** **

**UNITED STATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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**FORM 10-Q**

**(MarkOne)**

**x**                              QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF1934

**                                               **For the Quarterly Period EndedApril 1, 2007

**OR**

**o**                                 TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF1934

**                                               **For the Transition PeriodFrom                      To                     

**COMMISSIONFILE NUMBER: 000-22671**

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**QUICKLOGIC CORPORATION**

(Exact name of registrantas 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 May 4, 2007,28,858,420 shares of the registrant’s common stock were outstanding.

 

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**QUICKLOGICCORPORATION**

**FORM10-Q**

**April1, 2007**
|                                                                                                                               | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                          |     |
| **Part  I. Financial Information**                                                                                            | 3        |
| ** **                                                                                                                    |     |
| **Item  1. Financial Statements**                                                                                             | 3        |
| Condensed Unaudited Consolidated Statements of  Operations for the three months ended April 1, 2007 and April 2, 2006         | 3        |
| Condensed Unaudited Consolidated Balance Sheets as of  April 1, 2007 and December 31, 2006                               | 4        |
| Condensed Unaudited Consolidated Statements of Cash  Flows for the three months ended April 1, 2007 and April 2, 2006         | 5        |
| Condensed Unaudited Consolidated Statements of  Comprehensive Loss for the three months ended April 1, 2007 and April 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**                                                                                           | 31       |
|                                                                                                                          |     |
| **Part  II. Other Information**                                                                                               | 32       |
| ** **                                                                                                                    |     |
| **Item  1. Legal Proceedings**                                                                                                | 32       |
| ** **                                                                                                                    |     |
| **Item  1A. Risk Factors**                                                                                                    | 33       |
| ** **                                                                                                                    |     |
| **Item 6. Exhibits**                                                                                                          | 45       |
| ** **                                                                                                                    |     |
| Signatures                                                                                                                    | 46       |

 

 

2

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**PART I. FinancialInformation**

**Item 1. FinancialStatements**

**QUICKLOGICCORPORATIONCONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS(in thousands, except per share amounts)**
| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
|                                 |       |                             |       |   |   |
| Revenue                              |       | $                                | 6,242      |   | $ | 9,333 |   |
| Cost of revenue                      |       | 5,401                            |       | 3,760 |   |
| Gross profit                         |       | 841                              |       | 5,573 |   |
| Operating expenses:                  |       |                             |       |   |   |
| Research and  development            |       | 2,287                            |       | 2,400 |   |
| Selling, general  and administrative |       | 4,593                            |       | 4,617 |   |
| Loss from operations                 |       | (6,039                           | )          | (1,444 | ) |
| Interest expense                     |       | (85                              | )          | (74 | ) |
| Interest income and  other, net      |       | 246                              |       | 292 |   |
| Loss before income  taxes            |       | (5,878                           | )          | (1,226 | ) |
| Provision for income  taxes          |       | 15                               |       | 2 |   |
| Net loss                             |       | $                                | (5,893     | ) | $ | (1,228 | ) |
|                                 |       |                             |       |   |   |
| Net loss per share:                  |       |                             |       |   |   |
| Basic                                |       | $                                | (0.20      | ) | $ | (0.04 | ) |
| Diluted                              |       | $                                | (0.20      | ) | $ | (0.04 | ) |
|                                 |       |                             |       |   |   |
| Weighted average  shares:            |       |                             |       |   |   |
| Basic                                |       | 28,814                           |       | 28,059 |   |
| Diluted                              |       | 28,814                           |       | 28,059 |   |

 

See accompanying Notes toCondensed Unaudited Consolidated Financial Statements.

3

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**QUICKLOGICCORPORATIONCONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS(in thousands, except par value amount)**
| ** **                                                                                                                 | ** ** | **April 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                 |       |                    |       |                        |       |
|                                                                                                                       |       |                    |       |                        |       |
| Current assets:                                                                                                            |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                 |       | $                       | 21,120     |                        | $          | 24,621 |   |
| Short-term  investment in Tower Semiconductor Ltd.                                                                         |       | 1,530                   |       | 1,530                       |       |
| Accounts  receivable, net of allowances for doubtful accounts of $146 and $861,  respectively                              |       | 2,231                   |       | 2,839                       |       |
| Inventory                                                                                                                  |       | 6,473                   |       | 9,064                       |       |
| Other current  assets                                                                                                      |       | 1,645                   |       | 1,894                       |       |
| Total current  assets                                                                                                      |       | 32,999                  |       | 39,948                      |       |
| Property and equipment,  net                                                                                               |       | 5,011                   |       | 5,480                       |       |
| Investment in Tower  Semiconductor Ltd.                                                                                    |       | 769                     |       | 769                         |       |
| Other assets                                                                                                               |       | 4,017                   |       | 4,038                       |       |
| TOTAL ASSETS                                                                                                               |       | $                       | 42,796     |                        | $          | 50,235 |   |
|                                                                                                                       |       |                    |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                             |       |                    |       |                        |       |
|                                                                                                                       |       |                    |       |                        |       |
| Current liabilities:                                                                                                       |       |                    |       |                        |       |
| Trade payables                                                                                                             |       | $                       | 2,182      |                        | $          | 4,383 |   |
| Accrued  liabilities                                                                                                       |       | 2,640                   |       | 2,462                       |       |
| Deferred income  on shipments to distributors                                                                              |       | 1,594                   |       | 1,152                       |       |
| Deferred royalty  revenue                                                                                                  |       | 959                     |       | 960                         |       |
| Current portion  of debt and capital lease obligations                                                                     |       | 1,992                   |       | 2,292                       |       |
| Total current  liabilities                                                                                                 |       | 9,367                   |       | 11,249                      |       |
|                                                                                                                       |       |                    |       |                        |       |
| Long-term liabilities:                                                                                                     |       |                    |       |                        |       |
| Debt and capital  lease obligations, less current portion                                                                  |       | 1,238                   |       | 1,618                       |       |
| Total  liabilities                                                                                                         |       | 10,605                  |       | 12,867                      |       |
|                                                                                                                       |       |                    |       |                        |       |
| Commitments and  contingencies (see Notes 12 and 13)                                                                       |       |                    |       |                        |       |
|                                                                                                                       |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                 |       |                    |       |                        |       |
| Common stock,  $0.001 par value; 100,000 shares authorized; 28,858 and 28,680 shares issued  and outstanding, respectively |       | 29                      |       | 29                          |       |
| Additional  paid-in capital                                                                                                |       | 164,854                 |       | 164,138                     |       |
| Accumulated  other comprehensive income                                                                                    |       | 726                     |       | 726                         |       |
| Accumulated  deficit                                                                                                       |       | (133,418                | )          | (127,525                    | )          |
| Total  stockholders’ equity                                                                                           |       | 32,191                  |       | 37,368                      |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                            |       | $                       | 42,796     |                        | $          | 50,235 |   |

 

See accompanying Notes to Condensed UnauditedConsolidated Financial Statements.

4

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**QUICKLOGICCORPORATION**

**CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**
| ** **                                                                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                                  | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
| ** **                                                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                                      |       |                             |       |   |   |
| Net loss                                                                                    |       | $                                | (5,893     | ) | $ | (1,228 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used for) operating activities: |       |                             |       |   |   |
| Depreciation and  amortization                                                              |       | 807                              |       | 686 |   |
| Stock-based  compensation                                                                   |       | 381                              |       | 452 |   |
| Inventory  write-down                                                                       |       | 2,465                            |       | 232 |   |
| Utilization of  wafer credits from Tower Semiconductor Ltd.                                 |       | 67                               |       | 25 |   |
| Bad debt expense                                                                            |       | 35                               |       | — |   |
| Changes in  assets and liabilities:                                                         |       |                             |       |   |   |
| Accounts  receivable                                                                        |       | 573                              |       | 1,442 |   |
| Inventory                                                                                   |       | 126                              |       | (9 | ) |
| Other assets                                                                                |       | 203                              |       | (17 | ) |
| Trade payables                                                                              |       | (2,201                           | )          | (32 | ) |
| Accrued  liabilities                                                                        |       | 178                              |       | (591 | ) |
| Deferred income  and royalty revenue                                                        |       | 441                              |       | 316 |   |
| Net cash  provided by (used for) operating activities                                       |       | (2,818                           | )          | 1,276 |   |
|                                                                                        |       |                             |       |   |   |
| Cash flows from  investing activities:                                                      |       |                             |       |   |   |
| Capital  expenditures for property and equipment                                            |       | (338                             | )          | (709 | ) |
| Net cash used  for investing activities                                                     |       | (338                             | )          | (709 | ) |
|                                                                                        |       |                             |       |   |   |
| Cash flows from  financing activities:                                                      |       |                             |       |   |   |
| Payment of debt  and capital lease obligations                                              |       | (680                             | )          | (660 | ) |
| Proceeds from  debt and capital lease obligations                                           |       | —                           |       | 932 |   |
| Proceeds from  issuance of common stock                                                     |       | 335                              |       | 1,064 |   |
| Net cash  provided by (used for) financing activities                                       |       | (345                             | )          | 1,336 |   |
|                                                                                        |       |                             |       |   |   |
| Net increase (decrease)  in cash and cash equivalents                                       |       | (3,501                           | )          | 1,903 |   |
| Cash and cash  equivalents at beginning of period                                           |       | 24,621                           |       | 28,283 |   |
| Cash and cash  equivalents at end of period                                                 |       | $                                | 21,120     |   | $ | 30,186 |   |
|                                                                                        |       |                             |       |   |   |
| Supplemental  disclosures of cash flow information:                                         |       |                             |       |   |   |
| Interest paid                                                                               |       | $                                | 96         |   | $ | 58 |   |
| Income taxes  paid                                                                          |       | $                                | 19         |   | $ | 13 |   |
| 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** | ** ** |
|----------------------------------------|------------|----------------------------------|------------|
| ** **                             | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
|                                   |       |                             |       |   |   |
| Net loss                               |       | $                                | (5,893     | ) | $ | (1,228 | ) |
| Other comprehensive  loss, net of tax: |       |                             |       |   |   |
| Unrealized loss  on investments        |       | —                           |       | (229 | ) |
| Total comprehensive loss               |       | $                                | (5,893     | ) | $ | (1,457 | ) |

 

See accompanyingNotes to Condensed Unaudited Consolidated Financial Statements.

6

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**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

**Note1—The Company and Basis of Presentation**

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.

Theaccompanying interim consolidated financial statements are unaudited. In theopinion of management, these statements have been prepared in accordance withgenerally accepted accounting principles (“GAAP”) and include all adjustments,consisting only of normal recurring adjustments, necessary to provide a fairstatement of results for the interim periods presented. The Company recommendsthat these consolidated financial statements be read in conjunction with theCompany’s Form 10-K for the year ended December 31, 2006. Operatingresults for the first quarter of 2007 are not necessarily indicative of theresults that may be expected for the full year.

QuickLogic’sfiscal year ends on the Sunday closest to December 31.  QuickLogic’sfiscal first quarter for 2007 and 2006 ended Sunday, April 1, 2007 andApril 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 andaccompanying notes. This change had no impact on the Company’s financialposition, results of 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,sales and marketing efforts, the amount and financing arrangements forpurchases of capital equipment, changes in operating assets and liabilities,the ability to obtain or renew debt financing and to remain in compliance withthe terms of existing credit facilities, the ability to raise funds from thesale of shares of Tower Semiconductor Ltd. (“Tower”) and equity in the Company,the issuance and exercise of stock options, the terms of and participation inthe Company’s employee stock purchase plan, and other factors related to theuncertainties of the industry and global economics. Accordingly, there can beno assurance that events in the future will not require the Company to seekadditional capital or, if so required, that such capital will be available onterms acceptable to the 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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**QUICKLOGICCORPORATION**

**NOTESTO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**Note 2—SignificantAccounting Policies**

*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 haveno rights of return on programmed parts. Accordingly, revenue is recognizedupon delivery to a distributor since title and risk of ownership havetransferred to the distributor, the price is fixed, no right of return existsand collection of the 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 first quarterof 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 the productlife cycle of its customers’ products, new product development schedules, theeffect new products might have on the sale of existing products, productobsolescence, 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 inventory againstestimated market value and records a lower of cost or market reserve forinventories 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 possibleimpairment is based on the Company’s ability to recover the carrying value ofthe asset or asset group from the expected future pre-tax cash flows,undiscounted and without interest charges, of the related operations. If thesecash flows are less than the carrying value of the asset or asset group, animpairment loss is recognized for the difference between the estimated

8

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**QUICKLOGICCORPORATION**

**NOTESTO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

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 23% of totaloperating expenses for the first quarter of 2007 and 2006, respectively. TheCompany incurred a majority of these foreign currency expenses in Canada. TheCompany has 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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**QUICKLOGICCORPORATION**

**NOTESTO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (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. The Companyis currently evaluating the impact that SFAS 159 will have on its consolidatedfinancial statements.

