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**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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###### ** **

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

 

**(Mark One)**

 
| **o**        | **Quarterly report pursuant to Section 13 or 15(d) of the Securities  Exchange Act of 1934**                                                                          |
|--------------|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| ** **   |                                                                                                                                                                            |
| ** **   | **For the Quarterly Period Ended March 29, 2009**                                                                                                                          |
| ** **   | ** **                                                                                                                                                                      |
| ** **   | **OR**                                                                                                                                                                          |
| ** **   | ** **                                                                                                                                                                      |
| **o**        | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934**                                                                        |
| ** **   | ** **                                                                                                                                                                      |
| *** *** | ***For the Transition Period From              To             *** |

 

**COMMISSION FILE NUMBER: 000-22671**

 

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**QUICKLOGICCORPORATION**

(Exact name of registrant as specified in itscharter)

 

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

 

**1277 ORLEANS DRIVE SUNNYVALE, CA  94089**

(Address of principal executive offices,including Zip Code)

 

**(408) 990-4000**

(Registrant’s telephone number, includingarea code)

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch requirements for the past 90 days.                   Yes x  No o

 

Indicateby check mark whether the registrant has submitted electronically and posted onits corporate Web site, if any, every Interactive Data File required to besubmitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 ofthis chapter) during the preceding 12 months (or for such shorter period thatthe registrant was required to submit and post such files).         Yes o  No o

 

Indicateby check mark whether the registrant is a large accelerated filer, anaccelerated filer, or a non-accelerated filer, or a smaller reporting company.See definition of “large accelerated filer,” “accelerated filer” and “smallerreporting company” in Rule 12b-2 of the Exchange 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) |                              |

 

Indicateby check mark whether the registrant is a shell company (as defined inRule 12b-2 of the Securities Exchange Act). Yes o No x

 

Asof May 6, 2009, the registrant had outstanding 29,909,393 shares of commonstock, par value $0.001.

 

 

 

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**QUICKLOGIC CORPORATION**

**FORM 10-Q**

**March 29, 2009**

 
| ** **        | ** **                                                                                                                                          | ** ** | **Page** |
|-------------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|              |                                                                                                                                                |       |     |
| **Part I.**  | **Financial  Information**                                                                                                                          |       | 3        |
|              |                                                                                                                                                |       |     |
| Item 1.           | Financial  Statements                                                                                                                               |       | 3        |
|              | Condensed  Unaudited Consolidated Statements of Operations for the three months ended  March 29, 2009 and March 30, 2008                  |       | 3        |
|              | Condensed Unaudited Consolidated Balance Sheets as of  March 29, 2009 and December 28, 2008                                               |       | 4        |
|              | Condensed  Unaudited Consolidated Statements of Cash Flows for the three months ended  March 29, 2009 and March 30, 2008                  |       | 5        |
|              | Condensed  Unaudited Consolidated Statements of Comprehensive Income (Loss) for the three  months ended March 29, 2009 and March 30, 2008 |       | 6        |
|              | Notes to  Condensed Unaudited Consolidated Financial Statements                                                                                     |       | 7        |
|              |                                                                                                                                                |       |     |
| **Item 2.**       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                                         |       | 20       |
| ** **        |                                                                                                                                                |       |     |
| **Item 3.**       | Quantitative  and Qualitative Disclosures about Market Risk                                                                                         |       | 29       |
| ** **        |                                                                                                                                                |       |     |
| **Item 4.**       | Controls and  Procedures                                                                                                                            |       | 29       |
|              |                                                                                                                                                |       |     |
| **Part II.** | **Other Information**                                                                                                                               |       | 30       |
|              |                                                                                                                                                |       |     |
| **Item 1.**       | Legal Proceedings                                                                                                                                   |       | 30       |
| ** **        |                                                                                                                                                |       |     |
| **Item 1A.**      | Risk  Factors                                                                                                                                       |       | 30       |
| ** **        |                                                                                                                                                |       |     |
| **Item 6.**       | Exhibits                                                                                                                                            |       | 41       |
|              |                                                                                                                                                |       |     |
| Signatures        |                                                                                                                                                |       | 42       |

 

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**PART I. Financial Information**

 

**Item 1. Financial Statements**

 

**QUICKLOGIC CORPORATION**

**CONDENSEDUNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per share amounts)**

 

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 29, 2009**     | ** ** | **March 30, 2008** | ** ** |
|                                |       |                             |       |   |   |
| Revenue                             |       | $                                | 4,552      |   | $ | 11,023 |   |
| Cost of revenue                     |       | 1,819                            |       | 5,258 |   |
| Gross profit                        |       | 2,733                            |       | 5,765 |   |
| Operating expenses:                 |       |                             |       |   |   |
| Research and development            |       | 1,612                            |       | 2,821 |   |
| Selling, general and administrative |       | 2,643                            |       | 4,320 |   |
| Loss from operations                |       | (1,522                           | )          | (1,376 | ) |
| Interest expense                    |       | (24                              | )          | (71 | ) |
| Interest income and other, net      |       | (46                              | )          | 104 |   |
| Loss before income taxes            |       | (1,592                           | )          | (1,343 | ) |
| Provision for income taxes          |       | 4                                |       | 34 |   |
| Net loss                            |       | $                                | (1,596     | ) | $ | (1,377 | ) |
|                                |       |                             |       |   |   |
| Net loss per share:                 |       |                             |       |   |   |
| Basic                               |       | $                                | (0.05      | ) | $ | (0.05 | ) |
| Diluted                             |       | $                                | (0.05      | ) | $ | (0.05 | ) |
|                                |       |                             |       |   |   |
| Weighted average shares:            |       |                             |       |   |   |
| Basic                               |       | 29,909                           |       | 29,406 |   |
| Diluted                             |       | 29,909                           |       | 29,406 |   |

