**UNITEDSTATES**

**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

----

 

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

######  

**(Mark One)**

 

| **x**      | ** ** | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR  15(D) OF THE SECURITIES   EXCHANGE ACT OF 1934**                                                                                                                                                                                                                            |
|------------|------------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** ** | ** ** | **For the Quarterly Period Ended March 30, 2008 **                                                                                                                                                                                                                                                                   |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                     |
| ** ** | ** ** | **OR**                                                                                                                                                                                                                                                                                                                         |
| ** ** | ** ** | ** **                                                                                                                                                                                                                                                                                                                     |
| **o**      | ** ** | **TRANSITION REPORT PURSUANT TO  SECTION 13 OR 15(D) OF THE SECURITIES   EXCHANGE ACT OF 1934**                                                                                                                                                                                                                           |
|       |       | **For the  Transition Period  From                         To                         ** |

 

**COMMISSIONFILE NUMBER: 000-22671**

 

----

 

**QUICKLOGIC CORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

 

**1277ORLEANS DRIVE SUNNYVALE, CA  94089**

(Address ofprincipal executive offices, including Zip Code)

 

**(408) 990-4000**

(Registrant’stelephone number, including area code)

 

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

 

Indicate by check mark whether the registrantis a large accelerated filer, an accelerated filer, a non-accelerated filer, ora smaller reporting company. See definitions of “large accelerated filer,”“accelerated filer,” and “smaller reporting company” in Rule 12b-2 of theExchange Act. (Check one):

 

| Large  accelerated filer o                     |   | Accelerated  filer x         |
|------------------------------------------------|--------|-----------------------------------|
|                                           |   |                              |
| Non-accelerated  filer o                       |   | Smaller  reporting company o |
| (Do  not check if a smaller reporting company) |   |                              |

 

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Securities Exchange Act).Yes o No x

 

As of May 5, 2008, 29,433,693 shares of theregistrant’s common stock were outstanding.

 

 

----

 

**QUICKLOGICCORPORATION**

**FORM 10-Q**

**March 30,2008**

 
| ** **                                                                                                                                | **Page** |
|-------------------------------------------------------------------------------------------------------------------------------------------|----------|
|                                                                                                                                      |     |
| **Part I.  Financial Information**                                                                                                   | 3        |
|                                                                                                                                      |     |
| **Item 1. Financial Statements**                                                                                                          | 3        |
| Condensed  Unaudited Consolidated Statements of Operations for the three months ended  March 30, 2008 and April 1, 2007         | 3        |
| Condensed  Unaudited Consolidated Balance Sheets as of March 30, 2008 and  December 30, 2007                                    | 4        |
| Condensed  Unaudited Consolidated Statements of Cash Flows for the three months ended  March 30, 2008 and April 1, 2007         | 5        |
| Condensed  Unaudited Consolidated Statements of Comprehensive Loss for the three months  ended March 30, 2008 and April 1, 2007 | 6        |
| Notes  to Condensed Unaudited Consolidated Financial Statements                                                                           | 7        |
|                                                                                                                                      |     |
| **Item 2. Management’s Discussion and Analysis of Financial  Condition and Results of Operations**                                   | 23       |
|                                                                                                                                      |     |
| **Item 3. Quantitative and Qualitative Disclosures about  Market Risk**                                                                   | 34       |
|                                                                                                                                      |     |
| **Item 4. Controls and Procedures**                                                                                                       | 34       |
|                                                                                                                                      |     |
| **Part II. Other  Information**                                                                                                      | 35       |
|                                                                                                                                      |     |
| **Item 1. Legal Proceedings**                                                                                                             | 35       |
|                                                                                                                                      |     |
| **Item 1A. Risk Factors**                                                                                                                 | 36       |
|                                                                                                                                      |     |
| **Item 6. Exhibits**                                                                                                                      | 48       |
|                                                                                                                                      |     |
| Signatures                                                                                                                                | 49       |

 

2

----

 

**PART I. Financial Information**

 

**Item 1. Financial Statements**

 

**QUICKLOGIC CORPORATION**

**CONDENSED UNAUDITED CONSOLIDATEDSTATEMENTS OF OPERATIONS**

**(in thousands, except per shareamounts)**

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 30, 2008**     | ** ** | **April 1, 2007** | ** ** |
|                                |       |                             |       |   |   |
| Revenue                             |       | $                                | 11,023     |   | $ | 6,242 |   |
| Cost of revenue                     |       | 5,258                            |       | 5,401 |   |
| Gross profit                        |       | 5,765                            |       | 841 |   |
| Operating expenses:                 |       |                             |       |   |   |
| Research and development            |       | 2,821                            |       | 2,287 |   |
| Selling, general and administrative |       | 4,320                            |       | 4,593 |   |
| Loss from operations                |       | (1,376                           | )          | (6,039 | ) |
| Interest expense                    |       | (71                              | )          | (85 | ) |
| Interest income and other, net      |       | 104                              |       | 246 |   |
| Loss before income taxes            |       | (1,343                           | )          | (5,878 | ) |
| Provision for income taxes          |       | 34                               |       | 15 |   |
| Net loss                            |       | $                                | (1,377     | ) | $ | (5,893 | ) |
|                                |       |                             |       |   |   |
| Net loss per share:                 |       |                             |       |   |   |
| Basic                               |       | $                                | (0.05      | ) | $ | (0.20 | ) |
| Diluted                             |       | $                                | (0.05      | ) | $ | (0.20 | ) |
|                                |       |                             |       |   |   |
| Weighted average shares:            |       |                             |       |   |   |
| Basic                               |       | 29,406                           |       | 28,814 |   |
| Diluted                             |       | 29,406                           |       | 28,814 |   |

 

See accompanying Notes to Condensed Unaudited Consolidated FinancialStatements.

 

3

----

 

**QUICKLOGIC CORPORATION**

**CONDENSED UNAUDITED CONSOLIDATEDBALANCE SHEETS**

**(in thousands, except par valueamount)**

 
| ** **                                                                                                                | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                | ** ** | ** **               | ** ** | ** **                  | ** ** |
|                                                                                                                      |       |                     |       |                        |       |
| Current assets:                                                                                                           |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                 |       | $                        | 19,322     |                        | $          | 20,868 |   |
| Short-term investment in Tower Semiconductor Ltd.                                                                         |       | 939                      |       | 1,279                       |       |
| Accounts receivable, net of allowances for doubtful accounts of $154  and $194, respectively                              |       | 3,709                    |       | 2,634                       |       |
| Inventories                                                                                                               |       | 4,569                    |       | 5,770                       |       |
| Other current assets                                                                                                      |       | 1,595                    |       | 1,607                       |       |
| Total current assets                                                                                                      |       | 30,134                   |       | 32,158                      |       |
| Property and equipment, net                                                                                               |       | 5,438                    |       | 5,877                       |       |
| Investment in Tower Semiconductor Ltd.                                                                                    |       | 473                      |       | 644                         |       |
| Other assets                                                                                                              |       | 2,609                    |       | 2,745                       |       |
| TOTAL ASSETS                                                                                                              |       | $                        | 38,654     |                        | $          | 41,424 |   |
|                                                                                                                      |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                            |       |                     |       |                        |       |
|                                                                                                                      |       |                     |       |                        |       |
| Current liabilities:                                                                                                      |       |                     |       |                        |       |
| Trade payables                                                                                                            |       | $                        | 2,773      |                        | $          | 4,207 |   |
| Accrued liabilities                                                                                                       |       | 2,675                    |       | 2,228                       |       |
| Deferred income on shipments to distributors                                                                              |       | 650                      |       | 516                         |       |
| Deferred royalty revenue                                                                                                  |       | 389                      |       | 431                         |       |
| Current portion of debt and capital lease obligations                                                                     |       | 2,353                    |       | 2,497                       |       |
| Total current liabilities                                                                                                 |       | 8,840                    |       | 9,879                       |       |
|                                                                                                                      |       |                     |       |                        |       |
| Long-term liabilities:                                                                                                    |       |                     |       |                        |       |
| Debt and capital lease obligations, less current portion                                                                  |       | 1,969                    |       | 2,527                       |       |
| Total liabilities                                                                                                         |       | 10,809                   |       | 12,406                      |       |
|                                                                                                                      |       |                     |       |                        |       |
| Commitments and contingencies (see Notes 13 and 14)                                                                  |       |                     |       |                        |       |
|                                                                                                                      |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                |       |                     |       |                        |       |
| Common stock, $0.001 par value; 100,000 shares authorized; 29,416 and  29,390 shares issued and outstanding, respectively |       | 29                       |       | 29                          |       |
| Additional paid-in capital                                                                                                |       | 168,013                  |       | 167,298                     |       |
| Accumulated other comprehensive income (loss)                                                                             |       | (161                     | )          | 350                         |       |
| Accumulated deficit                                                                                                       |       | (140,036                 | )          | (138,659                    | )          |
| Total stockholders’ equity                                                                                           |       | 27,845                   |       | 29,018                      |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                           |       | $                        | 38,654     |                        | $          | 41,424 |   |

 

See accompanying Notes to Condensed Unaudited Consolidated FinancialStatements.

 

4

----

 

**QUICKLOGIC CORPORATION**

**CONDENSED UNAUDITED CONSOLIDATEDSTATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                    | ** ** | **March 30, 2008**     | ** ** | **April 1, 2007** | ** ** |
| ** **                                                                    | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                                         |       |                             |       |   |   |
| Net loss                                                                      |       | $                                | (1,377     | ) | $ | (5,893 | ) |
| Adjustments to reconcile net loss to net cash used for operating  activities: |       |                             |       |   |   |
| Depreciation and amortization                                                 |       | 646                              |       | 807 |   |
| Stock-based compensation                                                      |       | 665                              |       | 381 |   |
| Decrease in wafer credits from Tower Semiconductor Ltd.                       |       | 113                              |       | 67 |   |
| Write-down of inventories                                                     |       | 956                              |       | 2,465 |   |
| Bad debt expense                                                              |       | 15                               |       | 35 |   |
| Changes in assets and liabilities:                                            |       |                             |       |   |   |
| Accounts receivable                                                           |       | (1,090                           | )          | 573 |   |
| Inventories                                                                   |       | 245                              |       | 126 |   |
| Other assets                                                                  |       | 35                               |       | 203 |   |
| Trade payables                                                                |       | (1,389                           | )          | (2,201 | ) |
| Accrued liabilities                                                           |       | 447                              |       | 178 |   |
| Deferred income and royalty revenue                                           |       | 92                               |       | 441 |   |
| Net cash used for operating activities                                        |       | (642                             | )          | (2,818 | ) |
|                                                                          |       |                             |       |   |   |
| Cash flows from investing activities:                                         |       |                             |       |   |   |
| Capital expenditures for property and equipment                               |       | (252                             | )          | (338 | ) |
| Net cash used for investing activities                                        |       | (252                             | )          | (338 | ) |
|                                                                          |       |                             |       |   |   |
| Cash flows from financing activities:                                         |       |                             |       |   |   |
| Payment of debt and capital lease obligations                                 |       | (702                             | )          | (680 | ) |
| Proceeds from issuance of common stock                                        |       | 50                               |       | 335 |   |
| Net cash used for financing activities                                        |       | (652                             | )          | (345 | ) |
|                                                                          |       |                             |       |   |   |
| Net decrease in cash and cash equivalents                                     |       | (1,546                           | )          | (3,501 | ) |
| Cash and cash equivalents at beginning of period                              |       | 20,868                           |       | 24,621 |   |
| Cash and cash equivalents at end of period                                    |       | $                                | 19,322     |   | $ | 21,120 |   |
|                                                                          |       |                             |       |   |   |
| Supplemental disclosures of cash flow information:                            |       |                             |       |   |   |
| Interest paid                                                                 |       | $                                | 79         |   | $ | 96 |   |
| Income taxes paid                                                             |       | $                                | 42         |   | $ | 19 |   |

 

See accompanying Notes to Condensed Unaudited Consolidated FinancialStatements.

 

5

----

 

**QUICKLOGIC CORPORATION**

**CONDENSED UNAUDITED CONSOLIDATEDSTATEMENTS OF COMPREHENSIVE LOSS**

**(in thousands)**

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|----------------------------------|------------|
| ** **                                        | ** ** | **March 30, 2008**     | ** ** | **April 1, 2007** | ** ** |
| ** **                                        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net loss                                          |       | $                                | (1,377     | ) | $ | (5,893 | ) |
| Other comprehensive loss, net of tax:             |       |                             |       |   |   |
| Unrealized loss on available-for-sale investments |       | (511                             | )          | — |   |
| Total comprehensive loss                          |       | $                                | (1,888     | ) | $ | (5,893 | ) |

 

See accompanying Notes to Condensed Unaudited Consolidated FinancialStatements.

 

6

----

** **

**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

QuickLogic Corporation (“QuickLogic”or the “Company”) was founded in 1988 and reincorporated in Delaware in 1999.The Company develops and markets low power programmable solutions that enablecustomers to add features to their mobile, consumer and industrial products.The Company is a fabless semiconductor company that operates in a singleindustry segment where it designs, markets and supports Customer SpecificStandard Products (“CSSPs”), Field Programmable Gate Arrays (“FPGAs”),application solutions, 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 30, 2007. Operatingresults for the first quarter of 2008 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 2008 and 2007 ended Sunday, March 30, 2008 and April 1,2007, respectively.

 

*Liquidity*

 

The Company anticipatesthat its existing cash resources will fund operations, finance purchases ofcapital equipment and provide adequate working capital for the next twelvemonths. The Company’s liquidity is affected by many factors including, amongothers, the level of revenue and gross profit, the conversion of designopportunities into revenue, market acceptance of existing and new productsincluding ArcticLinkTM and PolarPro® solution platforms, fluctuationsin revenue as a result of product end-of-life, fluctuations in revenue as aresult of the stage in the product life cycle of its customers’ products, costsof securing access to and availability of adequate manufacturing capacity,levels of inventories, wafer purchase commitments, customer credit terms, theamount and timing of research and development expenditures, the timing of newproduct introductions, production volumes, product quality, sales and marketingefforts, the value and liquidity of its investment portfolio, the amount andfinancing arrangements for purchases of capital equipment, changes in operatingassets and liabilities, the ability to obtain or renew debt financing and toremain in compliance with the terms of existing credit facilities, the abilityto raise funds from the sale of shares of Tower Semiconductor Ltd. (“Tower”)and equity in the Company, the issuance and exercise of stock options andparticipation in the Company’s employee stock purchase plan, and other factorsrelated to the uncertainties of the industry and global economics. Accordingly,there can be no assurance that events in the future will not require the Companyto seek additional capital or, if so required, that such capital will beavailable on terms acceptable to the Company.

 

*Principles of Consolidation*

 

The consolidatedfinancial statements include the accounts of QuickLogic Corporation and itswholly owned subsidiaries, QuickLogic International, Inc., QuickLogicCanada Company, QuickLogic Kabushiki Kaisha and QuickLogic Software (India)Private Ltd. The Company and its subsidiaries use the U.S. dollar as itsfunctional currency. All intercompany accounts and transactions are eliminatedin consolidation.

 

*Uses of Estimates*

 

The preparation of theseconsolidated financial statements in conformity with GAAP requires managementto make estimates and assumptions that affect the reported amounts of assetsand liabilities, the disclosures of contingent assets and liabilities and thereported amounts of revenue and expenses during the period. Actual resultscould differ from those estimates, particularly in relation to revenuerecognition, the allowance for doubtful accounts, sales returns, valuation ofinvestments, valuation of long-lived assets, valuation of inventories includingidentification of excess quantities, market value and obsolescence, measurementof stock-based compensation awards, accounting for income taxes and estimatingaccrued liabilities.

 

7

----

** **

**Quicklogic corporation**

**Notes to condensed unaudited consolidatedfinancial statements — (****Continued)**

 

*Reclassifications*

 

For presentationpurposes, certain amounts in prior period financial statements, referred to inthese financial statements, have been reclassified to conform to the reportingin current period financial statements.

 

**Note 2—Significant AccountingPolicies**

 

*Revenue Recognition*

 

The Company suppliesstandard products which must be programmed before they can be used in anapplication. 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 Company generallyrecognizes revenue as products are shipped if evidence of an arrangementexists, delivery has occurred, the sales price is fixed or determinable,collection of the resulting receivable is reasonably assured and productreturns are reasonably estimable.

 

Revenue is recognizedupon shipment of both programmed and unprogrammed parts to original equipmentmanufacturer (“OEM”) customers, provided that legal title and risk of ownershiphave transferred.

 

The Company also sells todistributors under agreements that allow for price adjustments and, in the caseof unprogrammed parts, certain rights of return on unsold inventories.

 

Because programmed partscan only be used by a specific customer, it is the Company’s practice to agreeupon any price adjustments with a distributor prior to shipment. Furthermore,distributors are not allowed any future price adjustments and have no rights ofreturn on programmed parts. The Company also sells certain unprogrammedend-of-life products to distributors at a fixed price, and distributors are notallowed any future price adjustments and have no rights of return on theseunprogrammed end-of-life parts. Accordingly, revenue is recognized uponshipment to a distributor since title and risk of ownership have transferred tothe distributor, the price is fixed, no right of return exists and collectionof the resulting receivable is reasonably assured.