**Note 3—NetLoss Per Share**

Basic net loss per shareis computed by dividing net loss available to common stockholders by theweighted average number of common shares outstanding during the period. Dilutednet loss per share is computed using the weighted average number of commonshares outstanding during the period plus potentially dilutive common sharesoutstanding during the period under the treasury stock method. In computingdiluted net loss per share, the average stock price for the period is used indetermining the number of shares assumed to be purchased from the exercise ofstock options. A reconciliation of the basic and diluted per share computationsis as follows (in thousands, except per share amounts):
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
| ** **               | ** ** | **Net Loss**                | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** | **Net Loss** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| Basic                    |       | $                                | (5,893     | ) | 28,814 |   | $ | (0.20 | ) | $ | (1,228 | ) | 28,059 |   | $ | (0.04 | ) |
| Effect of stock  options |       | —                           |       | — |   | — |   | — |   | — |   | — |   |
| Diluted                  |       | $                                | (5,893     | ) | 28,814 |   | $ | (0.20 | ) | $ | (1,228 | ) | 28,059 |   | $ | (0.04 | ) |

 

For the firstquarter of 2007, 6,979,000 of shares associated with options outstanding and theestimated number of shares to be purchased under the current offering period ofthe 1999 Employee Stock Purchase Plan 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. For the first quarter of 2006,6,366,000 of shares associated with options outstanding were not included inthe calculation of diluted net loss per share, as they were consideredantidilutive due to the net loss 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 April 1,2007, the Company held 1,344,543 available for sale Tower ordinary shares withan unrealized gain of $726,000 recorded in accumulated other comprehensiveincome, representing the difference between the adjusted cost per share and$1.71 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.

The Company alsoreceived $4.7 million in prepaid wafer credits in partial consideration forthe investment, $3.6 million of which remained available as of April 1,2007. The credits have no stated maturity and the Company has guaranteedcapacity at Tower through at least 2010. These credits are recorded withinlong-term other assets on the balance sheets and can be applied toward waferpurchases from Tower at 15% of the value of future purchases.

10

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**QUICKLOGICCORPORATION**

**NOTESTO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**Note 5—Balance Sheet Components**
| ** **                                | ** ** | **April 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|-------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **(in thousands)** | ** ** |
| Inventory:                                |       |                    |       |                        |       |
| Raw materials                             |       | $                       | 378        |                        | $          | 791 |   |
| Work-in-process                           |       | 5,624                   |       | 7,845                       |       |
| Finished goods                            |       | 471                     |       | 428                         |       |
|                                      |       | $                       | 6,473      |                        | $          | 9,064 |   |
|                                      |       |                    |       |                        |       |
| Other current  assets:                    |       |                    |       |                        |       |
| Prepaid expenses                          |       | $                       | 1,496      |                        | $          | 1,566 |   |
| Other                                     |       | 149                     |       | 328                         |       |
|                                      |       | $                       | 1,645      |                        | $          | 1,894 |   |
|                                      |       |                    |       |                        |       |
| Property and  equipment:                  |       |                    |       |                        |       |
| Equipment                                 |       | $                       | 13,813     |                        | $          | 13,477 |   |
| Software                                  |       | 9,372                   |       | 9,370                       |       |
| Furniture and fixtures                    |       | 824                     |       | 824                         |       |
| Leasehold improvements                    |       | 803                     |       | 803                         |       |
|                                      |       | 24,812                  |       | 24,474                      |       |
| Accumulated depreciation and amortization |       | (19,801                 | )          | (18,994                     | )          |
|                                      |       | $                       | 5,011      |                        | $          | 5,480 |   |
|                                      |       |                    |       |                        |       |
| Other assets:                             |       |                    |       |                        |       |
| Prepaid wafer credits                     |       | $                       | 3,567      |                        | $          | 3,634 |   |
| Other                                     |       | 450                     |       | 404                         |       |
|                                      |       | $                       | 4,017      |                        | $          | 4,038 |   |
|                                      |       |                    |       |                        |       |
| Accrued  liabilities:                     |       |                    |       |                        |       |
| Employee related accruals                 |       | $                       | 1,668      |                        | $          | 1,150 |   |
| Other                                     |       | 972                     |       | 1,312                       |       |
|                                      |       | $                       | 2,640      |                        | $          | 2,462 |   |

 

11

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**QUICKLOGICCORPORATION**

**NOTESTO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

**Note 6—Obligations**
| ** **                                             | ** ** | **April 1,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **(in thousands)** | ** ** |
| Debt and capital  lease obligations:                   |       |                    |       |                        |       |
| Notes payable to bank                                  |       | $                       | 2,186      |                        | $          | 2,526 |   |
| Capital leases                                         |       | 1,044                   |       | 1,384                       |       |
|                                                   |       | 3,230                   |       | 3,910                       |       |
| Current portion of debt and capital lease  obligations |       | (1,992                  | )          | (2,292                      | )          |
|                                                   |       | $                       | 1,238      |                        | $          | 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 is 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. Terms of the various advances under the agreement are asfollows (in thousands):
| ** **                 | ** ** | **Original  Balance** | ** ** | **Balance at  April 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                 |       | 261                                      |       | n/a                   |       | Prime  + 2.00%                      |       | Multiple draws maturing  on or  before April 2008 |       |
| Notes payable              |       | 932                   |       | 631                                      |       | n/a                   |       | Prime  + 1.75%                      |       | Multiple draws maturing  on or  before April 2009      |       |
| Notes payable              |       | 1,558                 |       | 1,294                                    |       | n/a                   |       | Prime  + 1.00%                      |       | Multiple draws maturing  on or  before September 2009  |       |
| Notes payable              |       | n/a                   |       | —                                   |       | 442                   |       | Prime  + 1.00% or  Treasury + 4.00% |       | 30 or 36 months from  date of  advance                 |       |
| Total                      |       |                  |       | $                                        | 2,186      |                  |       |                                |       |                                                   |       |   |
|                            |            |                       |            |                                          |            |                       |            |                                     |            |                                                        |            |  |

 

The bank has afirst priority security interest in substantially all of the Company’s tangibleand intangible assets to secure any outstanding amounts under the agreement.Under the terms of the agreement, the Company must maintain a minimum tangiblenet worth and adjusted quick ratio. The agreement also has certain restrictionsincluding, among others, on the incurrence of other indebtedness, themaintenance of depository accounts, the disposition of assets, mergers,acquisitions, investments, the granting of liens and the payment of dividends.The Company was in compliance with the financial covenants of the agreement asof April 1, 2007.

At April 1,2007, the prime rate under the credit facility was 8.25%. As of April 1, 2007and December 31, 2006, $1.1 million and $1.3 million, respectively, ofamounts outstanding under the equipment line of credit were classified aslong-term obligations.

12

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

*Capital Leases*

In December 2005,the Company leased design software and related maintenance under a two-yearcapital lease at an imputed interest rate of 8.5% per annum. Terms of theagreement require the Company to make quarterly payments of approximately$204,000 through 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 April 1,2007, $589,000 was outstanding under the capital lease, zero of which wasclassified as a long-term obligation.

In January 2006,the Company leased design software tools and related maintenance under athree-year capital lease at an imputed interest rate of 9.0% per annum. Termsof the agreement require the Company to make semi-annual payments ofapproximately $148,000 through July 2008. The Company recorded a capital assetfor $633,000 that is being depreciated over the term of the agreement, prepaidmaintenance of $158,000 that is being amortized over the term of the agreementand a capital lease obligation of $791,000. As of April 1, 2007, $406,000 wasoutstanding under the capital lease, $141,000 of which was classified as along-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 annualamounts of $28,000 through January 2009. As of April 1, 2007, $49,000 wasoutstanding under the capital lease, $26,000 of which was classified as along-term obligation.

**Note 7—Deferred Royalty Revenue**

InOctober 2000, the Company entered into a technology license and wafersupply agreement with Aeroflex Incorporated (“Aeroflex”). Under the terms ofthe agreement, the Company received $750,000 of prepaid royalties. In addition,Aeroflex receives a prepaid royalty credit for a portion of the amounts paidfor wafers purchased from the Company under the agreement. As of April 1, 2007and December 31, 2006, the Company had recorded approximately $959,000 and$960,000, respectively, of deferred royalty revenue under this agreement whichis classified as a current liability. The Company recognized $110,000 ofroyalty revenue under the agreement in the first quarter of 2007.

**Note8—Employee Stock Plans**

*1989 Stock Option Plan*

The 1989 StockOption Plan (the “1989 Plan”) provided for the issuance of incentive andnonqualified options for the purchase of up to 4.6 million shares of commonstock. Options granted under the 1989 Plan have a term of up to ten years,and typically vest at a rate of 25% of the total grant per year over afour-year period. In September 1999, the Company adopted the 1999 StockPlan and no further stock option grants were made under the 1989 Plan.

*1999 Stock Plan*

The 1999 Stock Plan(the “1999 Plan”) was adopted by the Board of Directors in August 1999 andwas approved by the Company’s stockholders in September 1999. The Companymay issue either stock options or restricted stock under the terms of the 1999Plan. To date only stock options have been issued under the 1999 Plan, but theCompany may issue restricted stock in the future. As of April 1, 2007,approximately 15.0 million shares were reserved for issuance under the 1999Plan. In addition, each January an annual increase is added to the 1999 Planequal to the lesser of (i) 5,000,000 shares, (ii) 5% of the Company’soutstanding shares on such date, or (iii) a lesser amount determined bythe Board of Directors. Options or equity awards that are cancelled orforfeited under the 1989 Plan also become available for grant under the1999 Plan. Options granted under the 1999 Plan have a term of up toten years. Options typically vest at a rate of 25% one year after thevesting commencement date, and one forty-eighth for each month of servicethereafter. However, the Company has implemented a different vestingschedule in the past and may implement different vesting schedules in thefuture with respect to any new equity awards.

*Employee Stock Purchase Plan*

The 1999 EmployeeStock Purchase Plan (“ESPP”) was adopted by the Board of Directors inAugust 1999 and was approved by the Company’s stockholders inSeptember 1999. As of April 1, 2007, approximately 

13

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

5.3 million shareswere reserved for issuance under the ESPP. In addition, each August an annualincrease is added to the ESPP equal to the lesser of (i) 1,500,000 shares,(ii) 4% of the Company’s outstanding shares on such date, or (iii) alesser amount determined by the Board of Directors.

The Board ofDirectors amended the ESPP in November 2005 to provide for six-month offeringperiods. Participants purchase shares through payroll deductions of up to 20%of an employee’s total compensation (maximum of 20,000 shares per offeringperiod). The amended ESPP permits the Board of Directors to determine, prior toeach offering period, whether participants purchase shares at: (i) 85% of thefair market 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 thebeginning or the end of an offering period. The Board of Directors hasdetermined that, until further notice, future offering periods will be made at85% of the lower of the fair market value of the common stock at the beginningor the end of an offering period.

**Note9—Stock-Based Compensation**

Effective January 2, 2006, the Company adoptedthe provisions of SFAS 123(R) which requires the measurement andrecognition of expense related to the fair value of stock-based compensationawards made to employees and directors over the requisite service period. UnderSFAS 123(R), stock-based compensation expense is recognized in the Company’sconsolidated statements of operations and includes: (i) compensationexpense for stock-based compensation awards granted prior to, but not yetvested as of January 1, 2006, based on the grant-date fair value estimatedand re-measured upon modification in accordance with the pro forma provisionsof SFAS 123, and (ii) compensation expense for the stock-basedcompensation awards granted or modified subsequent to January 1, 2006,based on the grant-date fair value estimated in accordance with the provisionsof SFAS 123(R). The impact of SFAS 123(R) on the Company’s consolidatedfinancial statements for first quarter of 2007 and 2006 was as follows (inthousands, except per share amounts):

 
| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
| Cost of revenue                      |       | $                                | 55         |   | $ | 49 |   |
| Research and  development            |       | 85                               |       | 146 |   |
| Selling, general  and administrative |       | 241                              |       | 257 |   |
| Total costs and  expenses            |       | $                                | 381        |   | $ | 452 |   |

 

The amount ofstock-based compensation included in inventory for the first quarter of 2007and 2006 was not material.

*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-based compensation 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.

14

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

The following weightedaverage assumptions are included in the estimated fair value calculations forstock option grants:

 
| ** **                                                              | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                              | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
| Expected term  (years)                                                  |       | 5.10                             |       | 5.75 |   |
| Risk-free  interest rate                                                |       | 4.70                             | %          | 4.75 | % |
| Volatility                                                              |       | 80.00                            | %          | 82.00 | % |
| Estimated  pre-vesting annual forfeiture rate — employees          |       | 7.50                             | %          | 8.10 | % |
| Estimated  pre-vesting annual forfeiture rate — executive officers |       | 1.60                             | %          | 8.10 | % |
| Dividend yield                                                          |       | —                           |       | — |   |

 

The methodologies for determining theabove values were as follows:

·                  *Expected term:*The expected term represents the period that the Company’s stock-based awardsare expected to be outstanding and is estimated based on historical experience.

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

·                  *Volatility:* TheCompany determines expected volatility based on historical volatility of theCompany’s common stock, and other factors.

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

·                  *Estimated pre-vesting forfeitures:* When estimatingpre-vesting forfeitures, the Company considers termination behavior based onactual historical information for the class of employees.