 

See accompanying Notes to Condensed Unaudited Consolidated FinancialStatements.

 

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**QUICKLOGIC CORPORATION**

**CONDENSEDUNAUDITED CONSOLIDATED BALANCE SHEETS**

**(in thousands, except par value amount)**

 

 
| ** **                                                                                                                | ** ** | **March 29,  2009** | ** ** | **December 28,  2008** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                |       |                     |       |                        |       |
|                                                                                                                      |       |                     |       |                        |       |
| Current assets:                                                                                                           |       |                     |       |                        |       |
| Cash and cash equivalents                                                                                                 |       | $                        | 18,194     |                        | $          | 19,376 |   |
| Short-term investment in Tower Semiconductor Ltd.                                                                         |       | 197                      |       | 116                         |       |
| Accounts receivable, net of allowances for doubtful accounts of $10  and $10, respectively                                |       | 2,151                    |       | 1,746                       |       |
| Inventories                                                                                                               |       | 1,932                    |       | 1,900                       |       |
| Other current assets                                                                                                      |       | 822                      |       | 833                         |       |
| Total current assets                                                                                                      |       | 23,296                   |       | 23,971                      |       |
| Property and equipment, net                                                                                               |       | 3,681                    |       | 3,493                       |       |
| Investment in Tower Semiconductor Ltd.                                                                                    |       | 99                       |       | 59                          |       |
| Other assets                                                                                                              |       | 783                      |       | 903                         |       |
| TOTAL ASSETS                                                                                                              |       | $                        | 27,859     |                        | $          | 28,426 |   |
|                                                                                                                      |       |                     |       |                        |       |
| **LIABILITIES AND STOCKHOLDERS’  EQUITY**                                                                            |       |                     |       |                        |       |
|                                                                                                                      |       |                     |       |                        |       |
| Current liabilities:                                                                                                      |       |                     |       |                        |       |
| Revolving line of credit                                                                                                  |       | $                        | 2,000      |                        | $          | 2,000 |   |
| Trade payables                                                                                                            |       | 2,109                    |       | 1,992                       |       |
| Accrued liabilities                                                                                                       |       | 1,791                    |       | 1,537                       |       |
| Deferred income on shipments to distributors                                                                              |       | 5                        |       | 282                         |       |
| Current portion of debt and capital lease obligations                                                                     |       | 793                      |       | 753                         |       |
| Total current liabilities                                                                                                 |       | 6,698                    |       | 6,564                       |       |
|                                                                                                                      |       |                     |       |                        |       |
| Long-term liabilities:                                                                                                    |       |                     |       |                        |       |
| Debt and capital lease obligations, less current portion                                                                  |       | 390                      |       | —                      |       |
| Total liabilities                                                                                                         |       | 7,088                    |       | 6,564                       |       |
|                                                                                                                      |       |                     |       |                        |       |
| Commitments and contingencies (see Note 12)                                                                               |       |                     |       |                        |       |
|                                                                                                                      |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                |       |                     |       |                        |       |
| Common stock, $0.001 par value; 100,000 shares authorized; 29,909 and  29,909 shares issued and outstanding, respectively |       | 30                       |       | 30                          |       |
| Additional paid-in capital                                                                                                |       | 170,230                  |       | 169,846                     |       |
| Accumulated other comprehensive income                                                                                    |       | 121                      |       | —                      |       |
| Accumulated deficit                                                                                                       |       | (149,610                 | )          | (148,014                    | )          |
| Total stockholders’ equity                                                                                           |       | 20,771                   |       | 21,862                      |       |
| TOTAL LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                           |       | $                        | 27,859     |                        | $          | 28,426 |   |

 

See accompanying Notes to Condensed Unaudited Consolidated FinancialStatements.

