**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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###### **FORM 10-Q**

**(MarkOne)**

| x          |   | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                        |
|------------|--------|--------------------------------------------------------------------------------------------------------------------------|
|       |   | ** **                                                                                                               |
| ** ** |   | **For the Quarterly Period Ended July 1, 2007**                                                                     |
| ** ** |   | ** **                                                                                                               |
| ** ** |   | **OR**                                                                                                                   |
| ** ** |   | ** **                                                                                                               |
| **o**      |   | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES EXCHANGE ACT OF 1934**                       |
| ** ** |   | ** **                                                                                                               |
| ** ** |   | **For the Transition Period From             To ** |

 

**COMMISSIONFILE NUMBER: 000-22671**

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**QUICKLOGICCORPORATION**

(Exact name of registrant as specified in its charter)

| **DELAWARE**                     |   | **77-0188504**                        |
|----------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of |   | (I.R.S. Employer  Identification No.) |
| incorporation or  organization)  |   |                                  |

 

**1277ORLEANS DRIVE SUNNYVALE, CA  94089**

(Address of principal executive offices, including Zip Code)

**(408) 990-4000**

(Registrant’s telephone number, including area code)

Indicate by checkmark whether the registrant (1) has filed all reports required to be filedby Section 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to suchrequirements for the past 90 days. Yes x  No o

Indicate by checkmark whether the registrant is a large accelerated filer, an accelerated filer,or a non-accelerated filer. See definition of “accelerated filer and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o                                   Acceleratedfiler x                                              Non-acceleratedfiler o

Indicate by checkmark whether the registrant is a shell company (as defined in Rule 12b-2 of theSecurities Exchange Act of 1934). Yes oNo x

As of August 2, 2007,29,087,203 shares of the registrant’s common stock were outstanding.

 

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**QUICKLOGICCORPORATION**

**FORM10-Q**

**JULY1, 2007**
|                                                                                                                                      | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                                 |       |     |
| **Part  I. Financial Information**                                                                                                   |       | 3        |
| ** **                                                                                                                           |       |     |
| **Item  1. Financial Statements**                                                                                                    |       | 3        |
| Condensed Unaudited Consolidated Statements of  Operations for the three and six months ended July 1, 2007 and July 2,  2006    |       | 3        |
| Condensed Unaudited Consolidated Balance Sheets as of  July 1, 2007 and December 31, 2006                                       |       | 4        |
| Condensed Unaudited Consolidated Statements of Cash  Flows for the six months ended July 1, 2007 and July 2, 2006                    |       | 5        |
| Condensed Unaudited Consolidated Statements of  Comprehensive Loss for the three and six months ended July 1, 2007 and July  2, 2006 |       | 6        |
| Notes to Condensed Unaudited Consolidated Financial  Statements                                                                      |       | 7        |
|                                                                                                                                 |       |     |
| **Item 2. Management’s Discussion and Analysis of Financial  Condition and Results of Operations**                              |       | 21       |
| ** **                                                                                                                           |       |     |
| **Item 3. Quantitative and Qualitative Disclosures about  Market Risk**                                                              |       | 31       |
| ** **                                                                                                                           |       |     |
| **Item 4. Controls and Procedures**                                                                                                  |       | 32       |
|                                                                                                                                 |       |     |
| **Part  II. Other Information**                                                                                                      |       | 33       |
| ** **                                                                                                                           |       |     |
| **Item  1. Legal Proceedings**                                                                                                       |       | 33       |
| ** **                                                                                                                           |       |     |
| **Item  1A. Risk Factors**                                                                                                           |       | 34       |
| ** **                                                                                                                           |       |     |
| **Item 4. Submission of Matters to  a Vote of Security Holders**                                                                     |       | 47       |
| ** **                                                                                                                           |       |     |
| **Item 6. Exhibits**                                                                                                                 |       | 48       |
| ** **                                                                                                                           |       |     |
| Signatures                                                                                                                           |       | 49       |

 

2

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**PARTI. Financial Information**

**Item1. Financial Statements**

**QUICKLOGICCORPORATION**

**CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(Inthousands, except per share amounts)**
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **July 1, 2007**       | ** ** | **July 2, 2006**     | ** ** | **July 1, 2007** | ** ** | **July 2, 2006** | ** ** |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Revenue                              |       | $                                | 8,405      |                           | $          | 9,249 |   | $ | 14,647 |   | $ | 18,582 |   |
| Cost of revenue                      |       | 3,975                            |       | 4,221                          |       | 9,376 |   | 7,981 |   |
| Gross profit                         |       | 4,430                            |       | 5,028                          |       | 5,271 |   | 10,601 |   |
| Operating expenses:                  |       |                             |       |                           |       |   |   |   |   |
| Research and  development            |       | 2,339                            |       | 2,357                          |       | 4,626 |   | 4,757 |   |
| Selling, general  and administrative |       | 4,387                            |       | 4,594                          |       | 8,980 |   | 9,211 |   |
| Loss from operations                 |       | (2,296                           | )          | (1,923                         | )          | (8,335 | ) | (3,367 | ) |
| Interest expense                     |       | (72                              | )          | (96                            | )          | (157 | ) | (170 | ) |
| Interest income and  other, net      |       | 317                              |       | 341                            |       | 563 |   | 633 |   |
| Loss before income  taxes            |       | (2,051                           | )          | (1,678                         | )          | (7,929 | ) | (2,904 | ) |
| Provision for income  taxes          |       | 27                               |       | 21                             |       | 42 |   | 23 |   |
| Net loss                             |       | $                                | (2,078     | )                              | $          | (1,699 | ) | $ | (7,971 | ) | $ | (2,927 | ) |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Net loss per share:                  |       |                             |       |                           |       |   |   |   |   |
| Basic                                |       | $                                | (0.07      | )                              | $          | (0.06 | ) | $ | (0.28 | ) | $ | (0.10 | ) |
| Diluted                              |       | $                                | (0.07      | )                              | $          | (0.06 | ) | $ | (0.28 | ) | $ | (0.10 | ) |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Weighted average  shares:            |       |                             |       |                           |       |   |   |   |   |
| Basic                                |       | 28,966                           |       | 28,519                         |       | 28,890 |   | 28,290 |   |
| Diluted                              |       | 28,966                           |       | 28,519                         |       | 28,890 |   | 28,290 |   |

 

See accompanyingNotes to Condensed Unaudited Consolidated Financial Statements.

3

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**QUICKLOGICCORPORATION**

**CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS**

**(Inthousands, except par value amount)**
| ** **                                                                                                                | ** ** | **July 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                | ** ** | ** **             | ** ** | ** **                  | ** ** |
|                                                                                                                      |       |                   |       |                        |       |
| Current assets:                                                                                                           |       |                   |       |                        |       |
| Cash and cash equivalents                                                                                                 |       | $                      | 19,820     |                        | $          | 24,621 |   |
| Short-term investment in Tower Semiconductor Ltd.                                                                         |       | 1,279                  |       | 1,530                       |       |
| Accounts receivable, net of allowances for doubtful  accounts of $264 and $861, respectively                              |       | 2,658                  |       | 2,839                       |       |
| Inventory                                                                                                                 |       | 5,620                  |       | 9,064                       |       |
| Other current assets                                                                                                      |       | 1,733                  |       | 1,894                       |       |
| Total current assets                                                                                                      |       | 31,110                 |       | 39,948                      |       |
| Property and  equipment, net                                                                                              |       | 4,460                  |       | 5,480                       |       |
| Investment in  Tower Semiconductor Ltd.                                                                                   |       | 644                    |       | 769                         |       |
| Other assets                                                                                                              |       | 3,500                  |       | 4,038                       |       |
| TOTAL ASSETS                                                                                                              |       | $                      | 39,714     |                        | $          | 50,235 |   |
|                                                                                                                      |       |                   |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’ EQUITY**                                                                             | ** ** | ** **             | ** ** | ** **                  | ** ** |
|                                                                                                                      |       |                   |       |                        |       |
| Current  liabilities:                                                                                                     |       |                   |       |                        |       |
| Trade payables                                                                                                            |       | $                      | 1,771      |                        | $          | 4,383 |   |
| Accrued liabilities                                                                                                       |       | 2,208                  |       | 2,462                       |       |
| Deferred income on shipments to distributors                                                                              |       | 1,155                  |       | 1,152                       |       |
| Deferred royalty revenue                                                                                                  |       | 849                    |       | 960                         |       |
| Current portion of debt and capital lease  obligations                                                                    |       | 1,825                  |       | 2,292                       |       |
| Total current liabilities                                                                                                 |       | 7,808                  |       | 11,249                      |       |
|                                                                                                                      |       |                   |       |                        |       |
| Long-term  liabilities:                                                                                                   |       |                   |       |                        |       |
| Debt and capital lease obligations, less current  portion                                                                 |       | 1,304                  |       | 1,618                       |       |
| Total liabilities                                                                                                         |       | 9,112                  |       | 12,867                      |       |
|                                                                                                                      |       |                   |       |                        |       |
| Commitments and  contingencies (see Notes 12 and 13)                                                                      |       |                   |       |                        |       |
|                                                                                                                      |       |                   |       |                        |       |
| Stockholders’  equity:                                                                                               |       |                   |       |                        |       |
| Common stock, $0.001 par value; 100,000 shares  authorized; 29,080 and 28,680 shares issued and outstanding, respectively |       | 29                     |       | 29                          |       |
| Additional paid-in capital                                                                                                |       | 165,719                |       | 164,138                     |       |
| Accumulated other comprehensive income                                                                                    |       | 350                    |       | 726                         |       |
| Accumulated deficit                                                                                                       |       | (135,496               | )          | (127,525                    | )          |
| Total stockholders’ equity                                                                                           |       | 30,602                 |       | 37,368                      |       |
| TOTAL LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                          |       | $                      | 39,714     |                        | $          | 50,235 |   |

 

See accompanyingNotes to Condensed Unaudited Consolidated Financial Statements.

4

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**QUICKLOGICCORPORATION**

**CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(Inthousands)**
| ** **                                                                                  | ** ** | **Six Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                                  | ** ** | **July 1, 2007**     | ** ** | **July 2, 2006** | ** ** |
| ** **                                                                                  | ** ** | ** **                     | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                                      |       |                           |       |   |   |
| Net loss                                                                                    |       | $                              | (7,971     | ) | $ | (2,927 | ) |
| Adjustments to reconcile net loss to net cash  provided by (used for) operating activities: |       |                           |       |   |   |
| Depreciation and amortization                                                               |       | 1,565                          |       | 1,491 |   |
| Gain on disposal of property and equipment                                                  |       | (95                            | )          | — |   |
| Stock-based compensation                                                                    |       | 809                            |       | 855 |   |
| Inventory write-down                                                                        |       | 3,224                          |       | 470 |   |
| Decrease in wafer credits from Tower Semiconductor  Ltd.                                    |       | 454                            |       | 56 |   |
| Bad debt expense                                                                            |       | 153                            |       | 49 |   |
| Changes in assets and liabilities:                                                          |       |                           |       |   |   |
| Accounts receivable                                                                         |       | 28                             |       | 1,032 |   |
| Inventory                                                                                   |       | 220                            |       | (73 | ) |
| Other assets                                                                                |       | 245                            |       | 191 |   |
| Trade payables                                                                              |       | (2,612                         | )          | 468 |   |
| Accrued liabilities                                                                         |       | (254                           | )          | (748 | ) |
| Deferred income and royalty revenue                                                         |       | (108                           | )          | (34 | ) |
| Net cash provided by (used for) operating activities                                        |       | (4,342                         | )          | 830 |   |
|                                                                                        |       |                           |       |   |   |
| Cash flows from  investing activities:                                                      |       |                           |       |   |   |
| Capital expenditures for property and equipment                                             |       | (545                           | )          | (1,180 | ) |
| Proceeds from sale of equipment                                                             |       | 95                             |       | — |   |
| Net cash used for investing activities                                                      |       | (450                           | )          | (1,180 | ) |
|                                                                                        |       |                           |       |   |   |
| Cash flows from  financing activities:                                                      |       |                           |       |   |   |
| Payment of debt and capital lease obligations                                               |       | (1,223                         | )          | (1,218 | ) |
| Proceeds from debt obligations                                                              |       | 442                            |       | 932 |   |
| Proceeds from issuance of common stock                                                      |       | 772                            |       | 2,526 |   |
| Net cash provided by (used for) financing activities                                        |       | (9                             | )          | 2,240 |   |
|                                                                                        |       |                           |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                                       |       | (4,801                         | )          | 1,890 |   |
| Cash and cash equivalents at beginning of period                                            |       | 24,621                         |       | 28,283 |   |
| Cash and cash equivalents at end of period                                                  |       | $                              | 19,820     |   | $ | 30,173 |   |
|                                                                                        |       |                           |       |   |   |
| Supplemental  disclosures of cash flow information:                                         |       |                           |       |   |   |
| Interest paid                                                                               |       | $                              | 164        |   | $ | 126 |   |
| Income taxes paid                                                                           |       | $                              | 16         |   | $ | 11 |   |
| Supplemental  schedule of non-cash investing and financing activities:                 |       |                           |       |   |   |
| Capital lease obligation to finance capital  expenditures and related maintenance           |       | $                              | —     |   | $ | 791 |   |

 

See accompanyingNotes to Condensed Unaudited Consolidated Financial Statements.

5

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**QUICKLOGICCORPORATION**

**CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVELOSS**

**(Inthousands)**
| ** **                                    | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                    | ** ** | **July 1, 2007**       | ** ** | **July 2, 2006**     | ** ** | **July 1, 2007** | ** ** | **July 2, 2006** | ** ** |
|                                          |       |                             |       |                           |       |   |   |   |   |
| Net loss                                      |       | $                                | (2,078     | )                              | $          | (1,699 | ) | $ | (7,971 | ) | $ | (2,927 | ) |
| Other  comprehensive gain (loss), net of tax: |       |                             |       |                           |       |   |   |   |   |
| Unrealized gain (loss) on investments         |       | (376                             | )          | 161                            |       | (376 | ) | (68 | ) |
| Total comprehensive  loss                     |       | $                                | (2,454     | )                              | $          | (1,538 | ) | $ | (8,347 | ) | $ | (2,995 | ) |

 

See accompanyingNotes to Condensed Unaudited Consolidated Financial Statements.

6

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**QUICKLOGICCORPORATION**

**NOTES TO CONDENSED UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

**Note 1—The Company and Basis ofPresentation**

QuickLogicCorporation (“QuickLogic” or the “Company”) was founded in 1988 andreincorporated in Delaware in 1999. The Company develops and markets low powerprogrammable solutions that enable customers to add features to their mobile,consumer and industrial products. The Company is a fabless semiconductorcompany that operates in a single industry segment where it designs, marketsand supports Customer Specific Standard Products (“CSSPs”), Embedded StandardProducts (“ESPs”), Field Programmable Gate Arrays (“FPGAs”), applicationsolutions, associated design software and programming hardware.

The accompanyinginterim consolidated financial statements are unaudited. In the opinion ofmanagement, these statements have been prepared in accordance with generallyaccepted accounting principles (“GAAP”) and include all adjustments, consistingonly of normal recurring adjustments, necessary to provide a fair statement ofresults for the interim periods presented. The Company recommends that theseconsolidated financial statements be read in conjunction with the Company’sForm 10-K for the year ended December 31, 2006. Operating results forthe three and six months ended July 1, 2007 are not necessarily indicative ofthe results that may be expected for the full year.

QuickLogic’sfiscal year ends on the Sunday closest to December 31. QuickLogic’sfiscal second quarter for 2007 and 2006 ended Sunday, July 1, 2007 andJuly 2, 2006, respectively. Beginning with fiscal year 2006, theCompany changed its reporting convention to utilize the actual closing datesfor all periods presented in its consolidated financial statements and accompanyingnotes. This change had no impact on the Company’s financial position, resultsof operation or cash flows for any of the periods presented.

*Liquidity*

TheCompany anticipates that its existing cash resources will fund operations,finance purchases of capital equipment and provide adequate working capital forthe next twelve months. The Company’s liquidity is affected by many factorsincluding, among others, the level of revenue and gross profit, marketacceptance of existing and new products including ArcticLinkTM, PolarProTM,EclipseTM II and QuickPCI® II devices,fluctuations in revenue as a result of product end-of-life, fluctuations inrevenue as a result of the stage in the product life cycle of its customers’products, costs of securing access to and availability of adequatemanufacturing capacity, inventory levels, wafer purchase commitments, customercredit terms, the amount and timing of research and development expenditures,the timing of new product introductions, production volumes, product quality, salesand marketing efforts, the amount and financing arrangements for purchases ofcapital equipment, changes in operating assets and liabilities, the ability toobtain or renew debt financing and to remain in compliance with the terms ofexisting credit facilities, the ability to raise funds from the sale of sharesof Tower Semiconductor Ltd. (“Tower”) and equity in the Company, the issuanceand exercise of stock options, the terms of and participation in the Company’semployee stock purchase plan, and other factors related to the uncertainties ofthe industry and global economics. Accordingly, there can be no assurance thatevents in the future will not require the Company to seek additional capitalor, if so required, that such capital will be available on terms acceptable tothe Company.

*Principles of Consolidation*

The consolidated financial statements include the accounts ofQuickLogic Corporation and its wholly owned subsidiaries, QuickLogicInternational, Inc., QuickLogic Canada Company, QuickLogic KabushikiKaisha, QuickLogic Software (India) Private Ltd. and QuickLogic GmbH. TheCompany and its subsidiaries use the U.S. dollar as its functional currency.All intercompany accounts and transactions are eliminated in consolidation.

*Uses of Estimates*

The preparation ofthese consolidated financial statements in conformity with GAAP requiresmanagement to make estimates and assumptions that affect the reported amountsof assets and liabilities, the disclosures of contingent assets and liabilitiesand the reported amounts of revenue and expenses during the period. Actualresults could differ from those estimates, particularly in relation to revenuerecognition, the allowance for doubtful accounts, sales returns, valuation ofinvestments, valuation of long-lived assets, inventory valuation includingidentification of excess quantities, market value and obsolescence, measurementof stock-based compensation awards, accounting for income taxes and estimatingaccrued liabilities.

7

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENT — (Continued)**

**Note 2—Significant AccountingPolicies**

*RevenueRecognition*

The Companysupplies standard products which must be programmed before they can be used inan application. The Company’s products may be programmed by the Company,distributors, end customers or third parties. Once programmed, the Company’sparts cannot be erased and, therefore, programmed parts are only useful to aspecific customer.

The Companygenerally recognizes revenue as products are shipped if evidence of anarrangement exists, delivery has occurred, the sales price is fixed ordeterminable, collection of the resulting receivable is reasonably assured andproduct returns are reasonably estimable.

Revenue isrecognized upon shipment of both programmed and unprogrammed parts to originalequipment manufacturer (“OEM”) customers, provided that legal title and risk ofownership have transferred.