Theweighted average estimated fair value for options granted during the firstquarter of 2007 and 2006 was $1.98 and $3.60 per option, respectively. As ofthe end of the first quarter of 2007, the fair value of unvested stock-basedcompensation awards, net of expected forfeitures, was $3.3 million whichis expected to be recognized over the next four years.

*Stock-Based Compensation Award Activity*

The following tablesummarizes stock-based compensation award activity under the 1989 Plan and the1999 Plan, and the related weighted average exercise price, for the firstquarter of 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                            |       | (126                                      | )          | 126                            |       | 2.94 |   |
| Forfeited or  expired              |       | 581                                       |       | (581                           | )          | 6.76 |   |
| Exercised                          |       | —                                    |       | (178                           | )          | 1.88 |   |
| Balance at April 1,  2007          |       | 8,514                                     |       | 6,831                          |       | $ | 4.86 |   |

 

As of April 1, 2007and December 31, 2006, options to purchase 5,115,000 and 5,689,000 shareswere vested, respectively.

15

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

The total intrinsic value of options exercised duringthe first quarter of 2007 and 2006 was $190,000 and $820,000, respectively.Total cash received from employees as a result of employee stock optionexercises during the first quarter of 2007 and 2006 was approximately $335,000and $1.1 million, respectively. The Company settles employee stock optionexercises with newly issued common shares. In connection with these exercises,there was no tax benefit realized by the Company due to the Company’s currentloss position.

*EmployeeStock 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. Inconnection with the May 2006 offering period, approximately 86,000 shares ofcommon stock were purchased. Stock-based compensation relating to the ESPP was$35,000 in the first quarter of 2006. The purchase discount of rights issuedpursuant to the Company’s ESPP during the first quarter of 2006 was $0.84 perright.

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

The current offering period under the ESPP commenced onJanuary 24, 2007, once the Company had completed its stock option review andwas current with its filings as required by the Securities and ExchangeCommission (“SEC”) and Nasdaq, and will end on May 14, 2007, the next regularlyscheduled purchase date. Future offering periods are expected to return to thestandard six-month period. Stock-based compensation relating to the ESPP was$76,000 in the first quarter of 2007. The weighted average estimated fairvalue, as defined by SFAS 123(R), of rights issued pursuant to the Company’sESPP during the first quarter of 2007 was $0.84 per right.

The following weighted average assumptions are included inthe estimated fair value calculations for rights to purchase stock under theESPP for the purchase period that will end on May 14, 2007:

|                          | ** ** | **Three Months  Ended  April 1, 2007** | ** ** |
|--------------------------|------------|-------------------------------------------------------|------------|
| Expected term  (months)  |       | 3.60                                                  |       |
| Risk-free  interest rate |       | 5.00                                                  | %          |
| Volatility               |       | 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 on historical volatility of the Company’s commonstock, and other factors, for the term of the purchase period.

·                  *Dividend yield:* The dividend yieldassumption is based on the Company’s intent not to issue a dividend under itsdividend policy.

**Note 10—Income Taxes**

In the first quarter of 2007 and 2006, the Company recorded income taxexpense of $15,000 and $2,000, respectively, which consisted primarily of income taxes on foreign operations.

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.

16

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

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. As a result of theimplementation of FIN 48, the Company recognized no material adjustment in theliability for unrecognized income tax benefits. The Company had approximately$111,000 and $120,000 of unrecognized tax benefits at January 1, 2007, the adoptiondate, and April 1, 2007, respectively. The Company recognizes interest andpenalties related to uncertain tax positions in income tax expense. As of April1, 2007, the Company had approximately $9,000 of accrued interest and penaltiesrelated to uncertain tax positions.

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**

TheCompany identifies its business segments based on business activities,management responsibility and geographic location. For all periods presented,the Company operated in a single business segment.

17

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

The following is abreakdown of revenue by product line (in thousands):
| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
| *Revenue  by product line (1):* | * *   | * *                         | * *   | * * | * * |
| New products                         |       | $                                | 848        |   | $ | 1,088 |   |
| Mature products                      |       | 3,931                            |       | 5,154 |   |
| End-of-life products                 |       | 1,463                            |       | 3,091 |   |
| Total revenue                        |       | $                                | 6,242      |   | $ | 9,333 |   |

----

*(1)**         *Newproducts include PolarProTM,EclipseTM II, QuickPCI® IIand QuickMIPS products. Mature products include pASIC 3, QuickRAM, Eclipse,QuickPCI, QuickDSP and QuickFC products, as well as royalty revenue,programming hardware and design software. End-of-life products include pASIC® 1, pASIC 2 and V3 products.

The following is a breakdown ofrevenue by shipment destination (in thousands):
| ** **               | ** ** | **Three Months Ended** | ** ** |
|--------------------------|------------|----------------------------------|------------|
| ** **               | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
| *Revenue  by geography:* | * *   | * *                         | * *   | * * | * * |
| United States            |       | $                                | 3,090      |   | $ | 4,836 |   |
| Europe                   |       | 837                              |       | 2,033 |   |
| Japan                    |       | 610                              |       | 988 |   |
| China                    |       | 331                              |       | 605 |   |
| Rest of North America    |       | 987                              |       | 594 |   |
| Rest of Asia Pacific     |       | 387                              |       | 277 |   |
| Total revenue            |       | $                                | 6,242      |   | $ | 9,333 |   |

 

The followingdistributors and customers accounted for 10% or more of the Company’s revenuefor the periods presented: 
| ** **                                  | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
| Distributor “A”                   |       | 21                               | %          | 33 | % |
| Distributor “B”                   |       | 18                               | %          | 13 | % |
| Customer “A” —  domestic OEM |       | 14                               | %          | 12 | % |
| Customer “B” — domestic  OEM |       | 11                               | %          | * |   |

----

*                    Representsless than 10% 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: 
| ** **                                  | ** ** | **April 1,  2007** | ** ** | **April 2,  2006** | ** ** |
|---------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| Distributor “A”                   |       | 24                      | %          | 42                      | %          |
| Customer “B” — domestic  OEM |       | 13                      | %          | *                       |       |

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*                    Representsless than 10% of accounts receivable as of the date presented.

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

18

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

**Note 12—Commitments andContingencies**

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 April 1, 2007 andDecember 31, 2006, the Company had $2.4 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 first quarter of2007 and 2006 was approximately $225,000 and $210,000, respectively. TheCompany has subleased a portion of its primary facilities to a tenant untilMarch 2009.

*SECInquiry*

On July 26, 2006,the Company notified the SEC that it was conducting an internal review of itshistorical stock option practices and related accounting. On August 1, 2006,the Company received an informal inquiry from the SEC requesting certaindocuments and information relating to the Company’s practices, procedures anddisclosures regarding its stock option grants. The Company complied with allrequests made by the SEC. On March 20, 2007, the Company received notice thatthe inquiry was terminated and no enforcement action has been recommended.

*NasdaqStaff Determination Notices*

During 2006, theCompany received two Nasdaq Staff Determination notices stating that it was notthen in compliance with Marketplace Rule 4310(c)(14) because the Company hadnot timely filed its Forms 10-Q for the quarters ended July 2, 2006 and October1, 2006 and, therefore, that the Company’s securities were subject to delistingfrom the Nasdaq Global Market. On January 12, 2007, after the Company hadprovided all required information and filed its Forms 10-Q for the second andthird quarters of 2006, the Panel determined to continue listing the Company’ssecurities on the Nasdaq Global Market, ending the delisting proceedings.

**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 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*.A stipulation of settlement for the claims against the issuer defendants,including the Company, has been signed and was submitted to the court. Underthe stipulation of settlement, the plaintiffs will dismiss and release allclaims against participating defendants in exchange for a contingent paymentguaranty by the insurance companies collectively responsible for insuring theissuers in all the related cases, and the assignment or surrender to theplaintiffs of certain claims the issuer defendants may have against theunderwriters. Under the guaranty, the insurers will be required to pay theamount, if any, by which $1.0 billion exceeds the aggregate amount ultimatelycollected by the plaintiffs from the underwriter defendants in all the cases.On February 15, 2005, the court preliminarily approved the settlementcontingent on specified modifications. The settlement is still subject to courtapproval and a number of other conditions. There is no guarantee that thesettlement will become effective. On December 5, 2006, the Court of Appeals forthe Second Circuit reversed the Court’s October 2004 order certifying a classin six test cases that were selected by the underwriter defendants andplaintiffs in the coordinated proceedings. QuickLogic is not among the testcases and it is unclear what impact this will have on the class certified inthe QuickLogic action or on the proposed settlement pending before the court.If this settlement does not occur and litigation against QuickLogic continues,the Company intends to defend the case vigorously.

On November 2,2006 and November 29, 2006, purported shareholder derivative complaints werefiled against certain of the Company’s current and former officers anddirectors in the U.S. District Court for the Northern 

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

District of California.The complaints allege that the individual defendants 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 name theCompany as a nominal defendant and seek unspecified monetary damages againstthe individual defendants as well as various forms of injunctive relief.

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 2. Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

*The followingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, as well as information contained in “Risk Factors” in Part II, Item1A and elsewhere in this Quarterly Report on Form 10-Q, contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933 and Section 21E of the Securities Exchange Act of 1934. We intendthat these forward-looking statements be subject to the safe harbors created bythose provisions. Forward-looking statements are generally written in thefuture tense and/or are preceded by words such as “will,” “may,” “should,” “forecast,”“could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan” orother similar words. Forward-looking statements include statements (1) regardingour revenue levels, including the commercial success of our new products, (2) ourgross profit and factors that affect gross profit, (3) our level ofoperating expenses, (4) our research and development efforts, (5) ourliquidity, (6) our partners and suppliers and (7) industry trends.The following discussion should be read in conjunction with the attachedcondensed unaudited consolidated financial statements and notes thereto, andwith our audited consolidated financial statements and notes thereto for thefiscal year ended December 31, 2006, found in our Annual Report onForm 10-K filed with the Securities and Exchange Commission, or SEC, onMarch 15, 2007.*

*Theforward-looking statements contained in this Quarterly Report involve a numberof risks and uncertainties, many of which are outside of our control. Factorsthat could cause actual results to differ materially from projected results include,but are not limited to, risks associated with (1) the commercial andtechnical success of our new products such as ArcticLinkTM, PolarProTM, EclipseTMII and QuickPCI® II, (2) our successful introduction of products andsolutions incorporating emerging technologies or standards, (3) limitedvisibility into demand for our products including demand from significantcustomers or for new products, (4) the liquidity required to support ourfuture operating and capital requirements, (5) our ability to accuratelyestimate quarterly revenue and (6) our dependence upon single suppliers tofabricate and assemble our products. Although we believe that the assumptionsunderlying the forward-looking statements contained in this Quarterly Reportare reasonable, any of the assumptions could be inaccurate, and therefore therecan be no assurance that such statements will be accurate. The risks, uncertaintiesand assumptions referred to above that could cause our results to differmaterially from the results expressed or implied by such forward-lookingstatements include, but are not limited to, those discussed under the heading “RiskFactors” in Part II, Item 1A hereto and the risks, uncertainties andassumptions discussed from time to time in our other public filings and publicannouncements. All forward-looking statements included in this document arebased on information available to us as of the date hereof. In light of thesignificant uncertainties inherent in the forward-looking statements includedherein, the inclusion of such information should not be regarded as arepresentation by us or any other person that the results or conditions describedin such statements or our objectives and plans will be achieved. Furthermore,past performance in operations and share price is not necessarily indicative offuture performance. We disclaim any intention or obligation to update or reviseany forward-looking statements, whether as a result of new information, futureevents or otherwise.*

**Overview**

We develop and market low power programmable solutionsthat enable customers to add features to their mobile, consumer and industrialproducts. We are a fabless semiconductor company that operates in a singleindustry segment where we design and sell Customer Specific Standard Products,or CSSPs, Embedded Standard Products, or ESPs, Field Programmable Gate Arrays,or FPGAs, associated design software and programming hardware. CSSPs implementcustomer specific solutions as a standard product. Our ESP and FPGA devices arealso standard products that can be programmed to perform desired logicfunctions. In 1991, we introduced our first FPGA products based upon our ViaLink®technology. We believe that the underlying attributes of our ViaLinktechnology, including low power consumption, high reliability, design securityand design efficiency, enable us to deliver differentiated silicon solutions toour customers.

Consumer products are the new driver for semiconductorsales, and the needs of the consumer market bring a unique set of requirementsas compared to traditional FPGA markets. One important trend in the consumermarket is towards mobile, hand-held devices. Important industry trendsaffecting this market include miniaturization and the need to increase batterylife. An equally important trend is shrinking product life cycles, which drivesa need for faster, lower risk product development. And of course, there isintense pressure on the total product cost, including per unit component costsand non-recurring development expenses. As more people experience theadvantages of a mobile lifestyle at home, they demand the same advantages intheir professional lives. Therefore, we believe that 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.

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

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

·                  *Customer Specific Standard Products*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;

·                  *Embedded Standard Products* incorporating afixed 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

·                  *FPGAs*which are general purpose FPGAs usedby customers who value the low power consumption, high IP security, instant onand reliability of our devices.