 

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**QUICKLOGIC CORPORATION**

**CONDENSEDUNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

 
| ** **                                                                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **March 29, 2009**     | ** ** | **March 30, 2008** | ** ** |
| ** **                                                                        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cash flows from operating activities:                                             |       |                             |       |   |   |
| Net loss                                                                          |       | $                                | (1,596     | ) | $ | (1,377 | ) |
| Adjustments to reconcile net loss to net cash used for operating  activities:     |       |                             |       |   |   |
| Depreciation and amortization                                                     |       | 468                              |       | 646 |   |
| Stock-based compensation                                                          |       | 384                              |       | 665 |   |
| Utilization of wafer credits from Tower Semiconductor Ltd.                        |       | 106                              |       | 113 |   |
| Write-down of inventories                                                         |       | 178                              |       | 956 |   |
| Bad debt expense                                                                  |       | —                           |       | 15 |   |
| Write-off of long-lived asset                                                     |       | 13                               |       | — |   |
| Changes in assets and liabilities:                                                |       |                             |       |   |   |
| Accounts receivable                                                               |       | (405                             | )          | (1,090 | ) |
| Inventories                                                                       |       | (210                             | )          | 245 |   |
| Other assets                                                                      |       | 127                              |       | 35 |   |
| Trade payables                                                                    |       | 117                              |       | (1,389 | ) |
| Accrued liabilities                                                               |       | 254                              |       | 447 |   |
| Deferred income and royalty revenue                                               |       | (277                             | )          | 92 |   |
| Net cash used for operating activities                                            |       | (841                             | )          | (642 | ) |
|                                                                              |       |                             |       |   |   |
| Cash flows from investing activities:                                             |       |                             |       |   |   |
| Capital expenditures for property and equipment                                   |       | (5                               | )          | (252 | ) |
| Net cash used for investing activities                                            |       | (5                               | )          | (252 | ) |
|                                                                              |       |                             |       |   |   |
| Cash flows from financing activities:                                             |       |                             |       |   |   |
| Payment of debt and capital lease obligations                                     |       | (2,336                           | )          | (702 | ) |
| Proceeds from debt obligations                                                    |       | 2,000                            |       | — |   |
| Proceeds from issuance of common stock                                            |       | —                           |       | 50 |   |
| Net cash used for financing activities                                            |       | (336                             | )          | (652 | ) |
|                                                                              |       |                             |       |   |   |
| Net decrease in cash and cash equivalents                                         |       | (1,182                           | )          | (1,546 | ) |
| Cash and cash equivalents at beginning of period                                  |       | 19,376                           |       | 20,868 |   |
| Cash and cash equivalents at end of period                                        |       | $                                | 18,194     |   | $ | 19,322 |   |
|                                                                              |       |                             |       |   |   |
| Supplemental disclosures of cash flow information:                                |       |                             |       |   |   |
| Interest paid                                                                     |       | $                                | 25         |   | $ | 79 |   |
| Income taxes paid                                                                 |       | $                                | —     |   | $ | 42 |   |
|                                                                              |       |                             |       |   |   |
| Supplemental schedule of non-cash investing and financing  activities :      |       |                             |       |   |   |
| Capital lease obligation to finance capital expenditures and related  maintenance |       | $                                | 766        |   | $ | — |   |

 

See accompanying Notes to Condensed Unaudited Consolidated FinancialStatements.

 

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**QUICKLOGIC CORPORATION**

**CONDENSEDUNAUDITED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)**

**(in thousands)**

 
| ** **                                               | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                               | ** ** | **March 29, 2009**     | ** ** | **March 30, 2008** | ** ** |
| Net loss                                                 |       | $                                | (1,596     | ) | $ | (1,377 | ) |
| Other comprehensive gain (loss), net of tax:             |       |                             |       |   |   |
| Unrealized gain (loss) on available-for-sale investments |       | 121                              |       | (511 | ) |
| Total comprehensive gain (loss)                          |       | $                                | (1,475     | ) | $ | (1,888 | ) |

 

See accompanying Notes to Condensed Unaudited Consolidated FinancialStatements.

 

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**QUICKLOGIC CORPORATION**

**NOTES TOCONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS**

 

**Note 1— The Company and Basis of Presentation**

 

QuickLogic Corporation, or QuickLogic or the Company,was founded in 1988 and reincorporated in Delaware in 1999. The Companydevelops and markets low power programmable solutions that enable customers toadd differentiated features and capabilities to their mobile, consumer and industrialproducts. The Company is a fabless semiconductor company that operates in asingle industry segment where it designs, markets and supports CustomerSpecific Standard Products, or CSSPs, Field Programmable Gate Arrays, or FPGAs,application solutions, associated design software and programming hardware.

 

The accompanying interim consolidated financial statements areunaudited. In the opinion of management, these statements have been prepared inaccordance with generally accepted accounting principles, or GAAP, and includeall adjustments, consisting only of normal recurring adjustments, necessary toprovide a fair statement of results for the interim periods presented. TheCompany recommends that these consolidated financial statements be read in conjunctionwith the Company’s Form 10-K for the year ended December 28, 2008.Operating results for the first quarter of 2009 are not necessarily indicativeof the results that may be expected for the full year.

 

QuickLogic’s fiscal year ends on the Sunday closest toDecember 31.  QuickLogic’s fiscal first quarter for 2009 and 2008ended Sunday, March 29, 2009 and March 30, 2008, respectively.