The Company alsosells to distributors under agreements that allow for price adjustments and, inthe case of unprogrammed parts, certain rights of return on unsold inventory.

Because programmedparts can only be used by a specific customer, it is the Company’s practice toagree upon any price adjustments with a distributor prior to shipment. Furthermore,distributors are not allowed any future price adjustments and have no rights ofreturn on programmed parts. Accordingly, revenue is recognized upon delivery toa distributor since title and risk of ownership have transferred to thedistributor, the price is fixed, no right of return exists and collection ofthe resulting receivable is reasonably assured.

Unprogrammed partsshipped to distributors may be used by multiple end customers and distributorsmay have certain return and price adjustment privileges on unsold inventory.Accordingly, revenue associated with unprogrammed parts is deferred untilresale to the end customer.

Software revenuefrom sales of design tools is recognized when persuasive evidence of anagreement exists, delivery of the software has occurred, no significant Companyobligations with regard to implementation or integration remain, the fee isfixed or determinable and collection is reasonably assured. Software revenueamounted to less than one percent of the Company’s revenue for the secondquarter and the first half of 2007 and 2006.

*Inventory*

Inventory isstated at the lower of standard cost or net realizable value. Standard costapproximates actual cost on a first-in, first-out basis. The Company routinelyevaluates quantities and values of its inventory in light of current marketconditions and market trends and records reserves for quantities in excess ofdemand and product obsolescence. The evaluation may take into considerationhistoric usage, expected demand, anticipated sales price, the stage in theproduct life cycle of its customers’ products, new product developmentschedules, the effect new products might have on the sale of existing products,product obsolescence, customer design activity, customer concentrations, productmerchantability and other factors. Market conditions are subject to change andactual consumption of inventory could differ from forecasted demand. TheCompany’s semiconductor products have historically had an unusually longproduct life cycle and obsolescence has not been a significant factor in thevaluation of inventories. However, as the Company pursues opportunities in themobile market, its product life cycle may be shorter and increase the potentialfor obsolescence. The Company also regularly reviews the cost of inventoryagainst estimated market value and records a lower of cost or market reservefor inventories that have a cost in excess of estimated market value.

*Long-Lived Assets*

The Companyreviews the recoverability of its long-lived assets, such as property andequipment, prepaid wafer credits and investments, annually and when events orchanges in circumstances occur that indicate that the carrying value of theasset or asset group may not be recoverable. The assessment of possible impairmentis based on the Company’s ability to recover the carrying value of the asset orasset group from the expected future pre-tax

8

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENT — (Continued)**

cash flows, undiscountedand without interest charges, of the related operations. If these cash flowsare less than the carrying value of the asset or asset group, an impairmentloss is recognized for the difference between the estimated fair value and thecarrying value, and the carrying value of the related assets is reduced by thisdifference. The measurement of impairment requires management to estimatefuture cash flows and the fair value of long-lived assets.

*Comprehensive Income (Loss)*

Comprehensiveincome (loss) includes all changes in equity (net assets) during a period fromnon-owner sources. Comprehensive income (loss) for the Company has includedrealized and unrealized holding gains or losses on its holdings of Towerordinary shares. See Note 4.

*Stock-Based Compensation*

The Companyaccounts for stock-based compensation under the provisions of Statement ofFinancial Accounting Standards (“SFAS”) No. 123 (revised 2004), “*Share-Based Payment*,” (“SFAS 123(R)”) andrelated interpretations which requires the measurement and recognition ofexpense related to the fair value of stock-based compensation awards.Accordingly, stock-based compensation is measured at the grant date andre-measured upon modification, as appropriate, based on the fair value of theaward using the Black-Scholes option pricing model (“Black-Scholes”), and isrecognized as expense over the requisite service period of the award.Black-Scholes requires the use of highly subjective, complex assumptions,including expected term and the price volatility of the Company’s stock. SeeNote 9.

*Foreign Currency Transactions*

All of the Company’ssales and cost of manufacturing are transacted in U.S. dollars. The Companyconducts a portion of its research and development activities in Canada andIndia and has sales and marketing activities in various countries outside ofthe United States. Most of these international expenses are incurred in localcurrency. Foreign currency transaction gains and losses are included ininterest income and other, net, as they occur. The effect of foreign currencyexchange rate fluctuations has not been significant to date. Operating expensesdenominated in foreign currencies were approximately 23% and 22% of totaloperating expenses for the first half of 2007 and 2006, respectively. The Companyincurred a majority of these foreign currency expenses in Canada. The Companyhas not used derivative financial instruments to hedge its exposure tofluctuations in foreign currency.

*Concentration of Credit Risk*

Financialinstruments, which potentially subject the Company to concentrations of creditrisk, consist principally of cash and cash equivalents, investment in Tower andaccounts receivable. Cash and cash equivalents are maintained with high qualityinstitutions. See Note 4 for information regarding the Company’s investment inTower. The Company’s accounts receivable are denominated in U.S. dollars andare derived primarily from sales to customers located in North America, Europe,Japan and Asia. The Company performs ongoing credit evaluations of itscustomers and generally does not require collateral. See Note 11 forinformation regarding concentrations associated with accounts receivable.

*Warranty Costs*

The Companygenerally warrants finished goods against defects in material and workmanshipunder normal use for twelve months from the date of shipment. The Companydoes not have significant product warranty related costs or liabilities. Theone-time programmable nature of QuickLogic’s products minimizes warranty costs.

*RecentlyIssued Accounting Pronouncements*

In September 2006, theFinancial Accounting Standards Board (“FASB”) issued SFAS No. 157, *“Fair Value Measurements,”* (“SFAS 157”).SFAS 157 establishes a framework for measuring fair value and expandsdisclosures about fair value measurements. The changes to current practiceresulting from the application of SFAS 157 relate to the definition of fairvalue, the methods used to measure fair value and expanded disclosures aboutfair value measurements. SFAS 157 is effective for fiscal years beginning afterNovember 15, 2007 and interim periods within those fiscal years. The Company iscurrently evaluating the impact that SFAS 157 will have on its consolidatedfinancial statements.

9

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENT — (Continued)**

In February 2007,the FASB issued SFAS No. 159, *“The FairValue Option for Financial Assets and Financial Liabilities,*” (“SFAS159”). SFAS 159 permits companies to choose to measure certain financialinstruments and certain other items at fair value. The standard requires thatunrealized gains and losses on items for which the fair value option has beenelected be reported in earnings. SFAS 159 is effective for fiscal yearsbeginning after November 15, 2007, although earlier adoption is permitted. TheCompany is currently evaluating the impact that SFAS 159 will have on itsconsolidated financial statements.

**Note 3—NetLoss Per Share**

Basicnet loss per share is computed by dividing net loss available to commonstockholders by the weighted average number of common shares outstanding duringthe period. Diluted net loss per share is computed using the weighted averagenumber of common shares outstanding during the period plus potentially dilutivecommon shares outstanding during the period under the treasury stock method. Incomputing diluted net loss per share, the average stock price for the period isused in determining the number of shares assumed to be purchased from theexercise of stock options. A reconciliation of the basic and diluted per sharecomputations is as follows (in thousands, except per share amounts):
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **July 1, 2007**       | ** ** | **July 2, 2006** | ** ** |
| ** **               | ** ** | **Net Loss**                | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** | **Net Loss** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| Basic                    |       | $                                | (2,078     | ) | 28,966 |   | $ | (0.07 | ) | $ | (1,699 | ) | 28,519 |   | $ | (0.06 | ) |
| Effect of stock  options |       | —                           |       | — |   | — |   | — |   | — |   | — |   |
| Diluted                  |       | $                                | (2,078     | ) | 28,966 |   | $ | (0.07 | ) | $ | (1,699 | ) | 28,519 |   | $ | (0.06 | ) |

 
| ** **               | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **July 1, 2007**     | ** ** | **July 2, 2006** | ** ** |
| ** **               | ** ** | **Net Loss**              | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** | **Net Loss** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| Basic                    |       | $                              | (7,971     | ) | 28,890 |   | $ | (0.28 | ) | $ | (2,927 | ) | 28,290 |   | $ | (0.10 | ) |
| Effect of stock  options |       | —                         |       | — |   | — |   | — |   | — |   | — |   |
| Diluted                  |       | $                              | (7,971     | ) | 28,890 |   | $ | (0.28 | ) | $ | (2,927 | ) | 28,290 |   | $ | (0.10 | ) |

 

For the secondquarter and first half of 2007, 6,864,000 shares associated with optionsoutstanding and the estimated number of shares to be purchased under thecurrent offering period of the 1999 Employee Stock Purchase Plan were notincluded in the calculation of diluted net loss per share, as they wereconsidered antidilutive due to the net loss the Company experienced during thisperiod. For the second quarter and first half of 2006, 6,096,000 sharesassociated with options outstanding were not included in the calculation ofdiluted net loss per share, as they were considered antidilutive due to the netloss the Company experienced during this period.

**Note 4—Investment in TowerSemiconductor Ltd.**

OnDecember 12, 2000, the Company entered into several agreements with Tower,as amended, under which the Company agreed to make a strategic investment inTower of up to $25 million as part of Tower’s plan to build and equip anew wafer fabrication facility. During 2001 and 2002, the Company paid a totalof $21.3 million to Tower to fulfill its investment requirements under theagreement. In partial consideration for the investment, the Company received1,757,368 Tower ordinary shares with an original cost of $16.6 million.Due to write-downs in prior periods as a result of “other than temporary”declines in market value, the adjusted cost of the Company’s Tower ordinaryshares is $1.17 per share. The Company sold a portion of the Towerordinary shares in fiscal 2003.

As of July 1,2007, the Company held 1,344,543 available for sale Tower ordinary shares withan unrealized gain of $350,000 recorded in accumulated other comprehensiveincome, representing the difference between the adjusted cost per share and$1.43 per share, their market value on the last trading day of the reportingperiod. The Company plans to hold 450,000 of the Tower ordinary shares in orderto receive competitive product pricing under the Agreement and has recordedthese shares as a long-term investment on the balance sheets. The remaining894,543 shares are classified as a short-term investment on the balance sheets.

10

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENT — (Continued)**

The Company alsoreceived $4.7 million in prepaid wafer credits in partial considerationfor the investment. As of July 1, 2007, the prepaid wafer credits balance was$3.2 million. The Company has guaranteed capacity at Tower through atleast 2010. These credits are recorded within long-term other assets on thebalance sheets and can be applied toward wafer purchases from Tower at 15% ofthe value of purchases made through 2010.

**Note 5—BalanceSheet Components**
| ** **                                | ** ** | **July 1,  2007**  | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **(in thousands)** | ** ** |
| Inventory:                                |       |                    |       |                        |       |
| Raw materials                             |       | $                       | 221        |                        | $          | 791 |   |
| Work-in-process                           |       | 4,961                   |       | 7,845                       |       |
| Finished goods                            |       | 438                     |       | 428                         |       |
|                                      |       | $                       | 5,620      |                        | $          | 9,064 |   |
|                                      |       |                    |       |                        |       |
| Other current  assets:                    |       |                    |       |                        |       |
| Prepaid expenses                          |       | $                       | 1,407      |                        | $          | 1,566 |   |
| Other                                     |       | 326                     |       | 328                         |       |
|                                      |       | $                       | 1,733      |                        | $          | 1,894 |   |
|                                      |       |                    |       |                        |       |
| Property and  equipment:                  |       |                    |       |                        |       |
| Equipment                                 |       | $                       | 13,457     |                        | $          | 13,477 |   |
| Software                                  |       | 9,380                   |       | 9,370                       |       |
| Furniture and fixtures                    |       | 824                     |       | 824                         |       |
| Leasehold improvements                    |       | 803                     |       | 803                         |       |
|                                      |       | 24,464                  |       | 24,474                      |       |
| Accumulated depreciation and amortization |       | (20,004                 | )          | (18,994                     | )          |
|                                      |       | $                       | 4,460      |                        | $          | 5,480 |   |
|                                      |       |                    |       |                        |       |
| Other assets:                             |       |                    |       |                        |       |
| Prepaid wafer credits                     |       | $                       | 3,180      |                        | $          | 3,634 |   |
| Other                                     |       | 320                     |       | 404                         |       |
|                                      |       | $                       | 3,500      |                        | $          | 4,038 |   |
|                                      |       |                    |       |                        |       |
| Accrued  liabilities:                     |       |                    |       |                        |       |
| Employee related accruals                 |       | $                       | 1,505      |                        | $          | 1,150 |   |
| Other                                     |       | 703                     |       | 1,312                       |       |
|                                      |       | $                       | 2,208      |                        | $          | 2,462 |   |

 

11

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENT — (Continued)**

**Note 6—Obligations**
| ** **                                             | ** ** | **July 1,  2007**  | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **(in thousands)** | ** ** |
|                                                   |       |                    |       |                        |       |
| Debt and capital  lease obligations:                   |       |                    |       |                        |       |
| Notes payable to bank                                  |       | $                       | 2,277      |                        | $          | 2,526 |   |
| Capital leases                                         |       | 852                     |       | 1,384                       |       |
|                                                   |       | 3,129                   |       | 3,910                       |       |
| Current portion of debt and capital lease  obligations |       | (1,825                  | )          | (2,292                      | )          |
|                                                   |       | $                       | 1,304      |                        | $          | 1,618 |   |

 

*Revolving Line of Credit and NotesPayable to Bank*

Effective June 2006,the Company entered into a Second Amended and Restated Loan and SecurityAgreement with Silicon Valley Bank. Terms of the agreement included a$5.0 million revolving line of credit that is available throughJune 2008 and an additional $2.0 million of borrowing capacity underthe equipment line of credit that was available to be drawn against throughJune 2007. Advances under the equipment line of credit must be repaid ineither 30 or 36 equal monthly installments, depending upon the nature ofthe items financed. The agreement was amended in June 2007 to include anadditional $2.5 million of borrowing capacity under the equipment line ofcredit that is available to be drawn against through June 2008 and providesthat future advances under the equipment line of credit be repaid in 36 equalmonthly installments. Terms of the various advances under the agreement are asfollows (in thousands):
| ** **                 | ** ** | **Original  Balance** | ** ** | **Balance at  July 1,  2007** | ** ** | **Available  Credit** | ** ** | **Interest Rate**             | ** **                         | **Maturity Date**                               | ** **         |
|----------------------------|------------|-----------------------|------------|-----------------------------------------|------------|-----------------------|------------|------------------------------------|------------------------------------|------------------------------------------------------|--------------------|
| Revolving Line  of Credit: |       |                  |       |                                    |       |                  |       |                               |                               |                                                 |               |
| Non-formula advances       |       | n/a                   |       | —                                  |       | $                     | 5,000      |                               | Greater of Prime +  0.50% or 8.50% |                                                 | June 28, 2008 |   |
|                       |       |                  |       |                                    |       |                  |       |                               |                               |                                                 |               |
| Equipment Line  of Credit: |       |                  |       |                                    |       |                  |       |                               |                               |                                                 |               |
|                       |       |                  |       |                                    |       |                  |       |                               |                               |                                                 |               |
| Notes payable              |       | $                     | 1,409      |                                    | $          | 137                   |       | n/a                                |                               | Prime + 2.00%                                        |               | Multiple draws maturing  on or before April 2008 |   |
| Notes payable              |       | 932                   |       | 549                                     |       | n/a                   |       | Prime + 1.75%                      |                               | Multiple draws maturing  on or before April 2009     |               |
| Notes payable              |       | 1,558                 |       | 1,162                                   |       | n/a                   |       | Prime + 1.00%                      |                               | Multiple draws maturing  on or before September 2009 |               |
| Notes payable              |       | 442                   |       | 429                                     |       | n/a                   |       | Prime + 1.00%                      |                               | Multiple draws maturing  on or before May 2010  |               |
|                       |       |                  |       |                                    |       |                  |       |                               |                               |                                                 |               |
| Notes payable              |       | n/a                   |       | —                                  |       | 2,500                 |       | Prime + 1.00% or  Treasury + 4.00% |                               | 36 months from date of  advance                      |               |
| Total                      |       |                  |       | $                                       | 2,277      |                  |       |                               |                               |                                                 |               |   |
|                            |            |                       |            |                                         |            |                       |            |                                    |                                    |                                                      |                    |  |  |  |

 

12

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENT — (Continued)**

The bank has a firstpriority security interest in substantially all of the Company’s tangible andintangible assets to secure any outstanding amounts under the agreement. Underthe terms of the agreement, the Company must maintain a minimum tangible networth and adjusted quick ratio. The agreement also has certain restrictionsincluding, among others, on the incurrence of other indebtedness, the maintenanceof depository accounts, the disposition of assets, mergers, acquisitions,investments, the granting of liens and the payment of dividends. The Companywas in compliance with the financial covenants of the agreement as of July 1,2007.

At July 1, 2007, theprime rate under the credit facility was 8.25%. As of July 1, 2007 andDecember 31, 2006, $1.1 million and $1.3 million, respectively, of amountsoutstanding under the equipment line of credit were classified as long-termobligations.

*CapitalLease*

In December 2005, theCompany leased design software and related maintenance under a two-year capitallease at an imputed interest rate of 8.5% per annum. Terms of the agreementrequire the Company to make quarterly payments of approximately $204,000through November 2007. The Company recorded a capital asset for$1.2 million that is being depreciated over the term of the agreement,prepaid maintenance of $272,000 that is being amortized over the term of theagreement and a capital lease obligation of $1.5 million. As of July 1,2007, $397,000 was outstanding under the capital lease, zero of which wasclassified as a long-term obligation.

InJanuary 2006, the Company leased design software tools and relatedmaintenance under a three-year capital lease at an imputed interest rate of9.0% per annum. Terms of the agreement require the Company to make semi-annualpayments of approximately $148,000 through July 2008. The Company recorded acapital asset for $633,000 that is being depreciated over the term of the agreement,prepaid maintenance of $158,000 that is being amortized over the term of theagreement and a capital lease obligation of $791,000. As of July 1, 2007,$406,000 was outstanding under the capital lease, $141,000 of which wasclassified as a long-term obligation.

In the fourthquarter of 2006, the Company entered into a capital lease obligation in theamount of $77,000 to finance design software. The capital lease obligation hasan imputed interest rate of 9.25% per annum and is being repaid in annual amountsof $28,000 through January 2009. As of July 1, 2007, $49,000 was outstandingunder the capital lease, $26,000 of which was classified as a long-termobligation.

**Note 7—Deferred Royalty Revenue**

In October 2000, theCompany entered into a technology license and wafer supply agreement withAeroflex Incorporated (“Aeroflex”). Under the terms of the agreement, theCompany received $750,000 of prepaid royalties. In addition, Aeroflex receivesa prepaid royalty credit for a portion of the amounts paid for wafers purchasedfrom the Company under the agreement. As of July 1, 2007 and December 31, 2006,the Company had recorded approximately $849,000 and $960,000, respectively, ofdeferred royalty revenue under this agreement which is classified as a currentliability. The Company recognized $220,000 and zero royalty revenue in thefirst half of 2007 and 2006, respectively.