 

Unprogrammed parts shipped to distributors may be used by multiple endcustomers and distributors may have certain return and price adjustmentprivileges on unsold inventories. Accordingly, revenue associated withunprogrammed parts, other than the end-of-life products described above, isdeferred until resale to the end customer. Deferred income on shipments todistributors reflects the amount of gross margin expected to be realized whendistributors sell through these products purchased from the Company.

 

Revenue recognitiondepends on notification from the distributor that product has been sold to thedistributor’s end customer. Also reported by the distributor are product resaleprice, quantity and end customer shipment information, as well as inventorieson hand. Reported distributor inventories on hand are reconciled to deferredrevenue balances monthly.

 

Software revenue fromsales of design tools is recognized when persuasive evidence of an agreementexists, 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 firstquarter of 2008 and 2007.

 

*Inventories*

 

Inventories are stated atthe lower of standard cost or net realizable value. Standard cost approximatesactual cost on a first-in, first-out basis. The Company routinely evaluatesquantities and values of its inventories in light of current market conditionsand market trends and records reserves for quantities in excess of demand andproduct obsolescence. The evaluation may take into consideration historicusage, expected demand, anticipated sales price, the stage in the product lifecycle of its customers’ products, new product development schedules, the effectnew products might have on the sale of existing products, product obsolescence,customer design activity, customer concentrations, product merchantability andother factors. Market conditions are subject to change. Actual consumption ofinventories could differ from forecasted demand, and this difference could havea material impact 

 

8

----

** **

**Quicklogic corporation**

**Notes to condensedunaudited consolidated financial statements — (****Continued)**

 

on the Company’s grossmargin and inventory balances based on additional provisions for excess orobsolete inventories or a benefit from inventories previously written down.

 

The Company’ssemiconductor products have historically had an unusually long product lifecycle and obsolescence has not been a significant factor in the valuation ofinventories. However, as the Company pursues opportunities in the mobile marketand continues to develop new CSSPs and products, the Company believes itsproduct life cycle will be shorter and increase the potential for obsolescence.The Company also regularly reviews the cost of inventories against estimatedmarket value and records a lower of cost or market reserve for inventories thathave a cost in excess of estimated market value, which could have a materialimpact on the Company’s gross margin and inventory balances based on additionalwrite-downs to net realizable value or a benefit from inventories previouslywritten down.

 

*Long-Lived Assets*

 

The Company reviews therecoverability of its long-lived assets, such as property and equipment,prepaid wafer credits and investments, annually and when events or changes incircumstances occur that indicate that the carrying value of the asset or assetgroup may not be recoverable. The assessment of possible impairment is based onthe Company’s ability to recover the carrying value of the asset or asset groupfrom the expected future pre-tax cash flows, undiscounted and without interestcharges, of the related operations. If these cash flows are less than thecarrying value of the asset or asset group, an impairment loss is recognizedfor the difference between the estimated fair value and the carrying value, andthe carrying value of the related assets is reduced by this difference. Themeasurement of impairment requires management to estimate future cash flows andthe fair value of long-lived assets.

 

*Comprehensive Income (Loss)*

 

Comprehensive income(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 Company accounts forstock-based compensation under the provisions of Statement of FinancialAccounting 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. The fairvalue of stock-based compensation awards is measured at the grant date andre-measured upon modification, as appropriate. The Company uses theBlack-Scholes option pricing model (“Black-Scholes”) to estimate the fair valueof employee stock options and rights to purchase shares under the Company’s1999 Employee Stock Purchase Plan (“ESPP”), consistent with the provisions ofSFAS 123(R). The fair value of restricted stock awards (“RSAs”) and restrictedstock units (“RSUs”) is based on the closing price of the Company’s commonstock on the date of grant. Equity compensation awards which vest with serviceare expensed on a straight-line basis over the requisite service period.Performance based awards that are expected to vest are expensed on astraight-line basis over the vesting period. The Company regularly reviews theassumptions used to compute the fair value of its stock-based awards and itwill revise its assumptions as appropriate. In the event that assumptions usedto compute the fair value of its stock-based awards are later determined to beinaccurate or if the Company changes its assumptions significantly in futureperiods, stock-based compensation expense and the results of operations couldbe materially impacted. See Note 10.

 

*FairValue*

 

Effective December 31,2007, the Company adopted the provisions of SFAS No. 157, “*Fair Value Measurements*,” (“SFAS 157”) andSFAS No. 159, “*The Fair Value Optionfor Financial Assets and Financial Liabilities*,” (“SFAS 159”). SFAS157 establishes a framework for measuring fair value and expands disclosuresabout fair value measurements. SFAS 159 permits companies to choose to measurecertain financial instruments and certain other items at fair value. See Note8.

 

9

----

** **

**Quicklogic corporation**

**Notes to condensedunaudited consolidated financial statements — (****Continued)**

 

*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 local currency.Foreign currency transaction gains and losses are included in interest incomeand other, net, as they occur. Operating expenses denominated in foreigncurrencies were approximately 24% and 23% of total operating expenses for thefirst quarter of 2008 and 2007, respectively. The Company incurred a majorityof these foreign currency expenses in Canada. The Company has not usedderivative financial instruments to hedge its exposure to fluctuations inforeign currency and, therefore, is susceptible to fluctuations in foreignexchange gains or losses in its results of operations in future reportingperiods.

 

*Concentrationof Credit and Equity Risk and Suppliers*

 

Financial instruments,which potentially subject the Company to concentrations of credit risk, consistprincipally of cash and cash equivalents and accounts receivable. Cash and cashequivalents are maintained with high quality institutions. The Company’saccounts receivable are denominated in U.S. dollars and are derived primarilyfrom sales to customers located in North America, Europe and Asia Pacific. TheCompany performs ongoing credit evaluations of its customers and generally doesnot require collateral. See Note 12 for information regarding concentrationsassociated with accounts receivable. The Company’s investment in Tower issubject to equity risk. See Note 4 for information regarding the Company’sinvestment in Tower.

 

The Company depends on a limited number of contract manufacturers,subcontractors, and suppliers for wafer fabrication, assembly, programming andtest of its devices, and for the supply of programming equipment, and theseservices are typically provided by one supplier for each of the Company’sdevices. The Company generally purchases these single or limited sourceservices through standard purchase orders or under its agreement with Tower.Because the Company relies on independent subcontractors to perform theseservices, it cannot directly control its product delivery schedules, costs orquality levels. The Company’s future success also depends on the financialviability of its independent subcontractors. These subcontract manufacturersproduce products for other companies and the Company must place orders inadvance of expected delivery. As a result, the Company has only a limitedability to react to fluctuations in demand for its products, which could causeit to have an excess or a shortage of inventories of a particular product, andits ability to respond to changes in demand is limited by these suppliers’ability to provide products with the quantity, quality, cost and timelinessthat it requires. The decision not to provide these services to the Company orthe inability to supply these services to the Company, such as in the case of anatural or financial disaster, would have a significant impact on the Company’sbusiness. Increased demand from other companies could result in thesesubcontract manufacturers allocating available capacity to customers that arelarger or have long-term supply contracts in place and the Company may beunable to obtain adequate foundry and other capacity at acceptable prices, orexperience delays or interruption in supply. Additionally, volatility ofeconomic, market, social and political conditions in countries where thesesuppliers operate may be unpredictable and could result in a reduction inproduct revenue or increase the Company’s cost of revenue and could adverselyaffect its business, financial condition and results of operations.

 

*Warranty Costs*

 

The Company generallywarrants finished goods against defects in material and workmanship undernormal use for twelve months from the date of shipment. The Company doesnot have significant product warranty related costs or liabilities. Theone-time programmable nature of QuickLogic’s products minimizes warranty costs.

 

*Recently Issued AccountingPronouncements*

 

In December 2007,the Financial Accounting Standards Board (“FASB”) issued SFAS No. 141(R), *“Business Combinations,”* (“SFAS 141(R)”).SFAS 141(R) establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, contractual contingencies, and contingentconsideration at their fair value on the acquisition date, any controllinginterest in the acquiree and the goodwill acquired. SFAS 141(R) alsoestablishes disclosure requirements to enable the evaluation of the nature andfinancial effects of the business combination. SFAS 141(R) is effectivefor fiscal years beginning after December 15, 2008. The Company does notexpect SFAS 141(R) to have a significant impact on its consolidatedfinancial statements.

 

10

----

** **

**Quicklogic corporation**

**Notes to condensedunaudited consolidated financial statements — (****Continued)**

 

**Note 3—Net Loss 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 was 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** | ** ** |
|------------------------------|------------|----------------------------------|------------|
| ** **                   | ** ** | **March 30, 2008**     | ** ** | **April 1, 2007** | ** ** |
| ** **                   | ** ** | **Net Loss**                | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** | **Net Loss** | ** ** | **Shares** | ** ** | **Per Share  Amount** | ** ** |
| Basic                        |       | $                                | (1,377     | ) | 29,406 |   | $ | (0.05 | ) | $ | (5,893 | ) | 28,814 |   | $ | (0.20 | ) |
| Effect of stock-based awards |       | —                           |       | — |   | — |   | — |   | — |   | — |   |
| Diluted                      |       | $                                | (1,377     | ) | 29,406 |   | $ | (0.05 | ) | $ | (5,893 | ) | 28,814 |   | $ | (0.20 | ) |

 

Forthe first quarter of 2008 and 2007, 8.7 million and 7.0 million shares,respectively, associated with stock-based awards outstanding and the estimatednumber of shares to be purchased under the offering period of the ESPP were notincluded in the calculation of diluted net loss per share, as they wereconsidered antidilutive due to the net loss the Company experienced during thisperiod.

 

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

 

On December 12,2000, the Company entered into several agreements with Tower, as amended, underwhich the Company agreed to make a strategic investment in Tower of up to$25 million as part of Tower’s plan to build and equip a new waferfabrication facility. During 2001 and 2002, the Company paid a total of$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 carrying value 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 March 30,2008, the Company held 1,344,543 available-for-sale Tower ordinary shares withan unrealized loss of $161,000 recorded in accumulated other comprehensive losson the balance sheet, representing the difference between the carrying valueper share and $1.05 per share, their market value on the last trading day ofthe reporting period. Pursuant to SFAS 157, the fair value of the Company’smarketable securities as of March 30, 2008 was determined based on “Level1” inputs as described in Note 8. The Company plans to continue to hold 450,000of the Tower ordinary shares in order to receive preferred product pricingunder the agreements with Tower and has recorded these shares as a long-terminvestment on the balance sheets. The remaining 894,543 shares are classifiedas a short-term investment on the balance sheets.

 

The Company also received$4.7 million in prepaid wafer credits in partial consideration for theinvestment. As of March 30, 2008, the prepaid wafer credits balance was$2.4 million. The Company has guaranteed capacity at Tower through atleast 2010. These credits are recorded within long-term other assets on thebalance sheets and can be applied toward wafer purchases from Tower at 15% ofthe value of purchases made through 2010.

 

11

----

** **

**Quicklogic corporation**

**Notes to condensedunaudited consolidated financial statements — (****Continued)**

 

**Note 5—Balance Sheet Components**

 
| ** **                                | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **(in thousands)**  | ** ** |
| Inventories:                              |       |                     |       |                        |       |
| Raw materials                             |       | $                        | 142        |                        | $          | 199 |   |
| Work-in-process                           |       | 3,474                    |       | 4,714                       |       |
| Finished goods                            |       | 953                      |       | 857                         |       |
|                                      |       | $                        | 4,569      |                        | $          | 5,770 |   |
|                                      |       |                     |       |                        |       |
| Other current assets:                     |       |                     |       |                        |       |
| Prepaid expenses                          |       | $                        | 1,413      |                        | $          | 1,371 |   |
| Other                                     |       | 182                      |       | 236                         |       |
|                                      |       | $                        | 1,595      |                        | $          | 1,607 |   |
|                                      |       |                     |       |                        |       |
| Property and equipment:                   |       |                     |       |                        |       |
| Equipment                                 |       | $                        | 15,145     |                        | $          | 14,979 |   |
| Software                                  |       | 9,328                    |       | 9,303                       |       |
| Furniture and fixtures                    |       | 826                      |       | 823                         |       |
| Leasehold improvements                    |       | 803                      |       | 803                         |       |
|                                      |       | 26,102                   |       | 25,908                      |       |
| Accumulated depreciation and amortization |       | (20,664                  | )          | (20,031                     | )          |
|                                      |       | $                        | 5,438      |                        | $          | 5,877 |   |
|                                      |       |                     |       |                        |       |
| Other assets:                             |       |                     |       |                        |       |
| Prepaid wafer credits                     |       | $                        | 2,438      |                        | $          | 2,551 |   |
| Other                                     |       | 171                      |       | 194                         |       |
|                                      |       | $                        | 2,609      |                        | $          | 2,745 |   |
|                                      |       |                     |       |                        |       |
| Accrued liabilities:                      |       |                     |       |                        |       |
| Employee related accruals                 |       | $                        | 1,962      |                        | $          | 1,452 |   |
| Other                                     |       | 713                      |       | 776                         |       |
|                                      |       | $                        | 2,675      |                        | $          | 2,228 |   |

 

12

----

** **

**Quicklogic corporation**

**Notes to condensedunaudited consolidated financial statements — (****Continued)**

 

**Note 6—Obligations**

** **
| ** **                                            | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **(in thousands)**  | ** ** |
|                                                  |       |                     |       |                        |       |
| Debt and capital lease obligations:                   |       |                     |       |                        |       |
| Notes payable to bank                                 |       | $                        | 2,892      |                        | $          | 3,278 |   |
| Capital leases                                        |       | 1,430                    |       | 1,746                       |       |
|                                                  |       | 4,322                    |       | 5,024                       |       |
| Current portion of debt and capital lease obligations |       | (2,353                   | )          | (2,497                      | )          |
|                                                  |       | $                        | 1,969      |                        | $          | 2,527 |   |

 

*Revolving Line of Credit and NotesPayable to Bank*

 

Effective June 2006, the Company entered into aSecond Amended and Restated Loan and Security Agreement with Silicon ValleyBank. Terms of the agreement included a $5.0 million revolving line ofcredit that is available through June 2008 and an additional$2.0 million of borrowing capacity under the equipment line of credit thatwas available to be drawn against through June 2007. Advances under theequipment line of credit must be repaid in either 30 or 36 equal monthlyinstallments, depending upon the nature of the items financed. The agreementwas amended in June 2007 to include an additional $2.5 million ofborrowing capacity under the equipment line of credit that is available to bedrawn against through June 2008 and provides that future advances underthe equipment line of credit be repaid in 36 equal monthly installments. Uponeach draw the Company can elect an interest rate that is fixed at the U.S.treasury yield to maturity plus four percent or that floats at the prime rateplus one percent. Terms of the various advances under the agreement are asfollows (in thousands):

 
| ** **                | ** ** | **Original  Balance** | ** ** | **Balance at  March 30,  2008** | ** ** | **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      |                                      | 2          |                  | n/a        |                                   | Prime  + 2.00% |                                                          | Multiple  draws   maturing on or before  April 2008 |   |
| Notes payable             |       | 932                   |       | 302                                       |       | n/a                   |       | Prime  + 1.75%                         |           | Multiple  draws   maturing on or before   April 2009     |                                                     |
| Notes payable             |       | 1,558                 |       | 767                                       |       | n/a                   |       | Prime  + 1.00%                         |           | Multiple  draws   maturing on or before   September 2009 |                                                     |
| Notes payable             |       | 442                   |       | 319                                       |       | n/a                   |       | Prime  + 1.00%                         |           | Multiple  draws   maturing on or before   May 2010       |                                                     |
| Notes payable             |       | 1,630                 |       | 1,502                                     |       | n/a                   |       | 7.25%                                  |           | Multiple  draws   maturing on or before   December 2010  |                                                     |
| Notes payable             |       | n/a                   |       | —                                    |       | 870                   |       | Prime  + 1.00%   or Treasury +   4.00% |           | 36  months from   date of advance                             |                                                     |
| Total                     |       |                  |       | $                                         | 2,892      |                  |       |                                   |           |                                                          |                                                     |   |
|                           |            |                       |            |                                           |            |                       |            |                                        |                |                                                               |                                                          |  |  |  |

 

The bank has a firstpriority security interest in substantially all of the Company’s tangible andintangible assets to secure any outstanding amounts under the agreement. Underthe terms of the agreement, the Company must 

 

13

----

** **

**Quicklogic corporation**

**Notes to condensedunaudited consolidated financial statements — (****Continued)**

 

maintain a minimumtangible net worth and adjusted quick ratio. The agreement also has certainrestrictions including, among others, on the incurrence of other indebtedness,the maintenance 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 the end of the current reporting period.

 

At March 30, 2008,the prime rate under the credit facility was 5.25%. As of March 30, 2008and December 30, 2007, $1.4 million and $1.8 million, respectively, ofamounts outstanding under the equipment line of credit were classified aslong-term obligations.

 

*Capital Leases*

 

In December 2007, the Company leased designsoftware and related maintenance under a two year capital lease at an imputedinterest rate of 7.1% per annum. Terms of the agreement require the Company tomake quarterly payments of approximately $190,000 through November 2009.The Company recorded a capital asset of $1.2 million that is beingdepreciated over the term of the agreement, prepaid maintenance of $256,000that is being amortized over the term of the agreement and a capital leaseobligation of $1.4 million. As of March 30, 2008, $1.2 million wasoutstanding under the capital lease, $550,000 of which was classified as along-term obligation.

