16.3 million as of December 31, 2004. Working capital at June 30, 2005 includes cash and cash equivalents of $8.6 million and short-term investments of $5.2 million.

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

Recent Accounting Pronouncements

In November 2004, the FASB issued Statement of Financial Accounting Standards No. 151 (“SFAS No. 151”), “Inventory Costs, an amendment of ARB No. 43, Chapter 4”, SFAS No. 151 clarifies that abnormal inventory costs such as costs of idle facilities, excess freight and handling costs, and wasted materials (spoilage) are required to be recognized as current period charges. SFAS No. 151 will be effective in fiscal years beginning after June 15, 2005. The adoption of SFAS No. 151 is not expected to have a material effect on our financial position or results of operations.

Factors That May Affect Future Operating Results

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

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

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

	•		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;

	•		demand placed on foundries may exceed available supply resulting in supply allocations or long lead times; 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 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 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.

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 2005, except for a profit in the third quarter of 2002, which was attributable to an income tax refund, and a net profit for the third quarter of 2004 which occurred from the sale of our land and buildings. Because of those losses, we had an accumulated deficit of $26.7 million as of June 30, 2005.

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 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.

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 93% and 89% of net revenue for the three months and six months ended June 30, 2005, respectively, and approximately 91% and 87% of net revenue for the comparable periods in 2004. Two customers, Uniden Corporation and Giant Electronics, Ltd. (a subcontract manufacturer for Plantronics, Inc), together accounted for 67% of our net revenue for the second quarter of 2005. Sales to domestic distributors accounted for approximately 3% and 4% of net revenue for the three months and six months ended June 30, 2005, respectively, and for both of the comparable periods in 2004. 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 97% and 96% of net revenue for the three months and six months ended June 30, 2005, respectively, and approximately 97% and 95% of net revenue for the comparable periods in 2004. 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

	•		political and economic instability, including wars, acts of terrorism, political unrest, boycotts 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. In the future, if we have difficulties or delays in obtaining expert licenses, we may be unable to sell our products to international customers which could harm our operating results.

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.

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. 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.

Because we do not have long-term commitments from our distributors or customers, we must estimate customer demand, and errors in our estimates can have negative effects on our inventory levels, sales and operating results.

Our sales are made on the basis of individual purchase orders rather than long-term purchase commitments. 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, we may end up with excess inventory and 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 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. 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.

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

Our wafer suppliers and test and assembly subcontractors are subject to a variety of U.S. and foreign government regulations related to the discharge or disposal of toxic, volatile or otherwise hazardous chemicals used in their manufacturing processes. Failure by our suppliers or subcontractors to comply with environmental regulations could result in fines, suspension of production or cessation of operations. Environmental regulations could also require our suppliers or subcontractors to acquire equipment or incur other expenses to comply with environmental regulations. If our suppliers or subcontractors incur substantial additional expenses, product costs could significantly increase, 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 competition for qualified personnel is intense, we may not be successful in attracting and retaining personnel, which could have an impact upon the development or sales of our products.

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

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, 2005 and June 30, 2005 our stock price has traded as high as $6.24 on June 2, 2005 and as low as $4.20 on April 25, 2005. 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.

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 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. The Financial Accounting Standards Board and other agencies have finalized changes to U.S. generally accepted accounting principles that will require us, starting in our first quarter of 2006, to record a charge to earnings for employee stock option grants and other equity incentives. We may have significant and ongoing accounting charges resulting from option grant and other equity incentive expensing that could reduce our overall net income. In addition, since we historically have used equity-related compensation as a component of our total employee compensation program, the accounting change could make the use of equity-related compensation less attractive to us and therefore make it more difficult to attract and retain employees.

While we believe that we currently have adequate internal control procedures in place, we are still exposed to potential risks from recent legislation requiring companies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of 2002.

We are evaluating our internal controls systems in order to allow management to report on, and our independent public accountants to attest to, our internal controls, as required by Section 404 of the Sarbanes-Oxley Act. We are performing the system and process evaluation and testing required in an effort to comply with the management certification and auditor attestation requirements of Section 404. We are required to be in compliance with this section of the Sarbanes-Oxley Act by December 31, 2006. As a result, we are incurring additional expenses and a diversion of management’s time. While we believe that our internal control procedures are adequate and we anticipate being able to fully implement the requirements relating to internal controls and all other aspects of Section 404 in a timely fashion, we cannot be certain as to the timing of completion of our evaluation, testing and remediation actions or the impact of the same on our operations since there is no precedent available by which to measure compliance adequacy. If we are not able to implement the requirements of Section 404 in a timely manner or with adequate compliance, we might be subject to sanctions or investigation by regulatory authorities, such as the SEC or The Nasdaq National Market. Any such action could adversely affect our financial results and the market price of our common stock.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

Interest Rate Risk

As of June 30, 2005, 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. If market interest rates were to increase immediately and uniformly by 10% as of June 30, 2005, 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. Our disclosure controls are designed to meet, and management believes that they meet, reasonable assurance standards. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any disclosure controls and procedures also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.

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

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

PART II. OTHER INFORMATION

Item 6. Exhibits


Exhibit
Number		Description of Document
3(ii)		Amended and Restated Bylaws of the Registrant

10.1		Amendment to 1994 Director Option Plan

31.1		Rule 13a-14(a) Certification by the Chief Executive Officer

31.2		Rule 13a-14(a) Certification by the Chief Financial Officer

32.1*		Section 1350 Certification by the Chief Executive Officer

32.2*		Section 1350 Certification by the Chief Financial Officer.


*		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.

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.


	MICRO LINEAR CORPORATION
Date: August 17, 2005	By	/s/ TIMOTHY A. RICHARDSON
		Timothy A. Richardson
		President and Chief Executive Officer (Principal Executive Officer)


Date: August 17, 2005	By	/s/ MICHAEL W. SCHRADLE
		Michael W. Schradle
		Chief Financial Officer (Principal Financial and Accounting Officer)

INDEX TO EXHIBITS


Exhibit
Number		Description of Document
3(ii)		Amended and Restated Bylaws of the Registrant

10.1		Amendment to 1994 Director Option Plan

31.1		Rule 13a-14(a) Certification by the Chief Executive Officer

31.2		Rule 13a-14(a) Certification by the Chief Financial Officer

32.1*		Section 1350 Certification by the Chief Executive Officer

32.2*		Section 1350 Certification by the Chief Financial Officer.


*		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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MICRO LINEAR CORP /CA/ 10-Q