This range of solutions allows customers to acquire asolution tailored for their needs. Mobile product original designmanufacturers, or ODMs, tend to prefer a complete solution, and purchase CSSPs.Other customers, such as a European cellular data card manufacturer, choose ourESP solutions, while military and gaming customers tend to prefer FPGAs.

Whether a customer uses our CSSPs as a complete solution,our ESPs as a “known good starting point” in their design, or our FPGAs as a “blankslate” to design their unique application, we believe our solutions andproducts enable system manufacturers to improve their time-to-market, lowertotal system power consumption and add features or performance to theirembedded applications. In addition, we believe that our products and solutionsprovide our customers with the lowest power consumption and highest IP securityof 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:

·                  *Proven System Solutions*—out-of-the-boxsolutions based on industry standard interfaces and intellectual property alongwith proven software and drivers;

·                  *Flexibility*—solutions can be combined asrequired to meet a customer’s specific needs;

·                  *Small Form Factor*—single chip solutions inpackages as small as 6x6 millimeters;

·                  *Instant On*—live at power up becauseViaLink-based products require no configuration bit stream;

·                  *High Reliability*—ViaLink-based products donot rely on an SRAM cell that is susceptible to alpha particles, or brownouts,to define and maintain their functionality; and

·                  *Unmatched IP Security*—it is virtuallyimpossible to clone or reverse engineer designs implemented using our ViaLinktechnology.

Our PolarPro architecture builds on our low powerEclipse II architecture to provide lower power consumption and a morecost-effective device. All PolarPro devices include the new and innovative VeryLow Power, or VLP, mode, power aware placement and glitch free clock gating.Based on our engineering analysis of portable media player applications, webelieve designers using PolarPro can extend battery life by as much as fourtimes as

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

compared to a standard product implementation, settinga new standard for low power consumption through the use of programmable logic.

We announced our first Solution Platform product offering,ArcticLink, in March 2007 and announced sample availability in April 2007. OurSolution Platforms combine hard-wired logic and programmable fabric on onedevice. Adding hard-wired intellectual property enables us to deliver morelogic, while the programmable fabric allows us to provide CSSPs that can berapidly customized to differentiate products, add features and reduce systemdevelopment costs. This combination of hard-wired and programmable fabricenables us to deliver low cost, small form factor solutions that can becustomized for particular customer or market requirements. The high routingdensity and flexibility of our ViaLink technology is critical to the efficientinterface between the hard-wired logic and the programmable fabric.

The low power consumption, high performance, smallform factor and fast time-to-market of our solutions are ideal for powersensitive mobile applications that need to efficiently integrate storage,networking and/or graphics capabilities. These products are being designed intoapplications for markets and customers that are new to us. Examples of how ournew customers have utilized our new products are:

·                  s*martphones*—where our solutions enable thesimultaneous display of video on the handset and an external display;

·                  *portable navigation products*—where oursolutions allow the incorporation of the latest storage technology, managedNAND flash memory, and access to the latest peripherals, such as high capacitySD cards;

·                  *portable media players*—where our solutionsallow a processor to access a micro hard disk drive;

·                  *cellular data cards*—where our solutionsprovide the lowest power interface between a cellular radio and a laptop cardslot; and

·                  *handheld point-of-sale, or POS, terminals*—whereour solutions enable Wi-Fi, BlueTooth and storage connectivity*.*

Our new products are also being designed intoapplications in our traditional markets, such as data communications,instrumentation and test and military-aerospace, where customers value the lowpower consumption, instant-on, IP security, reliability and fast time-to-marketof our products.

In addition to working directly with our customers, wepartner with other technology companies to develop additional intellectualproperty, reference platforms and system software to provide applicationsolutions. We work with processor manufacturers, such as Marvell TechnologyGroup Ltd. and Analog Devices, Inc., and companies that supply storage,networking or graphics components for embedded systems. The depth of theserelationships varies depending on the partner and the dynamics of the endmarket being targeted, but is typically a co-marketing program that includesjoint account calls, promotional activities and/or engineering collaboration,such as reference designs.

We sell programmed and unprogrammed products throughdistributors and directly to original equipment manufacturers, or OEMs. Werecognize revenue at the time of shipment of products directly to OEMs.However, we sell the majority of our products through distributors who earn anegotiated margin on the sale of our products. We defer recognition of revenuefrom sales of unprogrammed products to distributors until after they have soldour products to systems manufacturers. We recognize revenue on programmedproducts at the time of shipment to our distributors. During the first quarterof 2007 and 2006, approximately 62% and 51%, respectively, of the units shippedto our distributors were programmed by us and, accordingly, are not returnable.The percentage of sales derived through distributors was 62% and 61% for thefirst quarter 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** | ** ** |
|---------------------------------------------|------------|----------------------------------|------------|
| ** **                                  | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
| Distributor “A”                   |       | 21                               | %          | 33 | % |
| Distributor “B”                   |       | 18                               | %          | 13 | % |
| Customer “A” —  domestic OEM |       | 14                               | %          | 12 | % |
| Customer “B” — domestic  OEM |       | 11                               | %          | * |   |

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*                    Representsless than 10% of revenue for the period presented.

We anticipate that a limited number of distributorsand customers will continue to account for a significant portion of our revenueand that individual distributors and customers could account for a largerportion of our revenue.

Our international sales were 50% and 48% of ourrevenue in the first quarter of 2007 and 2006, respectively. We expect thatrevenue from sales to international customers will continue to represent asignificant portion of our revenue. All of our sales originate in the UnitedStates and are denominated in U.S. dollars.

We outsource the wafer manufacturing, assembly andtesting of all of our products. We currently rely upon Taiwan SemiconductorManufacturing Company Ltd., or TSMC, Tower, Kawasaki Microelectronics, Inc. andSamsung Semiconductor, Inc. to manufacture our products, and we rely primarilyupon Amkor Technology, Inc. to assemble, test and program our products.Our wafer suppliers’ lead times are often as long as three months and sometimeslonger. In addition, Tower requires us to provide them with a monthly waferstart forecast. Under the terms of our agreement with them, we are limited inthe quantity that we can increase or decrease our wafer forecast and we arecommitted to take delivery of and pay for a minimum portion of the forecastedwafer volume. Our long manufacturing cycle times are at odds with our customers’desire for short delivery lead times and, as a result, we typically purchasewafers based on our internal forecasts of customer demand.

**CriticalAccounting Policies and Estimates**

The methods, estimates and judgments we use inapplying our most critical accounting policies have a significant impact on theresults we report in our consolidated financial statements. The Securities andExchange Commission, or 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.

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

**Results ofOperations**

The followingtable sets forth the percentage of revenue for certain items in our statementsof operations for the periods indicated:
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
| Revenue                             |       | 100.0                            | %          | 100.0 | % |
| Cost of revenue  (1)                |       | 86.5                             |       | 40.3 |   |
| Gross profit                        |       | 13.5                             |       | 59.7 |   |
| Operating  expenses:                |       |                             |       |   |   |
| Research and development            |       | 36.6                             |       | 25.7 |   |
| Selling, general and administrative |       | 73.6                             |       | 49.5 |   |
| Loss from  operations               |       | (96.7                            | )          | (15.5 | ) |
| Interest expense                    |       | (1.4                             | )          | (0.8 | ) |
| Interest income  and other, net     |       | 3.9                              |       | 3.1 |   |
| Loss before  income taxes           |       | (94.2                            | )          | (13.2 | ) |
| Provision for  income taxes         |       | 0.2                              |       | — |   |
| Net loss                            |       | (94.4                            | )%         | (13.2 | )% |

 
| ** **                      | ** ** | **Three Months Ended** | ** ** |
|---------------------------------|------------|----------------------------------|------------|
| ** **                      | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
| *Revenue  by product line (2):* |       |                             |       |   |   |
| New products                    |       | $                                | 848        |   | $ | 1,088 |   |
| Mature products                 |       | 3,931                            |       | 5,154 |   |
| End-of-life products            |       | 1,463                            |       | 3,091 |   |
| Total revenue                   |       | $                                | 6,242      |   | $ | 9,333 |   |

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(1)             Includes$2.5 million and $232,000 of costs for excess inventory and relatedcharges, which represents 39.5% and 2.5% of revenue, respectively.

(2)             Newproducts include PolarPro, Eclipse II, QuickPCI II and QuickMIPS products.Mature products 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 EndedApril 1, 2007 and April 2, 2006**

*Revenue.*   Ourrevenue for the first quarter of 2007 was $6.2 million, representing adecline of $3.1 million, or 33.1%, from revenue of $9.3 million inthe first quarter of 2006. Our end-of-life product revenue declined by $1.6 millionas a result of a $1.7 million decline in our pASIC 1 and pASIC 2product revenue due to their end-of-life, partially offset by a $110,000increase in our V3 product revenue due to higher demand as a result of theirannounced end-of-life in January 2007. Our mature product revenue declined by$1.2 million as a result of lower customer demand for pASIC 3, QuickRAMand QuickPCI products. Our new product revenue declined by $240,000 due to adecline in revenue from one customer as a result of the late stage of itsproduct life cycle. This customer, purchasing our Eclipse II devices through acontract manufacturer, represented $590,000 of revenue in the first quarter of2006 and no revenue in the first quarter of 2007.

Our revenue for the first quarter of 2007 was 19.4%lower sequentially, declining by approximately $1.5 million to $6.2 millionfrom $7.7 million in the fourth quarter of 2006. This sequential revenuedecrease was primarily due to: 1) a $580,000 decline in new product revenue dueto the customer’s product life cycle as mentioned above; 2) a $670,000 declinein mature product revenue due primarily to a $550,000 decline in royaltyrevenue, which is based on reported sales by the licensee; and 3) a $250,000decline in our end-of-life products as a result of an $860,000 decline in ourpASIC 1 and pASIC 2 product revenue due to their end-of-life,partially offset by a $600,000 increase in our V3 product revenue due to higherdemand as a result of their announced end-of-life in January 2007.

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

Our foundry agreement with the supplier thatfabricated our pASIC 1 and pASIC 2 products expired at the end of2005. We announced an end-of-life for these products in 2004 and requested thatour customers take delivery of lifetime buy orders before the end of 2005.These products contributed $520,000 and $2.3 million of our revenue in thefirst quarter of 2007 and 2006, respectively. We currently believe that amajority of our customers that use pASIC 1 and pASIC 2 products haveeither purchased sufficient quantities of our product to satisfy their demandthroughout the expected life of their products or have converted to using otherof our products, such as pASIC 3, which is pin compatible withpASIC 2. Because of the end-of-life of these products, we have experienceda significant reduction in pASIC 1 and pASIC 2 revenue since the third quarterof 2005 and believe that they will not represent significant revenue in 2007.We have no further manufacturing capacity for these products and any futurerevenue is limited to inventory on hand.

In January 2007, we announced the end-of-life for ourV3 products, primarily due to the loss of manufacturing capacity for theseproducts, and asked our customers to take delivery of lifetime buy ordersbefore the end of 2007. These products contributed $940,000 and $830,000 of ourrevenue in the first quarter of 2007 and 2006, respectively. Due to the natureof end-of-life purchases, revenue levels from these products could fluctuate upor down significantly on a sequential basis. After 2007, we expect that theseproducts will contribute less than five percent of revenue.

In order to grow our revenue from its current level,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 continue to seek to expand our revenue, includingthe pursuit of high volume sales opportunities in the consumer market segment,by providing CSSPs incorporating industry standard interfaces such as UniversalSerial Bus 2.0 On-the-Go, or USB 2.0 OTG, Secure Digital Input/Output, or SDIO,and Integrated Drive Electronics, or IDE. Our industry is characterized byintense price competition and by lower prices as order volumes increase. Whilewinning large volume sales opportunities will increase our revenue, we believethese opportunities may decrease our average selling price and gross profit asa percentage of revenue.

*GrossProfit.*   Gross profit was $841,000 and $5.6 millionin the first quarter of 2007 and 2006, respectively, which represented 13.5%and 59.7% of revenue for those periods. The $4.7 million decline in grossprofit was primarily due to: 1) increased inventory reserves of $2.2 million,primarily for excess quantities as a result of a change in forecasted productmix; 2) lower revenue and change in product mix and cost, which contributed$1.9 million; and 3) higher unabsorbed overhead of approximately $400,000as a result of lower production volumes. In the first quarter of 2007, weprovided inventory reserves primarily for excess quantities in the amount of$2.5 million and sold approximately $80,000 of inventory that waspreviously reserved. In the first quarter of 2006, we provided inventoryreserves primarily for excess quantities in the amount of $232,000 and soldapproximately $320,000 of inventory that was previously reserved.

*Researchand Development Expense.*   Research anddevelopment expense was $2.3 million and $2.4 million in the firstquarter of 2007 and 2006, respectively, which represented 36.6% and 25.7% ofrevenue for those periods. The decrease of approximately $113,000 was primarilya result of $140,000 of lower compensation expense due to a decrease in thenumber of employees, partially offset by higher development project expenses.We believe that continued or increased investments in product development andprocess technology are essential for us to remain competitive in the markets weserve. We expect that these development efforts will allow us to expand ourproduct and solution offerings, increase our revenue and provide additionalvalue to our customers and stockholders.