 

*Liquidity*

 

The Company anticipates that its existing cash resources will fundoperations, finance purchases of capital equipment and provide adequate workingcapital for the next twelve months. The Company’s liquidity is affected by manyfactors including, among others, the level of revenue and gross profit as aresult of the cyclicality of the semiconductor industry and the current globaleconomic crisis, the conversion of design opportunities into revenue, marketacceptance of existing and new products including CSSPs based on ourArcticLinkTM and PolarPro® solution platforms, fluctuations in revenue asa result of product end-of-life, fluctuations in revenue as a result of thestage in the product life cycle of its customers’ products, costs of securingaccess to and availability of adequate manufacturing capacity, levels ofinventories, wafer purchase commitments, customer credit terms, the amount andtiming of research and development expenditures, the timing of new productintroductions, production volumes, product quality, sales and marketingefforts, the value and liquidity of its investment portfolio, the amount and financingarrangements for purchases of capital equipment, changes in operating assetsand liabilities, the ability to obtain or renew debt financing and to remain incompliance with the terms of existing credit facilities, the ability to raisefunds from the sale of shares of Tower Semiconductor Ltd., or Tower, and equityin the Company, the issuance and exercise of stock options and participation inthe Company’s employee stock purchase plan, and other factors related to theuncertainties of the industry and global economics. Accordingly, there can beno assurance that events in the future will not require the Company to seekadditional capital or, if so required, that such capital will be available onterms acceptable to the Company.

 

*Principles of Consolidation*

 

The consolidated financial statements include theaccounts of QuickLogic Corporation and its wholly owned subsidiaries,QuickLogic International, Inc., QuickLogic Canada Company, QuickLogicKabushiki Kaisha and QuickLogic Software (India) Private Ltd. The Company andits subsidiaries use the U.S. dollar as its functional currency. Allintercompany accounts and transactions are eliminated in consolidation.

 

*ForeignCurrency*

 

Thefunctional currency of the Company’s non-U.S. operations is the U.S. dollar.Accordingly, all monetary assets and liabilities of these foreign operationsare translated into U.S. dollars at current period-end exchange rates andnon-monetary assets and related elements of expense are translated usinghistorical rates of exchange. Income and expense elements are translated toU.S. dollars using average exchange rates in effect during the period. Gainsand losses from the foreign currency transactions of these subsidiaries arerecorded as interest income and other in the statement of operations.

 

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* *

**QUICKLOGIC CORPORATION**

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

* *

*Uses of Estimates*

 

The preparation of these consolidated financialstatements in conformity with generally accepted accounting principles, orGAAP, requires management to make estimates and assumptions that affect thereported amounts of assets and liabilities, the disclosures of contingentassets and liabilities and the reported amounts of revenue and expenses duringthe period. Actual results could differ from those estimates, particularly inrelation to revenue recognition, the allowance for doubtful accounts, salesreturns, valuation of investments, valuation of long-lived assets, valuation ofinventories including identification of excess quantities, market value andobsolescence, measurement of stock-based compensation awards, accounting for incometaxes and measuring accrued liabilities.

* *

*Concentration of CreditRisk*

 

The Company’s accounts receivable are denominated inU.S. dollars and are derived primarily from sales to customers located in NorthAmerica, Europe and Asia Pacific. The Company performs ongoing creditevaluations of its customers and generally does not require collateral. SeeNote 11 for information regarding concentrations associated with accountsreceivable. The Company’s investment in Tower is subject to equity risk. See Note4 for information regarding the Company’s investment in Tower SemiconductorLtd.

* *

***Note 2—Significant Accounting Policies***

 

There have been no material changes in the Company’ssignificant accounting policies for the first quarter of 2009 from its disclosurein the Annual Report on Form 10-K for the year ended December 28,2008, except as described below. For a discussion of the significant accountingpolicies, please see the Annual Report on Form 10-K for the fiscal yearended December 28, 2008 filed with the Securities Exchange Commission, orSEC, on March 11, 2009.

* *

*RevenueRecognition*

 

The Company supplies standard products which must beprogrammed before they can be used in an application. The Company’s productsmay be programmed by the Company, distributors, end-customers or third parties.Once programmed, the Company’s parts cannot be erased and, therefore,programmed parts are only useful to a specific customer.

 

The Company generally recognizes revenue as productsare shipped if evidence of an arrangement exists, delivery has occurred, thesales price is fixed or determinable, collection of the resulting receivable isreasonably assured and product returns are reasonably estimable.

 

Revenue is recognized upon shipment of both programmedand unprogrammed parts to original equipment manufacturer, or OEM, customers,provided that legal title and risk of ownership have transferred.

 

A significant portion of our sales is made throughdistributors. In the case of programmed parts and unprogrammed, end-of-lifeproducts, it is the Company’s practice to agree upon the sales price with adistributor prior to shipment. Furthermore, distributors are not allowed anyfuture price adjustments and have no rights of return. Accordingly, the salesprice is fixed or determinable and revenue is recognized upon shipment ifpersuasive evidence of an arrangement exists, delivery has occurred, collectionof the resulting receivable is reasonably assured and title and risk of losshave been transferred.