 

In the fourth quarter of2006, the Company entered into a capital lease obligation in the amount of$77,000 to finance design software. The capital lease obligation has an imputedinterest rate of 9.25% per annum and is being repaid in annual amounts of$28,000 through January 2009. As of March 30, 2008, $49,000 wasoutstanding under the capital lease, zero of which was classified as along-term obligation.

 

In January 2006, theCompany leased design software tools and related maintenance under a three yearcapital lease at an imputed interest rate of 9.0% per annum. Terms of theagreement require the Company to make semi-annual payments of approximately$148,000 through July 2008. The Company recorded a capital asset of$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 March 30, 2008, $142,000was outstanding under the capital lease, zero of which was classified as along-term obligation.

 

**Note 7—Deferred Royalty Revenue**

 

In October 2000, theCompany entered into a technology license and wafer supply agreement withAeroflex Incorporated (“Aeroflex”). Under the terms of the agreement, theCompany received $750,000 of prepaid royalties. In addition, Aeroflex receivesa prepaid royalty credit for a portion of the amounts paid for wafers purchasedfrom the Company under the agreement. Prepaid royalties are recognized asrevenue when Aeroflex reports the sale of products incorporating the licensed technology.As of March 30, 2008 and December 30, 2007, the Company hadclassified as a current liability approximately $389,000 and $431,000,respectively, of deferred royalty revenue under this agreement. The Companyrecognized $90,000 and $110,000 of royalty revenue under the agreement in thefirst quarter of 2008 and 2007, respectively.

 

**Note 8—Fair Value Measurements**

 

In September 2006,the FASB issued SFAS 157. SFAS 157 establishes a framework for measuring fairvalue and expands disclosures about fair value measurements. The changes tocurrent practice resulting from the application of SFAS 157 relate to thedefinition of fair value, the methods used to measure fair value and expandeddisclosures about fair value measurements. In February 2008, the FASBissued FASB Staff Position Financial Accounting Standards (“FSP FAS”) No. 157-1,“*Application of FASB Statement No. 157to FASB Statement No. 13 and Its Related Interpretive AccountingPronouncements That Address Leasing Transactions,”* (“FSP FAS 157-1”)and FASB FSP FAS No. 157-2, “*EffectiveDate of FASB Statement No.157,”*(“FSP FAS 157-2”). FSP FAS 157-1removes leasing from the scope of SFAS 157. FSP FAS 157-2 delays the effectivedate of SFAS 157 from 2008 to 2009 for all nonfinancial assets and nonfinancialliabilities, except those that are recognized or disclosed at fair value in theconsolidated financial statements on a recurring basis.  SFAS 157 is effective for fiscal yearsbeginning after November 15, 2007 and interim periods within those fiscalyears for financial assets and liabilities, as well as for any other assets andliabilities that are carried at fair value on a recurring basis in theconsolidated financial statements.

 

14

----

 

**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

 

EffectiveDecember 31, 2007, the Company adopted the provisions of SFAS 157 asamended by FSP FAS 157-1 and FSP FAS 157-2. The adoption of this standard infiscal 2008 was limited to financial assets and liabilities. The adoption ofSFAS 157 did not have a material effect on the Company’s financial condition orresults of operations.  The Company is inthe process of evaluating the impact of this standard with respect to theCompany’s nonfinancial assets and liabilities and the effect it will have onits consolidated financial statements.

 

SFAS 157 specifies a hierarchy of valuationtechniques based upon whether the inputs to those valuation techniques reflectassumptions other market participants would use based upon market data obtainedfrom independent sources (observable inputs) or reflect the company’s ownassumption of market participant valuation (unobservable inputs). The fairvalue hierarchy consists of the following three levels:

 

·           *Level 1*–Inputs are quoted prices in active markets for identical assets or liabilities.

 

·           *Level 2*– Inputs are quoted prices for similar assetsor liabilities in an active market, quoted prices for identical or similar assetsor liabilities in markets that are not active, inputs other than quotedprices that are observable and market-corroborated inputswhich are derived principally from or corroborated by observable market data.

 

·           *Level 3* –Inputs are derived from valuation techniques in which one or more significantinputs or value drivers are unobservable.

 

Thefollowing table presents the Company’s financial assets that are measured atfair value on a recurring basis as of the end of the first quarter of 2008consistent with the fair value hierarchy provisions of SFAS 157 (in thousands):

 
| ** **                            | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
|---------------------------------------|------------|-----------|------------|------------------|------------|------------------|------------|------------------|------------|
| Assets:                               |       |      |       |             |       |             |       |             |       |
| Cash equivalents                      |       | $         | 17,016     |             | $          | 17,016           |       | $                | —     |   | $ | — |   |
| Investment in Tower Semiconductor Ltd |       | 1,412     |       | 1,412            |       | —           |       | —           |       |
| Total assets                          |       | $         | 18,428     |             | $          | 18,428           |       | $                | —     |   | $ | — |   |

 

Asof the end of the first quarter of 2008, the Company did not have any financialliabilities that are subject to the provision of SFAS 157.

 

InFebruary 2007, the FASB issued SFAS 159. SFAS 159 permits companies tochoose to measure certain financial instruments and certain other items at fairvalue. The standard requires that unrealized gains and losses on items forwhich the fair value option has been elected be reported in earnings. SFAS 159is effective for fiscal years beginning after November 15, 2007, althoughearlier adoption is permitted. Effective December 31, 2007, the Companyadopted the provisions of SFAS 159.  Theadoption of SFAS 159 did not have an effect on the Company’s financialcondition or results of operations as it did not elect the fair value option.

 

**Note9—Employee Stock Plans**

 

*1989 StockOption Plan*

 

The1989 Stock Option Plan (the “1989 Plan”) provided for the issuance of incentiveand nonqualified 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 a fouryear period. In September 1999, the Company adopted the 1999 Stock Planand no further stock option grants were made under the 1989 Plan.

 

*1999 StockPlan*

 

The1999 Stock Plan (the “1999 Plan”) was adopted by the Board of Directors in August 1999and was approved by the Company’s stockholders in September 1999. As of March 30,2008, approximately 16.3 million shares were reserved for issuance under the1999 Plan. In addition, each January an annual increase is added to the1999 Plan equal to the lesser of (i) 5,000,000 shares, (ii) 5% of theCompany’s outstanding shares on such date, or (iii) a lesser amountdetermined by the Board of Directors. Equity awards that are cancelled,forfeited or repurchased under the 1989 Plan also become available forgrant under the 

 

15

----

 

**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

 

1999 Plan. Equity awardsgranted under the 1999 Plan have a term of up to ten years. Optionstypically vest at a rate of 25% one year after the vesting commencement date, andone forty-eighth for each month of service thereafter. Starting in the thirdquarter of 2007, the Company began granting performance based RSUs which willvest following achievement of a 2008 quarterly revenue goal. The Company hasimplemented a different vesting schedule in the past and may implementdifferent vesting schedules in the future with respect to any new equityawards.

 

*EmployeeStock Purchase Plan*

 

The1999 Employee Stock Purchase Plan (“ESPP”) was adopted by the Board ofDirectors in August 1999 and was approved by the Company’s stockholders inSeptember 1999. As of March 30, 2008, approximately 6.1 millionshares were reserved for issuance under the ESPP. In addition, each August anannual increase is added to the ESPP equal to the lesser of (i) 1,500,000shares, (ii) 4% of the Company’s outstanding shares on such date, or (iii) alesser amount determined by the Board of Directors.

 

TheESPP, as amended, provides for six month offering periods. Participantspurchase shares through payroll deductions of up to 20% of an employee’s totalcompensation (maximum of 20,000 shares per offering period). The amended ESPPpermits the Board of Directors to determine, prior to each offering period,whether participants purchase shares at: (i) 85% of the fair market valueof the common stock at the end of the offering period; or (ii) 85% of thelower of the fair market value of the common stock at the beginning or the endof an offering period. The Board of Directors has determined that, untilfurther notice, future offering periods will be made at 85% of the lower of thefair market value of the common stock at the beginning or the end of anoffering period.

 

**Note10—Stock-Based Compensation**

 

Effective January 2,2006, the Company adopted the provisions of SFAS 123(R), using themodified prospective transition method, 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.Under SFAS 123(R), stock-based compensation expense is recognized in theCompany’s consolidated 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 the first quarter of 2008 and 2007 was as follows (inthousands):

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 30,  2008**         | ** ** | **April 1,  2007** | ** ** |
| Cost of revenue                     |       | $                                | 65         |   | $ | 55 |   |
| Research and development            |       | 158                              |       | 85 |   |
| Selling, general and administrative |       | 442                              |       | 241 |   |
| Total costs and expenses            |       | $                                | 665        |   | $ | 381 |   |

 

The amount of stock-based compensation included in inventoryfor the first quarter of 2008 and 2007 was not material.

 

*ValuationAssumptions*

 

SFAS 123(R) requirescompanies to estimate the fair value of stock-based compensation awards. Thefair value of stock-based compensation awards is measured at the grant date andre-measured upon modification, as appropriate. The Company uses theBlack-Scholes option pricing model (“Black-Scholes”), to estimate the fairvalue of employee stock options and rights to purchase shares under the Company’sESPP, consistent with the provisions of SFAS 123(R). Using Black-Scholesrequires the Company to develop highly subjective assumptions including theexpected term of awards, expected volatility of its stock, expected risk-freeinterest rate and expected dividend rate over the term of the award. TheCompany’s expected term of awards assumption is based primarily on itshistorical experience with similar grants. The Company’s expected stock pricevolatility assumption for both 

 

16

----

 

**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

 

stock options and ESPP sharesis based on the historical volatility of the Company’s stock, using the dailyaverage of the opening and closing prices and measured using historical dataappropriate for the expected life. The risk-free interest rate assumptionapproximates the risk-free interest rate of a Treasury Constant Maturity bondwith a maturity approximately equal to the expected term of the stock option orESPP shares. This fair value is expensed over the requisite service period ofthe award. The fair value of RSAs and RSUs is based on the closing price of theCompany’s common stock on the date of grant. Equity compensation awards whichvest with service are expensed using the straight-line attribution method overthe requisite service period. RSU awards which are expected to vestbased on the achievement of a performance goal are expensed over the estimatedvesting period.

 

Inaddition to the assumptions used in Black-Scholes, SFAS 123(R) requiresthat the Company recognize expense for awards ultimately expected to vest;therefore we are required to develop an estimate of the number of awardsexpected to be forfeited prior to vesting (“forfeiture rate”). The forfeiturerate is estimated based on historical pre-vest cancellation experience and isapplied to all share-based awards.

 

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

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **March 30, 2008**     | ** ** | **April 1, 2007** | ** ** |
| Expected term (years)   |       | 5.24                             |       | 5.10 |   |
| Risk-free interest rate |       | 2.75                             | %          | 4.70 | % |
| Expected volatility     |       | 50.75                            | %          | 80.00 | % |
| Expected dividend       |       | —                           |       | — |   |

 

The methodologies fordetermining the above values were as follows:

 

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

 

·           *Risk-free interest rate:*The risk-free interest rate assumption isbased upon the risk-free rate of a Treasury Constant Maturity bond with amaturity appropriate for the expected term of the Company’s employee stockoptions.

 

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

 

·           *Expected dividend:*The expected dividend assumption is based on the Company’s intent notto issue a dividend under its dividend policy.

 

The weighted average estimated fair value foroptions granted during first quarter of 2008 and 2007 was $1.41 and $1.98 peroption, respectively. As of the end of the first quarter of 2008, the fairvalue of unvested stock options, net of expected forfeitures, was approximately$4.3 million. This unrecognized stock-based compensation expense is expected tobe recorded over a weighted average period of approximately 3.1 years.

 

17

----

 

**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

 

*Stock-BasedCompensation Award Activity*

 

The following tablesummarizes the shares available for grant under the 1989 Plan and the 1999 Planfor the first quarter of 2008:

 
| ** **                        | ** ** | **Shares  Available for Grant** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **(in thousands)**                   | ** ** |
| Balance at December 30, 2007 |       | 6,588                                     |       |
| Authorized                        |       | 1,470                                     |       |
| Options granted                   |       | (146                                      | )          |
| Options forfeited or expired      |       | 125                                       |       |
| RSAs granted                      |       | (8                                        | )          |
| RSUs granted                      |       | (47                                       | )          |
| RSUs forfeited or expired         |       | 63                                        |       |
| Balance at March 30, 2008    |       | 8,045                                     |       |

 

*Stock Options*

 

The following tablesummarizes stock options outstanding and stock option activity under the 1989Plan and the 1999 Plan, and the related weighted average exercise price, forthe first quarter of 2008:

 
| ** **                                          | ** ** | **Number of Shares** | ** ** | **Weighted  Average Exercise  Price** | ** ** | **Weighted  Average  Remaining Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|-----------------------------------------------------|------------|--------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                                          | ** ** | **(in thousands)**        | ** ** | ** **                                 | ** ** | **(in years)**                        | ** ** | **(in thousands)**             | ** ** |
| Balance outstanding at December 30,  2007      |       | 7,594                          |       | $                                          | 4.72       |                                       |       |                                |       |   |
| Granted                                             |       | 146                            |       | 2.96                                       |       |                                       |       |                                |       |
| Forfeited or expired                                |       | (125                           | )          | 4.56                                       |       |                                       |       |                                |       |
| Exercised                                           |       | (19                            | )          | 2.54                                       |       |                                       |       |                                |       |
| Balance outstanding at March 30, 2008          |       | 7,596                          |       | $                                          | 4.69       |                                       | 5.86       |                                | $          | 973 |   |
| Exercisable at March 30, 2008                  |       | 5,209                          |       | $                                          | 5.22       |                                       | 4.40       |                                | $          | 935 |   |
| Vested and expected to vest at  March 30, 2008 |       | 6,997                          |       | $                                          | 4.79       |                                       | 5.59       |                                | $          | 964 |   |

 

Theaggregate intrinsic value in the table above represents the total pretaxintrinsic value, based on the Company’s closing stock price of $2.91 as of theend of the Company’s current reporting period, which would have been receivedby the option holders had all option holders exercised their options as of thatdate.

 

Thetotal intrinsic value of options exercised during the first quarter of 2008 and2007 was $10,000 and $190,000, respectively. Total cash received from employeesas a result of employee stock option exercises during the first quarter of 2008and 2007 was approximately $50,000 and $335,000, respectively. The Companysettles employee stock option exercises with newly issued common shares. Inconnection with these exercises, there was no tax benefit realized by theCompany due to the Company’s current loss position.

 

18

----

 

**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

 

*RestrictedStock Awards and Restricted Stock Units*

 

The Company began issuingRSAs and RSUs in 2007. RSAs entitle the holder to purchase shares of commonstock at par value during a short period of time, and purchased shares are heldin escrow until they vest. RSUs entitle the holder to receive, at no cost, onecommon share for each restricted stock unit as it vests. A summary of theCompany’s RSA and RSU activity and related information for the first quarter of2008 are as follows:

 
| ** **                          | ** ** | **RSAs and RSUs Outstanding** | ** ** |
|-------------------------------------|------------|----------------------------------------------|------------|
| ** **                          | ** ** | **Number of Shares**               | ** ** | **Weighted Average  Grant Date Fair Value** | ** ** |
| ** **                          | ** ** | **(in thousands)**                      | ** ** | ** ** | ** ** |
| Nonvested at December 30, 2007 |       | 937                                          |       | $ | 3.60 |   |
| Granted                             |       | 55                                           |       | 3.06 |   |
| Vested                              |       | (8                                           | )          | 3.28 |   |
| Forfeited                           |       | (63                                          | )          | 3.59 |   |
| Nonvested at March 30, 2008    |       | 921                                          |       | $ | 3.57 |   |

 

Asof the end of the first quarter of 2008, the unrecognized stock-basedcompensation expense related to outstanding performance based RSUs, which isare not currently expected to vest, was $3.3 million. The Company willrecognize this expense to the extent it determines these performance based RSUsare likely to vest.

 

*EmployeeStock Purchase Plan*

 

Theoffering period ending May 14, 2007 commenced on January 24, 2007,once the Company had completed its stock option review and was current with itsfilings as required by the Securities and Exchange Commission (“SEC”) andNasdaq. Offering periods beginning May 15, 2007 or later are standard sixmonth offering periods. Employees participating in these offering periodspurchase common stock at 85% of the lower of the fair market value of thecommon stock at the beginning or the end of the offering period.

 

Theweighted average estimated fair value, as defined by SFAS 123(R), of rightsissued pursuant to the Company’s ESPP during the first quarter of 2008 and 2007was $1.15 and $0.84 per right, respectively.

 

Thefollowing weighted average assumptions are included in the estimated fair valuecalculations for rights to purchase stock under the ESPP as of the grant date:

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **March 30, 2008**     | ** ** | **April 1, 2007** | ** ** |
| Expected life (months)  |       | 6.00                             |       | 3.60 |   |
| Risk-free interest rate |       | 3.56                             | %          | 5.00 | % |
| Volatility              |       | 50.00                            | %          | 55.00 | % |
| Dividend yield          |       | —                           |       | — |   |

 

The methodologies fordetermining the above values were as follows:

 

·           *Expected term:*The expected term represents the length of the purchase periodcontained in the ESPP.