*Selling,General and Administrative Expense.*   Selling,general and administrative expense was $4.6 million and $4.6 millionfor first quarter of 2007 and 2006, respectively, which represented 73.6% and49.5% of revenue for those periods. The primary reason for the increase inselling, general and administrative expense as a percentage of revenue is dueto the lower revenue in the first quarter of 2007. The $24,000 decrease inselling, general and administrative expense was primarily due to lowercommissions to outside sales representatives as result of lower revenue andlower travel expense, partially offset by higher compensation expenses due tothe increase in the number of sales and marketing employees.

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

*InterestExpense.*   Interest expense increased to $85,000for first quarter of 2007 as compared to $74,000 for the first quarter of2006. This $11,000 increase was primarily due to higher interest rates onoutstanding debt and capital leases.

*InterestIncome and Other, Net.*   Interest income andother, net decreased to $246,000 of income for the first quarter of 2007 ascompared to $292,000 of income for the first quarter of 2006. The $46,000decrease in interest income and other, net is primarily due to decreasedinterest income received as a result of lower invested cash balances.

*Provisionfor Income Taxes.*   For the first quarter of 2007,we incurred a net loss of $5.9 million and recorded a provision for incometaxes of $15,000, which consisted of incometaxes on foreign operations. For the first quarter of 2006, we incurreda net loss of $1.2 million and recorded a provision for income taxes of$2,000, which consisted of income taxes onforeign operations. Our ability to utilize our income tax losscarryforwards in future periods is uncertain and, accordingly, we recorded afull valuation allowance against the related tax benefit. We will continue toassess the realizability of the deferred tax assets in future periods.

*Stock-Based Compensation.*   Forthe first quarter of 2007 and 2006, stock-based compensation totaled $381,000and $452,000, respectively, and was included in the statement of operations asfollows (in thousands):
| ** **                           | ** ** | **Three Months Ended** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|
| ** **                           | ** ** | **April 1, 2007**      | ** ** | **April 2, 2006** | ** ** |
|                                 |       |                             |       |   |   |
| Cost of revenue                      |       | $                                | 55         |   | $ | 49 |   |
| Research and  development            |       | 85                               |       | 146 |   |
| Selling, general  and administrative |       | 241                              |       | 257 |   |
| Total                                |       | $                                | 381        |   | $ | 452 |   |

 

**Liquidity andCapital Resources**

We have financed our operating losses and capitalinvestments through sales of common stock, private equity investments, capitaland operating leases, bank lines of credit and cash flow from operations. As ofApril 1, 2007, our principal sources of liquidity consisted of our cash andcash equivalents of $21.1 million, available credit under our revolvingline of credit with Silicon Valley Bank of approximately $5.0 million,available credit under our equipment line of credit of approximately $442,000,and our investment in Tower with a market value of approximately $2.3 million.

As of April 1, 2007, our interest-bearing debtconsisted of $2.2 million outstanding from Silicon Valley Bank and $1.0 millionoutstanding under capital leases. As of April 1, 2007, our accumulated deficitwas $133.4 million. Capital expenditures, which are largely driven by thedevelopment of new products and manufacturing levels, could be up to $5.0 millionin the next twelve months.

In June 2006, we entered into a Second Amended andRestated Loan and Security Agreement with Silicon Valley Bank. Terms of the agreementincluded a $5.0 million revolving line of credit that is available throughJune 2008 and an additional $2.0 million of borrowing capacity under anequipment line of credit that is available to be drawn against through June2007. As of April 1, 2007, we had no balances outstanding under the revolvingline of credit, $2.2 million outstanding under the current and previousequipment lines of credit and $442,000 available to be drawn against futureequipment purchases. Advances under the new equipment line of credit must berepaid in either 30 or 36 equal monthly installments, depending upon the natureof the items financed. The bank has a first priority security interest onsubstantially all of our tangible and intangible assets to secure any outstandingamounts under the agreement. Under the terms of the agreement, we must maintaina minimum tangible net worth and an adjusted quick ratio. The agreement alsohas certain restrictions including, among others, the incurrence of otherindebtedness, the maintenance of depository accounts, the disposition ofassets, mergers, acquisitions, the granting of liens and the payment ofdividends. We were in compliance with all loan covenants as of April 1, 2007.

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

As of April 1, 2007, we had $589,000 outstanding undera capital lease obligation to finance design automation software and relatedmaintenance. The capital lease obligation has an imputed interest rate of 8.5%per annum and is being repaid in quarterly amounts of $204,000 through November2007.

As of April 1, 2007, we had $406,000 outstanding undera capital lease obligation for design software tools and related maintenance.The capital lease obligation has an imputed interest rate of 9.0% per annum andis being repaid in semi-annual amounts of $148,000 through July 2008.

As of April 1, 2007, we also had $49,000 outstandingunder a capital lease obligation for design software. The capital leaseobligation has an imputed interest rate of 9.25% per annum and is being repaidin annual amounts of $28,000 through January 2009.

*Net cash fromoperating activities*

Net cash used for operating activities was $2.8 millionin the first quarter of 2007. The cash used for operating activities resultedprimarily from a net loss of $5.9 million, adjusted for $3.8 millionof non-cash charges including reserves for excess inventory of $2.5 million,depreciation and amortization of $807,000 and stock-based compensation of $381,000.In addition, changes in working capital accounts used cash in the amount of$680,000 primarily as a result of a decrease of $2.2 million in accountspayable due to timing of inventory purchases and expenditures at the end ofeach period. These uses of cash were partially offset by a $573,000 decrease inaccounts receivable due primarily to a reduction in revenue levels and strongcollections, a $441,000 increase in deferred income and royalty revenue dueprimarily to higher inventories at distributors on which revenue is deferred, a$203,000 decrease in other assets, and a $178,000 increase in accruedliabilities.

Net cash provided by operating activities was $1.3 millionin the first quarter of 2006. The cash provided by operating activities resultedprimarily from a net loss of $1.2 million, adjusted for $1.4 millionof non-cash charges including depreciation and amortization of $686,000,stock-based compensation of $452,000 and reserves for excess inventory of$232,000. In addition, changes in working capital accounts provided cash in theamount of $1.1 million primarily as a result of a decrease of $1.4 millionin accounts receivable due to a reduction in revenue levels and the timing ofshipments in the period and a $316,000 increase in deferred income and royaltyrevenue due primarily to higher inventories at distributors on which revenue isdeferred. These sources of cash were partially offset by a $591,000 decrease inaccrued liabilities.

*Net cash frominvesting activities*

Net cash used for investing activities for the firstquarter of 2007 and 2006 was $338,000 and $709,000, respectively, as a resultof capital expenditures made primarily to acquire equipment and software usedin the development and production of our products and solutions.

*Net cash fromfinancing activities*

Net cash used for financing activities was $345,000for the first quarter of 2007, resulting from scheduled payments of $680,000under the terms of our debt and capital lease obligations, partially offset by$335,000 in proceeds related to the issuance of common shares upon the exerciseof stock options by employees.

Net cash provided by financing activities was $1.3 millionfor the first quarter of 2006, resulting from $1.1 million in proceedsrelated to the issuance of common shares upon the exercise of stock options byemployees and $932,000 in proceeds from borrowings under our equipment line ofcredit, partially offset by scheduled payments of $660,000 under the terms ofour debt and capital lease obligations.

We require substantial cash to fund our business,particularly to finance our operations, to acquire property and equipment, therepayment of debt and for working capital requirements. Our future liquiditywill depend on many factors such as these, as well as our level of revenue andgross profit, market acceptance of our existing and new products, the declinein revenue under end-of-life programs, wafer purchase commitments, the amountand timing of research and development expenditures, the timing of new productintroductions, production volumes, the quality of our products, sales andmarketing efforts, our ability to obtain debt financing and to remain incompliance

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

with the terms of our credit facilities, our abilityto raise funds from the sale of Tower shares and equity in the Company, theexercise of employee stock options and participation in our employee stockpurchase plan, and other factors related to the uncertainties of the industryand global economics. However, we believe that our existing cash resources willbe sufficient to fund operations, capital expenditures of up to $5.0 million,and provide adequate working capital for at least the next twelve months. Asour liquidity is affected by many factors as mentioned above and as discussedin our “Risk Factors,” there can be no assurance that we will not seekadditional capital during the next twelve months or that such capital will beavailable on terms acceptable to us. After the next twelve months, ourcash requirements will depend on many factors, including our level of revenueand gross profit, the market acceptance of our new products, the levels atwhich we maintain inventory and accounts receivable, costs of securing accessto adequate manufacturing capacity, new product development efforts, capitalexpenditures and the level of our operating expenses.

**ContractualObligations and Commercial Commitments**

The followingtable summarizes our contractual obligations and commercial commitments as ofApril 1, 2007 and the effect such obligations and commitments are expectedto have on our liquidity and cash flows in future fiscal periods (inthousands):
| ** **                                                | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1-3  Years** | ** ** | **More than  3 Years** | ** ** |
|                                                      |       |                                      |       |   |   |   |   |   |   |
| *Contractual  cash obligations:*                          |       |                                      |       |   |   |   |   |   |   |
| Operating leases                                          |       | $                                         | 1,587      |   | $ | 743 |   | $ | 844 |   | $ | — |   |
| Wafer purchases (1)                                       |       | 2,412                                     |       | 2,412 |   | — |   | — |   |
| Other purchase commitments                                |       | 1,990                                     |       | 1,863 |   | 127 |   | — |   |
| *Total contractual cash obligations*                      |       | 5,989                                     |       | 5,018 |   | 971 |   | — |   |
|                                                      |       |                                      |       |   |   |   |   |   |   |
| *Other  commercial commitments (2):*                      |       |                                      |       |   |   |   |   |   |   |
| Notes payable to bank                                     |       | 2,186                                     |       | 1,115 |   | 1,071 |   | — |   |
| Capital lease obligations                                 |       | 1,044                                     |       | 877 |   | 167 |   | — |   |
| *Total commercial commitments*                            |       | 3,230                                     |       | 1,992 |   | 1,238 |   | — |   |
| Total contractual  obligations and commercial commitments |       | $                                         | 9,219      |   | $ | 7,010 |   | $ | 2,209 |   | $ | — |   |

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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 $2.4 millioninclude both firm purchase commitments and a portion of our forecasted waferstarts as of April 1, 2007.

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

**Inflation**

The impact of inflation on our business has not beenmaterial for the periods presented.

**Off-Balance SheetArrangements**

We do not maintain any off-balance sheet partnerships,arrangements or other relationships with unconsolidated entities or others,often referred to as structured finance or special purpose entities, which areestablished for the purpose of facilitating off-balance sheet arrangements orother contractually narrow or limited purposes.

**Recently IssuedAccounting Pronouncements**

In September 2006, the Financial Accounting StandardsBoard, or FASB, issued Statement of Financial Accounting Standards No. 157, *“Fair Value Measurements,”* or SFAS 157.SFAS 157 establishes a framework for measuring fair value, and expandsdisclosures about fair value measurements. The changes to current practice

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

resulting from the application of SFAS 157 relate tothe definition of fair value, the methods used to measure fair value andexpanded disclosures about fair value measurements. SFAS 157 is effective forfiscal years beginning after November 15, 2007 and interim periods within thosefiscal years. We are currently evaluating the impact that SFAS 157 will have onour consolidated financial statements.

In February 2007, the FASB issued Statement ofFinancial Accounting Standards No. 159, *“TheFair Value Option for Financial Assets and Financial Liabilities,*”or SFAS 159. SFAS 159 permits companies to choose to measure certainfinancial instruments and certain other items at fair value. The standardrequires that unrealized gains and losses on items for which the fair valueoption has been elected be reported in earnings. SFAS 159 is effective forfiscal years beginning after November 15, 2007, although earlier adoptionis permitted. We are currently evaluating the impact that SFAS 159 willhave on our consolidated financial statements.

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

**Interest Rate Risk**

Our exposure to market rate risk for changes ininterest rates relates primarily to our investment portfolio and variable ratedebt. We do not use derivative financial instruments to manage our interestrate risk. We are adverse to principal loss and ensure the safety andpreservation of invested funds by limiting default, market risk andreinvestment risk. Our investment portfolio is generally comprised ofinvestments that meet high credit quality standards. Since these securities aresubject to interest rate risk, they could decline in value if interest ratesfluctuate. Due to the short duration and conservative nature of our investmentportfolio, we do not anticipate any material loss with respect to ourinvestment portfolio. A 10% move in interest rates as of April 1, 2007would have an immaterial effect on our financial position, results ofoperations and cash flows.

**Foreign CurrencyExchange Rate Risk**

All of our sales and cost of manufacturing aretransacted in U.S. dollars. We conduct a portion of our research anddevelopment activities in Canada and India and have sales and marketing officesin several locations outside of the United States. We use the U.S. dollar as ourfunctional currency. Most of the costs incurred at these internationallocations are in local currency. If these local currencies strengthen againstthe U.S. dollar, our payroll and other local expenses will be higher than wecurrently anticipate. Since our sales are transacted in U.S. dollars, thisnegative impact on expenses would not be offset by any positive effect onrevenue. Operating expenses denominated in foreign currencies wereapproximately 23% and 23% of total operating expenses for the first quarter of2007 and 2006, respectively. A majority of these foreign expenses were incurredin Canada. A currency exchange rate fluctuation of 10% would have caused ouroperating expenses to change by approximately $180,000 in the first quarter of2007.