 

Until the first quarter of 2009 in the case ofunprogrammed, other than end-of-life parts, which may be used by multipleend-customers, the distribution agreements allowed for rights of return andpost shipment price adjustments such as Ship from Stock and Debits, or SSDs.These rights of return and SSD provisions prevented us from being able toreasonably estimate the final price of the inventory to be sold and the amountof inventory that could be returned pursuant to these agreements. As a result,the price to the customer was not fixed or determinable at the time wedelivered products to our distributors. Accordingly, product revenue from salesmade through those distributors was deferred until the distributors shipped theproduct to the end-customers. Deferred income on shipments to distributorsreflected the amount of gross margin expected to be realized when distributorssell through these products purchased from the Company.

 

During the fourth quarter of 2008, the Companyrenegotiated the majority of its agreements with its distributors. Under thenew agreements, post shipment price adjustments such as SSDs have beeneliminated and parts held by distributors may only be returned for qualityreasons under the Company’s standard warranty policy. Revenue is recognizedupon shipment of both programmed and unprogrammed parts to distributors ifpersuasive 

 

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**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSEDUNAUDITED CONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

evidence of an arrangement exists,delivery has occurred, the sales price is fixed or determinable, collection ofthe resulting receivable is reasonably assured and risk of loss has been transferred.As of the end of the first quarter of 2009, all of the Company’s distributorshave signed the new agreements.

* *

*New AccountingPronouncements*

 

In April 2009, the Financial Accounting StandardsBoard issued three FASB Staff Positions, or FSPs, related to fair valuemeasurements, disclosures and other-than-temporary impairments. FSP FAS 157-4, *Determining Fair Value When the Volume and Level of Activity for theAsset or Liability Have Significantly Decreased and Identifying TransactionsThat Are Not Orderly*, provides additional guidance for estimatingfair value in accordance with Statement of Financial Accounting Standard, orSFAS, No. 157 when the volume and level of activity for an asset orliability have significantly decreased. FSP FAS 157-4 also includes guidance onidentifying circumstances that indicate a transaction is not orderly. FSP FAS115-2 and FAS 124-2, *Recognition andPresentation of Other-Than-Temporary Impairments*, amends theother-than-temporary impairment guidance in U.S. GAAP to make the guidance moreoperational and to improve the presentation of other-than-temporary impairmentsin the financial statements. Finally, FSP FAS 107-1 and Accounting PrinciplesBoard, or APB, 28-1, *Interim Disclosures AboutFair Value of Financial Instruments*, amends SFAS No. 107, *Disclosures about Fair Value of Financial Instruments*, torequire disclosures about fair value of financial instruments in interimfinancial statements as well as in annual financial statements and also amendsAPB Opinion No. 28, *Interim FinancialReporting*, to require those disclosures in all interim financialstatements. These FSPs are effective for periods ending after June 15,2009. Early adoption is permitted for periods ending after March 15, 2009;however the Company will adopt the FSPs during the second quarter of 2009. TheCompany is still evaluating the impact, if any, the FSPs will have on itsconsolidated results of operations or financial condition.

* *

***Note 3—Net Loss Per Share***

 

Basic net loss per share is computed by dividing netloss available to common stockholders by the weighted average number of commonshares outstanding during the period. Diluted net loss per share was computedusing the weighted average number of common shares outstanding during theperiod plus potentially dilutive common shares outstanding during the periodunder the treasury stock method. In computing diluted net loss per share, theaverage stock price for the period is used in determining the number of sharesassumed to be purchased from the exercise of stock options.

 

For the first quarter of 2009 and 2008, 7.2 millionand 8.7 million shares, respectively, associated with equity awards outstandingand the estimated number of shares to be purchased under the current offeringperiod of the 1999 Employee Stock Purchase Plan were not included in thecalculation of diluted net loss per share, as they were considered antidilutivedue to the net loss the Company experienced during these periods.

** **

**Note 4—Investment in Tower Semiconductor Ltd.**

 

On December 12, 2000, the Company entered intoseveral agreements with Tower, as amended, under which the Company agreed tomake a strategic investment in Tower of up to $25 million as part ofTower’s plan to build and equip a new wafer fabrication facility. During 2001and 2002, the Company paid a total of $21.3 million to Tower to fulfillits investment requirements under the agreement. In partial consideration forthe investment, the Company received 1,757,368 Tower ordinary shares with anoriginal cost of $16.6 million. Due to write-downs in prior periods as aresult of “other than temporary” declines in market value, the carrying valueof the Company’s Tower ordinary shares is $0.13 per share. The Companysold a portion of the Tower ordinary shares in fiscal 2003.

 

During 2008 the Company wrote down the value of itsinvestment in Tower shares by $1.4 million due to an “other than temporary”decline in market value, resulting in a carrying value of $0.13 per share forthe period ended December 28, 2008. This determination included factorssuch as market value and the period of time that the market had been below thecarrying value of the shares.

 

As of March 29, 2009, the Company held 1,344,543available-for-sale Tower ordinary shares with an unrealized gain of $121,000recorded in accumulated other comprehensive income on the balance sheet,representing the difference between the carrying value per share and $0.22 pershare, their market value on the last trading day of the reporting period.Pursuant to SFAS 157, the fair value of the Company’s marketable securities as 

 

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**QUICKLOGIC CORPORATION**

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

 

of March 29, 2009 was determinedbased on “Level 1” inputs as described in Note 7. The Company plans to continueto hold 450,000 of the Tower ordinary shares in order to receive preferredproduct pricing under the agreements with Tower and has recorded these sharesas a long-term investment on the balance sheets. The remaining 894,543 sharesare classified as a short-term investment on the balance sheets.