 

·           *Risk-free interest rate:*The risk-free interest rate assumption isbased upon the risk-free rate of a Treasury Constant Maturity bond with amaturity appropriate for the term of the purchase period.

 

·           *Expected volatility:*The Company determines expected volatilitybased on historical volatility of the Company’s common stock for the term ofthe purchase period.

 

·           *Expected dividend:*The expected dividend assumption is based on the Company’s intent notto issue a dividend under its dividend policy.

 

Asof the end of the first quarter of 2008, the unrecognized stock-basedcompensation expense relating to the Company’s ESPP was $50,000 and is expectedto be recognized over a weighted average period of approximately 1.4 months.

 

19

----

 

**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIALSTATEMENTS — (Continued)**

 

**Note 11—IncomeTaxes**

 

In the first quarter of 2008 and 2007, the Companyrecorded income tax expense of $34,000 and $15,000, respectively, whichconsisted primarily of income taxes on foreign operations.

 

Due to the uncertainties surrounding the realizationof the deferred tax assets resulting from the Company’s accumulated deficit andnet tax losses in previous years, the Company has provided a full valuationallowance against the associated deferred tax assets. The Company will continueto assess the realizability of the deferred tax assets in future periods.

 

TheCompany had approximately $77,000 and $78,000 of unrecognized tax benefits at March 30,2008 and December 30, 2007, respectively. The Company recognizes interestand penalties related to uncertain tax positions in income tax expense. As of March 30,2008, the Company had approximately $6,000 of accrued interest and penaltiesrelated to uncertain tax positions.

 

TheCompany is no longer subject to U.S. federal, state and non-U.S. income taxaudits by taxing authorities for fiscal years through 1992. The Companyestimates that any unrecognized tax benefit will not change significantlywithin the next twelve months.

 

**Note 12—InformationConcerning Product Lines, Geographic Information and Revenue Concentration**

 

The Company identifies its business segments basedon business activities, management responsibility and geographic location. Forall periods presented, the Company operated in a single business segment.

 

The following is a breakdownof revenue by product line (in thousands):

 
| ** **                    | ** ** | **Three Months Ended** | ** ** |
|-------------------------------|------------|----------------------------------|------------|
| ** **                    | ** ** | **March 30, 2008**     | ** ** | **April 1, 2007** | ** ** |
| *Revenue by product line(1):* |       |                             |       |   |   |
| New products                  |       | $                                | 2,598      |   | $ | 606 |   |
| Mature products               |       | 4,324                            |       | 3,506 |   |
| End-of-life products          |       | 4,101                            |       | 2,130 |   |
| Total revenue                 |       | $                                | 11,023     |   | $ | 6,242 |   |

 

----

      (1)  For all periods presented: New productsinclude ArcticLink, PolarPro, EclipseTM II and QuickPCI® II products;mature products include pASIC® 3, QuickRAM®, Eclipse,QuickDSP and QuickFC products, as well as royalty revenue, programming hardwareand design software; end-of-life products include pASIC 1, pASIC 2,V3, QuickMIPS and QuickPCI products.

 

The following is a breakdownof revenue by shipment destination (in thousands):

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **March 30, 2008**     | ** ** | **April 1, 2007** | ** ** |
| *Revenue by geography:* |       |                             |       |   |   |
| United States           |       | $                                | 4,543      |   | $ | 3,090 |   |
| Europe                  |       | 1,769                            |       | 837 |   |
| Taiwan                  |       | 2,059                            |       | 288 |   |
| Japan                   |       | 874                              |       | 610 |   |
| China                   |       | 1,236                            |       | 331 |   |
| Rest of North America   |       | 385                              |       | 987 |   |
| Rest of Asia Pacific    |       | 157                              |       | 99 |   |
| Total revenue           |       | $                                | 11,023     |   | $ | 6,242 |   |

 

 

20

----

 

**QUICKLOGIC CORPORATION**

**NOTES TOCONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

The following distributorsand customers accounted for 10% or more of the Company’s revenue for theperiods presented:

 
| ** **                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|
| ** **                        | ** ** | **March 30, 2008**     | ** ** | **April 1, 2007** | ** ** |
| Distributor “A”         |       | 16                               | %          | 21 | % |
| Distributor “B”         |       | 18                               | %          | 18 | % |
| Customer “A” – OEM |       | 17                               | %          | * |   |
| Customer “B” – OEM |       | 12                               | %          | 14 | % |
| Customer “C” – OEM |       | 11                               | %          | * |   |
| Customer “D” – OEM |       | *                                |       | 11 | % |

 

----

* Represents less than 10% of revenue for the periodpresented.

 

The following distributorsand customers accounted for 10% or more of the Company’s accounts receivable asof the dates presented:

 
| ** **                        | ** ** | **March 30,  2008** | ** ** | **December 30,  2007** | ** ** |
|-----------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Distributor “A”    | ** ** | 32                       | %          | 31                          | %          |
| Distributor “B”         |       | 13                       | %          | *                           |       |
| Customer “A” – OEM |       | 17                       | %          | 22                          | %          |
| Customer “C” – OEM |       | 11                       | %          | *                           |       |

 

----

* Represents less than 10% of accounts receivable asof the date presented.

 

As of March 30, 2008, less than 10% of theCompany’s long-lived assets, including property and equipment and other assets,were located outside the United States.

 

**Note 13—Commitmentsand Contingencies**

 

Certain of the Company’swafer manufacturers require the Company to forecast wafer starts several monthsin advance. The Company is committed to take delivery of and pay for a portionof forecasted wafer volume. As of March 30, 2008 and December 30,2007, the Company had $3.6 million and $4.3 million, respectively, ofoutstanding commitments for the purchase of wafer inventory.

 

Our principal administrative, sales,marketing, research and development and final testing facility is located in abuilding of approximately 42,600 square feet in Sunnyvale, California. Thisfacility is leased through March 2009 with an option to renew. We havesub-let approximately 8,000 square feet of this facility through March 2009.Our research and development facility in Toronto, Canada, consisting ofapproximately 8,400 square feet, is leased through February 2010. Duringthe first quarter of 2008, we decided to outsource many of the developmentactivities previously performed in Toronto, and plan to reduce our staffing inToronto accordingly, primarily during the second quarter of 2008. See Note 16.We lease a 4,500 square foot facility in Bangalore, India for the purpose ofsoftware development. This facility is leased through November 2009. Wealso lease office space in Hong Kong, China; Taipei, Taiwan; London, England;and Tokyo, Japan. We believe that our existing facilities are adequate for ourcurrent needs. Total rent expense, net of sublease income, for the firstquarter of 2008 and 2007 was approximately $180,000 and $225,000, respectively.

 

**Note 14—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

 

21

----

 

**QUICKLOGIC CORPORATION**

**NOTES TOCONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

to the registration statementsbetween October 14, 1999 and December 6, 2000. Various plaintiffshave filed similar actions asserting virtually identical allegations againstover 300 other public companies, their underwriters, and their officers anddirectors arising out of each company’s public offering. These actions,including the action against QuickLogic, have been coordinated for pretrialpurposes and captioned *In re Initial PublicOffering Securities Litigation, 21 MC 92*. In June 2004, a stipulationof settlement and release of claims against the issuer defendants, includingQuickLogic, was submitted to the court for approval. On August 31, 2005,the court preliminarily approved the settlement. In December 2006, theappellate court overturned the certification of classes in the six test casesthat were selected by the underwriter defendants and plaintiffs in thecoordinated proceedings. Because class certification was a condition of thesettlement, it was unlikely that the settlement would receive final Courtapproval. On June 25, 2007, the Court entered an order terminating theproposed settlement based upon a stipulation among the parties to thesettlement. Plaintiffs have filed amended master allegations and amendedcomplaints and moved for class certification in the six test cases, which thedefendants in those cases have opposed. On March 26, 2008, the Court denied the defendants’ motion to dismissthe amended compliants. If a settlement does not occur and litigation againstQuickLogic continues, the Company intends to defend the case vigorously.

 

Noestimate can be made of the possible loss or possible range of loss associatedwith the resolution of these contingencies and, accordingly, the Company hasnot recorded a liability.

 

Fromtime to time, the Company is involved in legal actions arising in the ordinarycourse of business, including but not limited to intellectual propertyinfringement and collection matters. Absolute assurance cannot be giventhat third party assertions will be resolved without costly litigation in amanner that is not adverse to the Company’s financial position, results ofoperations or cash flows or without requiring royalty or other payments in thefuture which may adversely impact gross profit.

 

**Note 15—ShelfRegistration Statement**

 

On July 12, 2005, the Company filed a shelfregistration statement on Form S-3, which was declared effective on July 26,2005 by the SEC. Under the shelf registration statement, the Company has theability to raise up to $30.0 million, in one or more transactions, by sellingcommon stock, preferred stock, depositary shares, or warrants. The Company hasnot raised any funds in connection with this filing. Under the SecuritiesOffering Reform of 2005, the Company may offer and sell securities registeredunder this shelf registration statement through November 30, 2008.

 

**Note 16—SubsequentEvents**

 

InApril 2008, the Company established a plan to outsource certaindevelopment functions that have been performed in-house. The change of certaindevelopment activities to an on-demand, outsourced model from an in-house,fixed cost model is expected to be fully implemented by the third quarter of2008. The Company has retained its core competencies and does not expect thischange to have a material impact on its product introduction schedules oroperating results for 2008. This change is expected to lower the Company’s developmentexpense per project. As a result of this decision, the Company’s research anddevelopment staffing in Toronto, Canada will be reduced by the end of thesecond quarter of 2008. The Company expects to incur outsourced costsapproximating the fixed cost savings through the end of 2008.

 

22

----

 

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

 

*Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations, as well as information contained in “Risk Factors” in Part II,Item 1A and elsewhere in this Quarterly Report on Form 10-Q, contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. We intend that these forward-looking statements be subject to thesafe harbors created by those provisions. Forward-looking statements aregenerally written in the future tense and/or are preceded by words such as “will,”“may,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “anticipate,”“intend,” “plan,” or other similar words. Forward-looking statements includestatements regarding (1) the conversion of our design opportunities intorevenue, (2)  our liquidity, (3) our revenue levels, includingthe commercial success of our Customer Specific Standard Products, or CSSPs,and new products, and the effect of our end-of-life products, (4) ourgross profit and factors that affect gross profit, (5) our level ofoperating expenses, (6) our research and development efforts, (7) ourpartners and suppliers and (8) industry trends. The following discussionshould be read in conjunction with the attached condensed unauditedconsolidated financial statements and notes thereto, and with our auditedconsolidated financial statements and notes thereto for the fiscal**year ended December 30,2007, found in our Annual Report on Form 10-K filed with the Securitiesand Exchange Commission, or SEC, on March 11, 2008.*

 

*The forward-looking statements contained in this QuarterlyReport involve a number of risks and uncertainties, many of which are outsideof our control. Factors that could cause actual results to differ materiallyfrom projected results include, but are not limited to, risks associated with (1) theconversion of CSSP design opportunities into revenue, (2) the liquidityrequired to support our future operating and capital requirements, (3) thecommercial and technical success of our CSSPs and new products such asArcticLinkTM and PolarPro®, (4) our successful introduction of products andCSSPs incorporating emerging technologies or standards, (5) limitedvisibility into demand for our products including demand from significantcustomers or for new products, (6) our ability to accurately estimatequarterly revenue and (7) 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,uncertainties and assumptions referred to above that could cause our results todiffer materially 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 conditionsdescribed in such statements or our objectives and plans will be achieved.Furthermore, past performance in operations and share price is not necessarilyindicative of future performance. We disclaim any intention or obligation toupdate or revise any forward-looking statements, whether as a result of newinformation, future events or otherwise.*

 

**Overview**

 

Weare a fabless semiconductor company that operates in a single industry segmentwhere we design, market and support CSSPs, Field Programmable Gate Arrays, orFPGAs, application solutions, associated design software and programminghardware. Our new product family includes ArcticLink, PolarPro, EclipseTM II andQuickPCI® II; our mature product family includes pASIC® 3, QuickRAM®, Eclipse,software and programming hardware and royalty revenue; our end-of-life productfamily includes pASIC 1, pASIC 2, QuickMIPS and V3. We develop CSSPs using ourArcticLink and PolarPro solution platforms.

 

CSSPsare customer specific complete solutions that include our silicon solutionplatform, proven system blocks, or PSBs, custom logic and software drivers. OurArcticLink and PolarPro solution platforms are standard silicon products andmust be programmed to be effective in a system. Our PSBs range fromintellectual property, or IP, which improves video images to IP which implementscommonly used mobile system interfaces, such as secure digital input output, orSDIO, or universal serial bus 2.0 on-the-go, or USB 2.0 OTG. We providecomplete solutions by selecting the appropriate solution platform and PSBs,providing custom logic, integrating logic, programming the device and providingsoftware drivers required for the customers’ application.

 

CSSPs,which we pioneered and introduced in the first quarter of 2007, are developedfor specific low power application markets that have similar differentiated IP,intelligent data processing or connectivity requirements. 

 

23

----

 

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

 

Target customers value CSSPsfor either of two primary reasons. Market leading companies seek to developproduct platforms from which several products can be introduced. For example,multimedia phone companies may plan to introduce products offering mobile TV,WiMAX, Bluetooth 2.1 and USB 2.0 OTG. These manufacturers value our ability toprovide a range of products from a single platform design by incorporatingdifferent features in the programmable fabric of our solution platforms. Othercustomers value the flexibility of programmable fabric to address specificproduct requirements. By providing customized solutions for these customers weincrease their ability to meet the time-to-market and time-in-market pressuresassociated with their markets.

 

Consumerproducts are a strong driver for semiconductor sales, and the needs of theconsumer market have a unique set of requirements. One important trend in theconsumer market is towards mobile, handheld devices. The market for mobile,handheld devices is large. In 2007, 1.1 billion cellular phones, ranging frommultimedia to ultra low cost phones, were sold. Important industry trendsaffecting the large market for mobile devices include the use of platforms toenable rapid product proliferation, the need for high bandwidth solutionsenabling mobile internet and streaming video, miniaturization and the need to increasebattery life. Another important trend is shrinking product life cycles, whichdrives a need for faster, lower risk product development. There is intensepressure on the total product cost of these devices, including per unitcomponent costs and non-recurring development costs. As more people experiencethe advantages of a mobile lifestyle at home, they demand the same advantagesin their professional lives. Therefore, we believe that these trends towardmobile, handheld products which have a small form factor and maximize batterylife will also be evident in the industrial, medical and military markets.

 

Inaddition to CSSPs, we sell products to industrial, military and other customerswho do their own selection and integration of IP cores and add software driversto their application. We market FPGAs, IP cores and software drivers to thesecustomers, who value the low power consumption, reduced development riskthrough the use of proven IP cores, fast time-to-market, high IP security,instant-on and reliability of our devices.

 

Thisrange of offerings allows customers to acquire a solution tailored for theirneeds. Mobile product original equipment manufacturers, or OEMs, and originaldesign manufacturers, or ODMs, tend to prefer a complete solution, and purchaseCSSPs. Other customers with proprietary IP requirements choose to purchase ourFPGAs or ArcticLink solution platforms and utilize our IP cores as appropriate.Whether a customer uses our CSSPs as a complete solution, or proven IP coreswith our FPGAs, we believe our solutions and products enable systemmanufacturers to improve their time-to-market, lower total system powerconsumption, reduce their development risk and total cost of ownership, and addfeatures or performance to their embedded applications.

 

OurCSSPs and the rest of our product offerings are based on our patented ViaLink®metal-to-metal programmable technology. ViaLink is the foundation of ourcompetitive advantage in providing energy efficient devices and solutions thatdeliver the high performance, high reliability, IP security and instant-onfeatures that our customers value. In 1991, we introduced our first FPGAproducts based upon our ViaLink technology. Our ViaLink technology allows us tocreate devices smaller than competitors’ products on comparable technology,thereby minimizing silicon area and cost. In addition, our ViaLink technologyhas lower electrical resistance and capacitance than other programmabletechnologies and therefore supports higher signal speed and low powerconsumption. Our architecture uses our ViaLink technology to maximizeinterconnects at every routing wire intersection, which allows more pathsbetween logic cells. As a result, system designers are able to use our deviceswith smaller gate counts to implement their designs than if they had usedcompeting FPGAs. The abundance of interconnect resources also provides anefficient connection between the Application Specific Standard Product, orASSP, and the FPGA portions of CSSPs.

 

Webelieve that the underlying attributes of our ViaLink technology, including lowpower consumption, high reliability, design security and design efficiency,enable us to deliver differentiated silicon solutions to our customers.