**Note8—Employee Stock Plans**

*1989 Stock Option Plan*

The 1989 StockOption Plan (the “1989 Plan”) provided for the issuance of incentive and nonqualifiedoptions for the purchase of up to 4.6 million shares of common stock. Optionsgranted under the 1989 Plan have a term of up to ten years, and typicallyvest at a rate of 25% of the total grant per year over a four-year period. InSeptember 1999, the Company adopted the 1999 Stock Plan and no furtherstock option grants were made under the 1989 Plan.

*1999 Stock Plan*

The 1999 StockPlan (the “1999 Plan”) was adopted by the Board of Directors inAugust 1999 and was approved by the Company’s stockholders inSeptember 1999. The Company may issue either stock options or restrictedstock under the terms of the 1999 Plan. As of July 1, 2007, approximately 14.9million shares were reserved for issuance under the 1999 Plan. In addition,each January an annual increase is added to the 1999 Plan

13

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENT — (Continued)**

equal to the lesser of(i) 5,000,000 shares, (ii) 5% of the Company’s outstanding shares onsuch date, or (iii) a lesser amount determined by the Board of Directors.Options or equity awards that are cancelled or forfeited under the1989 Plan also become available for grant under the 1999 Plan.Options granted under the 1999 Plan have a term of up to ten years.Options typically vest at a rate of 25% one year after the vesting commencementdate, and one forty-eighth for each month of service thereafter. However, theCompany has implemented a different vesting schedule in the past and mayimplement different vesting schedules in the future with respect to any newequity awards.

*Employee Stock Purchase Plan*

The 1999 Employee Stock Purchase Plan (“ESPP”) wasadopted by the Board of Directors in August 1999 and was approved by theCompany’s stockholders in September 1999. As of July 1, 2007,approximately 5.1 million shares were reserved for issuance under theESPP. In addition, each August an annual increase is added to the ESPP equal tothe lesser of (i) 1,500,000 shares, (ii) 4% of the Company’soutstanding shares on such date, or (iii) a lesser amount determined bythe Board of Directors.

The Board of Directorsamended the ESPP in November 2005 to provide for six-month offering periods.Participants purchase shares through payroll deductions of up to 20% of anemployee’s total compensation (maximum of 20,000 shares per offering period).The amended ESPP permits the Board of Directors to determine, prior to eachoffering period, whether participants purchase shares at: (i) 85% of the fairmarket value of the common stock at the end of the offering period; or (ii) 85%of the lower of the fair market value of the common stock at the beginning orthe end of an offering period. The Board of Directors has determined that,until further notice, future offering periods will be made at 85% of the lowerof the fair market value of the common stock at the beginning or the end of anoffering period.

**Note9—Stock-Based Compensation**

Effective January 2,2006, the Company adopted the provisions of SFAS 123(R) which requires themeasurement and recognition of expense related to the fair value of stock-basedcompensation awards made to employees and directors over the requisite serviceperiod. Under SFAS 123(R), stock-based compensation expense is recognized inthe Company’s consolidated statements of operations and includes:(i) compensation expense for stock-based compensation awards granted priorto, but not yet vested as of January 1, 2006, based on the grant date fairvalue estimated and re-measured upon modification in accordance with the proforma provisions of SFAS 123, and (ii) compensation expense for thestock-based compensation awards granted or modified subsequent toJanuary 1, 2006, based on the grant date fair value estimated inaccordance with the provisions of SFAS 123(R). The impact of SFAS 123(R) on theCompany’s consolidated financial statements for the second quarter and firsthalf of 2007 and 2006 was as follows (in thousands, except per share amounts):
| ** **                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **July 1, 2007**       | ** ** | **July 2, 2006**     | ** ** | **July 1, 2007** | ** ** | **July 2, 2006** | ** ** |
| Cost of revenue                      |       | $                                | 54         |                           | $          | 53 |   | $ | 109 |   | $ | 102 |   |
| Research and  development            |       | 94                               |       | 118                            |       | 179 |   | 264 |   |
| Selling, general  and administrative |       | 280                              |       | 232                            |       | 521 |   | 489 |   |
| Total costs and  expenses            |       | $                                | 428        |                           | $          | 403 |   | $ | 809 |   | $ | 855 |   |

 

The amount of stock-based compensation included ininventory for the second quarter and first half of 2007 and 2006 was notmaterial.

14

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENT — (Continued)**

*Valuation Assumptions*

SFAS 123(R) requirescompanies to estimate the fair value of stock-based compensation awards on thegrant date using an option pricing model. As required by SFAS 123(R), theCompany has made an estimate of expected forfeitures and is recognizingcompensation costs only for those equity awards expected to vest. The Companymeasures the fair value of stock option and ESPP awards using the Black-Scholesoption pricing model. Black-Scholes, as well as other currently acceptedoption valuation models, was developed to estimate the fair value of freelytradable, fully transferable options without vesting restrictions. Theseassumptions differ significantly from the characteristics of the Company’sstock-based compensation awards. Black-Scholes also requires the use of highlysubjective, complex assumptions, including expected term and the pricevolatility of the Company’s stock.

The following weightedaverage assumptions are included in the estimated fair value calculations forstock option grants:
| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **July 1, 2007**       | ** ** | **July 2, 2006**     | ** ** | **July 1, 2007** | ** ** | **July 2, 2006** | ** ** |
|                     |       |                             |       |                           |       |   |   |   |   |
| Expected term  (years)   |       | 5.10                             |       | 5.75                           |       | 5.10 |   | 5.75 |   |
| Risk-free  interest rate |       | 4.71                             | %          | 4.95                           | %          | 4.70 | % | 4.87 | % |
| Volatility               |       | 80.00                            | %          | 82.00                          | %          | 80.00 | % | 82.00 | % |
| Dividend yield           |       | —                           |       | —                         |       | — |   | — |   |

 

The methodologies for determining theabove values were as follows:

·                  *Expected term:* The expected term represents the period thatthe Company’s stock-based awards are expected to be outstanding and isestimated based on historical experience.

·                  *Risk-free interest rate:* The risk-free interest rateassumption is based upon the observed interest rate appropriate for theexpected term of the Company’s employee stock options.

·                  *Volatility:* The Company determines expected volatility basedprimarily on historical volatility of the Company’s common stock.

·                  *Dividend yield:* The dividend yield assumption is based onthe Company’s intent not to issue a dividend under its dividend policy.

The weightedaverage estimated fair value for options granted during the second quarter of2007 and 2006 was $1.86 and $4.11 per option, respectively. The weightedaverage estimated fair value for options granted during the first half of 2007and 2006 was $1.92 and $3.89 per option, respectively. As of the end of thesecond quarter of 2007, the fair value of unvested stock-based compensationawards, net of expected forfeitures, was $3.2 million which is expected tobe recognized over the next four years.

15

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENT — (Continued)**

*Stock-Based Compensation AwardActivity*

The following tablesummarizes stock-based compensation award activity under the 1989 Plan and the1999 Plan, and the related weighted average exercise price, for the first halfof 2007 and fiscal year 2006:
| ** **                         | ** ** | ** **                                | ** ** | **Options Outstanding**   | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **Shares  Available for Grant** | ** ** | **Number of Shares** | ** ** | **Weighted Average  Exercise Price** | ** ** |
| ** **                         | ** ** | **(in thousands)**                   | ** ** | **(in thousands)**        | ** ** | ** ** | ** ** |
| Balance at  January 2, 2006        |       | 6,658                                     |       | 6,735                          |       | $ | 5.37 |   |
| Authorized                         |       | 1,394                                     |       | —                         |       | — |   |
| Granted                            |       | (1,711                                    | )          | 1,711                          |       | 3.25 |   |
| Forfeited or  expired              |       | 284                                       |       | (284                           | )          | 9.02 |   |
| Exercised                          |       | —                                    |       | (698                           | )          | 3.07 |   |
| Balance at  December 31, 2006 |       | 6,625                                     |       | 7,464                          |       | 4.97 |   |
| Authorized                         |       | 1,434                                     |       | —                         |       | — |   |
| Granted (1)                        |       | (267                                      | )          | 250                            |       | 2.84 |   |
| Forfeited or  expired              |       | 843                                       |       | (843                           | )          | 6.54 |   |
| Exercised                          |       | —                                    |       | (253                           | )          | 1.74 |   |
| Balance at July 1, 2007            |       | 8,635                                     |       | 6,618                          |       | $ | 4.81 |   |

 

----

(1)          During the secondquarter of 2007, the Company granted an aggregate of 16,692 shares of fullyvested restricted stock awards under the 1999 Plan.

The totalintrinsic value of options exercised during the second quarter of 2007 and 2006was $100,000 and $700,000, respectively. The total intrinsic value of optionsexercised during the first half of 2007 and 2006 was $290,000 and $1.5 million,respectively. Total cash received from employees as a result of employee stockoption exercises during the second quarter and first half of 2007 wasapproximately $110,000 and $445,000, respectively. Total cash received fromemployees as a result of employee stock option exercises during the secondquarter and first half of 2006 was approximately $1.1 million and $2.1 million,respectively. The Company settles employee stock option exercises with newlyissued common shares. In connection with these exercises, there was no taxbenefit realized by the Company due to the Company’s current loss position.

*Employee Stock Purchase Plan*

The offering period ending May 2006 under the ESPP providedthat shares were purchased at 85% of the fair market value of the common stockat the end of the offering period. Accordingly, the fair value of stock-basedcompensation awards under the ESPP was recognized based upon employeedeductions and the purchase discount, rather than using a pricing model.Stock-based compensation relating to the ESPP was $34,000 and $69,000 in thesecond quarter and first half of 2006, respectively. The purchase discount ofrights issued pursuant to the Company’s ESPP during the second quarter andfirst half of 2006 was $0.84 per right.

The Companycancelled the offering period ended November 2006 due to its internal review ofstock option granting practices and related accounting.

The offeringperiod ending May 14, 2007 commenced on January 24, 2007, once the Company hadcompleted its stock option review and was current with its filings as requiredby the Securities and Exchange Commission (“SEC”) and Nasdaq. The currentoffering period ending November 14, 2007 returned to the standard six-monthperiod. Employees participating in these offering periods purchase common stockat 85% of the lower of the fair market value of the common stock at thebeginning or the end of the offering period. Stock-based compensation relatingto the ESPP was $87,000 and $163,000 in the second quarter and first half of2007, respectively. The weighted average estimated fair value, as defined bySFAS 123(R), of rights issued pursuant to the Company’s ESPP during the secondquarter and first half of 2007 was $0.90 and $0.88 per right, respectively.

16

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENT — (Continued)**

The following weighted average assumptions areincluded in the estimated fair value calculations for rights to purchase stockunder the ESPP as of the grant date:
| ** **               | ** ** | **Three Months  Ended  July 1, 2007** | ** ** | **Six Months  Ended  July 1, 2007** | ** ** |
|--------------------------|------------|------------------------------------------------------|------------|----------------------------------------------------|------------|
| Expected life  (months)  |       | 6.0                                        |       | 5.1                                      |       |
| Risk-free  interest rate |       | 5.00                                                 | %          | 5.00                                               | %          |
| Volatility               |       | 55.00                                                | %          | 55.00                                              | %          |
| Dividend yield           |       | —                                               |       | —                                             |       |

 

The methodologies fordetermining the above values were as follows:

·                  *Expected term:*The expected termrepresents the length of the purchase period contained in the ESPP.

·                  *Risk-free interest rate:*The risk-freeinterest rate assumption is based upon the observed interest rate appropriatefor the term of the purchase period.

·                  *Volatility:*The Company determinesexpected volatility based primarily on historical volatility of the Company’scommon stock for the term of the purchase period.

·                  *Dividendyield:*The dividend yield assumption is based on the Company’sintent not to issue a dividend under its dividend policy.

**Note 10—IncomeTaxes**

In the second quarter of 2007 and 2006, the Company recorded income taxexpense of $27,000 and $21,000, respectively, which consisted primarily of income taxes on foreign operations. In thefirst half of 2007 and 2006, the Company recorded income tax expense of $42,000and $23,000, respectively, which consisted primarily of income taxes on foreignoperations.

Due to theuncertainties surrounding the realization of the deferred tax assets resultingfrom the Company’s accumulated deficit and net tax losses in previous years,the Company has provided a full valuation allowance against the associateddeferred tax assets. The Company will continue to assess the realizability ofthe deferred tax assets in future periods.

AtDecember 31, 2006, the Company had net operating loss carryforwards forfederal and state income tax purposes of approximately $82.1 million and$22.0 million, respectively. These carryforwards, if not utilized tooffset future taxable income and income taxes payable, will expire beginning in2007 for federal and state purposes. Included in the net operating losscarryforward amount is $4.3 million and $3.1 million for federal and stateincome tax purposes, respectively, of stock option deductions that, whenrecognized, will result in a credit to stockholders’ equity.

On January 1, 2007, the Company adopted theprovisions of FASB Interpretation No. 48, *“Accountingfor Uncertainty in Income Taxes”* (“FIN 48”), an interpretation ofFASB Statement No. 109 (“SFAS 109”). FIN 48 addressed the determinationof how tax benefits claimed or expected to be claimed on a tax return should berecorded in the consolidated financial statements. Under FIN 48, the Companymust recognize the tax benefit from an uncertain tax position only if it ismore likely than not that the tax position will be sustained on examination bythe taxing authorities, based on the technical merits of the position. The taxbenefits recognized in the consolidated financial statements from such aposition are measured based on the largest benefit that has a greater thanfifty percent likelihood of being realized upon ultimate resolution. The Company did not recognize materialadditional liability as a result of the implementation of FIN 48. The Companyhad approximately $111,000 of unrecognized tax benefits at January 1, 2007, theadoption date. The Company recognizes interest and penalties related touncertain tax positions in income tax expense. As of January 1, 2007, theCompany had approximately $9,000 of accrued interest and penalties related touncertain tax positions. In May 2007, the FASB issued FASB Staff Position (“FSP”)FIN 48-1 “Definition of Settlement in FASB Interpretation No. 48” (“FSPFIN 48-1”) relating to FIN 48. The Company has applied the provisions ofFSP FIN 48-1 in its adoption of FIN 48.

There were no significant changes to any ofthese amounts during the first half of 2007.

17

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**QUICKLOGIC CORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

The Company is no longer subject to U.S.federal, state and non-U.S. income tax audits by taxing authorities for fiscalyears through 1992. The Company estimates that any unrecognized tax benefitwill not change significantly within the next twelve months.

Under the TaxReform Act of 1986, the amount of and the benefit from net operating lossesthat can be carried forward may be impaired in certain circumstances. Eventswhich may cause changes in the Company’s tax carryforwards include, but are notlimited to, a cumulative ownership change of more than 50% over a three-yearperiod. Since inception, the Company has had cumulative changes in ownershipwhich will limit the loss carryforward deduction under IRC Section 382.However, the Company believes that such limitations will not have a materialeffect on the future utilization of losses.

Enacted in October2004, Section 409A of the Internal Revenue Code significantly changed the rulesfor nonqualified deferred compensation plans. Section 409A imposes certainrestrictions on stock awards that constitute deferred compensation. As a resultof the Company’s stock option review in 2006, the Board of Directors modifiedoptions granted to two executive officers that resulted in an increase to theirexercise price in order to eliminate any additional tax exposure under Section409A and thereby maintain the incentive value of the options. The Companybelieves that the implications of Section 409A on grants with intrinsic valuethat vested after December 31, 2004 and modifications made to existing grantsafter October 3, 2004, along with potential remedial actions, is not materialto its consolidated financial statements.

**Note 11—InformationConcerning Product Lines, Geographic Information and Revenue Concentration**

The Companyidentifies its business segments based on business activities, managementresponsibility and geographic location. For all periods presented, the Companyoperated in a single business segment.

The following is abreakdown of revenue by product line (in thousands):
| ** **                      | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                      | ** ** | **July 1, 2007**       | ** ** | **July 2, 2006**     | ** ** | **July 1, 2007** | ** ** | **July 2, 2006** | ** ** |
| *Revenue by product line*(1)*:* | * *   | * *                         | * *   | * *                       | * *   | * * | * * | * * | * * |
| New products                    |       | $                                | 1,134      |                           | $          | 2,283 |   | $ | 1,982 |   | $ | 3,371 |   |
| Mature products                 |       | 4,983                            |       | 5,113                          |       | 8,914 |   | 10,267 |   |
| End-of-life  products           |       | 2,288                            |       | 1,853                          |       | 3,751 |   | 4,944 |   |
| Total revenue                   |       | $                                | 8,405      |                           | $          | 9,249 |   | $ | 14,647 |   | $ | 18,582 |   |

 

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(1)          New products includeArcticLink, PolarPro, Eclipse II, QuickPCI II and QuickMIPS products. Matureproducts include pASIC® 3, QuickRAM, Eclipse, QuickPCI, QuickDSP andQuickFC products, as well as royalty revenue, programming hardware and designsoftware. End-of-life products include pASIC 1, pASIC 2 and V3 products.

The following is abreakdown of revenue by shipment destination (in thousands):
| ** **               | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **               | ** ** | **July 1, 2007**       | ** ** | **July 2, 2006**     | ** ** | **July 1, 2007** | ** ** | **July 2, 2006** | ** ** |
| *Revenue  by geography:* | * *   | * *                         | * *   | * *                       | * *   | * * | * * | * * | * * |
| United States            |       | $                                | 3,808      |                           | $          | 3,207 |   | $ | 6,898 |   | $ | 8,043 |   |
| Europe                   |       | 1,709                            |       | 4,013                          |       | 2,546 |   | 6,046 |   |
| Japan                    |       | 748                              |       | 954                            |       | 1,358 |   | 1,942 |   |
| China                    |       | 470                              |       | 515                            |       | 801 |   | 1,120 |   |
| Rest of North America    |       | 1,265                            |       | 344                            |       | 2,252 |   | 938 |   |
| Rest of Asia Pacific     |       | 405                              |       | 216                            |       | 792 |   | 493 |   |
| Total revenue            |       | $                                | 8,405      |                           | $          | 9,249 |   | $ | 14,647 |   | $ | 18,582 |   |

 

18

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

The followingdistributors and customers accounted for 10% or more of the Company’s revenuefor the periods presented: 
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **July 1, 2007**       | ** ** | **July 2, 2006**     | ** ** | **July 1, 2007** | ** ** | **July 2, 2006** | ** ** |
| Distributor “A”          |       | 20                               | %          | 23                             | %          | 20 | % | 28 | % |
| Distributor “B”          |       | 18                               | %          | 12                             | %          | 18 | % | 13 | % |
| Customer “A” –  OEM |       | 12                               | %          | *                              |       | 12 | % | * |   |
| Customer “B” –  OEM |       | 11                               | %          | 12                             | %          | 12 | % | 12 | % |
| Customer “C” – OEM  |       | *                                |       | 19                             | %          | * |   | 12 | % |

 

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* Represents less than10% of revenue for the period presented.