 

The Company also received $4.7 million in prepaidwafer credits in partial consideration for the investment. As of March 29,2009, the prepaid wafer credits balance was $740,000. The Company hasguaranteed capacity at Tower through at least 2010. These credits are recordedwithin long-term other assets on the balance sheets and can be applied towardwafer purchases from Tower at 15% of the value of purchases made through 2010.

** **

**Note 5—Balance Sheet Components**

** **
| ** **                                | ** ** | **March 29,  2009** | ** ** | **December 28,  2008** | ** ** |
|-------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                | ** ** | **(in thousands)**  | ** ** |
| Inventories:                              |       |                     |       |                        |       |
| Raw materials                             |       | $                        | 35         |                        | $          | 75 |   |
| Work-in-process                           |       | 1,652                    |       | 1,579                       |       |
| Finished goods                            |       | 245                      |       | 246                         |       |
|                                      |       | $                        | 1,932      |                        | $          | 1,900 |   |
|                                      |       |                     |       |                        |       |
| Other current assets:                     |       |                     |       |                        |       |
| Prepaid expenses                          |       | $                        | 704        |                        | $          | 743 |   |
| Other                                     |       | 118                      |       | 90                          |       |
|                                      |       | $                        | 822        |                        | $          | 833 |   |
|                                      |       |                     |       |                        |       |
| Property and equipment:                   |       |                     |       |                        |       |
| Equipment                                 |       | $                        | 13,335     |                        | $          | 13,881 |   |
| Software                                  |       | 8,696                    |       | 8,030                       |       |
| Furniture and fixtures                    |       | 781                      |       | 840                         |       |
| Leasehold improvements                    |       | 801                      |       | 800                         |       |
|                                      |       | 23,613                   |       | 23,551                      |       |
| Accumulated depreciation and amortization |       | (19,932                  | )          | (20,058                     | )          |
|                                      |       | $                        | 3,681      |                        | $          | 3,493 |   |
|                                      |       |                     |       |                        |       |
| Other assets:                             |       |                     |       |                        |       |
| Prepaid wafer credits                     |       | $                        | 740        |                        | $          | 846 |   |
| Other                                     |       | 43                       |       | 57                          |       |
|                                      |       | $                        | 783        |                        | $          | 903 |   |
|                                      |       |                     |       |                        |       |
| Accrued liabilities:                      |       |                     |       |                        |       |
| Employee related accruals                 |       | $                        | 1,271      |                        | $          | 1,047 |   |
| Other                                     |       | 520                      |       | 490                         |       |
|                                      |       | $                        | 1,791      |                        | $          | 1,537 |   |

 

10

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*Table of Contents*

 

**QUICKLOGIC CORPORATION**

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

 

***Note 6—Obligations***

** **
| ** **                                            | ** ** | **March 29,  2009** | ** ** | **December 28,  2008** | ** ** |
|-------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                            | ** ** | **(in thousands)**  | ** ** |
|                                                  |       |                     |       |                        |       |
| Debt and capital lease obligations:                   |       |                     |       |                        |       |
| Revolving line of credit                              |       | $                        | 2,000      |                        | $          | 2,000 |   |
| Capital leases                                        |       | 1,183                    |       | 753                         |       |
|                                                  |       | 3,183                    |       | 2,753                       |       |
| Current portion of debt and capital lease obligations |       | (2,793                   | )          | (2,753                      | )          |
|                                                  |       | $                        | 390        |                        | $          | — |   |

 

*Revolving Line of Credit*

 

Effective August 2008, the Company amended itsSecond Amended and Restated Loan and Security Agreement with Silicon ValleyBank. Terms of the amended agreement include a $6.0 million revolving lineof credit available through June 2010, as long as the Company is incompliance with the loan covenants. Upon each advance, the Company can elect avariable interest rate, which is the greater of six percent or the prime rateplus one percent, or a fixed rate which is LIBOR plus 3.50%. During the firstquarter of 2009, the Company repaid $2.0 million of revolving debt and borrowed$2.0 million of revolving debt with a variable interest rate of 5.0% as ofMarch 29, 2009.

 

The bank has a first priority security interest insubstantially all of the Company’s tangible and intangible assets to secure anyoutstanding amounts under the agreement. Under the terms of the agreement,except as noted above, the Company must maintain a minimum tangible net worthand adjusted quick ratio. The agreement also has certain restrictionsincluding, among others, on the incurrence of other indebtedness, themaintenance of depository accounts, the disposition of assets, mergers,acquisitions, investments, the granting of liens and the payment of dividends.The Company was in compliance with the financial covenants of the agreement asof the end of the current reporting period.