**Equity Price Risk**

Our exposure to equity price risk for changes inmarket value relates primarily to our investment in Tower Semiconductor Ltd.,or Tower. Tower’s ordinary shares trade on the Nasdaq Global Market under thesymbol “TSEM”. Since these securities are publicly traded on the open market,they are subject to market fluctuations. Temporary market fluctuations arereflected by increasing or decreasing the presented value of the relatedsecurities and recording “accumulated other comprehensive income (loss)” in theequity section of the balance sheet. An “other than temporary” decline inmarket value is reflected by decreasing the adjusted cost of the relatedsecurities and recording a charge to operating expenses in the incomestatement. A market value fluctuation of 10% would have had a $230,000 impacton accumulated other comprehensive income in the first quarter of 2007.

**Item 4. Controlsand Procedures**

**Evaluation ofDisclosure Controls and Procedures**

Our management evaluated, with the participation ofour Chief Executive Officer and Chief Financial Officer, the effectiveness ofour disclosure controls and procedures as of the end of the period covered bythis Quarterly Report on Form 10-Q. Based upon that evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective to ensure that information weare required to disclose in reports that we file or submit under the SecuritiesExchange Act of 1934, as amended, is (i) recorded, processed, summarizedand reported within the time periods specified in Securities and ExchangeCommission rules and forms and (ii) accumulated and communicated toour management, including our Chief Executive Officer and Chief FinancialOfficer, as appropriate to allow timely decisions regarding requireddisclosure. Based upon that evaluation, our Chief Executive Officer and ChiefFinancial Officer concluded that, our current disclosure controls andprocedures are effective at the reasonable assurance level.

**Changes inInternal Control Over Financial Reporting**

There were no changes in our internal control overfinancial reporting that occurred during the period covered by this QuarterlyReport on Form 10-Q that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**Part II.Other Information**

**Item 1. LegalProceedings**

On October 26, 2001, a putative securities classaction was filed in the U.S. District Court for the Southern District of NewYork against certain investment banks that underwrote QuickLogic’s initialpublic offering, QuickLogic and some of QuickLogic’s officers and directors.The complaint alleges excessive and undisclosed commissions in connection withthe allocation of shares of common stock in QuickLogic’s initial and secondarypublic offerings and artificially high prices through “tie-in” arrangementswhich required the underwriters’ customers to buy shares in the aftermarket atpre-determined prices in violation of the federal securities laws. Plaintiffsseek an unspecified amount of damages on behalf of persons who purchasedQuickLogic’s stock pursuant to the registration statements betweenOctober 14, 1999 and December 6, 2000. Various plaintiffs have filedsimilar actions asserting virtually identical allegations against over 300other public companies, their underwriters, and their officers and directorsarising out of each company’s public offering. These actions, including theaction against QuickLogic, have been coordinated for pretrial purposes andcaptioned *In re Initial Public OfferingSecurities Litigation, 21 MC 92*. A stipulation of settlementfor the claims against the issuer defendants, including QuickLogic, has beensigned and was submitted to the court. Under the stipulation of settlement, theplaintiffs will dismiss and release all claims against participating defendantsin exchange for a contingent payment guaranty by the insurance companiescollectively responsible for insuring the issuers in all the related cases, andthe assignment or surrender to the plaintiffs of certain claims the issuerdefendants may have against the underwriters. Under the guaranty, the insurerswill be required to pay the amount, if any, by which $1.0 billion exceedsthe aggregate amount ultimately collected by the plaintiffs from theunderwriter defendants in all the cases. On February 15, 2005, the courtpreliminarily approved the settlement contingent on specified modifications.The settlement is still subject to court approval and a number of otherconditions. There is no guarantee that the settlement will become effective. OnDecember 5, 2006, the Court of Appeals for the Second Circuit reversed theCourt’s October 2004 order certifying a class in six test cases that wereselected by the underwriter defendants and plaintiffs in the coordinatedproceedings. QuickLogic is not among the test cases and it is unclear whatimpact this will have on the class certified in the QuickLogic action or on theproposed settlement pending before the court. If this settlement does not occurand litigation against QuickLogic continues, the Company intends to defend thecase vigorously.

On November 2, 2006 and November 29, 2006, purportedshareholder derivative complaints were filed against certain of the Company’scurrent and former officers and directors in the U.S. District Court for theNorthern District of California. The complaints allege that the individualdefendants violated the federal securities laws and breached their duties tothe Company in connection with the granting and/or receipt of options forCompany stock. The complaints name the Company as a nominal defendant and seekunspecified monetary damages against the individual defendants as well as variousforms of injunctive relief.

No estimate can be made of the possible loss orpossible range of loss associated with the resolution of these contingenciesand, accordingly, the Company has not recorded a liability.

From time to time, the Company is involved in legalactions arising in the ordinary course of business, including but not limitedto intellectual property infringement and collection matters. Absoluteassurance cannot be given that third party assertions will be resolved withoutcostly litigation in a manner that is not adverse to the Company’s financialposition, results of operations or cash flows or without requiring royalty orother payments in the future which may adversely impact gross profit.

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**Item 1A. RiskFactors**

This description includes any material changes to andsupersedes the description of the risk factors associated with our businesspreviously disclosed in Item 1A of our 2006 Annual Report onForm 10-K filed with the SEC on March 15, 2007. Because of thefollowing risk factors, as well as other variables affecting our operatingresults, past financial performance may not be a reliable indicator of futureperformance, and historical trends should not be used to anticipate results ortrends in future periods.

**Risk Factors**

*If we fail to successfully develop, introduce and sellnew products, we may be unable to compete effectively in the future*

We operate in a highly competitive, quickly changingenvironment marked by rapid obsolescence of existing products. To competesuccessfully, we must obtain access to advanced fabrication capacity anddedicate significant resources to specify, design, develop, manufacture andsell new or enhanced products and solutions that provide increasingly higherlevels of performance, low power consumption, new features, reliability and/orcost savings to our customers. We experience a long delay between the time whenwe expend these product definition and development resources and invest inrelated long-lived assets, and the time when we begin to generate revenue, ifany, from these expenditures.

We are marketing our new products - ArcticLink,PolarPro, Eclipse II and QuickPCI II - to new customers and marketsand expect a significant portion of our future revenues to be generated fromthese new products. We believe our new products and solutions have a compellingadvantage in low power applications, and that this business will providelong-term revenue growth for QuickLogic, but there is no assurance when thiswill occur. Some of the opportunities for our new products are in the rapidlychanging mobile market, which typically has shorter product life cycles, highervolumes and greater price pressure than our traditional business. In order toreact quickly to opportunities or to obtain favorable wafer prices, we have madesignificant investments in and commitments to purchase PolarPro andEclipse II inventory. 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 productrevenue increased in the second and third quarters of 2006, it declined in thefourth quarter of 2006 and first quarter of 2007 due to the product life cycleof a significant customer for these products. If we are unable to design,produce and sell new solutions and products that meet design specifications,address customer requirements and generate sufficient revenue and gross profit,if market demand for our products fails to materialize, if we are unable toobtain adequate capacity on a timely basis, if we are unable to developCustomer Specific Standard Products, or CSSPs, or solutions in a timely manner,or if our customers do not successfully introduce products incorporating ourdevices, our revenue and gross margin will be materially harmed, our liquidityand cash flows will be materially effected, we may be required to write-offrelated inventory and long-lived assets or there may be other adverse effectson our business or the price of our common stock.

*We will be unable to compete effectively if we fail toanticipate product opportunities based upon emerging technologies and standardsor fail to develop products and solutions that incorporate these technologiesand standards in a timely manner*

We spend significant time and money to design anddevelop products and solutions around an industry standard, such as USB andIDE, or emerging technologies, such as low power programmable logic, advancedprocess technology or small form factor packaging. We intend to develop additionalproducts and solutions and adopt new technologies in the future. If systemmanufacturers adopt alternative standards or technologies, if an industrystandard or emerging technology that we have targeted fails to achieve broadmarket acceptance, if customers choose low power offerings from ourcompetitors, or if we are unable to bring the technologies or solutions tomarket in a timely and effective manner, we may be unable to generatesignificant revenue from our research and development efforts. As a result, ourbusiness would be materially harmed and we may be required to write-off relatedinventory and long-lived assets.

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*We have significant customers and limited visibilityinto the long-term demand for our products from these customers*

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. 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 lead-timesrequested by these customers, and we make significant inventory purchases andcapital expenditures in anticipation of future demand. For example, a domesticOEM of instrumentation and test equipment accounted for 13% of revenue in both2005 and 2006 and a European telecommunications OEM customer, purchasingproduct through their contract manufacturer, represented 14% of revenue in2006. If revenue from any significant customer were to decline substantially,we may be unable to offset this decline with increased revenue from othercustomers and we may purchase excess inventory. These factors could severelyharm our business.

In addition, we may make a significant investment inlong-lived assets for the production of our products based upon historical andexpected demand. If demand for or gross margin generated from our products doesnot meet our expectations or if we are unable to collect amounts due fromsignificant customers, we may be required to write-off inventory, provide foruncollectible accounts receivable or incur charges against long-lived assets,which would materially harm our business.

*We may not have the liquidity to support our futureoperations and capital requirements*

Our cash and cash equivalents balance at April 1, 2007was $21.1 million. At April 1, 2007, our interest-bearing debt consistedof $2.2 million outstanding from Silicon Valley Bank and $1.0 millionoutstanding under capital leases. On June 30, 2006, we amended andrestated our credit facility with Silicon Valley Bank. Terms of the agreementinclude a $5.0 million revolving line of credit available throughJune 2008 and $2.0 million of borrowing capacity under an equipmentline of credit that is available to be drawn against through June 2007. AtApril 1, 2007, we had $5.0 million available to borrow under our revolvingcredit facility and $442,000 available to borrow under our equipment line ofcredit.

At April 1, 2007, we held 1,344,543 Tower ordinaryshares, valued at approximately $2.3 million based upon the market closingprice of $1.71 per share at the end of the reporting period. Our ability toobtain competitive pricing from Tower is tied to our ownership of at least450,000 of these Tower shares.

Capital expenditures, which are largely driven bydevelopment activities and the introduction and initial manufacturing of newproducts, could be up to $5.0 million in the next twelve months. As ofApril 1, 2007, we had commitments to purchase $2.4 million of waferinventory.

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 adverselyaffected and we may not be able to operate our business without significantchanges in our operations, or at all.

*We may be unable to accurately estimate quarterlyrevenue, which could adversely affect the trading price of our stock*

We offer our customers a short delivery lead-time anda majority 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

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increased demand is limited to inventory on hand or onorder, the capacity available at our contract manufacturers and our capacity toprogram products to customer specifications. In addition, a significant portionof our revenue is deferred until our distributors ship unprogrammed parts toend customers since the price is not fixed or determinable until that time.Therefore, we are highly dependent on the accuracy and timeliness of resale andinventory reports from our distributors. Inaccurate distributor resale orinventory reports, as well as unanticipated changes in distributor inventorylevels, could contribute to our difficulty in predicting and reporting ourquarterly revenue and results of operations. If we fail to accurately estimatecustomer demand, record revenue, or if our available capacity is less thanneeded to meet customer demand, our results of operations could be harmed andour stock price could materially fluctuate.

*We depend upon third parties to fabricate, assemble,test and program our products, and they may discontinue manufacturing ourproducts, fail to give our products priority, be unable to successfullymanufacture our products to meet performance, volume or cost targets, orinaccurately report inventory to us*

We contract with third parties to fabricate, assemble,test and program our devices. Our devices are generally fabricated, assembledand programmed by single suppliers, and the loss of a supplier, transfer ofmanufacturing to a new location, expiration of a supply agreement or theinability of our suppliers to manufacture our products to meet volume,performance and cost targets could have a material adverse effect on ourbusiness. Tower solely manufactures our ArcticLink, PolarPro, Eclipse II,certain QuickPCI II, QuickMIPS and other new products currently underdevelopment. Our pASIC 1 and pASIC 2 devices were fabricated by a singlesupplier, and the expiration of this supply agreement has had a significanteffect on our business. We recently announced the end-of-life of our V3products, due primarily to a supplier’s decision to stop manufacturing theseproducts. V3 products contributed $2.2 million and $3.6 million ofrevenue in 2006 and 2005, respectively, and we currently do not expect thesedevices to contribute significant revenue after 2007. In addition, demand forassembly capacity at our primary supplier may increase. For this and otherreasons, capacity available to us may be constrained. Identifying andqualifying an additional assembly supplier is a time consuming and costlyprocess and may require volume commitments that we may be unwilling or unableto make. We sell programmers to customers that are made by a single supplier.Programming capacity at our subcontractors is also dependent on our investmentin sufficient programming hardware to meet fluctuating demand. Our relationshipwith our suppliers could change as a result of a merger or acquisition. If forany reason these suppliers or any other vendor becomes unable or unwilling tocontinue to provide services of acceptable quality, at acceptable costs and ina timely manner, our ability to operate our business or deliver our products toour customers could be severely impaired. We would have to identify and qualifysubstitute suppliers, which could be time consuming, difficult and result inunforeseen operational problems, or we could announce an end-of-life programfor these products, as we did with our pASIC 1, pASIC 2 and V3 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.