The followingdistributors and customers accounted for 10% or more of the Company’s accountsreceivable as of the dates presented: 
| ** **                         | ** ** | **July 1, 2007** | ** ** | **December 31, 2006** | ** ** |
|------------------------------------|------------|----------------------------|------------|---------------------------------|------------|
| Distributor “A”          |       | 22                         | %          | 15                              | %          |
| Customer “A” –  OEM |       | 16                         | %          | *                               |       |
| Customer “C” –  OEM |       | *                          |       | 12                              | %          |
| Customer “D” – OEM  |       | 10                         | %          | 13                              | %          |
| Customer “E” – OEM  |       | *                          |       | 11                              | %          |

 

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* Represents less than10% of accounts receivable as of the date presented.

As of July 1,2007, less than 10% of the Company’s long-lived assets, including property andequipment and other assets, were located outside the United States.

**Note 12—Commitments**

Certain of theCompany’s wafer manufacturers require the Company to forecast wafer startsseveral months in advance. The Company is committed to take delivery of and payfor a portion of forecasted wafer volume. As of July 1, 2007 andDecember 31, 2006, the Company had $3.5 million and$2.1 million, respectively, of outstanding commitments for the purchase ofwafer inventory.

The Companyleases, with an option to renew, its primary facility under a non-cancelableoperating lease that expires in March 2009. In addition, the Company rentsdevelopment facilities in Canada and India as well as sales offices in Europeand Asia. Total rent expense, net of sublease income, for the second quarter of2007 and 2006 was approximately $215,000 and $220,000, respectively, and rentexpense for the first half of 2007 and 2006 was approximately $440,000 and $430,000,respectively. The Company has subleased a portion of its primary facilities toa tenant until March 2009.

**Note 13—Litigation**

OnOctober 26, 2001, a putative securities class action was filed in the U.S.District Court for the Southern District of New York against certain investmentbanks that underwrote QuickLogic’s initial public offering, QuickLogic and someof QuickLogic’s officers and directors. The complaint alleges excessive andundisclosed commissions in connection with the allocation of shares of commonstock in QuickLogic’s initial and secondary public offerings and artificiallyhigh prices through “tie-in” arrangements which required the underwriters’customers to buy shares in the aftermarket at pre-determined prices in violationof the federal securities laws. Plaintiffs seek an unspecified amount ofdamages on behalf of persons who purchased QuickLogic’s stock pursuant to theregistration statements between October 14, 1999 and December 6,2000. Various plaintiffs have filed similar actions asserting virtuallyidentical allegations against over 300 other public companies, theirunderwriters, and their officers and directors arising out of each company’spublic offering. These actions, including the action against QuickLogic, havebeen coordinated for pretrial purposes and captioned *In re Initial Public Offering Securities Litigation, 21 MC 92*.In June 2004, a stipulation of settlement and release of claims against theissuer defendants, including QuickLogic, had been signed and was submitted tothe court for approval. On August 31, 2005, the court preliminarilyapproved the settlement. In December 2006, the appellate court overturned thecertification of classes

19

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

in the six test casesthat were selected by the underwriter defendants and plaintiffs in thecoordinated proceedings. Because class certification was a condition of thesettlement, it was unlikely that the settlement would receive final Courtapproval. On June 25, 2007, the Court entered an order terminating the proposedsettlement based upon a stipulation among the parties to the settlement.Plaintiffs have indicated that they will seek to amend their allegations and fileamended complaints. It is uncertain whether there will be any revised or futurecomplaints. If a settlement does not occur and litigation against QuickLogiccontinues, the Company intends to defend the case vigorously.

On November 2,2006 and November 29, 2006, purported shareholder derivative complaintswere filed against certain of the Company's current and former officers anddirectors in the U.S. District Court for the Northern District of California.The complaints alleged that the individual defendants had violated the federalsecurities laws and breached their duties to the Company in connection with thegranting and/or receipt of options for Company stock. The complaints named theCompany as a nominal defendant and sought unspecified monetary damages againstthe individual defendants as well as various forms of injunctive relief. OnAugust 7, 2007, the parties submitted to the Court a stipulation andproposed order to dismiss the case in its entirety and without prejudice.

No estimate can bemade of the possible loss or possible range of loss associated with theresolution of these contingencies and, accordingly, the Company has notrecorded a liability.

From time to time,the Company is involved in legal actions arising in the ordinary course ofbusiness, including but not limited to intellectual property infringement andcollection matters. Absolute assurance cannot be given that third partyassertions will be resolved without costly litigation in a manner that is notadverse to the Company’s financial position, results of operations or cashflows or without requiring royalty or other payments in the future which mayadversely impact gross profit.

20

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**QUICKLOGICCORPORATIONNOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations**

*Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations, as well as information contained in “Risk Factors” inPart II, Item 1A and elsewhere in this Quarterly Report on Form 10-Q,contains “forward-looking statements” within the meaning of Section 27A ofthe Securities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended. We intend that these forward-lookingstatements be subject to the safe harbors created by those provisions.Forward-looking statements are generally written in the future tense and/or arepreceded by words such as “will,” “may,” “should,” “forecast,” “could,” “expect,”“suggest,” “believe,” “anticipate,” “intend,” “plan” or other similar words.Forward-looking statements include statements (1) regarding our revenuelevels, including the commercial success of our new products, (2) ourgross profit and factors that affect gross profit, (3) our level of operatingexpenses, (4) our research and development efforts, (5) our liquidity, (6) ourpartners and suppliers and (7) industry trends. The following discussion shouldbe read in conjunction with the attached condensed unaudited consolidatedfinancial statements and notes thereto, and with our audited consolidatedfinancial statements and notes thereto for the fiscal year endedDecember 31, 2006, found in our Annual Report on Form 10-K filed withthe Securities and Exchange Commission, or SEC, on March 15, 2007 and withour condensed unaudited consolidated financial statements and notes thereto forthe quarter ended April, 1 2007 found in our Quarterly Report on Form 10-Qfiled with the SEC on May 10, 2007.*

*Theforward-looking statements contained in this Quarterly Report involve a numberof risks and uncertainties, many of which are outside of our control. Factors thatcould cause actual results to differ materially from projected results include,but are not limited to, risks associated with (1) the commercial and technicalsuccess of our new products such as ArcticLinkTM, PolarProTM, EclipseTM II andQuickPCI**® II,(2) our successful introduction of products and solutions incorporatingemerging technologies or standards, (3) limited visibility into demand for ourproducts including demand from significant customers or for new products, (4)the liquidity required to support our future operating and capitalrequirements, (5) our ability to accurately estimate quarterly revenue and (6)our dependence upon single suppliers to fabricate and assemble our products.Although we believe that the assumptions underlying the forward-lookingstatements contained in this Quarterly Report are reasonable, any of theassumptions could be inaccurate, and therefore there can be no assurance thatsuch statements will be accurate. The risks, uncertainties and assumptionsreferred to above that could cause our results to differ materially from theresults expressed or implied by such forward-looking statements include, butare not limited to, those discussed under the heading “Risk Factors” in PartII, Item 1A hereto and the risks, uncertainties and assumptions discussed fromtime to time in our other public filings and public announcements. Allforward-looking statements included in this document are based on informationavailable to us as of the date hereof. In light of the significant uncertaintiesinherent in the forward-looking statements included herein, the inclusion ofsuch information should not be regarded as a representation by us or any otherperson that the results or conditions described in such statements or ourobjectives and plans will be achieved. Furthermore, past performance inoperations and share price is not necessarily indicative of future performance.We disclaim any intention or obligation to update or revise any forward-lookingstatements, whether as a result of new information, future events or otherwise.*

**Overview**

We develop andmarket low power programmable solutions that enable customers to add featuresto their mobile, consumer and industrial products. We are a fablesssemiconductor company that operates in a single industry segment where wedesign and sell Customer Specific Standard Products, or CSSPs, EmbeddedStandard Products, or ESPs, Field Programmable Gate Arrays, or FPGAs,associated design software and programming hardware. CSSPs implement customerspecific solutions as a standard product. Our ESP and FPGA devices are alsostandard products that can be programmed to perform desired logic functions. In1991, we introduced our first FPGA products based upon our ViaLink® technology. We believe that the underlyingattributes of our ViaLink technology, including low power consumption, highreliability, design security and design efficiency, enable us to deliverdifferentiated silicon solutions to our customers.

Consumer productsare the new driver for semiconductor sales, and the needs of the consumermarket bring a unique set of requirements as compared to traditional FPGAmarkets. One important trend in the consumer market is towards mobile,hand-held devices. Important industry trends affecting this market includeminiaturization and the need to increase battery life. An equally importanttrend is shrinking product life cycles, which drives a need for faster, lowerrisk product development. And of course, there is intense pressure on the totalproduct cost, including per unit component costs and non-recurring developmentexpenses. As more people experience the advantages of a mobile lifestyle athome, they demand the same advantages in their professional lives. Therefore,we believe that

21

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations — (Continued)**

these trends towardmobile, hand-held products which have a small form factor and maximize batterylife will also be evident in the industrial, medical and military markets.

We market a range of solutions to our customers,including:

·                  *Customer Specific Standard Products*, orCSSPs*,* incorporating our devices,intellectual property, or IP, and software drivers. These complete solutionsare targeted at specific low power application segments that have similarconnectivity and performance requirements. In addition, the remainingprogrammable fabric can be utilized to address the customer’s specificrequirements. By providing customized solutions for customers we increase theirability to meet the time-to-market pressures associated with their markets;

·                  *EmbeddedStandard Products*, or ESPs,**incorporatinga fixed function along with programmable logic in a low power device. Ourcustomers build on this “known good starting point” to develop unique solutionsrequired for their products, which eliminates the need to acquire and assembleindustry standard IP, thus reducing design risk and improving time-to-market;and

·                  *FieldProgrammable Gate Arrays*, or FPGAs*,*which are general purpose FPGAs used by customers who value the lowpower consumption, high IP security, instant on and reliability of our devices.

This range of solutions allows customers to acquire a solution tailoredfor their needs. Mobile product original design manufacturers, or ODMs, tend toprefer a complete solution, and purchase CSSPs. Other customers, such as aEuropean cellular data card manufacturer, choose our ESP solutions, whilemilitary and gaming customers tend to prefer FPGAs.

Whether a customeruses our CSSPs as a complete solution, our ESPs as a “known good starting point”in their design, or our FPGAs as a “blank slate” to design their uniqueapplication, we believe our solutions and products enable system manufacturersto improve their time-to-market, lower total system power consumption and addfeatures or performance to their embedded applications. In addition, we believethat our products and solutions provide our customers with the lowest powerconsumption and highest IP security of all full featured FPGAs.

Our patented ViaLink metal-to-metal programmabletechnology is the foundation of our competitive advantage in providing energyefficient devices and solutions that deliver high performance, highreliability, IP security and instant on features that our customers value. OurViaLink technology allows us to create devices smaller than competitors’products on comparable technology, thereby minimizing silicon area and cost. Inaddition, our ViaLink technology has lower electrical resistance andcapacitance than other programmable technologies and, consequently, supportshigher signal speed and low power consumption. Our architecture uses ourViaLink technology to maximize interconnects at every routing wireintersection, which allows more paths between logic cells. As a result, systemdesigners are able to use our devices with smaller gate counts to implementtheir designs than if they had used competing FPGAs. The abundance ofinterconnect resources also provides a dense connection between the applicationspecific standard product, or ASSP, and the FPGA portions of CSSPs and ESPs.

Our CSSPs provide:

·                  *ProvenSystem Solutions –* out-of-the-box solutions based on industrystandard interfaces and intellectual property along with proven software anddrivers;

·                  *Flexibility*– solutions can be combined as required to meet a customer’s specific needs;

·                  *SmallForm Factor* – single chip solutions in packages as small as 6x6millimeters;

·                  *InstantOn* – live at power up because ViaLink based products require noconfiguration bit stream;

·                  *HighReliability* –ViaLink based products do not rely on an SRAM cell thatis susceptible to alpha particles, or brownouts, to define and maintain theirfunctionality; and

·                  *UnmatchedIP Security* –it is virtually impossible to clone or reverse engineerdesigns implemented using our ViaLink technology.

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — (Continued)**

Our PolarProarchitecture builds on our low power Eclipse II architecture to provide lowerpower consumption and a more cost effective device. All PolarPro devicesinclude the new and innovative Very Low Power, or VLP, mode, power awareplacement and glitch free clock gating. Based on our engineering analysis ofportable media player applications, we believe designers using PolarPro canextend battery life by as much as four times as compared to a standard productimplementation, setting a new standard for low power consumption through theuse of programmable logic.

We announced ourfirst Solution Platform product offering, ArcticLink, in March 2007 andreleased the product to production in July 2007. Our Solution Platforms combinehard-wired logic and programmable fabric on one device. Adding hard-wiredintellectual property enables us to deliver more logic, while the programmablefabric allows us to provide CSSPs that can be rapidly customized todifferentiate products, add features and reduce system development costs. Thiscombination of hard-wired and programmable fabric enables us to deliver low cost,small form factor solutions that can be customized for particular customer ormarket requirements. The high routing density and flexibility of our ViaLinktechnology is critical to the efficient interface between the hard-wired logicand the programmable fabric.

The low powerconsumption, high performance, small form factor and fast time-to-market of oursolutions are ideal for power sensitive mobile applications that need toefficiently integrate storage, networking and/or graphics capabilities. These productsare being designed into applications for markets and customers that are new tous. Examples of how our new customers have utilized our new products are:

·                  s*martphones*– where our solutions enable the simultaneous display of video on the handsetand an external display;

·                  *portablenavigation products –* where our solutions allow the incorporation ofthe latest storage technology, managed NAND flash memory, and access to thelatest high capacity SD cards and Secure/Digital Input/Output, or SDIO, based peripherals;

·                  *portablemedia players* – where our solutions allow a processor to access andefficiently control a micro hard disk drive;

·                  *cellulardata cards* – where our solutions provide the lowest power interfacebetween a cellular radio and a laptop card slot; and

·                  *handheldpoint-of-sale, or POS, terminals* – where our solutions enable highspeed connectivity to Wi-Fi and BlueTooth chipsets as well as storageconnectivity*.*

Our new productsare also being designed into applications in our traditional markets, such asdata communications, instrumentation and test and military-aerospace, wherecustomers value the low power consumption, instant-on, IP security, reliabilityand fast time-to-market of our products.

In addition toworking directly with our customers, we partner with other technology companiesto develop additional intellectual property, reference platforms and systemsoftware to provide application solutions. We work with processormanufacturers, such as Marvell Technology Group Ltd. and Analog Devices, Inc.,and companies that supply storage, networking or graphics components forembedded systems. The depth of these relationships varies depending on thepartner and the dynamics of the end market being targeted, but is typically aco-marketing program that includes joint account calls, promotional activitiesand/or engineering collaboration, such as reference designs.

We sell programmedand unprogrammed products through distributors and directly to originalequipment manufacturers, or OEMs. We recognize revenue at the time of shipmentof products directly to system manufacturers. However, we sell the majority ofour products through distributors who earn a negotiated margin on the sale ofour products. We defer recognition of revenue from sales of unprogrammedproducts to distributors until after they have sold our products to systemsmanufacturers. We recognize revenue on programmed products at the time ofshipment to our distributors. During the first half of 2007 and 2006,approximately 60% and 51%, respectively, of the units shipped to ourdistributors were programmed by us and, accordingly, are not returnable. Thepercentage of sales derived through distributors was 60% and 57% in the firsthalf of 2007 and 2006, respectively.

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**Item 2.  Management’s Discussion and Analysis ofFinancial Condition and Results of Operations — (Continued)**

The followingdistributors and customers accounted for 10% or more of the Company’s revenuefor the periods presented:
| ** **                         | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                         | ** ** | **July 1, 2007**       | ** ** | **July 2, 2006**     | ** ** | **July 1, 2007** | ** ** | **July 2, 2006** | ** ** |
| Distributor “A”          |       | 20                               | %          | 23                             | %          | 20 | % | 28 | % |
| Distributor “B”          |       | 18                               | %          | 12                             | %          | 18 | % | 13 | % |
| Customer “A” –  OEM |       | 12                               | %          | *                              |       | 12 | % | * |   |
| Customer “B” –  OEM |       | 11                               | %          | 12                             | %          | 12 | % | 12 | % |
| Customer “C” – OEM  |       | *                                |       | 19                             | %          | * |   | 12 | % |

 

We anticipate thata limited number of distributors and customers will continue to account for asignificant portion of our revenue and that individual distributors andcustomers could account for a larger portion of our revenue.

Our internationalsales were 53% and 57% of our revenue in the first half of 2007 and 2006,respectively. We expect that revenue from sales to international customers willcontinue to represent a significant portion of our revenue. All of our salesoriginate in the United States and are denominated in U.S. dollars.

We outsource thewafer manufacturing, assembly and testing of all of our products. We currentlyrely upon Taiwan Semiconductor Manufacturing Company Ltd., or TSMC, Tower,Kawasaki Microelectronics, Inc. and Samsung Semiconductor, Inc. to manufactureour products, and we rely primarily upon Amkor Technology, Inc. toassemble, test and program our products. Our wafer suppliers’ lead times areoften as long as three months and sometimes longer. In addition, Tower requiresus to provide them with a monthly wafer start forecast. Under the terms of ouragreement with them, we are limited in the quantity that we can increase ordecrease our wafer forecast and we are committed to take delivery of and payfor a minimum portion of the forecasted wafer volume. Our long manufacturingcycle times are at odds with our customers’ desire for short delivery leadtimes and, as a result, we typically purchase wafers based on our internalforecasts of customer demand.

**CriticalAccounting Policies and Estimates**

The methods,estimates and judgments we use in applying our most critical accountingpolicies have a significant impact on the results we report in our consolidatedfinancial statements. The SEC has defined critical accounting policies as thosethat are most important to the portrayal of our financial condition and resultsof operations and require us to make our most difficult and subjectivejudgments, often as a result of the need to make estimates of matters thatare inherently uncertain. Based on this definition, our critical policiesinclude revenue recognition including sales returns and allowances, inventoryvaluation including identification of excess quantities, market value andproduct obsolescence, allowance for doubtful accounts, valuation ofinvestments, valuation of long-lived assets, measurement of stock-basedcompensation, accounting for income taxes, and estimating accrued liabilities.We believe that we apply judgments and estimates in a consistent manner andthat such consistent application results in consolidated financial statementsand accompanying notes that fairly represent all periods presented. However,any factual errors or errors in these judgments and estimates may have amaterial impact on our statement of operations and financial condition.**For a discussion of critical accounting policies andestimates, please see Item 7 in our Annual Report on Form 10-K for thefiscal year ended December 31, 2006 filed with the SEC on March 15,2007, and Item 2 of our Quarterly Report on Form 10-Q for the fiscal quarterended April 1, 2007, filed with the SEC on May 10, 2007.