* *

*Capital Leases*

 

In 2007, the Company leased design software and relatedmaintenance under a two year capital lease at an imputed interest rate of 7.1%per annum. Terms of the agreement require the Company to make quarterlypayments of approximately $190,000 through November 2009. The Companyrecorded a capital asset of $1.2 million and prepaid maintenance of$256,000 that is being amortized over the term of the agreement and a capitallease obligation of $1.4 million. As of March 29, 2009, $550,000 wasoutstanding under the capital lease, all of which was classified as a currentliability.

 

In 2006, the Company entered into a capital leaseobligation in the amount of $77,000 to finance design software. The capitallease obligation had an imputed interest rate of 9.25% per annum and was repaidin annual amounts of $28,000 through January 2009. As of March 29,2009, no balance was outstanding under the capital lease.

 

In January 2009, the Company leased designsoftware tools and related maintenance under a three-year capital lease at animputed interest rate of 5.75% per annum. Terms of the agreement require theCompany to make semi-annual payments of approximately $138,000 throughAugust 2011, for a total of approximately $825,000 over the three yearsperiod. As of March 29, 2009, $632,000 was outstanding under the capitallease, of which $242,000 was classified as a current liability.

* *

***Note 7—Fair Value Measurements***

 

EffectiveDecember 31, 2007, the Company adopted the provisions of SFASNo. 157, *Fair Value Measurements*, asamended by FSP FAS 157-1, *Application of FASBStatement No. 157 to FASB Statement No. 13 and Other AccountingPronouncements That Address Fair Value Measurements for Purposes of LeaseClassification or Measurement under Statement 13*, and FSP FAS 157-2,*Effective Date of FASB Statement No. 157*.The adoption of this standard in fiscal 2008 was limited to financial assetsand liabilities. The adoption of SFAS 157 

 

11

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Table ofContents

 

**QUICKLOGIC CORPORATION**

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

 

didnot have a material effect on the Company’s financial condition or results ofoperations. The Company adopted FSP FAS 157-2 with respect to the Company’snon-financial assets and liabilities on December 29, 2008, and the adoptiondid not have an effect on its consolidated financial statements.

 

SFASNo. 157 specifies a hierarchy of valuation techniques based upon whetherthe inputs to those valuation techniques reflect assumptions other marketparticipants would use based upon market data obtained from independent sources(observable inputs) or reflect the company’s own assumption of marketparticipant valuation (unobservable inputs). The fair value hierarchy consistsof the following three levels:

 

·*Level1* — Inputs are quoted prices in active markets for identical assets orliabilities.

 

·*Level2* — Inputs are quoted prices for similar assets or liabilities in anactive market, quoted prices for identical or similar assets or 

liabilitiesin markets that are not active, inputs other than quoted prices that areobservable and market-corroborated inputs which are derived principally from orcorroborated by observable market data.

 

·*Level3* — Inputs are derived from valuation techniques in which one or moresignificant inputs or value drivers are unobservable.

 

Thefollowing table presents the Company’s financial assets that are measured atfair value on a recurring basis as of March 29, 2009 consistent with thefair value hierarchy provisions of SFAS No. 157 (in thousands):

 
| ** **            | ** ** | **As of March 29, 2009** | ** ** | **As of December 28, 2008** | ** ** |
|-----------------------|------------|----------------------------------------------|------------|-------------------------------------------------|------------|
| ** **            | ** ** | **Total**                                    | ** ** | **Level 1**                                | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** |
| Assets:               |       |                                         |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Money market funds(1) |       | $                                            | 14,808     |                                            | $          | 14,808 |   | — |   | — |   | $ | 19,376 |   | $ | 19,376 |   | — |   | — |   |
| Investment in Tower   |       |                                         |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Semiconductor Ltd.    |       | 296                                          |       | 296                                             |       | — |   | — |   | 175 |   | 175 |   | — |   | — |   |
|                  |       |                                         |       |                                            |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Total assets          |       | $                                            | 15,104     |                                            | $          | 15,104 |   | — |   | — |   | $ | 19,551 |   | $ | 19,551 |   | — |   | — |   |

 

----

(1)          Money marketfunds are presented as a part of cash and cash equivalents on the accompanyingconsolidated balance sheets.

 

The Company does not have any financial liabilitiesthat are subject to the provision of SFAS No. 157.

* *

***Note 8—Employee Stock Plans***

 

*1989 Stock Option Plan*

 

The 1989 Stock Option Plan, or 1989 Plan, provided forthe issuance of incentive and nonqualified options for the purchase of up to4.6 million shares of common stock. Options granted under the 1989 Plan have aterm of up to ten years, and typically vest at a rate of 25% of the totalgrant per year over a four year period. In September 1999, the Companyadopted the 1999 Stock Plan and no further stock option grants were made underthe 1989 Plan.

 

*1999Stock Plan*

 

The 1999 Stock Plan, or 1999 Plan, was adopted by theBoard of Directors in August 1999 and was approved by the Company’sstockholders in September 1999. As of March 29, 2009, approximately16.3 million shares were reserved for issuance under the 1999 Plan. Inaddition, each January an annual increase is added to the 1999 Plan equalto the lesser of (i) 5,000,000 shares, (ii) 5% of the Company’soutstanding shares on such date, or (iii) a lesser amount determined bythe Board of Directors. Equity awards that are cancelled, forfeited orrepurchased under the 1989 Plan also become available for grant under the1999 Plan. Equity awards granted under the 1999 Plan have a term ofup to ten years. Options typically vest at a rate of 25% one year afterthe vesting commencement date, and one forty-eighth for each month of servicethereafter. The Company has implemented a different vesting schedule inthe past and may implement different vesting schedules in the future withrespect to any new equity awards.