 

OurCSSPs provide:

 

·           *Complete Flexible Solutions –* we partner with customers to bring theirdifferentiated products to market quickly and to adapt these products to meetchanging market conditions;

 

24

----

 

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

 

·           *Platform Design Capability*– we partner with customers to develop arange of solutions from a single hardware platform, enabling thesemanufacturers to bring several products to market quickly and cost effectivelythrough the use of our programmable fabric;

 

·           *Reduced Design Expense and Risk*– we provide PSBs addressing a range of video, network, storage andcustom logic requirements, along with software drivers, thereby reducing thetime and cost of product development;

 

·           *Small**Form Factor*–we manufacture single chip solutions in packages as small as 5x5 millimeters,or even in known good die configuration;

 

·           *Energy**Efficiency*– ourViaLink technology is the lowest power consumption full featured programmablelogic technology on the market today, allowing the time-to-market andtime-in-market advantages of programmable logic for differentiated mobileproducts;

 

·           *Low**Total**Cost of Ownership*–CSSPs reduce time-to-market and lower the risk and expense associated with newproduct development. In platform designs these savings are leveraged overseveral products. The flexible nature of CSSPs enables new features in existingdesigns, which can be used to extend time-in-market and delay the cost of newproduct development. In addition, CSSPs often reduce bill of materials, or BOMcosts by combining the function of several ASSPs into one cost effectivedevice; a simplified BOM also leads to lower printed circuit board, or PCB,costs;

 

·           *Instant**-on*– our productsare live at power up because ViaLink based products require no configurationbit stream;

 

·           *High* *Reliability***– ViaLink based products do not rely on aSRAM cell that is susceptible to alpha particles, or brownouts, to define andmaintain their functionality; and

 

·           *Unmatched**IP Security*– our ViaLink technology makes it virtually impossible to clone orreverse engineer designs implemented in our programmable fabric.

 

Weoffer a range of CSSPs built on our PolarPro and ArcticLink solutionsplatforms. Our PolarPro architecture provides low power consumption and a costeffective device for pure digital applications. CSSPs developed using ourPolarPro solution implement PSBs and custom logic in programmable fabric. Basedon our engineering analysis of portable media player applications, we believedesigners using PolarPro can extend battery life by as much as four times ascompared to a standard product implementation, setting a new standard for lowpower consumption through the use of programmable logic.

 

Westarted shipping CSSPs based on our ArcticLink architecture in 2007. ArcticLinksolution platforms combine mixed signal physical layers, hard-wired logic andprogrammable fabric on one device. Mixed signal capability supports the trendtoward serial connectivity in mobile applications, where designers benefit fromlower pin counts, simplified PCB layout, lower cost PCB interconnect andreduced signal noise. Adding hard-wired intellectual property enables us todeliver more logic per die area, while the programmable fabric allows us toprovide CSSPs that can be rapidly customized to differentiate products, addfeatures and reduce system development costs. Market leading companies seek todevelop product platforms from which several products can be introduced. Thiscombination of mixed signal physical layer, hard-wired logic and programmablefabric enables us to deliver low cost, small form factor solutions that can becustomized for particular customer or market requirements.

 

We are marketing CSSPs toOEMs and ODMs offering differentiated mobile products. Our target mobilemarkets include:

 

·           *Cellular*–including multimedia and smartphones;

 

·           *Consumer Electronics*– including personal media players, or PMPs, personal navigation devices,or PNDs, and wireless hard disk drives or wireless storage devices; and

 

·           *Computing*–ultra mobile PCs, or UMPC, mobile internet devices, or MIDs, industrialpersonal digital assistants, or PDAs, handheld point-of-sales, or POS,terminals and broadband data cards.

 

25

----

 

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

 

Examples of how existing andpotential customers benefit from CSSPs are:

 

·           *Multimedia Phones*– we have been marketing our recently announced Visual EnhancementEngine, or VEETM, a PSB built upon an IP core we licensed, to enable improvedvideo image, color, contrast and resolution with longer battery life;

 

·           *Smartphones*– where our solutions enable the simultaneousdisplay of video on the handset and an external display;

 

·           *Personal Navigation Devices*– where our solutions allowthe incorporation of the latest storage technology, managed NAND, and access tothe latest high capacity SD cards and SDIO based peripherals;

 

·           *Portable Media Players* – where our solutions allow a processor toaccess and efficiently control a micro hard disk drive;

 

·           *Wireless Hard Disk Drives*– where our solutions allow for theintelligent transfer of data, which improves the data transfer rate, virtuallyeliminates the CPU cycles associated with data transfer and improves batterylife;

 

·           *Handheld POS Terminals*– where our solutions enable high speedconnectivity to Wi-Fi and BlueTooth chipsets as well as storage connectivity;and

 

·           *Cellular Data Cards*– where our solutions provide the lowest power interface between acellular radio and a laptop card slot.

 

Ournew products are also being designed into applications in our traditionalmarkets, such as data communications, instrumentation and test andmilitary-aerospace, where customers value the low power consumption,instant-on, IP security, reliability and fast time-to-market of our products.

 

Inaddition to working directly with our customers, we partner with othertechnology companies to develop additional intellectual property, referenceplatforms and system software to provide application solutions. We partner withcompanies that are experts in certain technologies. For instance, we licensedelements of our VEE technology from Apical Limited, a U.K. company that marketsenhanced video image capability to companies such as Nikon, Olympus and SonyEricsson. We also 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 OEMs. We recognize revenue at the time ofshipment of products directly to system manufacturers. However, we sell asignificant portion of our products through distributors who earn a negotiatedmargin on the sale of our products. We defer recognition of income from salesof non end-of-life unprogrammed products to distributors until after they havesold our products to systems manufacturers. We recognize revenue on programmedproducts and certain unprogrammed products, for which the price is fixed ordeterminable and there are no return privileges, at the time of shipment to ourdistributors. During the first quarter of 2008 and 2007, approximately 67% and62%, respectively, of the units shipped to our distributors were programmed byus and, accordingly, are not returnable. The percentage of sales derivedthrough distributors was 49% and 62% during the first quarter of 2008 and 2007,respectively.

 

Two distributors, Avnet, Inc. and FutureElectronics, accounted for 16% and 18% of revenue in the first quarter of 2008.These distributors accounted for 21% and 18% of revenue in the first quarter of2007. We anticipate that a limited number of distributors will continue toaccount for a significant portion of our revenue and that individualdistributors could account for a larger portion of our revenue.

 

Our international sales were 59% and 50% of ourrevenue in the first quarter of 2008 and 2007, 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.

 

26

----

 

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

 

Weoutsource the wafer manufacturing, assembly and testing of all of our products.We currently rely upon Taiwan Semiconductor Manufacturing Company Ltd., orTSMC, Tower, Kawasaki Microelectronics, Inc. and Samsung Semiconductor, Inc.to manufacture our products, and we rely upon Amkor Technology, Inc. andUnisem (M) Berhad to assemble, test and program our products. Our wafersuppliers’ lead times are often as long as three months and sometimes longer.In addition, Tower requires us to provide them with a monthly wafer startforecast. Under the terms of our agreement with them, we are limited in thequantity 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 in applyingour most critical accounting policies have a significant impact on the resultswe report in our consolidated financial statements. The SEC has definedcritical accounting policies as those that are most important to the portrayalof our financial condition and results of operations and require us to make ourmost difficult and subjective judgments, often as a result of the need tomake estimates of matters that are inherently uncertain. Based on thisdefinition, our critical policies include revenue recognition including salesreturns and allowances, valuation of inventories including identification ofexcess quantities and product obsolescence, allowance for doubtful accounts,valuation of investments, valuation of long-lived assets, measurement ofstock-based compensation, accounting for income taxes, fair value measurementsof financial assets and liabilities, and estimating accrued liabilities. Webelieve that we apply judgments and estimates in a consistent manner and thatsuch consistent application results in consolidated financial statements andaccompanying notes that fairly represent all periods presented. However, anyfactual errors or errors in these judgments and estimates may have a materialimpact on our statements of operations and financial condition. For adiscussion of critical accounting policies and estimates, please seeItem 7 in our Annual Report on Form 10-K for the fiscal year ended December 30,2007 filed with the SEC on March 11, 2008.

 

27

----

 

**QUICKLOGIC CORPORATION**

**NOTES TOCONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

**Results ofOperations**

 

The following table setsforth the percentage of revenue for certain items in our statements ofoperations for the periods indicated:

 
| ** **                                          | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------|------------|----------------------------------|------------|
| ** **                                          | ** ** | **March 30, 2008**     | ** ** | **April 1, 2007** | ** ** |
| Revenue                                             |       | 100.0                            | %          | 100.0 | % |
| Cost of revenue (1)                                 |       | 47.7                             |       | 86.5 |   |
| Gross profit                                        |       | 52.3                             |       | 13.5 |   |
| Operating expenses:                                 |       |                             |       |   |   |
| Research and development                            |       | 25.6                             |       | 36.6 |   |
| Selling, general and administrative                 |       | 39.2                             |       | 73.6 |   |
| Loss from operations                                |       | (12.5                            | )          | (96.7 | ) |
| Interest expense                                    |       | (0.6                             | )          | (1.4 | ) |
| Interest income and other, net                      |       | 0.9                              |       | 3.9 |   |
| Loss before income taxes                            |       | (12.2                            | )          | (94.2 | ) |
| Provision for income taxes                          |       | 0.3                              |       | 0.2 |   |
| Net loss                                            |       | (12.5                            | )%         | (94.4 | )% |
|                                                |       |                             |       |   |   |
|                                                |       | **Three Months Ended** |       |
|                                                |       | **March 30, 2008**     |       | **April 1, 2007** |   |
| *Revenue  by product line (2) (in thousands):* |       |                             |       |   |   |
| New products                                        |       | $                                | 2,598      |   | $ | 606 |   |
| Mature products                                     |       | 4,324                            |       | 3,506 |   |
| End-of-life products                                |       | 4,101                            |       | 2,130 |   |
| Total revenue                                       |       | $                                | 11,023     |   | $ | 6,242 |   |

 

 

----

(1) Includes $956,000 and $2.5 million of costsfor the write-down of inventories and related charges, which represents 8.7%and 39.5% of revenue for the first quarter of 2008 and 2007, respectively.

 

(2) For all periods presented:  New products include ArcticLink, PolarPro,Eclipse II and QuickPCI II products; mature products include pASIC 3, QuickRAM,Eclipse, QuickDSP and QuickFC products, as well as royalty revenue, programminghardware and design software; end-of-life products include pASIC 1,pASIC 2, V3, QuickMIPS and QuickPCI products.

 

**Three Months Ended March 30, 2008 and April 1,2007**

 

*Revenue.*  Our revenue for the first quarterof 2008 was $11.0 million, representing an increase of $4.8 million,or 76.6%, from revenue of $6.2 million in the first quarter of 2007.Revenue from new products, mature products and end-of-life products eachincreased compared to the first quarter of 2007. Our new product revenue increasedby $2.0 million, primarily due to higher demand from an Asian PND manufacturer,purchasing CSSPs built using our PolarPro solution platform. This customercontributed $1.8 million of revenue in the first quarter of 2008 and no revenuein the first quarter of 2007. Our end-of-life product revenue increased by $2.0million primarily due to a $2.0 million increase in our QuickPCI productrevenue and a $420,000 increase in our QuickMIPS product revenue as a result oftheir announced end-of-life in 2007, partially offset by a $610,000 decline inour V3 product revenue. One customer, purchasing primarily our QuickPCIend-of-life products for the datacom and telecom market, accounted for 11% andone percent of revenue in the first quarter of 2008 and 2007, respectively. Ourmature product revenue increased by $840,000 as a result of higher customerdemand for pASIC 3 and QuickRAM products. One international customer,purchasing primarily pASIC 3 devices, accounted for 12% and 14% of revenue inthe first quarter of 2008 and 2007, respectively.

 

Ourrevenue for the first quarter of 2008 was 2.6% higher sequentially, increasingby approximately $280,000 to $11.0 million from $10.7 million in thefourth quarter of 2007. This sequential revenue increase was primarily due toan increase in end-of-life and mature product revenue, partially offset by adecline in new product revenue. End-of-life product revenue increased by $1.0million primarily due to a $690,000 increase in our QuickPCI product revenueand a $510,000 increase in our QuickMIPS product revenue as a result of theannounced

 

28

----

 

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

 

end-of-lifeof these products, partially offset by a $270,000 decrease in our V3 productrevenue. Our new product revenue declined by $900,000 primarily due to lowerdemand for our Eclipse II and PolarPro products.

 

Ourdecision to end-of-life our pASIC 1, pASIC 2 and V3 products has been driven bythe decision of certain suppliers’ not to renew supply agreements for theseproducts. We announced additional end-of-life products in 2007 as a result ofour decision to focus on customers in the handheld mobile and military markets.In the second quarter of 2007, we announced the end-of-life of our QuickPCIproducts due to assembly capacity considerations and asked customers to takedelivery of lifetime buy orders before the end of 2007. In the fourth quarterof 2007, we announced the end-of-life of our QuickMIPS products due to a smallcustomer base and asked customers to take delivery of these products betweennow and the first half of 2008. Due to the nature of end-of-life purchases,revenue levels from these products could fluctuate significantly on asequential basis. We currently believe that revenue from end-of-life products,which was $4.1 million in the first quarter of 2008, will decline in the secondquarter of 2008, and that we will not have significant revenue from theseproducts by the third quarter of 2008.

 

Thefollowing is a breakdown of end-of-life product revenue (in thousands):

 
| ** **                | ** ** | **Three Months Ended** | ** ** |
|---------------------------|------------|----------------------------------|------------|
| ** **                | ** ** | **March 30, 2008**     | ** ** | **April 1, 2007** | ** ** |
| pASIC 1 and pASIC 2       |       | $                                | 648        |   | $ | 523 |   |
| V3                        |       | 329                              |       | 940 |   |
| QuickPCI                  |       | 2,464                            |       | 425 |   |
| QuickMIPS                 |       | 660                              |       | 242 |   |
| Total end-of-life revenue |       | $                                | 4,101      |   | $ | 2,130 |   |

 

Ourcurrent expectation is that revenue will decline sequentially in the secondquarter of 2008 due largely to a decline in revenue from end-of-life products.We believe that our ability to maintain or grow our total revenue after thesecond quarter will primarily depend on our ability to grow our new product revenue,especially revenue from CSSPs designed using our ArcticLink and PolarProsolution platforms and the development of additional new products and CSSPs. Ifnew product revenue does not grow to offset the expected decline in revenuefrom our end-of-life and mature product revenue, our profitability andfinancial condition will be affected. In the past, our new product revenue hasnot grown as quickly as we have planned.

 

Wecontinue to seek to expand our revenue, including the pursuit of high volume salesopportunities in the consumer market segment, by providing CSSPs incorporatingintellectual property such as boot from managed NAND or industry standardinterfaces such as USB 2.0 OTG, SDIO and integrated drive electronics, or IDE.Our industry is characterized by intense price competition and by lower marginsas order volumes increase. While winning large volume sales opportunities willincrease our revenue, we believe these opportunities may decrease our grossprofit as a percentage of revenue.

 

*Gross Profit*.  Gross profit was $5.8 million and $841,000 in the firstquarter of 2008 and 2007, respectively, which represented 52.3% and 13.5% ofrevenue for those periods. The $4.9 million increase in gross profit wasprimarily due to higher revenue and change in product mix and cost, whichcontributed $3.0 million, a decrease in the write-down of inventories andrelated charges of $1.5 million and lower unabsorbed overhead of approximately$590,000 due to higher production volumes. During the first quarter of 2008,the Company recorded inventory related charges totaling $956,000, or 8.7% ofrevenue, primarily for excess quantities due to a reduction in expected demandfor inventories on hand, and cost of revenue was reduced by $230,000, or 2.1%of revenue, through the sale of previously reserved inventories.

 

*Research and Development Expense.*  Research and development expensewas $2.8 million and $2.3 million in the first quarter of 2008 and2007, respectively, which represented 25.6% and 36.6% of revenue for thoseperiods. The increase of approximately $530,000 was primarily due to higherproject specific expenses of $240,000, $150,000 of higher expenses due to theuse of resources for development instead of overhead activities and highercompensation of $150,000 due to an increase in the number of employees. Webelieve that investments in product development and process technology areessential for us to remain competitive in the markets we serve. We expect

 

29

----

 

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

 

that our development efforts will allow us toexpand our product and solution offerings, increase our revenue and provideadditional value to our customers and stockholders.

 

In April 2008, we established a plan tooutsource certain development functions that have been performed in-house. Thechange of certain development activities to an on-demand, outsourced model froman in-house, fixed cost model is expected to be fully implemented by the thirdquarter of 2008. We have retained our core competencies and do not expect thischange to have a material impact on our product introduction schedules oroperating results for 2008. This change is expected to lower our developmentexpense per project. As a result of this decision, our research and developmentstaffing in Toronto, Canada will be reduced by the end of the second quarter of2008. We expect to incur outsourced costs approximating the fixed cost savingsthrough the end of 2008.

 

*Selling, General andAdministrative Expense.*  Selling,general and administrative expense was $4.3 million and $4.6 millionfor the first quarter of 2008 and 2007, respectively, which represented 39.2%and 73.6% of revenue for those periods. The $270,000 decrease in selling,general and administrative expense was primarily due to a $300,000 decrease inadministrative expenses, primarily in legal and consulting expenses, partiallyoffset by an increase in marketing expenses.

 

*InterestExpense.*  Interestexpense decreased to $71,000 for the first quarter of 2008 as compared to$85,000 for the first quarter of 2007. This $14,000 decline was primarilydue to lower interest rates.

 

*Interest Income and Other, Net.*  Interest income and other, netdecreased to $104,000 of income for the first quarter of 2008 as compared to$246,000 of income for the first quarter of 2007. The $142,000 decrease ininterest income and other, net is primarily due to decreased interest incomereceived as a result of lower average cash balances and lower interest rates.