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**Item 2. Management’s Discussion and Analysis of Financial Condition and Resultsof Operations — (Continued)**

**Results ofOperations**

The following table setsforth the percentage of revenue for certain items in our statements ofoperations for the periods indicated:
| ** **                          | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                          | ** ** | **July 1, 2007**       | ** ** | **July 2, 2006**     | ** ** | **July 1, 2007** | ** ** | **July 2, 2006** | ** ** |
| Revenue                             |       | 100.0                            | %          | 100.0                          | %          | 100.0 | % | 100.0 | % |
| Cost of revenue (1)                 |       | 47.3                             |       | 45.6                           |       | 64.0 |   | 43.0 |   |
| Gross profit                        |       | 52.7                             |       | 54.4                           |       | 36.0 |   | 57.0 |   |
| Operating  expenses:                |       |                             |       |                           |       |   |   |   |   |
| Research and development            |       | 27.8                             |       | 25.5                           |       | 31.6 |   | 25.6 |   |
| Selling, general and administrative |       | 52.2                             |       | 49.7                           |       | 61.3 |   | 49.6 |   |
| Loss from  operations               |       | (27.3                            | )          | (20.8                          | )          | (56.9 | ) | (18.2 | ) |
| Interest expense                    |       | (0.9                             | )          | (1.1                           | )          | (1.1 | ) | (0.9 | ) |
| Interest income  and other, net     |       | 3.8                              |       | 3.7                            |       | 3.9 |   | 3.4 |   |
| Loss before  income taxes           |       | (24.4                            | )          | (18.2                          | )          | (54.1 | ) | (15.7 | ) |
| Provision for  income taxes         |       | 0.3                              |       | 0.2                            |       | 0.3 |   | 0.1 |   |
| Net loss                            |       | (24.7                            | )%         | (18.4                          | )%         | (54.4 | )% | (15.8 | )% |

 
| ** **                       | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|----------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                       | ** ** | **July 1, 2007**       | ** ** | **July 2, 2006**     | ** ** | **July 1, 2007** | ** ** | **July 2, 2006** | ** ** |
| *Revenue  by product line*(2)*:* | * *   | * *                         | * *   | * *                       | * *   | * * | * * | * * | * * |
| New products                     |       | $                                | 1,134      |                           | $          | 2,283 |   | $ | 1,982 |   | $ | 3,371 |   |
| Mature products                  |       | 4,983                            |       | 5,113                          |       | 8,914 |   | 10,267 |   |
| End-of-life products             |       | 2,288                            |       | 1,853                          |       | 3,751 |   | 4,944 |   |
| Total revenue                    |       | $                                | 8,405      |                           | $          | 9,249 |   | $ | 14,647 |   | $ | 18,582 |   |

 

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(1)          The second quarter of2007 and 2006 include $759,000  and$238,000 of costs for inventory write-down and related charges, which represent9.0% and 2.6% of revenue, respectively. The first half of 2007 and 2006 include$3.2 million and $470,000 of costs for inventory write-down and relatedcharges, which represent 22.0% and 2.5% of revenue, respectively.

(2)          New products includeArcticLink, PolarPro, Eclipse II, QuickPCI II and QuickMIPS products. Matureproducts include pASIC® 3, QuickRAM, Eclipse, QuickPCI, QuickDSP andQuickFC products, as well as royalty revenue, programming hardware and designsoftware. End-of-life products include pASIC 1, pASIC 2 and V3 products.

**Three Months Ended July 1, 2007 and July 2, 2006**

*Revenue.*  Ourrevenue for the second quarter of 2007 was $8.4 million, representing adecline of $844,000, or 9.1%, from revenue of $9.2 million in the secondquarter of 2006. Our new product revenue declined by $1.1 million compared tothe second quarter of 2006. In the second quarter of 2006, a single endcustomer, purchasing our Eclipse II devices through a contract manufacturer,represented a significant portion of our new product revenue. This customerrepresented $1.7 million of revenue in the second quarter of 2006 and, due tothe late stage of their product life cycle, only represented $20,000 of revenuein the second quarter of 2007. Our mature product revenue declined by $130,000as a result of lower customer demand for pASIC 3 and QuickRAM products. Thesedecreases are partially offset by a $430,000 increase in our end-of-lifeproduct revenue as result of the V3 product end-of-life announced in January2007.

Our revenue forthe second quarter of 2007 was 34.7% higher sequentially, increasing by $2.2million to $8.4 million from $6.2 million in the first quarter of2007. This sequential revenue increase was primarily due to: 1) a $1.1 millionincrease in mature product revenue as a result of an increase in our pASIC 3,Eclipse, QuickRAM, and QuickPCI revenue; 2) a $820,000 increase in end-of-lifeproduct revenue due to higher demand as a result of the January 2007announcement of our V3 product end-of-life; and 3) a $290,000 increase in newproduct revenue due primarily to an increase in demand for our QuickMIPSproduct.

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations — (Continued)**

Our decision to end-of-life our pASIC 1, pASIC 2 andV3 products has been driven by our suppliers. Our foundry agreement with thesupplier that fabricated our pASIC 1 and pASIC 2 products expired atthe end of 2005, and we announced an end-of-life for these products in 2004.These products contributed $560,000 and $1.1 million of our revenue in thesecond quarter of 2007 and 2006, respectively. We have no further manufacturingcapacity for these products and any future revenue is limited to inventory onhand.

In January 2007,we announced the end-of-life for our V3 products, primarily due to the loss ofmanufacturing capacity for these products, and asked our customers to takedelivery of lifetime buy orders before the end of 2007. These productscontributed $1.7 million and $720,000 of revenue in the second quarter of 2007and 2006, respectively. Due to the nature of end-of-life purchases, revenuelevels from these products could fluctuate up or down significantly on asequential basis.  After 2007, we expectthat end-of-life products will contribute less than five percent of quarterlyrevenue.

In order to growour revenue from its current level, we are dependent upon increased revenuefrom our existing products, especially our new ArcticLink, PolarPro,Eclipse II and QuickPCI II products, and the development of additionalnew products and solutions.

We continue toseek to expand our revenue, including the pursuit of high volume salesopportunities in the consumer market segment, by providing CSSPs incorporatingindustry standard interfaces such as Universal Serial Bus 2.0 On-the-Go, or USB2.0 OTG, SDIO and Integrated Drive Electronics, or IDE. Our industry ischaracterized by intense price competition and by lower prices as order volumesincrease. While winning large volume sales opportunities will increase ourrevenue, we believe these opportunities may decrease our average selling priceand gross profit as a percentage of revenue.

*GrossProfit*.  Gross profit was $4.4 million and$5.0 million in the second quarter of 2007 and 2006, respectively, whichrepresented 52.7% and 54.4% of revenue for those periods. The$598,000 decline in gross profit was primarily due to a $580,000 reductionin gross profit associated with lower revenue and a $520,000 increase ininventory write-downs, partially offset by favorable product mix and othercosts.

*Researchand Development Expense.*  Research and developmentexpense was $2.3 million and $2.4 million in the second quarter of2007 and 2006, respectively, which represented 27.8% and 25.5% of revenue forthose periods. The decrease of approximately $20,000 was primarily a result oflower compensation expenses. We believe that continued or increased investmentsin product development and process technology are essential for us to remaincompetitive in the markets we serve. We expect that these development effortswill allow us to expand our product and solution offerings, increase ourrevenue and provide additional value to our customers and stockholders.

*Selling,General and Administrative Expense.*   Selling,general and administrative expense was $4.4 million and $4.6 millionfor the second quarter of 2007 and 2006, respectively, which represented 52.2%and 49.7% of revenue for those periods. The decrease of approximately $210,000in selling, general and administrative expense was primarily due to lowercommissions to independent sales representatives as a result of lower revenueand lower legal expense, partially offset by higher bad debt expense andcompensation expenses for new marketing and administrative employees.

*InterestExpense.*  Interest expense decreased to $72,000 forthe second quarter of 2007 as compared to $96,000 for the second quarter of2006. This $24,000 decrease was primarily due to lower outstanding debtand capital lease balances.

*InterestIncome and Other, Net.*  Interest income and other,net decreased to $317,000 of income for the second quarter of 2007 as comparedto $341,000 of income for the second quarter of 2006. The $24,000 decrease ininterest income and other, net is primarily due to decreased interest incomereceived as a result of lower invested cash balances, partially offset by a$95,000 gain on the sale of test equipment.

*Provision for Income Taxes.*  Forthe second quarter of 2007, we incurred a net loss of $2.1 million andrecorded a provision for income taxes of $27,000, which consisted of income taxes on foreign operations. For the secondquarter of 2006, we incurred a net loss of $1.7 million and recorded aprovision for income taxes of $21,000,

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations — (Continued)**

whichconsisted of income taxes on foreign operations. Our ability to utilizeour income tax loss carryforwards in future periods is uncertain and,accordingly, we recorded a full valuation allowance against the related taxbenefit. We will continue to assess the realizability of the deferred taxassets in future periods.

*Stock-BasedCompensation.*  Forthe second quarter of 2007 and 2006, stock-based compensation totaled $428,000and $403,000, respectively, and was included in the statement of operations asfollows (in thousands):
| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **July 1, 2007**       | ** ** | **July 2, 2006** | ** ** |
|                                 |       |                             |       |   |   |
| Cost of revenue                      |       | $                                | 54         |   | $ | 53 |   |
| Research and  development            |       | 94                               |       | 118 |   |
| Selling, general  and administrative |       | 280                              |       | 232 |   |
| Total                                |       | $                                | 428        |   | $ | 403 |   |

 

**Six Months Ended July 1, 2007 and July 2, 2006**

*Revenue.*  Ourrevenue for the first half of 2007 was $14.6 million, representing adecline of $3.9 million, or 21.2%, from revenue of $18.6 million forthe first half of 2006. Our new product revenue declined by $1.4 million due toa $2.3 million decline in revenue from one customer as result of the late stageof its product life cycle, as discussed above, partially offset by revenuegrowth from other customers. Our mature product revenue declined by $1.4million as a result of lower customer demand for our pASIC 3 and QuickRAMproducts. Our end-of-life product revenue declined by $1.2 million as result ofa $2.3 million decrease in our pASIC 1 and pASIC 2 revenue, partially offset byan increase in V3 product revenue of $1.1 million due to higher demand as aresult of their announced end-of-life in January 2007.

*GrossProfit*.  Gross profit was $5.3 million and$10.6 million in the first half of 2007 and 2006, respectively, whichrepresented 36.0% and 57.0% of revenue for those periods. The $5.3million decline in gross profit was primarily due to: 1) increasedinventory write-down of $2.8 million, primarily for excess quantities as aresult of a change in forecasted product mix; 2) lower revenue and overheadabsorption, which contributed $2.0 million; and 3) $380,000 lower benefit fromthe sale of previously reserved inventory.

*Researchand Development Expense.*  Research and developmentexpense was $4.6 million and $4.8 million for the first half of 2007 and 2006,respectively, which represented 31.6% and 25.6% of revenue for those periods,respectively. The decrease of approximately $130,000 was primarily a result oflower compensation expenses due to lower payroll and stock-based compensationexpenses.

*Selling,General and Administrative Expense.*  Selling,general and administrative expense was $9.0 million and $9.2 millionfor the first half of 2007 and 2006, respectively, which represented 61.3% and49.6% of revenue for those periods. The primary reason for the increase inselling, general and administrative expense as a percentage of revenue was dueto lower revenue in the first half of 2007 as compared to the first half of2006. The $230,000 decline in selling, general and administrative expense wasprimarily the result of lower legal expense and sales commissions paid toindependent sales representatives, partially offset by higher compensation expensesfor new marketing and administrative personnel.

*InterestExpense.*  Interest expense declined to $157,000 forthe first half of 2007 as compared to $170,000 for the first half of2006. This $13,000 decline was primarily due to lower debt and capitallease balances.

*InterestIncome and Other, Net.*  Interest income and other,net declined to $563,000 of income for the first half of 2007 as compared to$633,000 of income for the first half of 2006. The $70,000 decrease in interestincome and other, net is primarily due to lower invested cash balances, partiallyoffset by a gain on the sale of test equipment.

*Provision for Income Taxes.*  Forthe first half of 2007, we incurred a net loss of $8.0 million and recorded aprovision for income taxes of $42,000, which consisted of income taxes onforeign operations. For the first half of 2006, we incurred a net loss of$2.9 million and recorded a provision for income taxes of $23,000, which consisted of income taxes on foreignoperations. Our ability to utilize our income tax loss carryforwards infuture periods is

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**Item2.  Management’s Discussion and Analysisof Financial Condition and Results of Operations — (Continued)**

uncertain and,accordingly, we recorded a full valuation allowance against the related taxbenefit. We will continue to assess the realizability of the deferred taxassets in future periods.

*Stock-BasedCompensation.*  Forthe first half of 2007 and 2006, stock-based compensation totaled $809,000 and$855,000, respectively, and was included in the statement of operations asfollows (in thousands):
| ** **                           | ** ** | **Six months Ended** | ** ** |
|--------------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **July 1, 2007**     | ** ** | **July 2, 2006** | ** ** |
|                                 |       |                           |       |   |   |
| Cost of revenue                      |       | $                              | 109        |   | $ | 102 |   |
| Research and  development            |       | 179                            |       | 264 |   |
| Selling, general  and administrative |       | 521                            |       | 489 |   |
| Total                                |       | $                              | 809        |   | $ | 855 |   |

 

**Liquidityand Capital Resources**

We have financedour operating losses and capital investments through sales of common stock,private equity investments, capital and operating leases, bank lines of creditand cash flow from operations. As of July 1, 2007, our principal sources ofliquidity consisted of our cash and cash equivalents of $19.8 million,available credit under our revolving line of credit with Silicon Valley Bank ofapproximately $5.0 million, available credit under our equipment line ofcredit of approximately $2.5 million, and our investment in Tower with a marketvalue of approximately $1.9 million.

As of July 1,2007, our interest-bearing debt consisted of $2.3 million outstanding fromSilicon Valley Bank and $852,000 outstanding under capital leases. As of July1, 2007, our accumulated deficit was $135.5 million. Capital expenditures,which are largely driven by the development of new products and manufacturinglevels, could be up to $5.5 million in the next twelve months.

In June 2006, weentered into a Second Amended and Restated Loan and Security Agreement withSilicon Valley Bank. Terms of the agreement included a $5.0 million revolvingline of credit that is available through June 2008 and an additional $2.0million of borrowing capacity under an equipment line of credit that isavailable to be drawn against through June 2007. Advances under the equipmentline of credit are repaid in either 30 or 36 equal monthly installments,depending upon the nature of the items financed. The agreement was amended inJune 2007 to include an additional $2.5 million of borrowing capacity under theequipment line of credit that is available to be drawn against through June2008. Future advances against the equipment line of credit will be repaid in 36equal monthly installments. As of July 1, 2007, we had no balances outstandingunder the revolving line of credit, $2.3 million outstanding under thecurrent and previous equipment lines of credit and $2.5 million available to bedrawn against future equipment purchases. The bank has a first prioritysecurity interest on substantially all of our tangible and intangible assets tosecure any outstanding amounts under the agreement. Under the terms of theagreement, we must maintain a minimum tangible net worth and an adjusted quickratio. The agreement also has certain restrictions including, among others, theincurrence of other indebtedness, the maintenance of depository accounts, thedisposition of assets, mergers, acquisitions, the granting of liens and thepayment of dividends. We were in compliance with all loan covenants as of July1, 2007.

*Net cashfrom operating activities*

Net cash used foroperating activities was $4.3 million for the first half of 2007. The cashused for operating activities resulted primarily from a net loss of$8.0 million, adjusted for $6.1 million of non-cash charges includinginventory write-downs of $3.2 million, depreciation and amortization of $1.6million, stock-based compensation of $809,000, decrease in wafer credits of$454,000 and bad debt reserves of $153,000. In addition, changes in workingcapital accounts used cash in the amount of $2.5 million primarily as a resultof a $2.6 million decrease in accounts payable due to timing of inventorypurchases and expenditures, a $254,000 decrease in accrued liabilities and a$108,000 decrease in deferred income and royalty revenue due primarily toroyalty revenue recognized under the Aeroflex agreement. These uses of cashwere partially offset by a $245,000 decrease in prepaid expenses and a $220,000decrease in inventory.

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**Item 2.****           Management’s Discussionand Analysis of Financial Condition and Results of Operations — (Continued)**

Net cash providedby operating activities was $830,000 for the first half of 2006. The cashprovided by operating activities resulted primarily from a net loss of$2.9 million, adjusted for $2.9 million of non-cash charges includingdepreciation and amortization of $1.5 million, stock-based compensation of$855,000 and inventory write-downs of $470,000. In addition, changes in workingcapital accounts provided cash in the amount of $836,000 primarily due to a$1.0 million decrease in accounts receivable resulting from a reduction inrevenue levels and the timing of shipments in the period, a $468,000 increasein accounts payable due to the timing of purchases and payments in the periodand a $191,000 decrease in other assets due to the amortization of prepaidexpenses.  These sources of cash werepartially offset by a $748,000 decrease in accrued liabilities.

*Net cashfrom investing activities*

Netcash used for investing activities for the first half of 2007 and 2006 was$450,000 and $1.2 million, respectively, as a result of capital expendituresmade primarily to acquire equipment and software used in the development andproduction of our products.

*Net cash from financing activities*

Net cash used forfinancing activities was $9,000 for the first half of 2007, resulting fromscheduled payments of $1.2 million under the terms of our debt and capitallease obligations, partially offset by $772,000 in proceeds related to theissuance of common shares to employees under our equity plans and $442,000 inproceeds from borrowings under our equipment line of credit.

Net cash providedby financing activities was $2.2 million for the first half of 2006,resulting from $2.5 million in proceeds related to the issuance of commonshares to employees under our equity plans and $932,000 in proceeds fromborrowings under our equipment line of credit, partially offset by scheduledrepayments of $1.2 million under the terms of our debt and capital leaseobligations.