In addition, if competition for wafer manufacturingcapacity increases, if we need to migrate to more advanced wafer manufacturingtechnology, or if competition for assembly services increases, we may berequired to pay or invest significant amounts to secure access to thiscapacity. For example, in the second quarter of 2006, we entered into anagreement with Amkor to secure assembly capacity that required a payment of$1.0 million that is refundable if we meet certain volume commitments. Thenumber of companies that provide these services is limited and some of themhave limited operating histories and financial resources. In the event ourcurrent suppliers refuse or are unable to continue to provide these services tous, we may be unable to procure services from alternate suppliers in a timelymanner, if at all. Furthermore, if customer demand for our products increases,we may be unable to secure sufficient additional capacity from our currentsuppliers on commercially reasonable terms. Moreover, our reliance on a limitednumber of suppliers subjects us to reduced control over delivery schedules,quality assurance and costs. This lack of control may cause unforeseen productshortages or may increase our cost to manufacture and test our products, whichwould adversely affect our operating results and cash flows.

We record a majority of our inventory transactionsbased on information from our subcontractors. If we do not receive prompt andaccurate information from our suppliers, we could misstate inventory levels,incorrectly record gross profit, be unable to meet our delivery commitments tocustomers or commit to manufacturing inventory that is not required to meetcustomer delivery commitments, which could materially harm our business.

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*Our future results depend on our relationship withTower*

We have invested approximately $21.3 million inTower. In return for our investment, we received equity, prepaid wafer credits,favorable wafer pricing and committed production capacity in Tower’s foundryfacility. We believe that Tower’s long-term operation of this fabricationfacility depends on its ability to attract sufficient customer demand, toobtain additional financing, to increase capacity, to obtain the release ofgrants and approvals for changes in grant programs from the Israeli government’sInvestment Center and its ability to remain in compliance with the terms of itsgrant and credit agreements. The current political uncertainty and securitysituation in the Middle East where Tower’s fabrication facility is located, thecyclical nature of the market for foundry manufacturing services, Tower’sfinancial condition, or other factors may adversely impact Tower’s businessprospects and may discourage future investments in Tower from outside sources.If Tower is unable to obtain adequate financing and increase production outputin a timely manner, the value of our investment in Tower may declinesignificantly or possibly become worthless, our wafer credit from Tower maydecline in value or possibly become worthless, and we would have to identifyand qualify a substitute supplier to manufacture our products. This couldrequire significant development time, cause product shipment delays, impairlong-lived assets and the value of our wafer credits, damage our liquidity andseverely harm our business. In addition, Tower is the sole manufacturer of ourArcticLink, PolarPro, Eclipse II, certain QuickPCI II, QuickMIPS and othernew products currently under development.

The value of our investment in Tower and itscorresponding wafer credits may also be adversely affected by a deteriorationof conditions in the market for foundry manufacturing services and the marketfor semiconductor products. At April 1, 2007, the value of our Tower investmentwas $2.3 million and the value of our wafer credits recorded on ourbalance sheet was $3.6 million. If the fair value of our Tower investmentor our wafer credits are deemed to be impaired, we will record charges to ourstatement of operations. For instance, we wrote down the Tower shares due to an“other than temporary” decline in their market value by $1.5 million, $1.5 million,$3.8 million and $6.8 million in fiscal 2005, 2004, 2002 and 2001,respectively.

*Our customers may cancel or change their product plansafter we have expended substantial time and resources in the design of theirproducts*

Our customers often evaluate our products for sixmonths or more before designing them into their systems, and they may notcommence volume shipments for up to an additional six to twelve months, if atall. During this lengthy sales cycle, our potential customers may cancel orchange their product plans. In addition, customers may discontinue productsincorporating our devices at any time or they may choose to replace ourproducts with lower cost semiconductors. If customers cancel, reduce or delayproduct orders from us or choose not to release products that incorporate ourdevices after we have spent substantial time and resources in assisting themwith their product design, our revenue levels may be less than anticipated andour business could be materially harmed.

*If we fail to adequately forecast demand for ourproducts, we may incur product shortages or excess product inventory*

Our agreements with certain suppliers require us toprovide forecasts of our anticipated manufacturing orders, and place bindingmanufacturing commitments in advance of receiving purchase orders from ourcustomers. We are limited in our ability to increase or decrease our forecastsunder such agreements. Other manufacturers supply us product on a purchaseorder basis. The allocation of capacity is determined solely by our suppliersover which we have no direct control. Additionally, we may place orders on oursuppliers in advance of customer orders to allow us to quickly respond tochanging customer demand or to obtain favorable product costs. Furthermore, weprovide our suppliers with equipment which is used to program our products tocustomer specifications. The programming equipment is manufactured to ourspecifications and has significant order lead-times. These factors may resultin product shortages or excess product inventory. Obtaining additional supplyin the face of product, programming equipment or capacity shortages may becostly, or not possible, especially in the short term since most of ourproducts and programming equipment are supplied by a single supplier. Forexample, in the first quarter of 2007, we reserved $2.5 million ofinventory due primarily to changes in forecasted demand. Our failure toadequately forecast demand for our products could materially harm our business.

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*The announced end-of-life of our pASIC 1 andpASIC 2 products has resulted in a decline in our revenue*

Our foundry agreement with the supplier thatfabricates our pASIC 1 and pASIC 2 products expired onDecember 31, 2005 and the supplier no longer has the necessary equipmentto manufacture our products. We announced an end-of-life for these products in2004 and asked our customers to take delivery of lifetime buy orders before theend of 2005. As a result, we have experienced a reduction in revenue from theseproducts. Revenue from these products was $5.8 million and $21.1 millionin 2006 and 2005, respectively. A majority of our customers that usepASIC 1 and pASIC 2 products have either purchased sufficientquantities to satisfy their demand throughout the expected life of theirproducts or have converted their designs to our other products, such aspASIC 3 which is pin compatible with pASIC 2. Future revenue frompASIC 1 and pASIC 2 products is limited to inventory on hand and wedo not expect significant revenue from these products in 2007. Our operatingresults and liquidity have been adversely affected by the end-of-life of theseproducts as we are currently operating at a net loss and expect negative cashflow at our current revenue level. To mitigate the affects of the end-of-lifeof our pASIC 1 and pASIC 2 products, we plan to develop customerdemand for new products, such as ArcticLink, PolarPro, Eclipse II andQuickPCI II, which have active customer designs but limited revenue history.The pASIC 1 and pASIC 2 revenue decline has been more rapid than therevenue growth from our new product and mature products. While we expectrevenue growth from new products and mature products will offset the decline inpASIC 1 and pASIC 2 revenue, there is no assurance when this willoccur.

*We are expending substantial time and effort todevelop solutions with partners that depend on the availability and success oftechnology owned by the partner*

Our approach to developing solutions for potentialcustomers involves: (1) embedded processors developed by companies such asMarvell Semiconductor, Inc., who recently purchased the XScale business unitfrom Intel, and Analog Devices, Inc.; (2) peripheral devices developed by otherparties such as micro hard disk drives, Wi-Fi devices and NAND flash memory;and (3) specific industry standards such as USB 2.0 OTG, Serial Digital HighCapacity, or SDHC, IDE and SDIO. We have entered into informal partnershipswith other parties that involve the development of solutions that interfacewith their devices or standards. These informal partnerships also may involvejoint marketing campaigns and sales calls. For example, we have developed asolution incorporating a specific embedded processor, a micro hard disk driveand our Eclipse II device that improves performance and lowers the overallpower consumption of an application. If our solutions are not incorporated intocustomer products, if our partners discontinue production of or incorporate oursolution into their product offerings, or if the informal partnerships aresignificantly reduced or terminated by acquisition or other means, our revenueand gross margin will be materially harmed and we may be required to write-offrelated inventory and long-lived assets.

*We may be unable to successfully grow our business ifwe fail to compete effectively with others to attract and retain key personnel*

We believe our future success will depend upon ourability to attract and retain engineers and other highly competent personnel.Our employees are at-will and not subject to employment contracts. Hiring andretaining qualified sales, technical and financial personnel is difficult dueto the limited number of qualified professionals, economic conditions and thesize of our company. Competition for these types of employees is intense. Inaddition, new hires frequently require extensive training before they achievedesired levels of productivity. We have in the past experienced difficulty inrecruiting and retaining qualified senior management, sales, finance andtechnical personnel. Failure to attract, hire, train and retain personnel couldmaterially harm our business.

*Fluctuations in our manufacturing processes, yieldsand quality, especially for new products, may increase our costs*

Difficulties encountered during the complexsemiconductor manufacturing process can render a substantial percentage ofsemiconductor devices nonfunctional. New manufacturing techniques orfluctuations in the manufacturing process may change the performancedistribution and yield of our products. We have, in the past, experiencedmanufacturing runs that have contained substantially reduced or no functioningdevices, or that generated devices with below normal performancecharacteristics. Our reliance on third party suppliers may extend the period oftime required to analyze and correct these problems. Once corrected, ourcustomers may be required to redesign or requalify their products. As a result,we may incur substantially higher manufacturing costs, inventory shortages or reducedcustomer demand.

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Yield fluctuations frequently occur in connection withthe manufacture of newly introduced products, with changes in productarchitecture, with manufacturing at new facilities, on new fabricationprocesses or in conjunction with new backend manufacturing processes. Newlyintroduced solutions and products, such as our CSSPs, ArcticLink, and PolarProproducts, are often more complex and more difficult to produce, increasing therisk of manufacturing-related defects. New manufacturing facilities orprocesses are often more complex and take a period of time to achieve expectedquality levels and manufacturing efficiencies. While we test our products,including our software development tools, they may still contain errors ordefects that are found after we have commenced commercial production, thatoccur due to manufacturing variations or that are identified as newintellectual property is incorporated into our products. If our products orsoftware development tools contain undetected or unresolved defects, we maylose market share, experience delays in or loss of market acceptance, reserveor scrap inventory or be required to issue a product recall. In addition, wewould be at risk of product liability litigation if defects in our productswere discovered. Although we attempt to limit our liability to end usersthrough disclaimers of special, consequential and indirect damages and similarprovisions, we cannot assure you that such limitations of liability will belegally enforceable.

*We have a history of losses and cannot assure you thatwe will again be profitable in the future*

We incurred significant losses in 2006, 2004, 2003 and2002. Our accumulated deficit as of April 1, 2007 was $133.4 million.Although we recorded net income of $2.4 million in 2005, we recorded a netloss of $5.9 million in the first quarter of 2007 and we may not return toprofitability in any future periods.

*We depend upon third party distributors to market andsell our products, and they may discontinue sale of our products, fail to giveour products priority or be unable to successfully market, sell and support ourproducts*

We contract with third-party distributors to marketand sell a significant portion of our products. We typically have only a fewdistributors serving each geographic market and, in the future, we may have asingle distributor covering a geographic market. Although we have contractswith our distributors, our agreements with them may be terminated on shortnotice by either party and, if terminated, we may be unable to recruitadditional or replacement distributors. Additionally, distributors that we havecontracted with may acquire, be acquired or merge with other distributors whichmay result in the termination of our contract or less effort being placed onthe marketing, sale and support of our products and solutions. As a result, ourfuture performance will depend in part on our ability to retain our existingdistributors and to attract new distributors that will be able to effectivelymarket, sell and support our products and solutions. The loss of one or more ofour principal distributors, or our inability to attract new distributors, couldmaterially harm our business.

Many of our distributors, including our principaldistributors, 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. If our distributors give higher priority or greater attention tothe products of other companies, including products that compete with ourproducts and solutions, our business would be materially harmed.

Individual distributors and OEMs often represent asignificant portion of our accounts receivable. If we are unable to collectfunds due from these distributors and customers, our financial results may bematerially harmed.

*Our future operating results are likely to fluctuateand therefore may fail to meet expectations, which could cause our stock priceto decline*

Our operating results have varied widely in the pastand are likely to do so in the future. In addition, our past operating resultsmay not be an indicator of future operating results. Our future operatingresults will depend on many factors and may fail to meet our expectations for anumber of reasons, including those set forth in these risk factors. Any failureto meet expectations could cause our stock price to significantly fluctuate ordecline.

Factors that could cause our operating results tofluctuate include:

·                  the effect ofend-of-life programs;

·                  a significantchange in sales to, or the collectibility of accounts receivable from, ourlargest customers;

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·                  successfuldevelopment and market acceptance of our products and solutions;

·                  our ability toaccurately forecast product volumes and mix, and to respond to rapid changes incustomer demand;

·                  changes in salesvolume, product mix, average selling prices or production variances that affectgross profit;

·                  our ability toadjust our product features, manufacturing capacity and costs in response toeconomic and competitive pressures;

·                  our reliance onsubcontract manufacturers for product capacity, yield and quality;

·                  our competitors’product portfolio and product pricing policies;

·                  timelyimplementation of efficient manufacturing technologies;

·                  errors inapplying or changes in accounting and corporate governance rules;

·                  the issuance ofequity compensation awards or changes in the terms of our stock plan oremployee stock purchase plan;

·                  mergers oracquisitions;

·                  the impact ofimport and export laws and regulations;

·                  the cyclicalnature of the semiconductor industry and general economic, market, politicaland social conditions in the countries where we sell our products and the relatedeffect on our customers, distributors and suppliers; and

·                  our ability toobtain capital, debt financing and insurance on commercially reasonable terms.