 

*Provision for Income Taxes.*  For the first quarter of 2008, weincurred a net loss of $1.4 million and recorded a provision for incometaxes of $34,000, which consisted primarily of income taxes on foreignoperations. For the first quarter of 2007, we incurred a net loss of$5.9 million and recorded a provision for income taxes of $15,000, whichconsisted primarily of income taxes on foreign operations. Our ability toutilize our income tax loss carryforwards in future periods is uncertain and,accordingly, we recorded a full valuation allowance against the related taxbenefit. We will continue to assess the realizability of deferred tax assets infuture periods.

 

*Stock-Based Compensation.*  For the first quarter of 2008 and2007, stock-based compensation totaled $665,000 and $381,000, respectively, andwas included in the statements of operations as follows (in thousands):

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 30, 2008**     | ** ** | **April 1, 2007** | ** ** |
|                                |       |                             |       |   |   |
| Cost of revenue                     |       | $                                | 65         |   | $ | 55 |   |
| Research and development            |       | 158                              |       | 85 |   |
| Selling, general and administrative |       | 442                              |       | 241 |   |
| Total                               |       | $                                | 665        |   | $ | 381 |   |

 

Theamount of stock-based compensation included in inventories at the end of thefirst quarter of 2008 and 2007 was not material.

 

##### **Liquidity and Capital Resources**

#####  

Wehave financed our operating losses and capital investments through sales ofcommon stock, private equity investments, capital and operating leases, banklines of credit and cash flow from operations. As of March 30, 2008, ourprincipal sources of liquidity consisted of our cash and cash equivalents of$19.3 million, available credit under our revolving line of credit with SiliconValley Bank of approximately $5.0 million, available credit under our equipmentline of credit of approximately $870,000, and our investment in Tower with amarket value of approximately $1.4 million. We intend to hold 450,000 ofthese shares, valued at $473,000 as of the end of the first quarter of 2008,which is required under our agreement with Tower in order to obtain preferredwafer pricing. Pursuant to SFAS 157, the fair value of our cash equivalents andmarketable securities as of March 30, 2008 was determined based on “Level1” inputs as described in Note 8 to our consolidated financial statements.

 

30

----

 

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

 

Asof March 30, 2008, our interest-bearing debt consisted of $2.9 millionoutstanding from Silicon Valley Bank and $1.4 million outstanding under capitalleases. Our accumulated deficit was $140.0 million as of March 30,2008. Capital expenditures, which are largely driven by the development of newproducts and manufacturing levels, could be up to $3.0 million in the nexttwelve months.

 

InJune 2006, we entered into a Second Amended and Restated Loan and SecurityAgreement with Silicon Valley Bank. Terms of the agreement included a $5.0million revolving line of credit that is available through June 2008 andan additional $2.0 million of borrowing capacity under an equipment line ofcredit that is available to be drawn against through June 2007. Advancesunder the equipment line of credit are repaid in either 30 or 36 equal monthlyinstallments, depending upon the nature of the items financed. The agreementwas amended in June 2007 to include an additional $2.5 million ofborrowing capacity under the equipment line of credit that is available to bedrawn against through June 2008. Future advances against the equipmentline of credit will be repaid in 36 equal monthly installments. As of March 30,2008, we had no balances outstanding under the revolving line of credit,$2.9 million outstanding under the current and previous equipment lines ofcredit and $870,000 available to be drawn against future equipment purchases.The bank has a first priority security interest on substantially all of ourtangible and intangible assets to secure any outstanding amounts under theagreement. Under the terms of the agreement, we must maintain a minimumtangible net worth and an adjusted quick ratio. The agreement also has certainrestrictions including, among others, the incurrence of other indebtedness, themaintenance of depository accounts, the disposition of assets, mergers,acquisitions, the granting of liens and the payment of dividends. We were incompliance with all loan covenants as of end of the current reporting period.

 

*Net cashfrom operating activities*

 

Netcash used for operating activities was $642,000 in the first quarter of 2008.The cash used for operating activities resulted primarily from a net loss of$1.4 million, which included $2.4 million of non-cash charges. Thesenon-cash charges included the write-down of inventories, primarily for excessquantities, in the amount of $956,000, stock-based compensation of $665,000,depreciation and amortization of $646,000 and a decrease in wafer credits of$113,000. In addition, changes in working capital accounts used cash of $1.7 millionas a result of a decrease in accounts payable of $1.4 million due to timing ofexpenditures and purchases of inventories and an increase in accountsreceivable of $1.1 million due primarily to higher shipments in the last monthof the quarter. These cash uses were partially offset by an increase in accruedliabilities of $447,000, a decrease in inventories of $245,000 and an increasein deferred income and royalty revenue of $92,000.

 

Net cash used for operating activities was$2.8 million in the first quarter of 2007. The cash used for operatingactivities resulted primarily from a net loss of $5.9 million, whichincluded $3.8 million of non-cash charges. These non-cash charges includedthe write-down of inventories of $2.5 million, depreciation and amortization of$807,000 and stock-based compensation of $381,000. In addition, changes inworking capital accounts used cash in the amount of $680,000 primarily as aresult of a decrease of $2.2 million in accounts payable due to timing ofpurchases of inventories and expenditures. These uses of cash were partiallyoffset by a $573,000 decrease in accounts receivable due primarily to areduction in revenue levels and strong collections, a $441,000 increase indeferred income and royalty revenue due primarily to higher inventories atdistributors on which revenue is deferred, a $203,000 decrease in other assetsand a $178,000 increase in accrued liabilities.

 

*Net cashfrom investing activities*

 

Netcash used for investing activities for the first quarter of 2008 and 2007 was$252,000 and $338,000, respectively, as a result of capital expenditures madeprimarily to acquire equipment and software used in the development andproduction of our products and solutions.

 

*Net cashfrom financing activities*

 

Net cash used for financing activities was $652,000for the first quarter of 2008, resulting from scheduled payments of $702,000under the terms of our debt and capital lease obligations, partially offset by$50,000 in proceeds related to the issuance of common shares upon the exerciseof stock options by employees.

 

31

----

 

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

 

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.

 

Werequire substantial cash to fund our business, particularly to finance ouroperations, to acquire property and equipment, for the repayment of debt andfor working capital requirements. Our future liquidity will depend on many factorssuch as these, as well as our level of revenue and gross profit, marketacceptance of our existing and new products, the decline in revenue underend-of-life programs, wafer purchase commitments, the amount and timing ofresearch and development expenditures, the timing of new product introductions,production volumes, the quality of our products, sales and marketing efforts,the capital preservation and liquidity of our investment portfolio, our abilityto obtain debt financing and to remain in compliance with the terms of ourcredit facilities, our ability to raise funds from the sale of Tower shares andequity in the Company, the exercise of employee stock options and participationin our employee stock purchase plan, and other factors related to theuncertainties of the industry and global economics. However, we believe thatour existing cash resources will be sufficient to fund operations, capitalexpenditures of up to $3.0 million, and provide adequate working capitalfor at least the next twelve months. As our liquidity is affected by manyfactors as mentioned above and as discussed in our “Risk Factors” section,there can be no assurance that we will not seek additional capital during thenext twelve months or that such capital will be available on terms acceptableto us. After the next twelve months, our cash requirements will depend onmany factors, including our level of revenue and gross profit, the marketacceptance of our new products, the levels at which we maintain inventories andaccounts receivable, costs of securing access to adequate manufacturingcapacity, new product development efforts, capital expenditures and the levelof our operating expenses.

 

**ContractualObligations and Commercial Commitments**

 

The following tablesummarizes our contractual obligations and commercial commitments as of March 30,2008 and the effect such obligations and commitments are expected to have onour liquidity and cash flows in future fiscal periods (in thousands):

 
| ** **                                                | ** ** | **Payments Due by Period** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1-3  Years** | ** ** | **More than  3 Years** | ** ** |
|                                                      |       |                                      |       |   |   |   |   |   |   |
| *Contractual cash obligations:*                           |       |                                      |       |   |   |   |   |   |   |
| Operating leases                                          |       | $                                         | 955        |   | $ | 818 |   | $ | 137 |   | $ | — |   |
| Wafer purchases (1)                                       |       | 3,559                                     |       | 3,559 |   | — |   | — |   |
| Other purchase commitments                                |       | 3,737                                     |       | 3,737 |   | — |   | — |   |
| *Total contractual cash obligations*                      |       | 8,251                                     |       | 8,114 |   | 137 |   | — |   |
|                                                      |       |                                      |       |   |   |   |   |   |   |
| *Other commercial commitments (2):*                       |       |                                      |       |   |   |   |   |   |   |
| Notes payable to bank                                     |       | 2,892                                     |       | 1,473 |   | 1,419 |   | — |   |
| Capital lease obligations                                 |       | 1,430                                     |       | 880 |   | 550 |   | — |   |
| *Total commercial commitments*                            |       | 4,322                                     |       | 2,353 |   | 1,969 |   | — |   |
| Total contractual obligations and  commercial commitments |       | $                                         | 12,573     |   | $ | 10,467 |   | $ | 2,106 |   | $ | — |   |

 

----

| (1)    | Certain of our wafer  manufacturers require us to forecast wafer starts several months in advance.  We are committed to take delivery of and pay for a portion of forecasted  wafer volume. Wafer purchase commitments of $3.6 million include both  firm purchase commitments and a portion of our forecasted wafer starts as of  March 30, 2008. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                         |
| (2)    | Other commercial  commitments are included as liabilities on our balance sheet as of March 30,  2008.                                                                                                                                                                                                                                                   |

 

**Off-BalanceSheet Arrangements**

 

We do not maintain any off-balance sheetpartnerships, arrangements or other relationships with unconsolidated entitiesor others, often referred to as structured finance or special purpose entities,which are

 

32

----

 

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

 

established for the purpose of facilitatingoff-balance sheet arrangements or other contractually narrow or limitedpurposes.

 

**RecentlyIssued Accounting Pronouncements**

 

InDecember 2007, the Financial Accounting Standards Board, or FASB, issuedStatement of Financial Accounting Standards, SFAS, No. 141(R), *“Business Combinations,”* or SFAS 141(R).SFAS 141(R) establishes principles and requirements for how an acquirerrecognizes and measures in its financial statements the identifiable assetsacquired, the liabilities assumed, contractual contingencies, and contingentconsideration at their fair value on the acquisition date, any controllinginterest in the acquiree and the goodwill acquired. SFAS 141(R) alsoestablishes disclosure requirements to enable the evaluation of the nature andfinancial effects of the business combination. SFAS 141(R) is effectivefor fiscal years beginning after December 15, 2008. We do not expect SFAS141(R) to have a significant impact on our consolidated financialstatements.

 

33

----

 

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

 

**InterestRate Risk**

 

Ourexposure to market rate risk for changes in interest rates relates primarily toour investment portfolio and variable rate debt. We do not use derivative financialinstruments to manage our interest rate risk. We are adverse to principal lossand ensure the safety and preservation of invested funds by limiting default,market risk and reinvestment risk. Our investment portfolio is generallycomprised of investments that meet high credit quality standards and haveactive secondary and resale markets. At March 30, 2008, our portfolio ofinvestments was classified as “Level 1” under SFAS 157 (see Note 8 to ourconsolidated financial statements). Since these securities are subject tointerest rate risk, they could decline in value if interest rates fluctuate orif the liquidity of the investment portfolio were to change. Due to the shortduration and conservative nature of our investment portfolio, we do not anticipateany material loss with respect to our investment portfolio. A 10% move ininterest rates as of March 30, 2008 would have an immaterial effect on ourfinancial position, results of operations and cash flows.

 

**ForeignCurrency Exchange Rate Risk**

 

Allof our sales and cost of manufacturing are transacted in U.S. dollars. Weconduct a portion of our research and development activities in Canada andIndia and have sales and marketing offices in several locations outside of theUnited States. We use the U.S. dollar as our functional currency. Most of thecosts incurred at these international locations are in local currency. If theselocal currencies strengthen against the U.S. dollar, our payroll and otherlocal expenses will be higher than we currently anticipate. Since our sales aretransacted in U.S. dollars, this negative impact on expenses would not beoffset by any positive effect on revenue. Operating expenses denominated inforeign currencies were approximately 24% and 23% of total operating expenses forthe first quarter 2008 and 2007, respectively. A majority of these foreignexpenses were incurred in Canada. A currency exchange rate fluctuation of 10%would have caused our operating expenses to change by approximately $190,000 inthe first quarter of 2008.

 

**EquityPrice Risk**

 

Ourexposure to equity price risk for changes in market value relates primarily toour investment in Tower Semiconductor Ltd., or Tower. Tower’s ordinary sharestrade on the Nasdaq Global Market under the symbol “TSEM”. At March 30,2008, our Tower investment was classified as “Level 1” under SFAS 157 (see Note8 to our consolidated financial statements). Since these securities arepublicly traded on the open market, they are subject to market fluctuations.Temporary market fluctuations are reflected by increasing or decreasing thepresented value of the related securities and recording “accumulated othercomprehensive income (loss)” in the equity section of the balance sheet. An “otherthan temporary” decline in market value is reflected by decreasing the carryingvalue of the related securities and recording a charge to operating expenses inthe income statement. We wrote down the value of the Tower shares due to an “otherthan temporary” decline in their market value by $13.7 million between 2001 and2005. The determination that the decline in market value was “other thantemporary” included factors such as the then current market value and theperiod of time that the market value had been below the carrying value in eachof the respective periods. The value of the Tower ordinary shares was lowerthan our carrying value at the end of the first quarter of 2008, and if thevalue is lower than our carrying value at the end of the second quarter, we mayrecord an impairment charge for these securities. A market value fluctuation of10% would have a $140,000 impact on accumulated other comprehensive loss as of March 30,2008.

 

**Item 4.Controls and Procedures**

 

**Evaluationof Disclosure Controls and Procedures**

 

Wemaintain disclosure controls and procedures designed to ensure that informationrequired to be disclosed in the reports we file or submit pursuant to theSecurities and Exchange Act of 1934, as amended,  is recorded, processed, summarized andreported within the time periods specified in the rules and forms of theSecurities and Exchange Commission, and that such information is accumulatedand communicated to our management, including our Chief Executive Officer andChief Financial Officer, as appropriate, to allow timely decisions regardingrequired disclosure.

 

Management,with the participation of the Chief Executive Officer and Chief FinancialOfficer, has performed an evaluation of our disclosure controls andprocedures. Based on this evaluation, our Chief Executive

 

34

----

 

Officer and Chief Financial Officer haveconcluded that, as of March 30, 2008, our disclosure controls andprocedures were effective.

 

**Changes inInternal Control Over Financial Reporting**

 

There were no changes in ourinternal control over financial reporting that occurred during the periodcovered by this Quarterly Report on Form 10-Q that have materiallyaffected, or are reasonably likely to materially affect, our internal controlover financial reporting.

 

**Part II.Other Information**

 

**Item 1.Legal Proceedings**

 

On October 26, 2001, aputative securities class action was filed in the U.S. District Court for theSouthern District of New York against certain investment banks that underwroteQuickLogic’s initial public offering, QuickLogic and some of QuickLogic’sofficers and directors. The complaint alleges excessive and undisclosedcommissions in connection with the allocation of shares of common stock inQuickLogic’s initial and secondary public offerings and artificially highprices through “tie-in” arrangements which required the underwriters’ customersto buy shares in the aftermarket at pre-determined prices in violation of thefederal securities laws. Plaintiffs seek an unspecified amount of damages onbehalf of persons who purchased QuickLogic’s stock pursuant to the registrationstatements between October 14, 1999 and December 6, 2000. Variousplaintiffs have filed similar actions asserting virtually identical allegationsagainst over 300 other public companies, their underwriters, and their officersand directors arising out of each company’s public offering. These actions,including the action against QuickLogic, have been coordinated for pretrialpurposes and captioned *In re Initial PublicOffering Securities Litigation, 21 MC 92*. In June 2004, astipulation of settlement and release of claims against the issuer defendants,including QuickLogic, was submitted to the court for approval. On August 31,2005, the court preliminarily approved the settlement. In December 2006,the appellate court overturned the certification of classes in the six testcases that were selected by the underwriter defendants and plaintiffs in thecoordinated proceedings. Because class certification was a condition of thesettlement, it was unlikely that the settlement would receive final Courtapproval. On June 25, 2007, the Court entered an order terminating theproposed settlement based upon a stipulation among the parties to thesettlement. Plaintiffs have filed amended master allegations and amendedcomplaints and moved for class certification in the six test cases, which thedefendants in those cases have opposed. On March 26, 2008, the Court denied the defendants’ motion to dismissthe amended compliants. If a settlement does not occur and litigation againstQuickLogic continues, the Company intends to defend the case vigorously.

 

Noestimate can be made of the possible loss or possible range of loss associatedwith the resolution of these contingencies and, accordingly, the Company hasnot recorded a liability.

 

Fromtime to time, the Company is involved in legal actions arising in the ordinarycourse of business, including but not limited to intellectual propertyinfringement and collection matters. Absolute assurance cannot be giventhat third party assertions will be resolved without costly litigation in amanner that is not adverse to the Company’s financial position, results ofoperations or cash flows or without requiring royalty or other payments in thefuture which may adversely impact gross profit.