We requiresubstantial cash to fund our business, particularly to finance our operations,to acquire property and equipment, the repayment of debt and for workingcapital requirements. Our future liquidity will depend on many factors such asthese, as well as our level of revenue and gross profit, market acceptance ofour existing and new products, the decline in revenue under end-of-lifeprograms, wafer purchase commitments, the amount and timing of research and developmentexpenditures, the timing of new product introductions, production volumes, thequality of our products, sales and marketing efforts, our ability to obtaindebt financing and to remain in compliance with the terms of our creditfacilities, our ability to raise funds from the sale of Tower shares and equityin the Company, the exercise of employee stock options and participation in ouremployee stock purchase plan, and other factors related to the uncertainties ofthe industry and global economics. However, we believe that our existing cashresources will be sufficient to fund operations, capital expenditures of up to$5.5 million, and provide adequate working capital for at least the nexttwelve months. As our liquidity is affected by many factors as mentioned aboveand as discussed in our “Risk Factors,” there can be no assurance that we willnot seek additional capital during the next twelve months or that such capitalwill be available on terms acceptable to us. After the next twelve months,our cash requirements will depend on many factors, including our level ofrevenue and gross profit, the market acceptance of our new products, the levelsat which we maintain inventory and accounts receivable, costs of securingaccess to adequate manufacturing capacity, new product development efforts,capital expenditures and the level of our operating expenses.

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**Item 2.****           Management’s Discussionand Analysis of Financial Condition and Results of Operations — (Continued)**

**ContractualObligations and Commercial Commitments**

The following tablesummarizes our contractual obligations and commercial commitments as of July 1,2007 and the effect such obligations and commitments are expected to have onour liquidity and cash flows in future fiscal periods (in thousands):
| ** **                                                | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1-3  Years** | ** ** | **More than  3 Years** | ** ** |
|                                                      |       |                                      |       |   |   |   |   |   |   |
| *Contractual  cash obligations:*                          |       |                                      |       |   |   |   |   |   |   |
| Operating leases                                          |       | $                                         | 1,441      |   | $ | 750 |   | $ | 691 |   | $ | — |   |
| Wafer purchases (1)                                       |       | 3,496                                     |       | 3,496 |   | — |   | — |   |
| Other purchase commitments                                |       | 2,089                                     |       | 1,962 |   | 127 |   | — |   |
| Total contractual cash obligations                        |       | 7,026                                     |       | 6,208 |   | 818 |   | — |   |
|                                                      |       |                                      |       |   |   |   |   |   |   |
| *Other  commercial commitments*(2)*:*                     | * *   | * *                                  | * *   | * * | * * | * * | * * | * * | * * |
| Notes payable to bank                                     |       | 2,277                                     |       | 1,140 |   | 1,137 |   | — |   |
| Capital lease obligations                                 |       | 852                                       |       | 685 |   | 167 |   | — |   |
| Total commercial commitments                              |       | 3,129                                     |       | 1,825 |   | 1,304 |   | — |   |
| Total  contractual obligations and commercial commitments |       | $                                         | 10,155     |   | $ | 8,033 |   | $ | 2,122 |   | $ | — |   |

 

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(1)       Certainof our wafer manufacturers require us to forecast wafer starts several monthsin advance. We are committed to take delivery of and pay for a portion offorecasted wafer volume. Wafer purchase commitments of $3.5 millioninclude both firm purchase commitments and a portion of our forecasted waferstarts as of July 1, 2007.

(2)          Othercommercial commitments are included as liabilities on our balance sheet as ofJuly 1, 2007.

**Inflation**

Theimpact of inflation on our business has not been material for the periodspresented.

**Off-Balance Sheet Arrangements**

We do not maintainany off-balance sheet partnerships, arrangements or other relationships withunconsolidated entities or others, often referred to as structured finance orspecial purpose entities, which are established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limited purposes.

**Recently Issued AccountingPronouncements**

In September 2006,the Financial Accounting Standards Board, or FASB, issued Statement ofFinancial Accounting Standards No. 157, *“FairValue Measurements,”* or SFAS 157. SFAS 157 establishes a frameworkfor measuring fair value, and expands disclosures about fair valuemeasurements. The changes to current practice resulting from the application ofSFAS 157 relate to the definition of fair value, the methods used to measurefair value and expanded disclosures about fair value measurements. SFAS 157 iseffective for fiscal years beginning after November 15, 2007 and interimperiods within those fiscal years. We are currently evaluating the impact thatSFAS 157 will have on our consolidated financial statements.

In February 2007,the FASB issued Statement of Financial Accounting Standards No. 159, *“The Fair Value Option for Financial Assets andFinancial Liabilities,*” or SFAS 159. SFAS 159 permits companies tochoose to measure certain financial instruments and certain other items at fairvalue. The standard requires that unrealized gains and losses on items forwhich the fair value option has been elected be reported in earnings. SFAS 159is effective for fiscal years beginning after November 15, 2007, although earlieradoption is permitted. We are currently evaluating the impact that SFAS 159will have on our consolidated financial statements.

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**Item 3.Quantitative and Qualitative Disclosures about Market Risk**

**InterestRate Risk**

Our exposure tomarket rate risk for changes in interest rates relates primarily to ourinvestment portfolio and variable rate debt. We do not use derivative financialinstruments to manage our interest rate risk. We are adverse to principal lossand ensure the safety and preservation of invested funds by limiting default,market risk and reinvestment risk. Our investment portfolio is generallycomprised of investments that meet high credit quality standards. Since thesesecurities are subject to interest rate risk, they could decline in value ifinterest rates fluctuate. Due to the short duration and conservative nature ofour investment portfolio, we do not anticipate any material loss with respectto our investment portfolio. A 10% move in interest rates as of July 1, 2007would have an immaterial effect on our financial position, results ofoperations and cash flows.

**ForeignCurrency Exchange Rate Risk**

All of our salesand cost of manufacturing are transacted in U.S. dollars. We conduct a portionof our research and development activities in Canada and India and have salesand marketing offices in several locations outside of the United States. We usethe U.S. dollar as our functional currency. Most of the costs incurred at theseinternational locations are in local currency. If these local currenciesstrengthen against the U.S. dollar, our payroll and other local expenses willbe higher than we currently anticipate. Since our sales are transacted in U.S.dollars, this negative impact on expenses would not be offset by any positiveeffect on revenue. Additionally, if the U.S. dollar strengthens against thelocal currency of a foreign country, the price of our products will becomerelatively more expensive to customers in their currency. Operating expensesdenominated in foreign currencies were approximately 23% and 22% of totaloperating expenses for the first half of 2007 and 2006, respectively. Amajority of these foreign expenses were incurred in Canada. A currency exchangerate fluctuation of 10% would have caused our operating expenses to change byapproximately $350,000 in the first half of 2007.

**EquityPrice Risk**

Our exposure toequity price risk for changes in market value relates primarily to ourinvestment in Tower Semiconductor Ltd., or Tower. Tower’s ordinary shares tradeon the Nasdaq Global Market under the symbol “TSEM”. Since these securities arepublicly traded on the open market, they are subject to market fluctuations.Temporary market fluctuations are reflected by increasing or decreasing thepresented value of the related securities and recording “accumulated othercomprehensive income (loss)” in the equity section of the balance sheet. An “otherthan temporary” decline in market value is reflected by decreasing the adjustedcost of the related securities and recording a charge to operating expenses inthe income statement. A market value fluctuation of 10% would have a $190,000impact on accumulated other comprehensive income in the first half of 2007.

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**Item 4.Controls and Procedures**

**Evaluationof Disclosure Controls and Procedures**

Our managementevaluated, with the participation of our Chief Executive Officer and ChiefFinancial Officer, the effectiveness of our disclosure controls and proceduresas of the end of the period covered by this Quarterly Report on Form 10-Q.Based upon that evaluation, our Chief Executive Officer and Chief FinancialOfficer concluded that our disclosure controls and procedures are effective toensure that information we are required to disclose in reports that we file orsubmit under the Securities Exchange Act of 1934, as amended, is(i) recorded, processed, summarized and reported within the time periodsspecified in Securities and Exchange Commission rules and forms and(ii) accumulated and communicated to our management, including our ChiefExecutive Officer and Chief Financial Officer, as appropriate to allow timelydecisions regarding required disclosure. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer concluded that, our currentdisclosure controls and procedures are effective at the reasonable assurancelevel.

**Changesin Internal Control Over Financial Reporting**

There were nochanges in our internal control over financial reporting that occurred duringthe period covered by this Quarterly Report on Form 10-Q that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

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**Part II.Other Information**

**Item 1.Legal Proceedings**

OnOctober 26, 2001, a putative securities class action was filed in the U.S.District Court for the Southern District of New York against certain investmentbanks that underwrote QuickLogic’s initial public offering, QuickLogic and someof QuickLogic’s officers and directors. The complaint alleges excessive andundisclosed commissions in connection with the allocation of shares of commonstock in QuickLogic’s initial and secondary public offerings and artificiallyhigh prices through “tie-in” arrangements which required the underwriters’customers to buy shares in the aftermarket at pre-determined prices inviolation of the federal securities laws. Plaintiffs seek an unspecified amountof damages on behalf of persons who purchased QuickLogic’s stock pursuant tothe registration statements between October 14, 1999 and December 6,2000. Various plaintiffs have filed similar actions asserting virtuallyidentical allegations against over 300 other public companies, theirunderwriters, and their officers and directors arising out of each company’spublic offering. These actions, including the action against QuickLogic, havebeen coordinated for pretrial purposes and captioned *In re Initial Public Offering Securities Litigation, 21 MC 92*.In June 2004, a stipulation of settlement and release of claims against theissuer defendants, including QuickLogic, had been signed and was submitted tothe court for approval. On August 31, 2005, the court preliminarilyapproved the settlement. In December 2006, the appellate court overturned thecertification of classes in the six test cases that were selected by theunderwriter defendants and plaintiffs in the coordinated proceedings. Becauseclass certification was a condition of the settlement, it was unlikely that thesettlement would receive final Court approval. On June 25, 2007, the Courtentered an order terminating the proposed settlement based upon a stipulationamong the parties to the settlement. Plaintiffs have indicated that they willseek to amend their allegations and file amended complaints. It is uncertainwhether there will be any revised or future complaints. If a settlement doesnot occur and litigation against QuickLogic continues, the Company intends todefend the case vigorously.

On November 2,2006 and November 29, 2006, purported shareholder derivative complaintswere filed against certain of the Company's current and former officers anddirectors in the U.S. District Court for the Northern District of California.The complaints alleged that the individual defendants had violated the federalsecurities laws and breached their duties to the Company in connection with thegranting and/or receipt of options for Company stock. The complaints named theCompany as a nominal defendant and sought unspecified monetary damages againstthe individual defendants as well as various forms of injunctive relief. OnAugust 7, 2007, the parties submitted to the Court a stipulation andproposed order to dismiss the case in its entirety and without prejudice.

No estimate can bemade of the possible loss or possible range of loss associated with theresolution of these contingencies and, accordingly, the Company has notrecorded a liability.

From time to time,the Company is involved in legal actions arising in the ordinary course ofbusiness, including but not limited to intellectual property infringement andcollection matters. Absolute assurance cannot be given that third partyassertions will be resolved without costly litigation in a manner that is notadverse to the Company’s financial position, results of operations or cashflows or without requiring royalty or other payments in the future which mayadversely impact gross profit.

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**Item 1A.Risk Factors**

This descriptionincludes any material changes to and supersedes the description of the riskfactors associated with our business previously disclosed in Item 1A of our2006 Annual Report on Form 10-K filed with the SEC on March 15, 2007and our quarterly report on Form 10-Q for the period ended April 1,2007, filed with the SEC on May 10, 2007. Because of the following riskfactors, as well as other variables affecting our operating results, pastfinancial performance may not be a reliable indicator of future performance,and historical trends should not be used to anticipate results or trends infuture periods.

##### **Risk Factors**

# *If we fail to successfully develop,introduce and sell new products, we may be unable to compete effectively in thefuture*

We operate in ahighly competitive, quickly changing environment marked by rapid obsolescenceof existing products. To compete successfully, we must obtain access toadvanced fabrication capacity and dedicate significant resources to specify,design, develop, manufacture and sell new or enhanced products and solutionsthat provide increasingly higher levels of performance, low power consumption,new features, reliability and/or cost savings to our customers. We experience along delay between the time when we expend these product definition anddevelopment resources and invest in related long-lived assets, and the timewhen we begin to generate revenue, if any, from these expenditures.

We are marketingour new products - ArcticLink, PolarPro, Eclipse II and QuickPCI II -to new customers and markets and expect a significant portion of our futurerevenues to be generated from these new products. We believe our new productsand solutions have a compelling advantage in mobile applications, and that thisbusiness will provide long-term revenue growth for QuickLogic, but there is noassurance when this will occur. We have focused the marketing of our newproduct solutions on the market for hand-held, battery powered applicationssuch as portable navigation devices, smartphones, portable media players, datacards and portable industrial products. The market for these mobile devices isdynamic; these markets typically have shorter product life cycles, highervolumes and greater price pressure than our traditional business. We pursuecustomer opportunities in anticipation of future cost reductions and mayaggressively price products to gain market share. In order to react quickly toopportunities or to obtain favorable wafer prices, we make significantinvestments in and commitments to purchase inventory and capital equipmentbefore we have firm commitments from customers. Our gross margin and inventoryvaluation may be affected by these strategies if, for instance, we generatesignificant revenue before we are able to reduce our costs or if an opportunitypriced to gain market share becomes significant to our quarterly revenue.

In addition, the nature of the mobile market and thecustomers that operate in this market may cause revenue to fluctuatesignificantly from quarter to quarter. For example, while our new product revenueincreased in the second and third quarters of 2006, it declined in the fourthquarter of 2006 and first quarter of 2007 due to the product life cycle of asignificant customer for these products. If we are unable to design, produceand sell new solutions and products that meet design specifications, addresscustomer requirements and generate sufficient revenue and gross profit, ifmarket demand for our products fails to materialize, if we are unable to obtainadequate capacity on a timely basis, if we are unable to develop CustomerSpecific Standard Products, or CSSPs, or solutions in a timely manner, or ifour customers do not successfully introduce products incorporating our devices,our revenue and gross margin will be materially harmed, our liquidity and cashflows will be materially effected, we may be required to write-off relatedinventory and long-lived assets or there may be other adverse effects on ourbusiness or the price of our common stock.

# *We will be unable to competeeffectively if we fail to anticipate product opportunities based upon emergingtechnologies and standards or fail to develop products and solutions thatincorporate these technologies and standards in a timely manner*

We spendsignificant time and money to design and develop products and solutions aroundan industry standard, such as USB and IDE, or emerging technologies, such aslow power programmable logic, advanced process technology or small form factorpackaging. We intend to develop additional products and solutions and adopt newtechnologies in the future. If system manufacturers adopt alternative standardsor technologies, if an industry standard or emerging technology that we havetargeted fails to achieve broad market acceptance, if customers choose lowpower offerings from our competitors, or if we are unable to bring thetechnologies or

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solutions to market in atimely and effective manner, we may be unable to generate significant revenuefrom our research and development efforts. As a result, our business would bematerially harmed and we may be required to write-off related inventory andlong-lived assets.

# *We have significant customers andlimited visibility into the long-term demand for our products from thesecustomers*

A few end customers can represent a significantportion of our total revenue in a given reporting period and the likelihood ofthis occurring will increase in the future as we target high volume mobileapplications. Our marketing and sales efforts are focused on the leadingsuppliers in our target markets, and future revenue and gross profit growth istied to our success at these focus accounts. Our success at these accounts willdepend on our ability to bring value added solutions to these customers, and onour ability to compete with companies such as Cypress SemiconductorCorporation. As in the past, future demand from these customers may fluctuatesignificantly. These customers typically order products with short requesteddelivery lead times, and do not provide a commitment to purchase product pastthe period covered by purchase orders, which may be rescheduled or cancelled.In addition, our manufacturing lead times are longer than the delivery leadtimes requested by these customers, and we make significant inventory purchasesand capital expenditures in anticipation of future demand. For example, adomestic OEM of instrumentation and test equipment accounted for more than 12%of revenue in both 2006 and the first half of 2007 and a Europeantelecommunications OEM customer, purchasing product through their contractmanufacturer, represented 14% of revenue in 2006 and did not contributesignificant revenue in the first half of 2007. If revenue from any significantcustomer were to decline substantially, we may be unable to offset this declinewith increased revenue from other customers and we may purchase excessinventory. These factors could severely harm our business.

In addition, wemay make a significant investment in long-lived assets for the production ofour products based upon historical and expected demand. If demand for ourproducts or gross margin generated from our products does not meet ourexpectations or if we are unable to collect amounts due from significantcustomers, we may be required to write-off inventory, provide for uncollectibleaccounts receivable or incur charges against long-lived assets, which wouldmaterially harm our business.

# *We may not have the liquidity tosupport our future operations and capital requirements*

Our cash and cashequivalents balance at July 1, 2007 was $19.8 million. At July 1, 2007,our interest-bearing debt consisted of $2.3 million outstanding fromSilicon Valley Bank and $852,000 outstanding under capital leases. InJune 2007, we amended our credit facility with Silicon Valley Bank. Termsof the agreement include a $5.0 million revolving line of credit and$2.5 million of borrowing capacity under an equipment line of credit thatare available to be drawn against through June 2008. At July 1, 2007, wehad $5.0 million available to borrow under our revolving credit facilityand $2.5 million available to borrow under our equipment line of credit.

At July 1, 2007,we held 1,344,543 Tower ordinary shares, valued at approximately$1.9 million based upon the market closing price of $1.43 per share at theend of the reporting period. Our ability to obtain competitive pricing fromTower is tied to our ownership of at least 450,000 of these Tower shares.

Capitalexpenditures, which are largely driven by development activities and theintroduction and initial manufacturing of new products, could be up to$5.5 million in the next twelve months. As of July 1, 2007, we hadcommitments to purchase $3.5 million of wafer inventory.

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As a result of potential investments, current revenueand operating expense levels, changes in working capital and interest and debtpayments, we will need to generate significantly higher revenue and grossprofit, especially from our new ArcticLink, PolarPro, Eclipse II andQuickPCI II products and products currently under development, to generatepositive cash flow. In addition, these new products have been generating lowergross margin as a percentage of revenue than the rest of our historicalbusiness due to the markets that we have targeted and the larger orderquantities associated with these applications. Whether we can achieve cash flowlevels sufficient to support our operations cannot be accurately predicted.Unless such cash flow levels are achieved, we may borrow additional funds orsell debt or equity securities, or some combination thereof, to provide fundingfor our operations. If adequate funds are not available when needed, ourfinancial condition and operating results would be materially and adverselyaffected and we may not be able to operate our business without significant changesin our operations, or at all.