Although certain of these factors are out of ourimmediate control, unless we can anticipate and be prepared with contingencyplans that respond to these factors, our business may 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 semiconductor industry has historically beencharacterized by wide fluctuations in the demand for, and supply of, itsproducts. These fluctuations have resulted in circumstances when supply of and demandfor semiconductors have been widely out of balance. An industry-widesemiconductor oversupply could result in severe downward pricing pressure fromcustomers. In a market with undersupply of manufacturing capacity, we wouldhave to compete with larger foundry and assembly customers for limitedmanufacturing resources. In such an environment, we may be unable to have ourproducts manufactured in a timely manner, at a cost that generates adequategross profit or in sufficient quantities. Since we outsource all of ourmanufacturing and generally have a single-source of wafer supply, test,assembly and programming for our products, we are particularly vulnerable tosuch supply shortages and capacity limitations. As a result, we may be unableto fulfill orders and may lose customers. Any future industry-wide oversupplyor undersupply of semiconductors could materially harm our business.

*Customers may cancel or defer significant purchaseorders or our distributors may return our products, which would cause ourinventory levels to increase and our revenue to decline*

Our distributors or customers may cancel purchaseorders at any time with little or no penalty. Contractually, our distributorsare generally permitted to return unprogrammed products worth up to 10%, byvalue, of the products they purchase from us. If our distributors or customerscancel or defer significant purchase orders or return our products, ouraccounts receivable collections would decrease and inventories would increase,which would materially harm our business.

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# *Problemsassociated with international business operations could affect our ability tomanufacture and sell 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 manufacturing operationsand new product introductions are subject to risks of political instability,including the risk of conflict between Taiwan and the People’s Republic ofChina, between South Korea and North Korea, and conflicts involving Israel.

A significant portion ofour total revenue comes from sales to customers located outside the UnitedStates. We anticipate that sales to customers located outside the United Stateswill continue to represent a significant portion of our total revenue in futureperiods. 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:

·                                                      managingforeign distributors;

·                                                      collectingamounts due;

·                                                      staffingand managing foreign offices;

·                                                      politicaland economic instability;

·                                                      foreigncurrency exchange fluctuations;

·                                                      changesin tax laws, import and export regulations, tariffs and freight rates;

·                                                      timingand availability of export licenses;

·                                                      supplyingproducts that meet local environmental regulations; and

·                                                      inadequateprotection of intellectual property 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, weincur costs in foreign countries that may be difficult to reduce quicklybecause of employee related laws and practices in those foreign countries.

# *Manysystem manufacturers may be unwilling to switch to our products because oftheir familiarity with the products offered by our direct competitors, such asXilinx and Altera, which dominate the programmable logic market*

The semiconductorindustry is intensely competitive and characterized by:

·                                                      erosionof selling prices over product lives;

·                                                      rapidtechnological change;

·                                                      shortproduct life cycles; and

·                                                      strongdomestic and foreign competition.

If we are not ableto compete successfully in this environment, our business will be materiallyharmed.

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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. Xilinx andAltera together have a majority share of the programmable logic market. Manysystem manufacturers may be unwilling or unable to switch to our products dueto their familiarity with competitors’ products or other inhibiting factors.

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 thoseof our products. We may also face competition from suppliers of embeddedmicroprocessors, such as Freescale Semiconductor, Inc., or from suppliers ofproducts based on new or emerging technologies. Our inability to successfullycompete in any of the following areas could materially harm our business:

·                                                      thedevelopment of new products, solutions and advanced manufacturing technologies;

·                                                      thequality, power characteristics, performance characteristics, price andavailability of devices, programming hardware and software development tools;

·                                                      theability to engage with companies that provide synergistic products andservices;

·                                                      theincorporation of industry standards in our products and solutions;

·                                                      thediversity of product offerings available to customers; or

·                                                      thequality and cost effectiveness of design, development, manufacturing andmarketing efforts.

# *We maybe unable to adequately protect our intellectual property rights and may facesignificant expenses as a result 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

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that are similar orsuperior to our technology or design around the patents we own. We also rely ontrade secret protection for our technology, in part through confidentialityagreements with our employees, consultants and other third parties. However,these parties may breach these agreements and we may not have adequate remediesfor any breach. In any case, others may come to know about or determine ourtrade secrets through a variety of methods. In addition, the laws of certainterritories in which we develop, manufacture or sell our products may notprotect our intellectual property rights to the same extent as the laws of theUnited States.

# *We mayengage in manufacturing, distribution or technology agreements that involvenumerous risks, including the use of cash, diversion of resources andsignificant 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.

# *Ourbusiness is subject to the risks of earthquakes, other catastrophic events andbusiness interruptions for which we 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 fromunauthorized tampering. Any catastrophic event, such as an earthquake or othernatural disaster, the failure of our computer systems, war or acts ofterrorism, could significantly impair our ability to maintain our records, payour suppliers, or design, manufacture or ship our products. The occurrence ofany of these events could also affect our customers, distributors and suppliersand produce similar disruptive effects upon their business. If there is an earthquakeor other catastrophic event near our headquarters, our customers’ facilities,our distributors’ facilities or our suppliers’ facilities, our business couldbe seriously 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.

# *Ourprincipal stockholders have significant voting power and may vote for actionsthat may not be in the best interests 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.

# *OurShareholder Rights Plan, Certificate of Incorporation, Bylaws and Delaware lawcontain provisions that could discourage a takeover that is beneficial tostockholders*

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.

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# *Themarket price of our common stock may fluctuate significantly and could lead tosecurities 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.

# *Changesto existing accounting pronouncements or taxation rules or practices may causeadverse revenue fluctuations, affect our reported results of operations or howwe conduct our business*

GAAP arepromulgated by, and are subject to the interpretation of the FinancialAccounting Standards Board, or FASB, and the Securities and ExchangeCommission, or SEC. New accounting pronouncements or taxation rules and varyinginterpretations of accounting pronouncements or taxation practice have occurredand may occur in the future. Any future changes in accounting pronouncements ortaxation rules or practices may have a significant effect on how we report ourresults and may even affect our reporting of transactions completed before thechange is effective. In addition, a review of existing or prior accountingpractices may result in a change in previously reported amounts. This change toexisting rules, future changes, if any, or the questioning of current practicesmay adversely affect our reported financial results, our ability to remainlisted on the Nasdaq Global Market, or the way we conduct our business andsubject us to 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.

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.

# *Compliancewith changing regulations related to corporate governance and public disclosuremay result in additional expenses*

Changing laws,regulations and standards relating to corporate governance and publicdisclosure, including the Sarbanes-Oxley Act of 2002, new SEC regulations andthe Nasdaq National Market rules, are creating uncertainty for companies suchas ours. These new or changed laws, regulations and standards are subject tovarying interpretations in many cases due to their lack of specificity and, asa result, their application in practice may evolve over time as new guidance isprovided by regulatory and governing bodies, which could result in continuinguncertainty regarding compliance matters and higher costs necessitated byongoing revisions to disclosure and governance practices. We are committed tomaintaining high standards of corporate governance and public disclosure. As aresult, we intend to invest resources to comply with evolving laws, regulationsand standards, and this investment may result in increased general and administrativeexpenses and a diversion of management time and attention fromprofit-generating activities. If our efforts to comply with new or changedlaws, regulations and standards differ from the activities intended byregulatory or governing bodies due to ambiguities related to practice, ourreputation may be harmed and the market price of our common stock could beaffected.

# *Whilewe believe that we currently have adequate internal control procedures inplace, we are still exposed to potential risks from legislation requiringcompanies to evaluate controls under Section 404 of the Sarbanes-Oxley Act of2002*

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 in judgmentand breakdowns resulting from human failures. Internal control over financialreporting also can be circumvented by collusion or improper

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management override.Because of such limitations, there is a risk that material misstatements maynot be prevented or detected on a timely basis by internal control overfinancial reporting. However, these inherent limitations are known features ofthe financial reporting process. Therefore, it is possible to design into theprocess 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 of Section 404.As a result, we incurred additional expenses and a diversion of management’stime. While we believe that our internal control procedures are adequate and weintend to continue to fully comply with the requirements relating to internalcontrol and all other aspects of Section 404, our controls necessary forcontinued compliance with the Sarbanes-Oxley Act may not operate effectively atall times and may result in a material control disclosure. The identificationof a material weakness in internal control over financial reporting, if any,could indicate a lack of proper controls to generate accurate consolidatedfinancial statements. Furthermore, we cannot be certain as to the outcome offuture evaluations, testing and remediation actions or the impact of the sameon our operations. If we are not able to remain in compliance with therequirements of Section 404, we might be subject to sanctions or investigationby regulatory authorities, such as the SEC or the Nasdaq National Market. Anysuch action could adversely affect our financial results and the market priceof our common stock.

# *We haveimplemented import and export control procedures to comply with United Statesregulations but we are still exposed to potential risks from import and exportactivity*

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 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.

# *If wedo not maintain compliance with the listing requirements of the Nasdaq GlobalMarket, our common stock could be delisted, which could, among other things,reduce the price of our common stock and the levels of liquidity available to ourstockholders*

Our securitiescould be delisted in the future if we do not maintain compliance withapplicable listing requirements. If our securities were delisted from theNasdaq Global Market, they would subsequently be transferred to the NationalQuotation Service Bureau, or “Pink Sheets.” The trading of our common stock onthe Pink Sheets may reduce the price of our common stock and the levels ofliquidity available to our stockholders. In addition, the trading of our commonstock on the Pink Sheets will materially adversely affect our access to capitalmarkets and our ability to raise capital through alternative financing sourceson terms acceptable to us, or at all. Securities that trade on the Pink Sheetsare no longer eligible for margin loans, and a company trading on the PinkSheets cannot avail itself of federal preemption of state securities, or “bluesky,” laws, which adds substantial compliance costs to securities issuances,including shares issued pursuant to employee option plans, stock purchase plansand private or public offerings of securities. If we are delisted in the futurefrom the Nasdaq Global Market and transferred to the Pink Sheets, there mayalso be other negative implications, including the potential loss of confidenceby suppliers, customers and employees and the loss of institutional investorinterest in our company.

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# *Ourdirectors and management have been named parties to lawsuits related to ourhistorical stock option practices and related accounting, and we may be namedin additional litigation in the future, all of which could result in anunfavorable outcome and have a material adverse effect on our business,financial condition, results of operations, cash flows and the trading pricefor our securities*

Two lawsuits have been filed against the Company, our currentdirectors and officers and certain of our former directors and officersrelating to our historical stock option practices and related accounting. Wemay become the subject of additional private or government actions regardingthese matters in the future. These actions are in the preliminary stages, andtheir ultimate outcome could have a material adverse effect on our business,financial condition, results of operations, cash flows and the trading pricefor our securities. Litigation may be time consuming, expensive and disruptiveto normal business operations and the outcome of litigation is difficult topredict. The defense of these lawsuits will result in significant expendituresand the continued diversion of our management’s time and attention from theoperation of our business, which could impede our business. All or a portion ofany amount we may be required to pay to satisfy a judgment or settlement, ofany or all of these claims, if any, may not be covered by insurance.

**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              | .7         |            | Form of Restricted Stock Purchase Agreement under  the 1999 Stock Plan. |
| 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 byreference to the Company’s Registration Statement on Form S-1 declaredeffective October 14, 1999 (Commission File No. 333-28833).

(2)             Incorporated byreference to the Company’s Current Report on Form 8-K (Item 5.03)filed May 2, 2005.

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**Signatures**

Pursuant to therequirements of the Securities Exchange Act of 1934, as amended, the registranthas duly caused this report to be signed on its behalf by the undersignedthereunto duly authorized.
|                    | **QUICKLOGIC  CORPORATION**                                                                                                          |
|--------------------|--------------------------------------------------------------------------------------------------------------------------------------|
|               |                                                                                                                                 |
|               | /s/ CARL M.  MILLS                                                                                                                   |
| Date: May 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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**EXHIBIT INDEX**
| Exhibit  Number | ** ** | **Description** |
|-----------------|------------|-----------------|
| 3               | .1(1)      |            | Amended and Restated Certificate of Incorporation of  Registrant. |
| 3               | .2(2)      |            | Bylaws of Registrant. |
| 10              | .7         |            | Form of Restricted Stock Purchase Agreement under  the 1999 Stock Plan. |
| 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 byreference to the Company’s Registration Statement on Form S-1 declaredeffective October 14, 1999 (Commission File No. 333-28833).

(2)             Incorporated byreference to the Company’s Current Report on Form 8-K (Item 5.03)filed May 2, 2005.

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