 

35

----

 

**Item 1A. Risk Factors**

 

Thisdescription includes any material changes to and supersedes the description ofthe risk factors associated with our business previously disclosed in Item 1Aof our 2007 Annual Report on Form 10-K filed with the SEC on March 11,2008. Because of the following risk factors, as well as other variablesaffecting our operating results, past financial performance may not be areliable indicator of future performance, and historical trends should not beused to anticipate results or trends in future periods.

 

**Risk Factors**

 

# *Our CSSPdesign opportunities may not result in the revenue we expect*

#  

# We are transitioning tobecoming a supplier of CSSPs that addresses the mobile market from being abroad-based supplier of FPGA devices. We have developed a significant pipelineof design opportunities for CSSPs in our target markets, and we are focused onconverting these design opportunities into revenue. Revenue contributions fromnew mobile products will be important over the next two to four quarters tooffset the expected declines in other areas of our business. Mobile productlife cycles are short, and we must replace revenue lost at the end of theseproduct life cycles with sales from new design wins.**In addition, we currently expect a decline in revenue fromour end-of-life products as well as revenue from our mature products due to thestage of our customers’ product life cycles.

 

The generation of revenue from mobile market designopportunities is influenced by a number of factors, such as our ability tosupply solutions that meet customers’ cost targets and performancerequirements, the value and price of our solutions relative to competingsolutions, our customers’ decisions whether to produce in volume the productsutilizing our solution, the market success of our customers’ products andgeneral economic conditions. If these design opportunities result in revenuethat is significantly lower than we expect, our results of operations andfinancial condition will be adversely affected.

 

# *We may nothave the liquidity to support our future operations and capital requirements*

#  

AtMarch 30, 2008, our cash and cash equivalents balance was $19.3 millionand our interest-bearing debt consisted of $2.9 million outstanding fromSilicon Valley Bank and $1.4 million outstanding under capital leases. In June 2007,we amended our credit facility with Silicon Valley Bank and at March 30,2008, we had $5.0 million available to borrow under our revolving creditfacility and $870,000 available to borrow under our equipment line of creditunder the amended agreement.

 

AtMarch 30, 2008, we held 1,344,543 Tower ordinary shares, valued atapproximately $1.4 million based upon the market closing price of $1.05per share at the end of the reporting period. Our ability to continue to obtainpreferred pricing from Tower is tied to our ownership of at least 450,000 ofthese Tower shares.

 

Whileour primary investment object is the preservation of cash and our portfolio iscomprised of securities with active secondary and resale markets, anyinvestment is subject to a degree of interest rate and liquidity risk. Capitalexpenditures, which are largely driven by development activities and the introductionand initial manufacturing of new products, could total $3.0 million in thenext twelve months. At the end of the first quarter of 2008, we had commitmentsto purchase $3.6 million of wafer inventory.

 

Asa result of potential investments, expected revenue and operating expenselevels, changes in working capital and interest and debt payments, we will needto generate significantly higher revenue and gross profit, especially from ourArcticLink and PolarPro solution platforms and products currently underdevelopment, to generate positive cash flow. In addition, our new products havebeen generating lower gross margin as a percentage of revenue than the rest ofour historical business due to the competitive and cost-sensitive markets thatwe have targeted and the larger order quantities associated with theseapplications. Our current expectation is that revenue will decline sequentiallyin the second quarter of 2008 due largely to a decline in revenue fromend-of-life products. Based on our current expectations for revenue, grossprofit and expense levels, we have sufficient liquidity for the next twelvemonths. Whether we can achieve cash flow levels sufficient to support ouroperations cannot be accurately predicted. Unless such cash flow levels are achievedand our investment portfolio remains liquid and its capital is preserved, wemay have to borrow additional funds or sell debt or equity securities, or somecombination thereof, to

 

36

----

 

provide funding for our operations. Ifadequate funds are not available when needed, our financial condition andoperating results would be materially and adversely affected and we may not beable to operate our business without significant changes in our operations, or atall.

 

# *If we failto successfully develop, introduce and sell CSSPs and new products, we may beunable to compete effectively in the future*

#  

Wehave focused the development and marketing of our CSSPs to address the needs ofOEMs and ODMs that offer differentiated mobile products such as personalnavigation devices, multimedia phones, portable media players, data cards andwireless hard disk drives. These are new customers and markets for us and wecurrently have a small customer base for CSSPs. We believe that this businesswill provide long-term revenue growth for our Company; however, there is noassurance when this will occur.

 

Themarket for these mobile devices is highly competitive and dynamic, with shortend market product life cycles and rapid obsolescence of existing products. Tocompete successfully, we must obtain access to advanced fabrication capacityand dedicate significant resources to specify, design, develop, manufacture andsell new or enhanced CSSPs that provide increasingly higher levels ofperformance, low power consumption, new features, reliability and/or costsavings to our customers. Due to the short product life cycle of these devicesour revenue is subject to fluctuation in a short period of time and our abilityto grow our business depends on accelerating our design win activity. We oftenmake significant investments long before we generate revenue, if any, fromthese efforts. These markets typically have higher volumes and greater pricepressure than our traditional business; we quote opportunities in anticipationof future cost reductions and may aggressively price products to gain marketshare. In order to react quickly to opportunities or to obtain favorable waferprices, we make significant investments in and commitments to purchaseinventories and capital equipment before we have firm commitments fromcustomers. Our gross margin and valuation of inventories may be affected bythese strategies if, for instance, we generate significant revenue before weare able to reduce our costs or if an opportunity priced to gain market sharebecomes significant to our quarterly revenue.

 

 The growth of our CSSP business needs to bestrong enough to offset revenue declines in other areas of our business. Wehave announced an end-of-life for several products, due primarily to certainsuppliers’ decisions to stop manufacturing these products. End-of-life productscontributed $4.1 million, or 37% of revenue, in the first quarter of 2008 and$11.5 million, or 33% of revenue, in 2007. We currently do not expect thesedevices to contribute significant revenue by the third quarter of 2008. Becausethe product life cycle of mobile products is short, we must replace revenue atthe end of a product life cycle with sales from new design opportunities. In addition,sales of our mature product family could decline if competitors replace us inthese design opportunities. While we expect revenue and gross profit growthfrom CSSPs will offset the expected decline in revenue and gross profit fromour end-of-life products, our mature products and the effect of short mobileproduct life cycles, there is no assurance when this will occur. In order togrow our revenue from its current level, we are dependent upon increasedrevenue from our existing products, especially CSSPs based on our ArcticLinkand PolarPro solution platforms, and the development of additional new productsand solutions.

 

Ifwe are unable to design, produce and sell new CSSPs that meet designspecifications, address customer requirements and generate sufficient revenueand gross profit; if market demand for our CSSPs and other products fails tomaterialize; if we are unable to obtain adequate capacity on a timely basis; ifwe are unable to develop CSSPs or solutions in a timely manner; or if our customersdo not successfully introduce products incorporating our devices, our revenueand gross margin will be materially harmed, our liquidity and cash flows willbe materially affected, we may be required to write-off related inventories andlong-lived assets or there may be other adverse effects on our business or theprice of our common stock.

 

# *We will beunable to compete effectively if we fail to anticipate product opportunitiesbased upon emerging technologies and standards or fail to develop products andsolutions that incorporate these technologies and standards in a timely manner*

#  

Wespend significant time and money to design and develop silicon solutionplatforms such as ArcticLink and PolarPro and proven system blocks, such as ourVEE technology, USB and IDE, or emerging technologies, such as low powerprogrammable logic, advanced process technology or small form factor packaging.We intend to develop additional products and solutions and to adopt newtechnologies in the future. If system manufacturers

 

37

----

 

adopt alternative standards or technologies,if an industry standard or emerging technology that we have targeted fails toachieve broad market acceptance, if customers choose low power offerings fromour competitors, 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 relatedinventories and long-lived assets.

 

# *We have alimited number of significant customers and limited visibility into thelong-term demand for our products from these customers*

#  

Afew end customers can represent a significant portion of our total revenue in agiven reporting period and the likelihood of this occurring will increase inthe future as we target market leading manufacturers of high volume mobileapplications. As in the past, future demand from these customers may fluctuatesignificantly from quarter to quarter. These customers typically order productswith short requested delivery lead times, and do not provide a commitment topurchase product past the period covered by purchase orders, which may berescheduled or cancelled. In addition, our manufacturing lead times are longerthan the delivery lead times requested by these customers, and we makesignificant purchases of inventory and capital expenditures in anticipation offuture demand. If revenue from any significant customer were to declinesubstantially, we may be unable to offset this decline with increased revenueand gross margin from other customers and we may purchase excess inventories.These factors could severely harm our business.

 

Inaddition, we may make a significant investment in long-lived assets for theproduction of our products based upon historical and expected demand. If demandfor our products or gross margin generated from our products does not meet ourexpectations or if we are unable to collect amounts due from significantcustomers, we may be required to write-off inventories, provide foruncollectible accounts receivable or incur charges against long-lived assets,which would materially harm our business.

 

# *We may beunable to accurately estimate quarterly revenue, which could adversely affectthe trading price of our stock*

#  

Weoffer our customers a short delivery lead time and a majority of our shipmentsduring a quarter are ordered by customers in that quarter. As a result, weoften have low visibility to the current quarter’s revenue and our revenuelevels can change significantly in a short period of time. Furthermore, ourability to respond to increased demand is limited to inventories 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 levels ofinventory, 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 dependupon third parties to fabricate, assemble, test and program our products, andthey may discontinue manufacturing our products, fail to give our productspriority, be unable to successfully manufacture our products to meetperformance, volume or cost targets, or inaccurately report inventories to us*

#  

Wecontract with third parties to fabricate, assemble, test and program ourdevices. Our devices are generally fabricated, assembled and programmed bysingle suppliers, and the loss of a supplier, transfer of manufacturing to anew location, expiration of a supply agreement or the inability of oursuppliers to manufacture our products to meet volume, performance and costtargets could have a material adverse effect on our business. We sellprogrammers to customers that are supplied by a single source. Programmingcapacity at our subcontractors is also dependent on our investment in sufficientprogramming hardware to meet fluctuating demand. Our relationship with oursuppliers could change as a result of a merger or acquisition. If for anyreason 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. Alternate suppliers might not

 

38

----

 

be available to fabricate, assemble, test andprogram our devices or, if available, might be unwilling or unable to offerservices on acceptable terms. We have announced an end-of-life for severalproducts, due primarily to certain suppliers’ decisions to stop manufacturingthese products. End-of-life products contributed $4.1 million, or 37% ofrevenue, in the first quarter of 2008 and $11.5 million, or 33% of revenue, in2007. We currently do not expect these devices to contribute significantrevenue by the third quarter of 2008. 

 

Inaddition, if competition for wafer manufacturing capacity increases, if we needto migrate to more advanced wafer manufacturing technology, or if competitionfor assembly services increases, we may be required to pay or investsignificant amounts to secure access to this capacity. For example, between2001 and 2002 we invested $21.3 million in equity and prepaid wafer credits toobtain guaranteed wafer fabrication capacity at Tower Semiconductor. The numberof companies that provide these services is limited and some of them havelimited operating histories and financial resources. In the event our currentsuppliers refuse or are unable to continue to provide these services to us, orif we are unable to secure sufficient capacity from our current suppliers oncommercially reasonable terms, we may be unable to procure services fromalternate suppliers in a timely manner, if at all. Moreover, our reliance on alimited number of suppliers subjects us to reduced control over deliveryschedules, quality assurance and costs. This lack of control may causeunforeseen product shortages or may increase our cost to manufacture and testour products, which would adversely affect our operating results and cashflows.

 

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

 

# *Our futureresults depend on our relationship with Tower*

#  

Wehave invested approximately $21.3 million in Tower. In return for ourinvestment, we received equity, prepaid wafer credits, preferred wafer pricingand committed production capacity in Tower’s foundry facility. We believe thatTower’s long-term operation of this fabrication facility depends on its abilityto attract sufficient customer demand, to obtain additional financing, toincrease capacity, to obtain the release of grants and approvals for changes ingrant programs from the Israeli government’s Investment Center and its abilityto remain in compliance with the terms of its grant and credit agreements. Thecurrent political uncertainty and security situation in the Middle East whereTower’s fabrication facility is located, the cyclical nature of the market forfoundry manufacturing services, Tower’s financial condition, or other factorsmay adversely impact Tower’s business prospects and may discourage futureinvestments in Tower from outside sources. If Tower is unable to obtainadequate financing and increase production output in a timely manner, the valueof our investment in Tower may decline significantly or possibly becomeworthless, our wafer credit from Tower may decline in value or possibly becomeworthless, and we would have to identify and qualify a substitute supplier tomanufacture our products. This could require significant development time,cause product shipment delays, impair long-lived assets and the value of ourwafer credits, damage our liquidity and severely harm our business. Inaddition, Tower is the sole manufacturer of our new products and other newproducts currently under development.

 

Thevalue of our investment in Tower and its corresponding wafer credits may alsobe adversely affected by a deterioration of conditions in the market forfoundry manufacturing services, the market for semiconductor products and Tower’sability to remain in compliance with Nasdaq listing standards. If Tower doesnot remain in compliance with Nasdaq listing standards, the liquidity of our investmentmay be adversely affected. At the end of the first quarter of 2008, the valueof our Tower investment was $1.4 million and the value of our wafer creditsrecorded on our balance sheet was $2.4 million. If the fair value of ourTower investment or our wafer credits is deemed to be impaired, we will recordcharges to our statements of operations. If the value of Tower’s ordinaryshares remains below the carrying value at the end of the second quarter of2008, we may record an impairment charge for this investment. We wrote down theTower shares due to an “other than temporary” decline in their market value by$13.7 million between fiscal 2001 and 2005.

 

# *Ourcustomers may cancel or change their product plans after we have expendedsubstantial time and resources in the design of their products*

#  

Ourcustomers often evaluate our products for six months or more before designingthem into their systems, and they may not commence volume shipments for up toan additional six to twelve months, if at all. During this

 

39

----

 

lengthy sales cycle, our potential customersmay cancel or change their product plans. Customers may also discontinueproducts incorporating our devices at any time or they may choose to replaceour products with lower cost semiconductors. In addition, we are working withleading customers in our target markets to define our future products. Ifcustomers cancel, reduce or delay product orders from us or choose not torelease products that incorporate our devices after we have spent substantialtime and resources developing products or assisting customers with theirproduct design, our revenue levels may be less than anticipated and ourbusiness could be materially harmed.

 

# *If we failto adequately forecast demand for our products, we may incur product shortagesor excess product inventories*

#  

Ouragreements with certain suppliers require us to provide forecasts of ouranticipated manufacturing orders, and place binding manufacturing commitmentsin advance of receiving purchase orders from our customers. We are limited inour ability to increase or decrease our forecasts under such agreements. Othermanufacturers supply us product on a purchase order basis. The allocation ofcapacity is determined solely by our suppliers over which we have no directcontrol. Additionally, we may place orders with our suppliers in advance ofcustomer orders to allow us to quickly respond to changing customer demand orto obtain favorable product costs. Furthermore, we provide our suppliers withequipment which is used to program our products to customer specifications. Theprogramming equipment is manufactured to our specifications and has significantorder lead times. These factors may result in product shortages or excessproduct inventories. Obtaining additional supply in the face of product,programming equipment or capacity shortages may be costly, or not possible,especially in the short term since most of our products and programmingequipment are supplied by a single supplier. For example, in the first quarterof 2008, we wrote-down approximately $1.0 million of inventories due primarilyto changes in forecasted demand. Our failure to adequately forecast demand forour products could materially harm our business.

 

Ourdistributors or customers may cancel purchase orders at any time with little orno penalty. Contractually, our distributors are generally permitted to returnunprogrammed products worth up to 10%, by value, of the products they purchasefrom us. If our distributors or customers cancel or defer significant purchaseorders or return our products, our accounts receivable collections woulddecrease and inventories would increase, which would materially harm ourbusiness.

 

# *We areexpending substantial time and effort to develop solutions with partners thatdepend on the availability and success of technology owned by the partner*

#  

Ourapproach to developing solutions for potential customers involves: (1) embeddedprocessors developed by companies such as Marvell Semiconductor, Inc. andAnalog Devices, Inc.; (2) peripheral devices developed by otherparties such as micro hard disk drives, Wi-Fi devices and NAND flash memory; (3) proprietaryintellectual property such as key elements of our VEE technology; and (4) specificindustry standards such as USB 2.0 OTG, Serial Digital High Capacity, or SDHC,IDE and SDIO. We have entered into informal partnerships with other partiesthat involve the development of solutions that interface with their devices orstandards. These informal partnerships also may involve joint marketingcampaigns and sales calls. If our solutions are not incorporated into customerproducts, if our partners discontinue production of or develop and integrate acompeting solution into their product offerings, or if the informalpartnerships do not grow as expected or if they are significantly reduced orterminated by acquisition or other means, our revenue and gross margin will bematerially harmed and we may be required to write-off related inventories andlong-lived assets.

 

# *We may beunable to successfully grow our business if we fail to compete effectively withothers to attract and retain key personnel*

#  

Webelieve our future success depends upon our ability to attract and retainhighly competent personnel. Our employees are at-will and not subject toemployment contracts. Hiring and retaining qualified sales, technical andfinancial personnel is difficult due to the limited number of qualifiedprofessionals, economic conditions and the size of our company. Competition forthese types of employees is intense. In addition, new hires frequently requireextensive training before they achieve desired levels of productivity. Failureto attract, hire, train and retain personnel could materially harm ourbusiness.