# *We may be unable to accuratelyestimate quarterly revenue, which could adversely affect the trading price ofour stock*

We offer our customers a short delivery lead time and amajority of our shipments during a quarter are ordered by customers in thatquarter. As a result, we often have low visibility to the current quarter’srevenue, and our revenue levels can change significantly in a short period oftime. Furthermore, our ability to respond to increased demand is limited toinventory on hand or on order, the capacity available at our contractmanufacturers and our capacity to program products to customer specifications.In addition, a significant portion of our revenue is deferred until ourdistributors ship unprogrammed parts to end customers since the price is notfixed or determinable until that time. Therefore, we are highly dependent onthe accuracy and timeliness of resale and inventory reports from ourdistributors. Inaccurate distributor resale or inventory reports, as well asunanticipated changes in distributor inventory levels, could contribute to ourdifficulty in predicting and reporting our quarterly revenue and results ofoperations. If we fail to accurately estimate customer demand, record revenue,or if our available capacity is less than needed to meet customer demand, ourresults of operations could be harmed and our stock price could materiallyfluctuate.

# *We depend upon third parties tofabricate, assemble, test and program our products, and they may discontinuemanufacturing our products, fail to give our products priority, be unable tosuccessfully manufacture our products to meet performance, volume or costtargets, or inaccurately report inventory to us*

We contract withthird parties to fabricate, assemble, test and program our devices. Our devicesare generally fabricated, assembled and programmed by single suppliers, and theloss of a supplier, transfer of manufacturing to a new location, expiration ofa supply agreement or the inability of our suppliers to manufacture ourproducts to meet volume, performance and cost targets could have a materialadverse effect on our business. Tower solely manufactures our ArcticLink,PolarPro, Eclipse II, certain QuickPCI II, QuickMIPS and other new productscurrently under development. Our pASIC 1 and pASIC 2 devices werefabricated by a single supplier, and the expiration of this supply agreementhas had a significant effect on our business. We recently announced theend-of-life of our V3 products, due primarily to a supplier’s decision to stopmanufacturing these products. V3 products contributed $2.7 million and $1.5million of revenue in the first half of 2007 and 2006, respectively, and wecurrently do not expect these devices to contribute significant revenue after2007. In addition, demand for assembly capacity at our primary supplier mayincrease. For this and other reasons, capacity available to us may beconstrained. Identifying and qualifying an additional assembly supplier is atime consuming and costly process and may require volume commitments that wemay be unwilling or unable to make. We sell programmers to customers that aremade by a single supplier. Programming capacity at our subcontractors is alsodependent on our investment in sufficient programming hardware to meetfluctuating demand. Our relationship with our suppliers could change as aresult of a merger or acquisition. If for any reason these suppliers or anyother vendor becomes unable or unwilling to continue to provide services ofacceptable quality, at acceptable costs and in a timely manner, our ability tooperate our business or deliver our products to our customers could be severelyimpaired. We would have to identify and qualify substitute suppliers, whichcould be time consuming, difficult and result in unforeseen operationalproblems, or we could announce an end-of-life program for these products.Alternate suppliers might not be available to fabricate, assemble, test andprogram our devices or, if available, might be unwilling or unable to offerservices on acceptable terms.

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In addition, ifcompetition for wafer manufacturing capacity increases, if we need to migrateto more advanced wafer manufacturing technology, or if competition for assemblyservices increases, we may be required to pay or invest significant amounts tosecure access to this capacity. For example, in the second quarter of 2006, weentered into an agreement with Amkor to secure assembly capacity that requireda payment of $1.0 million that is refundable if we meet certain volumecommitments. The number of companies that provide these services is limited andsome of them have limited operating histories and financial resources. In theevent our current suppliers refuse or are unable to continue to provide theseservices to us, we may be unable to procure services from alternate suppliersin a timely manner, if at all. Furthermore, if customer demand for our productsincreases, we may be unable to secure sufficient additional capacity from ourcurrent suppliers on commercially reasonable terms. Moreover, our reliance on alimited number of suppliers subjects us to reduced control over deliveryschedules, quality assurance and costs. This lack of control may causeunforeseen product shortages or may increase our cost to manufacture and testour products, which would adversely affect our operating results and cashflows.

We record amajority of our inventory transactions based on information from oursubcontractors. If we do not receive prompt and accurate information from oursuppliers, we could misstate inventory levels, incorrectly record gross profit,be unable to meet our delivery commitments to customers or commit tomanufacturing inventory that is not required to meet customer deliverycommitments, which could materially harm our business.

# *Our future results depend on ourrelationship with Tower*

We have investedapproximately $21.3 million in Tower. In return for our investment, wereceived equity, prepaid wafer credits, favorable wafer pricing and committedproduction capacity in Tower’s foundry facility. We believe that Tower’slong-term operation of this fabrication facility depends on its ability toattract sufficient customer demand, to obtain additional financing, to increasecapacity, to obtain the release of grants and approvals for changes in grantprograms from the Israeli government’s Investment Center and its ability toremain in compliance with the terms of its grant and credit agreements. Thecurrent political uncertainty and security situation in the Middle East whereTower’s fabrication facility is located, the cyclical nature of the market forfoundry manufacturing services, Tower’s financial condition, or other factorsmay adversely impact Tower’s business prospects and may discourage futureinvestments in Tower from outside sources. If Tower is unable to obtainadequate financing and increase production output in a timely manner, the valueof our investment in Tower may decline significantly or possibly becomeworthless, our wafer credit from Tower may decline in value or possibly becomeworthless, and we would have to identify and qualify a substitute supplier tomanufacture our products. This could require significant development time,cause product shipment delays, impair long-lived assets and the value of ourwafer credits, damage our liquidity and severely harm our business. Inaddition, Tower is the sole manufacturer of our ArcticLink, PolarPro, EclipseII, certain QuickPCI II, QuickMIPS and other new products currently underdevelopment.

The value of ourinvestment in Tower and its corresponding wafer credits may also be adverselyaffected by a deterioration of conditions in the market for foundrymanufacturing services and the market for semiconductor products. At July 1,2007, the value of our Tower investment was $1.9 million and the value of ourwafer credits recorded on our balance sheet was $3.2 million. If the fairvalue of our Tower investment or our wafer credits are deemed to be impaired,we will record charges to our statement of operations. For instance, we wrotedown the Tower shares due to an “other than temporary” decline in their marketvalue by $1.5 million, $1.5 million, $3.8 million and $6.8 million infiscal 2005, 2004, 2002 and 2001, respectively.

# *Our customers may cancel or changetheir product plans after we have expended substantial time and resources inthe design of their products*

Our customersoften evaluate our products for six months or more before designing them intotheir systems, and they may not commence volume shipments for up to anadditional six to twelve months, if at all. During this lengthy sales cycle,our potential customers may cancel or change their product plans. Customers mayalso discontinue products incorporating our devices at any time or they maychoose to replace our products with lower cost semiconductors. In addition, weare working with leading customers in our target markets to define our futureproducts. If customers cancel, reduce or delay product orders from us or choosenot to release products that incorporate our devices after we have spentsubstantial time and resources developing products or assisting customers withtheir product design, our revenue levels may be less than anticipated and ourbusiness could be materially harmed.

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# *If we fail to adequately forecastdemand for our products, we may incur product shortages or excess productinventory*

Our agreementswith certain suppliers require us to provide forecasts of our anticipatedmanufacturing orders, and place binding manufacturing commitments in advance ofreceiving purchase orders from our customers. We are limited in our ability toincrease or decrease our forecasts under such agreements. Other manufacturerssupply us product on a purchase order basis. The allocation of capacity isdetermined solely by our suppliers over which we have no direct control.Additionally, we may place orders with our suppliers in advance of customerorders to allow us to quickly respond to changing customer demand or to obtainfavorable product costs. Furthermore, we provide our suppliers with equipmentwhich is used to program our products to customer specifications. Theprogramming equipment is manufactured to our specifications and has significantorder lead times. These factors may result in product shortages or excessproduct inventory. Obtaining additional supply in the face of product,programming equipment or capacity shortages may be costly, or not possible,especially in the short term since most of our products and programmingequipment are supplied by a single supplier. For example, in the first half of2007, we reserved $3.2 million of inventory due primarily to changes inforecasted demand. Our failure to adequately forecast demand for our productscould materially harm our business.

# *The end-of-life of our pASIC 1 and pASIC 2 products has resultedin a decline in our revenue and we have announced the end-of-life for our V3products and certain other products*

# Our foundry agreement with the supplier that fabricates ourpASIC 1 and pASIC 2 products expired on December 31, 2005 andthe supplier no longer has the necessary equipment to manufacture our products.We announced an end-of-life for these products in 2004 and asked our customersto take delivery of lifetime buy orders before the end of 2005. As a result, wehave experienced a reduction in revenue from these products. These productscontributed 44% of our 2005 revenue and seven percent of revenue in the firsthalf of 2007, and future sales of these products are limited to inventory onhand.

In January 2007,we announced the end-of-life for our V3 products, primarily due to the loss ofmanufacturing capacity for these products, and asked our customers to takedelivery of lifetime buy orders before the end of 2007. These productscontributed $1.7 million and $720,000 of revenue in the second quarter of 2007and 2006, respectively. Due to the nature of end-of-life purchases, revenuelevels from these products could fluctuate up or down significantly on asequential basis.  We also announced theend-of-life for our five volt PCI products and certain other products, andasked customers to take delivery of these devices before the end of 2007. After2007, we expect that our end-of-life products, five volt PCI products andcertain other products will contribute less than five percent of quarterlyrevenue.

Our operatingresults and liquidity have been adversely affected by the end-of-life of thepASIC 1 and pASIC 2 products, as we are currently operating at a net loss andexpect negative cash flow at our current revenue level. We expect a decline inV3 and five volt PCI product revenue and gross profit in 2008 as a result ofthe announced end-of-life of these products. While we expect revenue and grossprofit growth from new products and mature products will offset these declinesin revenue and gross profit, there is no assurance when this will occur.  In order to grow our revenue from its currentlevel, we are dependent upon increased revenue from our existing products, especiallyour new ArcticLink, PolarPro, Eclipse II and QuickPCI II products,and the development of additional new products and solutions.

# *We are expending substantial timeand effort to develop solutions with partners that depend on the availabilityand success of technology owned by the partner*

Our approach todeveloping solutions for potential customers involves: (1) embedded processorsdeveloped by companies such as Marvell Semiconductor, Inc., who recentlypurchased the XScale business unit from Intel, and Analog Devices, Inc.; (2)peripheral devices developed by other parties such as micro hard disk drives,Wi-Fi devices and NAND flash memory; and (3) specific industry standards suchas USB 2.0 OTG, Serial Digital High Capacity, or SDHC, IDE and SDIO. We haveentered into informal partnerships with other parties that involve thedevelopment of solutions that interface with their devices or standards. Theseinformal partnerships also may involve joint marketing campaigns and salescalls. For example, we have developed a solution incorporating a specificembedded processor, a micro hard disk drive and our Eclipse II device thatimproves performance and lowers the overall power consumption of anapplication. If our solutions are not incorporated into customer products, ifour partners discontinue production of or incorporate our solution into theirproduct offerings, or if the informal partnerships are significantly reduced orterminated by acquisition or other means, our revenue and gross margin will bematerially harmed and we may be required to write-off related inventory andlong-lived assets.

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# *We may be unable to successfullygrow our business if we fail to compete effectively with others to attract andretain key personnel*

Webelieve our future success will depend upon our ability to attract and retainengineers and other highly competent personnel. Our employees are at-will andnot subject to employment contracts. Hiring and retaining qualified sales,technical and financial personnel is difficult due to the limited number ofqualified professionals, economic conditions and the size of our company.Competition for these types of employees is intense. In addition, new hiresfrequently require extensive training before they achieve desired levels ofproductivity. We have in the past experienced difficulty in recruiting andretaining qualified senior management, sales, finance and technical personnel.Failure to attract, hire, train and retain personnel could materially harm ourbusiness.

# *Fluctuations in our manufacturingprocesses, yields and quality, especially for new products, may increase ourcosts*

Difficultiesencountered during the complex semiconductor manufacturing process can render asubstantial percentage of semiconductor devices nonfunctional. Newmanufacturing techniques or fluctuations in the manufacturing process maychange the performance distribution and yield of our products. We have, in thepast, experienced manufacturing runs that have contained substantially reducedor no functioning devices, or that generated devices with below normalperformance characteristics. Our reliance on third party suppliers may extendthe period of time required to analyze and correct these problems. Oncecorrected, our customers may be required to redesign or requalify theirproducts. As a result, we may incur substantially higher manufacturing costs,inventory shortages or reduced customer demand.

Yield fluctuationsfrequently occur in connection with the manufacture of newly introducedproducts, with changes in product architecture, with manufacturing at newfacilities, on new fabrication processes or in conjunction with new backendmanufacturing processes. Newly introduced solutions and products, such as ourCSSPs, ArcticLink, and PolarPro products, are often more complex and moredifficult to produce, increasing the risk of manufacturing related defects. Newmanufacturing facilities or processes are often more complex and take a periodof time to achieve expected quality levels and manufacturing efficiencies.While we test our products, including our software development tools, they maystill contain errors or defects that are found after we have commencedcommercial production, that occur due to manufacturing variations or that areidentified as new intellectual property is incorporated into our products. Ifour products or software development tools contain undetected or unresolveddefects, we may lose market share, experience delays in or loss of marketacceptance, reserve or scrap inventory or be required to issue a productrecall. In addition, we would be at risk of product liability litigation ifdefects in our products were discovered. Although we attempt to limit ourliability to end users through disclaimers of special, consequential andindirect damages and similar provisions, we cannot assure you that suchlimitations of liability will be legally enforceable.

# *We have a history of losses andcannot assure you that we will again be profitable in the future*

We incurredsignificant losses in 2006, 2004, 2003 and 2002. Our accumulated deficit as ofJuly 1, 2007 was $135.5 million. Although we recorded net income of$2.4 million in 2005, we recorded a net loss of $8.0 million in thefirst half of 2007 and we may not return to profitability in any futureperiods.

# *We depend upon third partydistributors and independent sales representatives to market and sell ourproducts, and they may discontinue sale of our products, fail to give ourproducts priority or be unable to successfully market, sell and support ourproducts*

We contract withthird party distributors and independent sales representatives to market andsell a significant portion of our products. We typically have only a fewdistributors and a single representative serving each geographic market and, inthe future, we may have a single distributor covering a geographic market.Although we have contracts with our distributors and representatives, ouragreements with them may be terminated on short notice by either party and, ifterminated, we may be unable to recruit additional or replacement distributorsor representatives. Additionally, these third parties that we have contractedwith may acquire, be acquired or merge with other parties which may result inthe termination of our contract or less effort being placed on the marketing,

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sale and support of ourproducts and solutions. As a result, our future performance will depend in parton our ability to retain our existing distributors and representatives and toattract new distributors and representatives that will be able to effectivelymarket, sell and support our products and solutions. The loss of one or more ofour principal distributors or representatives, or our inability to attract newdistributors or representatives, could materially harm our business.

Many of ourdistributors and representatives, including our principal distributors andrepresentatives, market and sell products for other companies. Many of theseproducts may compete directly or indirectly with our products and solutions.Also, we generally are not one of the principal suppliers of products to ourdistributors or representatives. If our distributors or representatives givehigher priority or greater attention to the products of other companies,including products that compete with our products and solutions, our business wouldbe materially harmed.

Individualdistributors and OEMs often represent a significant portion of our accountsreceivable. If we are unable to collect funds due from these distributors andcustomers, our financial results may be materially harmed.

# *Our future operating results arelikely to fluctuate and therefore may fail to meet expectations, which couldcause our stock price to decline*

Our operatingresults have varied widely in the past and are likely to do so in the future.In addition, our past operating results may not be an indicator of futureoperating results. Our future operating results will depend on many factors andmay fail to meet our expectations for a number of reasons, including those setforth in these risk factors. Any failure to meet expectations could cause ourstock price to significantly fluctuate or decline.

Factors that could causeour operating results to fluctuate include:

·                  the effect of end-of-life programs;

·                  a significant change in sales to, orthe collectibility of accounts receivable from, our largest customers;

·                  successful development and marketacceptance of our products and solutions;

·                  our ability to accurately forecastproduct volumes and mix, and to respond to rapid changes in customer demand;

·                  changes in sales volume, product mix,average selling prices or production variances that affect gross profit;

·                  our ability to adjust our productfeatures, manufacturing capacity and costs in response to economic andcompetitive pressures;

·                  our reliance on subcontract manufacturersfor product capacity, yield and quality;

·                  our competitors’ product portfolioand product pricing policies;

·                  timely implementation of efficientmanufacturing technologies;

·                  errors in applying or changes inaccounting and corporate governance rules;

·                  the issuance of equity compensationawards or changes in the terms of our stock plan or employee stock purchaseplan;

·                  mergers or acquisitions;

·                  the impact of import and export lawsand regulations;

·                  the cyclical nature of thesemiconductor industry and general economic, market, political and socialconditions in the countries where we sell our products and the related effecton our customers, distributors and suppliers; and

·                  our ability to obtain capital, debtfinancing and insurance on commercially reasonable terms.

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Although certainof these factors are out of our immediate control, unless we can anticipate andbe prepared with contingency plans that respond to these factors, our businessmay be materially harmed.

# *We may encounter periods of industry-widesemiconductor oversupply, resulting in pricing pressure, as well asundersupply, resulting in a risk that we could be unable to fulfill ourcustomers’ requirements*

The semiconductorindustry has historically been characterized by wide fluctuations in the demandfor, and supply of, its products. These fluctuations have resulted incircumstances when supply of and demand for semiconductors have been widely outof balance. An industry-wide semiconductor oversupply could result in severedownward pricing pressure from customers. In a market with undersupply ofmanufacturing capacity, we would have to compete with larger foundry andassembly customers for limited manufacturing resources. In such an environment,we may be unable to have our products manufactured in a timely manner, at acost that generates adequate gross profit or in sufficient quantities. Since weoutsource all of our manufacturing and generally have a single source of wafersupply, test, assembly and programming for our products, we are particularlyvulnerable to such supply shortages and capacity limitations. As a result, wemay be unable to fulfill orders and may lose customers. Any futureindustry-wide oversupply or undersupply of semiconductors could materially harmour business.

# *Customers may cancel or defersignificant purchase orders or our distributors may return our products, whichwould cause our inventory levels to increase and our revenue to decline*

Our distributorsor customers may cancel purchase orders at any time with little or no penalty.Contractually, our distributors are generally permitted to return unprogrammedproducts worth up to 10%, by value, of the products they purchase from us. Ifour distributors or customers cancel or defer significant purchase orders orreturn our products, our accounts receivable collections would decrease andinventories would increase, which would materially harm our business.

# *Problems associated withinternational business operations could affect our ability to manufacture andsell our products*

Most of ourproducts are manufactured outside of the United States at manufacturingfacilities operated by our suppliers in Taiwan, South Korea, the Philippinesand Israel. We expect to manufacture a majority of our new products and theproducts that we currently have under development in Israel and to assemblethese products in South Korea or China. As a result, these manufacturingoperations and new product introductions are subject to risks of politicalinstability, including the risk of conflict between Taiwan and the People’sRepublic of China, between South Korea and North Korea, and conflicts involvingIsrael.