 

40

----

# * *

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

# * *

Difficulties encounteredduring the complex semiconductor manufacturing process can render a substantialpercentage of semiconductor devices nonfunctional. New manufacturing techniquesor fluctuations 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, shortages of inventoriesor reduced customer demand.

 

Yield fluctuationsfrequently occur in connection with the manufacture of newly introducedproducts, with changes in product architecture, with manufacturing at newfacilities, on new fabrication processes or in conjunction with new backendmanufacturing processes. Newly introduced solutions and products, such as ourCSSPs and ArcticLink and PolarPro solution platforms, are often more complexand more difficult to produce, increasing the risk of manufacturing relateddefects. New manufacturing facilities or processes are often more complex andtake a period of time to achieve expected quality levels and manufacturingefficiencies. While we test our products, including our software developmenttools, they may still contain errors or defects that are found after we havecommenced commercial production. Undetected errors or defects may also resultfrom new manufacturing processes or when new intellectual property isincorporated into our products. If our products or software development toolscontain undetected or unresolved defects, we may lose market share, experiencedelays in or loss of market acceptance, reserve or scrap inventories or berequired to issue a product recall. In addition, we would be at risk of productliability litigation if defects in our products were discovered. Although weattempt to limit our liability to end users through disclaimers of special,consequential and indirect damages and similar provisions, we cannot assure youthat such limitations of liability will be legally enforceable.

 

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

# * *

We incurred significantlosses in 2007, 2006 and certain years prior to 2005. Our accumulated deficitas of March 30, 2008 was $140.0 million. Although we recorded netincome of $2.4 million in 2005, we recorded a net loss of$1.4 million in the first quarter of 2008, and we may not return toprofitability in any future periods.

 

# *Ourfuture operating results are likely to fluctuate and therefore may fail to meetexpectations, which could cause our stock price to decline*

# * *

Our operating results havevaried widely in the past and are likely to do so in the future. In addition,our past operating results may not be an indicator of future operating results.Our future operating results will depend on many factors and may fail to meetour expectations for a number of reasons, including those set forth in theserisk factors. Any failure to meet expectations could cause our stock price tosignificantly fluctuate or decline.

 

Factors that could cause our operating results tofluctuate include:

 

·           the effect of end-of-life programs;

 

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

 

·           successful development and marketacceptance of our products and solutions;

 

·           our ability to accurately forecast product volumes andmix, and to respond to rapid changes in customer demand;

 

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

 

·           our ability to adjust our product features,manufacturing capacity and costs in response to economic and competitivepressures;

 

·           our reliance on subcontract manufacturers for productcapacity, yield and quality;

 

41

----

 

·           our competitors’ product portfolio and product pricingpolicies;

 

·           timely implementation of efficient manufacturingtechnologies;

 

·           errors in applying or changes in accounting andcorporate governance rules;

 

·           the issuance of equity compensation awards or changesin the terms of our stock plan or employee stock purchase plan;

 

·           mergers or acquisitions;

 

·           the impact of import and export laws and regulations;

 

·           the cyclical nature of the semiconductor industry andgeneral economic, market, political and social conditions in the countrieswhere we sell our products and the related effect on our customers,distributors and suppliers; and

 

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

 

Although certain of thesefactors are out of our immediate control, unless we can anticipate and beprepared with contingency plans that respond to these factors, our business maybe materially harmed.

 

We may encounter periodsof industry wide semiconductor oversupply, resulting in pricing pressure, aswell as undersupply, 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 anddemand for 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.

# * *

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

# * *

Most of our products aremanufactured outside of the United States at manufacturing facilities operatedby our suppliers in Taiwan, South Korea, the Philippines, China and Israel. Weexpect to manufacture a majority of our new products and the products that wecurrently have under development in Israel and to assemble these products inSouth Korea or China. As a result, these manufacturing operations and newproduct introductions are subject to risks of political instability, includingthe risk of conflict between Taiwan and the People’s Republic of China, betweenSouth 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:

 

·           managing foreign distributors andsuppliers;

 

·           collecting amounts due;

 

·           staffing and managing foreign offices;

 

·           political and economic instability;

 

42

----

 

·           foreign currency exchange fluctuations;

 

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

 

·           timing and availability of export licenses;

 

·           supplying products that meet local environmentalregulations; and

 

·           inadequate protection of intellectualproperty rights.

 

In the past, we havedenominated 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. If the local currency of a foreign country inwhich we conduct business strengthens against the U.S. dollar, our payroll andother local expenses will be higher, and since sales are transacted in U.S.dollars, would not be offset by any increase in revenue. To the extent any suchrisks materialize, our business could be materially harmed.

 

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

# * *

# *Our CSSPs face competition fromsuppliers of ASSPs such as Cypress Semiconductor, suppliers of integratedapplication processors such as Qualcomm, and suppliers of ASICs such as LSILogic*

# * *

We face competition fromcompanies that offer ASSPs, such as Cypress Semiconductor and OxfordSemiconductor. While it is difficult to provide a unique solution through theuse of ASSPs, they generally are cost effective standard products and haveshort lead times. In certain design opportunities, ASSPs can be combined toachieve system design objectives. Manufacturers of integrated applicationprocessors, such as Qualcomm, often integrate new features when they introducenew products. A system designer could elect the use of an integrated processorthat includes the features offered in our CSSPs. Companies such as LSI Logicsupply Application Specific Integrated Circuits, or ASICs, which may bepurchased for a lower price at higher volumes and typically have greater logiccapacity, additional features and higher performance than our products. Ourinability to successfully compete in any of the following areas couldmaterially harm our business:

 

·           the development of new products, CSSPsand advanced manufacturing technologies;

 

·           the quality, power characteristics, performancecharacteristics, price and availability of devices, programming hardware andsoftware development tools;

 

·           the ability to engage with companies that providesynergistic products and services;

 

·           the incorporation of industry standards in ourproducts and solutions;

 

·           the diversity of product offerings available tocustomers; or

 

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

 

# *Many system manufacturers may beunwilling to switch to our products because of their familiarity with theproducts offered by our direct competitors, such as Xilinx, Inc. andAltera Corporation, which compete with us in the sale of FPGAs*

# * *

Companies that competewith our mature product family and end-of-life product family, and certain newproduct opportunities, include suppliers of complex programmable logic devices andfield programmable gate arrays, such as Xilinx, Inc., Altera Corporation,Actel Corporation and Lattice Semiconductor Corporation. Xilinx and Alteratogether have a majority share of the programmable logic market. Many systemmanufacturers may be unwilling or unable to switch to our products due to theirfamiliarity with competitors’ products or other inhibiting factors.

 

The semiconductorindustry is intensely competitive and characterized by:

 

·           erosion of selling prices over productlives;

 

43

----

 

·           rapid technological change;

 

·           short product life cycles; and

 

·           strong domestic and foreign competition.

 

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

 

Many of the companiesthat compete with CSSPs and our new product, mature and end-of-life familieshave substantially greater financial, technical, manufacturing, marketing,sales, distribution, name recognition and other resources than we do. Inaddition, many of our competitors have well established relationships with ourcurrent 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.

 

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

# * *

We contract with thirdparty distributors and independent sales representatives to market and sell asignificant portion of our products. We typically have only a few distributorsand a single representative serving each geographic market and, in the future,we may have a single distributor covering a geographic market. Although we havecontracts with our distributors and representatives, our agreements with themmay be terminated on short notice by either party and, if terminated, we may beunable to recruit additional or replacement distributors or representatives. Asa result, our future performance will depend in part on our ability to retain ourexisting distributors and representatives and to attract new distributors andrepresentatives that will be able to effectively market, sell and support ourproducts and solutions. The loss of one or more of our principal distributorsor representatives, or our inability to attract new distributors orrepresentatives, could materially harm our business.

 

Many of our distributorsand representatives, including our principal distributors and representatives,market and sell products for other companies. Many of these products maycompete directly or indirectly with our products and solutions. Also, wegenerally are not one of the principal suppliers of products to ourdistributors or representatives. If our distributors or representatives givehigher priority or greater attention to the products of other companies,including products that compete with our products and solutions, our businesswould be materially harmed.

 

Individual distributorsand OEMs often represent a significant portion of our accounts receivable. Ifwe are unable to collect funds due from these distributors and customers, duefor instance to their financial health or the liquidity of their investments,our financial results may be materially harmed.

 

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

# * *

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

 

In the past, we have beeninvolved in litigation relating to our alleged infringement of third partypatents or other intellectual property rights. This type of litigation isexpensive and consumes large amounts of management 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 type of litigation could materially harm ourbusiness.

 

Although we may seek toobtain a license under a third party’s intellectual property rights in order tobring an end to certain claims or actions asserted against us, we may not beable to obtain such a license on reasonable terms, 

 

44

----

 

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 is critical toour success that we continue to prevent competitors from copying ourinnovations, we intend to continue to seek patent and trade secret protectionfor our products. The process of seeking patent protection can be long andexpensive, and we cannot be certain that any currently pending or futureapplications will actually result in issued patents or that, even if patentsare issued, they will be of sufficient scope or strength to provide meaningfulprotection or any commercial advantage to us. Furthermore, others may developtechnologies that are similar or superior to our technology or design aroundthe patents we own. We also rely on trade secret protection for our technology,in part through confidentiality agreements with our employees, consultants andother third parties. However, these parties may breach these agreements and wemay not have adequate remedies for any breach. In any case, others may come toknow about or determine our trade secrets through a variety of methods. Inaddition, the laws of certain territories in which we develop, manufacture orsell our products may not protect our intellectual property rights to the sameextent as the laws of the United States.

 

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

# * *

We have entered into and,in the future, intend to enter into agreements that involve numerous risks,including the use of significant amounts of our cash; diversion of resourcesfrom other development projects or market opportunities; our ability toincorporate licensed technology in our products and solutions; our ability tointroduce related products in a cost effective and timely manner; our abilityto collect amounts due under these contracts; and market acceptance of relatedproducts and solutions. If we fail to recover the cost of these or other assetsfrom the cash flow generated by the related products, our assets will becomeimpaired and our financial results would be harmed.

 

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

# * *

Our operations and theoperations of our suppliers are vulnerable to interruption by fire, earthquake,power loss, flood, terrorist acts and other catastrophic events beyond ourcontrol. In particular, our headquarters are located near earthquake faultlines in the San Francisco Bay Area. In addition, we rely on sole suppliers tomanufacture our products and would not be able to qualify an alternate supplierof our products for several quarters. Our suppliers often hold significantquantities of our inventories which, in the event of a disaster, could bedestroyed. In addition, our business processes and systems are vulnerable tocomputer viruses, break-ins and similar disruptions from unauthorizedtampering. Any catastrophic event, such as an earthquake or other naturaldisaster, the failure of our computer systems, war or acts of terrorism, couldsignificantly impair our ability to maintain our records, pay our suppliers, ordesign, manufacture or ship our products. The occurrence of any of these eventscould also affect our customers, distributors and suppliers and produce similardisruptive effects upon their business. If there is an earthquake or othercatastrophic event near our headquarters, our customers’ facilities, ourdistributors’ facilities or our suppliers’ facilities, our business could beseriously harmed.

 

We do not have a detailed disaster recovery plan. In addition, we donot maintain sufficient business interruption and other insurance policies tocompensate us for all losses that may occur. Any losses or damages incurred byus as a result of a catastrophic event or any other significant uninsured losscould have a material adverse effect on our business.

# * *

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

# * *

Our officers, directorsand principal stockholders together control a significant portion of ouroutstanding 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 

 

45

----

 

significant corporatetransactions. This concentration of ownership may have the effect of delayingor preventing a change in control and might affect the market price of ourcommon stock. This concentration of ownership may not be in the best interestof our other stockholders.

 

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

# * *

Our Shareholder RightsPlan as well as provisions of our Certificate of Incorporation, our Bylaws andDelaware law could make it difficult for a third party to acquire us, even ifdoing so would be beneficial to our stockholders.

 

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

# * *

Stock prices for manycompanies in the technology and emerging growth sectors have experienced widefluctuations that have often been unrelated to the operating performance ofsuch companies. In the past, securities class action litigation has often beenbrought against a company following periods of volatility in the market priceof its securities. In the future, we may be the subject of similar litigation.Securities litigation could result in substantial costs and divert management’sattention.

 

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

# * *

Generally acceptedaccounting principles, or GAAP, are promulgated by, and are subject to theinterpretation of the Financial Accounting Standards Board, or FASB, and theSEC. New accounting pronouncements or taxation rules and varyinginterpretations of accounting pronouncements or taxation practices haveoccurred and may occur in the future. Any future changes in accountingpronouncements or taxation rules or practices may have a significanteffect on how we report our results and may even affect our reporting oftransactions completed before the change is effective. In addition, a review ofexisting or prior accounting practices may result in a change in previouslyreported amounts. This change to existing rules, future changes, if any, or thequestioning of current practices may adversely affect our reported financialresults, our ability to remain listed on the Nasdaq Global Market, or the waywe conduct our business and subject us to regulatory inquiries or litigation.

 

*Compliancewith regulations related to corporate governance and public disclosure mayresult in additional expenses*

* *

Federal securities laws, rules and regulations,as well as Nasdaq rules and regulations, require companies to maintainextensive corporate governance measures, impose comprehensive reporting anddisclosure requirements, set strict independence and financial expertisestandards for audit and other committee members and impose civil and criminalpenalties for companies and their chief executive officers, chief financialofficers and directors for securities law violations. These laws, rules andregulations have increased and will continue to increase the scope, complexityand cost of our corporate governance, reporting and disclosure practices, whichcould harm our results of operations and divert management’s attention frombusiness operations. We are committed to maintaining high standards ofcorporate governance and public disclosure. If our efforts to comply with newor changed laws, regulations and standards differ from the activities intendedby regulatory or governing bodies due to ambiguities related to practice, ourreputation may be harmed and the market price of our common stock could beaffected.

 

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

# * *

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Internal control over financial reporting cannot provideabsolute assurance of achieving financial reporting objectives because of itsinherent limitations. Internal control over financial reporting is a processthat involves human diligence and compliance and is subject to lapses injudgment and breakdowns resulting from human failures. Internal control overfinancial reporting also can be circumvented by collusion or impropermanagement override. Because of such limitations, there is a risk that materialmisstatements may not be prevented or detected on a timely basis by internalcontrol over financial reporting. However, these inherent limitations are 

 

46

----

 

known features of thefinancial reporting process. Therefore, it is possible to design into theprocess safeguards to reduce, though not eliminate, this risk.

 

As of December 30,2007, we have evaluated our internal control systems in order to allowmanagement to report on our internal control over financial reporting, as requiredby Section 404 of the Sarbanes-Oxley Act. We performed the system andprocess evaluation and testing required in an effort to comply with themanagement certification of Section 404. While we believe that ourinternal control procedures are adequate and we intend to continue to fullycomply with the requirements relating to internal control and all other aspectsof Section 404, our controls necessary for continued compliance with theSarbanes-Oxley Act may not operate effectively at all times and may result in amaterial control disclosure. The identification of a material weakness ininternal control over financial reporting, if any, could indicate a lack ofproper controls to generate accurate consolidated financial statements.Furthermore, we cannot be certain as to the outcome of future evaluations,testing and remediation actions or the impact of the same on our operations. Ifwe are not able to remain in compliance with the requirements of Section 404,we might be subject to sanctions or investigation by regulatory authorities,such as the SEC or the Nasdaq Global Market. Any such action could adverselyaffect our financial results and the market price of our common stock.

 

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

# * *

Our products, solutions,technology and software are subject to import and export control laws andregulations which, in some instances, may impose restrictions on businessactivities, or otherwise require licenses or other authorizations from agenciessuch as the U.S. Department of State, U.S. Department of Commerce and U.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.

# * *

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

# * *

The Company and certainof our directors and officers are named in a lawsuit relating to the initialpublic offering laddering litigation. We may become the subject of otherprivate or government actions in the future. Litigation may be time consuming,expensive and disruptive to normal business operations and the outcome oflitigation is difficult to predict. Any expenses associated with litigation orthe outcome relating to any such actions could have a material adverse effecton our business, financial condition, results of operations, cash flows and thetrading price for our securities.

 

47

----

 

**Item 6.Exhibits**

** **

a.     Exhibits

 

The following Exhibits are filed with this report:

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                       |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                  |
|   3.1(1)  |       | Amended and Restated  Certificate of Incorporation of Registrant.                                                                                     |
|   3.2(2)  |       | Bylaws of Registrant.                                                                                                                                 |
| 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. |

 

----

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

 

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

 

48

----

 

**Signatures**

** **

Pursuantto the requirements of the Securities Exchange Act, 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 8, 2008 | Carl  M. Mills                                                                                                                       |
| * *               | *Vice President, Finance and Chief Financial Officer**(as Principal Accounting and Financial  Officer and on behalf of**Registrant)* |

 

49

----

 

**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                       |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
|                |       |                                                                                                                                                  |
|   3.1(1)  |       | Amended and Restated  Certificate of Incorporation of Registrant.                                                                                     |
|   3.2(2)  |       | Bylaws of Registrant.                                                                                                                                 |
| 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. |

 

----

            (1)   Incorporatedby reference to the Company’s Registration Statement on Form S-1 declaredeffective October 14, 1999 (Commission File No. 333-28833).

 

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

 

50

----