A significantportion of our total revenue comes from sales to customers located outside theUnited States. We anticipate that sales to customers located outside the UnitedStates will continue to represent a significant portion of our total revenue infuture periods. In addition, most of our domestic customers sell their productsoutside of North America, thereby indirectly exposing us to risks associatedwith foreign commerce and economic instability. In addition to overseas salesoffices, we have significant research and development activities in Canada andIndia. Accordingly, our operations and revenue are subject to a number of risksassociated with foreign commerce, including the following:

·                  managing foreign distributors;

·                  collecting amounts due;

·                  staffing and managing foreignoffices;

·                  political and economic instability;

·                  foreign currency exchangefluctuations;

·                  changes in tax laws, import andexport regulations, tariffs and freight rates;

·                  timing and availability of exportlicenses;

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·                  supplyingproducts that meet local environmental regulations; and

·                  inadequate protection of intellectualproperty rights.

In the past, wehave denominated sales of our products to foreign countries exclusively in U.S.dollars. As a result, any increase in the value of the U.S. dollar relative tothe local currency of a foreign country will increase the price of our productsin that country so that our products become relatively more expensive tocustomers in their local currency. As a result, sales of our products in thatforeign country may decline. To the extent any such risks materialize, ourbusiness could be materially harmed.

In addition, we incurcosts in foreign countries that may be difficult to reduce quickly because ofemployee related laws and practices in those foreign countries.

# *Many system manufacturers may beunwilling to switch to our products because of their familiarity with the productsoffered by our direct competitors, such as Xilinx and Altera, which dominatethe programmable logic market*

The semiconductorindustry is intensely competitive and characterized by:

·                  erosion of selling prices overproduct lives;

·                  rapid technological change;

·                  short product life cycles; and

·                  strong domestic and foreigncompetition.

If we are not able tocompete successfully in this environment, our business will be materiallyharmed.

Many of ourcompetitors have substantially greater financial, technical, manufacturing,marketing, sales, distribution, name recognition and other resources than wedo. In addition, many of our competitors have well established relationshipswith our current and potential customers and have extensive knowledge of systemapplications. In the past, we have lost potential customers to competitors forvarious reasons, including, but not limited to, re-programmability and lowerprice. Our current direct competitors include suppliers of complex programmablelogic devices and field programmable gate arrays, such as Xilinx, Inc., AlteraCorporation, Actel Corporation and Lattice Semiconductor Corporation. Xilinxand Altera together have a majority share of the programmable logic market.Many system manufacturers may be unwilling or unable to switch to our productsdue to their familiarity with competitors’ products or other inhibitingfactors.

We also face competitionfrom companies that offer Application Specific Integrated Circuits, or ASICs,which may be purchased for a lower price at higher volumes and typically havegreater logic capacity, additional features and higher performance than ourproducts. We may also face competition from suppliers of embeddedmicroprocessors, such as Freescale Semiconductor, Inc., or from suppliers ofproducts based on new or emerging technologies, such as Cypress SemiconductorCorporation. Our inability to successfully compete in any of the followingareas could materially harm our business:

·                  the development of new products,solutions and advanced manufacturing technologies;

·                  the quality, power characteristics,performance characteristics, price and availability of devices, programminghardware and software development tools;

·                  the ability to engage with companiesthat provide synergistic products and services;

·                  the incorporation of industrystandards in our products and solutions;

·                  the diversity of product offeringsavailable to customers; or

·                  the quality and cost effectiveness ofdesign, development, manufacturing and marketing efforts.

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# *We may be unable to adequatelyprotect our intellectual property rights and may face significant expenses as aresult of future litigation*

Protection ofintellectual property rights is crucial to our business, since that is how wekeep others from copying the innovations that are central to our existing andfuture products. From time to time, we receive letters alleging patentinfringement or inviting us to license other parties’ patents. We evaluatethese requests on a case-by-case basis. These situations may lead to litigationif we reject the offer to obtain the license.

In the past, wehave been involved in litigation relating to alleged infringement by us ofothers’ patents or other intellectual property rights. This kind of litigationis expensive and consumes large amounts of management’s time and attention.Additionally, matters that we initially consider not material to our businesscould become costly. In addition, if the letters we sometimes receive allegingpatent infringement or other similar matters result in litigation that we lose,a court could order us to pay substantial damages and/or royalties, andprohibit us from making, using, selling or importing essential technologies.For these and other reasons, this kind of litigation could materially harm ourbusiness.

Although we mayseek to obtain a license under a third party’s intellectual property rights inorder to bring an end to certain claims or actions asserted against us, we maynot be able to obtain such a license on reasonable terms, or at all. We haveentered into technology license agreements with third parties which give thoseparties the right to use patents and other technology developed by us and whichgive us the right to use patents and other technology developed by them. Weanticipate that we will continue to enter into these kinds of licensingarrangements in the future; however, it is possible that desirable licenseswill not be available to us on commercially reasonable terms. If we loseexisting licenses to key technology, or are unable to enter into new licensesthat we deem important, our business could be materially harmed.

Because it iscritical to our success that we continue to prevent competitors from copyingour innovations, we intend to continue to seek patent and trade secretprotection for our products. The process of seeking patent protection can belong and expensive, and we cannot be certain that any currently pending orfuture applications will actually result in issued patents or that, even ifpatents are issued, they will be of sufficient scope or strength to providemeaningful protection or any commercial advantage to us. Furthermore, othersmay develop technologies that are similar or superior to our technology ordesign around the patents we own. We also rely on trade secret protection forour technology, in part through confidentiality agreements with our employees,consultants and other third parties. However, these parties may breach theseagreements and we may not have adequate remedies for any breach. In any case,others may come to know about or determine our trade secrets through a varietyof methods. In addition, the laws of certain territories in which we develop,manufacture or sell our products may not protect our intellectual propertyrights to the same extent as the laws of the United States.

# *We may engage in manufacturing,distribution or technology agreements that involve numerous risks, includingthe use of cash, diversion of resources and significant write-offs*

We have enteredinto and, in the future, intend to enter into agreements that involve numerousrisks, including the use of significant amounts of our cash; diversion ofresources from other development projects or market opportunities; our abilityto incorporate licensed technology in our products and solutions; our abilityto introduce related products in a cost effective and timely manner; ourability to collect amounts due under these contracts; and market acceptance ofrelated products and solutions. If we fail to recover the cost of these orother assets from the cash flow generated by the related products, our assetswill become impaired and our financial results would be harmed.

# *Our business is subject to the risksof earthquakes, other catastrophic events and business interruptions for whichwe may maintain limited insurance*

Our operations andthe operations of our suppliers are vulnerable to interruption by fire,earthquake, power loss, flood, terrorist acts and other catastrophic eventsbeyond our control. In particular, our headquarters are located near earthquakefault lines in the San Francisco Bay Area. In addition, we rely on solesuppliers to manufacture our products and would not be able to qualify analternate supplier of our products for several quarters. Our suppliers oftenhold significant quantities of our inventory which, in the event of a disaster,could be destroyed. In addition, our business processes and systems arevulnerable to computer viruses, break-ins and similar disruptions from

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unauthorized tampering.Any catastrophic event, such as an earthquake or other natural disaster, thefailure of our computer systems, war or acts of terrorism, could significantlyimpair our ability to maintain our records, pay our suppliers, or design,manufacture or ship our products. The occurrence of any of these events couldalso affect our customers, distributors and suppliers and produce similardisruptive effects upon their business. If there is an earthquake or othercatastrophic event near our headquarters, our customers’ facilities, ourdistributors’ facilities or our suppliers’ facilities, our business could beseriously harmed.

We do not have adetailed disaster recovery plan. In addition, we do not maintain sufficientbusiness interruption and other insurance policies to compensate us for alllosses that may occur. Any losses or damages incurred by us as a result of acatastrophic event or any other significant uninsured loss could have amaterial adverse effect on our business.

# *Our principal stockholders havesignificant voting power and may vote for actions that may not be in the bestinterests of our other stockholders*

Our officers,directors and principal stockholders together control a significant portion ofour outstanding common stock. As a result, these stockholders, if they acttogether, will be able to significantly influence our operations, affairs andall matters requiring stockholder approval, including the election of directorsand approval of significant corporate transactions. This concentration ofownership may have the effect of delaying or preventing a change in control andmight affect the market price of our common stock. This concentration ofownership may not be in the best interest of our other stockholders.

# *Our Shareholder Rights Plan,Certificate of Incorporation, Bylaws and Delaware law contain provisions thatcould discourage a takeover that is beneficial to stockholders*

Our ShareholderRights Plan as well as provisions of our Certificate of Incorporation, ourBylaws and Delaware law could make it difficult for a third party to acquireus, even if doing so would be beneficial to our stockholders.

# *The market price of our common stockmay fluctuate significantly and could lead to securities litigation*

Stock prices for many companies in the technology andemerging growth sectors have experienced wide fluctuations that have often beenunrelated to the operating performance of such companies. In the past,securities class action litigation has often been brought against a companyfollowing periods of volatility in the market price of its securities. In thefuture, we may be the subject of similar litigation. Securities litigationcould result in substantial costs and divert management’s attention.

# *Changes to existing accountingpronouncements or taxation rules or practices may cause adverse revenuefluctuations, affect our reported results of operations or how we conduct ourbusiness*

GAAP arepromulgated by, and are subject to the interpretation of the Financial AccountingStandards Board, or FASB, and the Securities and Exchange Commission, or SEC.New accounting pronouncements or taxation rules and varying interpretations ofaccounting pronouncements or taxation practice have occurred and may occur inthe future. Any future changes in accounting pronouncements or taxation rulesor practices may have a significant effect on how we report our results and mayeven affect our reporting of transactions completed before the change iseffective. In addition, a review of existing or prior accounting practices mayresult in a change in previously reported amounts. This change to existingrules, future changes, if any, or the questioning of current practices mayadversely affect our reported financial results, our ability to remain listedon the Nasdaq Global Market, or the way we conduct our business and subject usto regulatory inquiries or litigation.

For example, theFASB has issued SFAS 123(R), *“Share-BasedPayment,”* which we adopted in the first quarter of 2006. SFAS 123(R)requires us to measure compensation costs for all stock-based compensationawards (including our stock options and our employee stock purchase plan, ascurrently constructed) at fair value and record compensation expense over thevesting period. If this accounting pronouncement had been in effect during2005, we would have reported a net loss.

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Additionally, inJuly 2006 we initiated a review of our historical stock option practices andrelated accounting. This review identified accounting and administrative errorsthat, if they had been recorded at the time they occurred, would have resultedin total additional charges of approximately $964,000 between October 1999 andDecember 2005.

*Compliance with regulations related tocorporate governance and public disclosure may result in additional expenses*

Federal securitieslaws, rules and regulations, as well as Nasdaq rules and regulations, requirecompanies to maintain extensive corporate governance measures, imposecomprehensive reporting and disclosure requirements, set strict independenceand financial expertise standards for audit and other committee members andimpose civil and criminal penalties for companies and their chief executiveofficers, chief financial officers and directors for securities law violations.These laws, rules and regulations have increased and will continue to increasethe scope, complexity and cost of our corporate governance, reporting anddisclosure practices, which could harm our results of operations and divertmanagement’s attention from business operations. We are committed tomaintaining high standards of corporate governance and public disclosure. Ifour efforts to comply with new or changed laws, regulations and standardsdiffer from the activities intended by regulatory or governing bodies due toambiguities related to practice, our reputation may be harmed and the marketprice of our common stock could be affected.

# *While we believe that we currentlyhave adequate internal control procedures in place, we are still exposed topotential risks from legislation requiring companies to evaluate controls underSection 404 of the Sarbanes-Oxley Act of 2002*

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Internal control over financial reporting cannot provideabsolute assurance of achieving financial reporting objectives because of itsinherent limitations. Internal control over financial reporting is a processthat involves human diligence and compliance and is subject to lapses injudgment and breakdowns resulting from human failures. Internal control over financialreporting also can be circumvented by collusion or improper managementoverride. Because of such limitations, there is a risk that materialmisstatements may not be prevented or detected on a timely basis by internalcontrol over financial reporting. However, these inherent limitations are knownfeatures of the financial reporting process. Therefore, it is possible todesign into the process safeguards to reduce, though not eliminate, this risk.

As of December 2006, we have evaluated ourinternal control systems in order to allow management to report on, and ourindependent registered public accounting firm to attest to, our internalcontrol over financial reporting, as required by Section 404 of theSarbanes-Oxley Act. We performed the system and process evaluation and testingrequired in an effort to comply with the management certification andindependent registered public accounting firm attestation requirements ofSection 404. As a result, we incurred additional expenses and a diversionof management’s time. While we believe that our internal control procedures areadequate and we intend to continue to fully comply with the requirementsrelating to internal control and all other aspects of Section 404, our controlsnecessary for continued compliance with the Sarbanes-Oxley Act may not operateeffectively at all times and may result in a material control disclosure. Theidentification of a material weakness in internal control over financialreporting, if any, could indicate a lack of proper controls to generateaccurate consolidated financial statements. Furthermore, we cannot be certainas to the outcome of future evaluations, testing and remediation actions or theimpact of the same on our operations. If we are not able to remain incompliance with the requirements of Section 404, we might be subject tosanctions or investigation by regulatory authorities, such as the SEC or theNasdaq National Market. Any such action could adversely affect our financialresults and the market price of our common stock.

# *We have implemented import andexport control procedures to comply with United States regulations but we arestill exposed to potential risks from import and export activity*

Our products,solutions, technology and software are subject to import and export controllaws and regulations which, in some instances, may impose restrictions onbusiness activities, or otherwise require licenses or other authorizations fromagencies such as the U.S. Department of State, U.S. Department of Commerce andU.S. Department of the Treasury. These restrictions may impact deliveries tocustomers or limit development and manufacturing alternatives. We have importand export licensing and compliance procedures in place for purposes 

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ofconducting our business consistent with U.S. and applicable international lawsand regulations, and we periodically review these procedures to maintaincompliance with the requirements relating to import and export regulations. Ifwe are not able to remain in compliance with import and export regulations, wemight be subject to investigation, sanctions or penalties by regulatoryauthorities. Such penalties can include civil, criminal or administrativeremedies such as loss of export privileges. We cannot be certain as to theoutcome of an evaluation, investigation, inquiry or other action or the impactof these items on our operations. Any such action could adversely affect ourfinancial results and the market price of our common stock.

# *The Company and our directors andmanagement have in the past been named parties to lawsuits and may be subjectto future litigation, which could result in an unfavorable outcome and have amaterial adverse effect on our business, financial condition, results ofoperations, cash flows and the trading price for our securities*

The Company andcertain of our directors and officers are named in a lawsuit relating to theinitial public offering laddering litigation and certain officers and directorswere named in litigation relating to our historical stock option practices andrelated accounting. We may become the subject of other private or governmentactions in the future. Litigation may be time consuming, expensive anddisruptive to normal business operations and the outcome of litigation isdifficult to predict. Any expenses associated with litigation or the outcomerelating to any such actions could have a material adverse effect on ourbusiness, financial condition, results of operations, cash flows and thetrading price for our securities.

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

TheAnnual Meeting of Stockholders of QuickLogic was held on April 24, 2007. The following matters were voted upon at the meeting:

(i)                    The followingnominees were elected to hold office as a Class II director until 2010:
| Nominee        | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|----------------|------------|--------------------|------------|-------------------------|------------|
| Arturo Krueger |       | 25,160,243         |       | 1,309,683               |       |
| Gary H. Tauss  |       | 25,254,243         |       | 1,215,683               |       |

 

NicholasAretakis, Michael J. Callahan, E. Thomas Hart and Christine Russell willcontinue to serve as directors. Additionally on March 28, 2007, the Board ofDirectors, upon recommendation by the Nominating and Corporate GovernanceCommittee, appointed Hide Tanigami to serve as a Class III director of theCompany and member of the Nominating and Corporate Governance Committee.

(ii)                 The ratificationof PricewaterhouseCoopers LLP as the independent registered public accountingfirm of QuickLogic for the fiscal year ending December 30, 2007.
| Votes For     |   | 26,106,306 |   |
|---------------|--------|------------|--------|
| Votes Against |   | 294,552    |   |
| Abstentions   |   | 70,068     |   |

 

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**Item 6.Exhibits**

a.               Exhibits

The following Exhibitsare filed with this report:
| Exhibit  Number | ** ** | **Description** |
|-----------------|------------|-----------------|
| 3               | .1(1)      |            | Amended and Restated Certificate of Incorporation of  Registrant. |
| 3               | .2(2)      |            | Bylaws of Registrant. |
| 10              | .15        |            | First Amendment to Second Amended and Restated Loan  and Security Agreement between Silicon Valley Bank and the registrant  effective June 27, 2007. |
| 31              | .1         |            | CEO Certification pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
| 31              | .2         |            | CFO Certification pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
| 32              |       |            | CEO and CFO Certifications pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |

 

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(1)          Incorporated by reference to the Company’sRegistration Statement on Form S-1 declared effective October 14, 1999 (CommissionFile No. 333-28833).

(2)          Incorporated by reference to the Company’s Current Report onForm 8-K (Item 5.03) filed May 2, 2005.

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**Signatures**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                        |     | **QUICKLOGIC  CORPORATION**                                                                                                            |
|------------------------|----------|----------------------------------------------------------------------------------------------------------------------------------------|
|                   |     |                                                                                                                                   |
|                   |     | /s/ CARL M.  MILLS                                                                                                                     |
| Date: August 10,  2007 |     | Carl M. Mills                                                                                                                          |
| * *               | * * | *Vice  President, Finance and Chief Financial Officer   (as Principal Accounting and Financial Officer and on behalf of   Registrant)* |

 

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**EXHIBITINDEX**
| Exhibit  Number | ** ** | **Description** |
|-----------------|------------|-----------------|
| 3               | .1(1)      |            | Amended and Restated Certificate of Incorporation of  Registrant. |
| 3               | .2(2)      |            | Bylaws of Registrant. |
| 10              | .15        |            | First Amendment to Second Amended and Restated Loan  and Security Agreement between Silicon Valley Bank and the registrant  effective June 27, 2007. |
| 31              | .1         |            | CEO Certification pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
| 31              | .2         |            | CFO Certification pursuant to Section 302 of  the Sarbanes-Oxley Act of 2002. |
| 32              |       |            | CEO and CFO Certifications pursuant to  18 U.S.C. Section 1350, as adopted pursuant to Section 906 of  the Sarbanes-Oxley Act of 2002. |

 

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(1)          Incorporated by reference to the Company’sRegistration Statement on Form S-1 declared effective October 14, 1999(Commission File No. 333-28833).

(2)          Incorporated by reference to the Company’sCurrent Report on Form 8-K (Item 5.03) filed May 2, 2005.

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