 

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Table of Contents

 

**QUICKLOGIC CORPORATION**

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

 

*Employee Stock Purchase Plan*

 

The 1999 Employee Stock Purchase Plan, or ESPP, wasadopted by the Board of Directors in August 1999 and was approved by theCompany’s stockholders in September 1999. As of March 29, 2009,approximately 7.0 million shares were reserved for issuance under theESPP. In addition, each August an annual increase is added to the ESPPequal to the lesser of (i) 1,500,000 shares, (ii) 4% of the Company’soutstanding shares on such date, or (iii) a lesser amount determined bythe Board of Directors.

 

Through the purchase period ending November 2005,the ESPP contained consecutive, overlapping, twenty-four month offeringperiods. Each offering period included four six month purchase periods. TheESPP permitted participants to purchase shares through payroll deductions at85% of the lower of the fair market value of the common stock at the beginningof an offering period or the end of a purchase period.

 

The Board of Directors amended the ESPP inNovember 2005 to provide 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.

 

The offering period ending May 14, 2007 commencedon January 24, 2007, once the Company had completed its stock optionreview and was current with its filings as required by the SEC and Nasdaq.Offering periods beginning May 15, 2007 or later are standard six monthoffering periods.

* *

***Note 9—Stock-Based Compensation***

 

Under SFAS 123(R),stock-based compensation expense is recognized in the Company’s consolidatedstatements of operations and includes: (i) compensation expense forstock-based compensation awards granted prior to, but not yet vested as ofJanuary 1, 2006, based on the grant date fair value estimated andre-measured upon modification in accordance with the pro forma provisions ofSFAS 123, and (ii) compensation expense for the stock-based compensationawards granted or modified subsequent to January 1, 2006, based on thegrant date fair value estimated in accordance with the provisions of SFAS123(R). The impact of SFAS 123(R) on the Company’s consolidated financialstatements for the first quarter of 2009 and 2008 was as follows (inthousands):

 
| ** **                          | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------|------------|----------------------------------|------------|
| ** **                          | ** ** | **March 29,  2009**         | ** ** | **March 30,  2008** | ** ** |
| Cost of revenue                     |       | $                                | 51         |   | $ | 65 |   |
| Research and development            |       | 88                               |       | 158 |   |
| Selling, general and administrative |       | 245                              |       | 442 |   |
| Total costs and expenses            |       | $                                | 384        |   | $ | 665 |   |

 

Theamount of stock-based compensation included in inventory for the first quarterof 2009 and 2008 was not material.

 

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** **

**QUICKLOGIC CORPORATION**

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

* *

*Valuation Assumptions*

 

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

 
| ** **              | ** ** | **Three Months Ended** | ** ** |
|-------------------------|------------|----------------------------------|------------|
| ** **              | ** ** | **March 29, 2009**     | ** ** | **March 30, 2008** | ** ** |
| Expected term (years)   |       | 4.47                             |       | 5.24 |   |
| Risk-free interest rate |       | 1.65                             | %          | 2.75 | % |
| Expected volatility     |       | 48.67                            | %          | 50.75 | % |
| Expected dividend       |       | —                           |       | — |   |

 

The weighted averageestimated fair value for options granted during the first quarter of 2009 and2008 was $0.39 and $1.41 per option, respectively. As of March 29, 2009, thefair value of unvested stock options, net of expected forfeitures, wasapproximately $3.4 million. This unrecognized stock-based compensation expenseis expected to be recorded over a weighted average period of approximately 2.65years.

* *

*Stock-Based Compensation Award Activity*

 

The following table summarizes the shares availablefor grant under the 1989 Plan and the 1999 Plan for the first quarter of 2009:

 
| ** **                        | ** ** | **Shares  Available for Grant** | ** ** |
|-----------------------------------|------------|-------------------------------------------|------------|
| ** **                        | ** ** | **(in thousands)**                   | ** ** |
| Balance at December 28, 2008 |       | 8,313                                     |       |
| Authorized                        |       | —                                    |       |
| Options granted                   |       | (36                                       | )          |
| Options forfeited or expired      |       | 355                                       |       |
| RSAs granted                      |       | —                                    |       |
| RSUs granted                      |       | —                                    |       |
| RSUs forfeited or expired         |       | 599                                       |       |
| Balance at March 29, 2009    |       | 9,231                                     |       |

* *

*Stock Options*

* *

The following table summarizes stock optionsoutstanding and stock option activity under the 1989 Plan and the 1999 Plan,and the related weighted average exercise price, for the first quarter of 2009:

 
| ** **                                         | ** ** | **Number of Shares** | ** ** | **Weighted  Average Exercise  Price** | ** ** | **Weighted  Average  Remaining Term** | ** ** | **Aggregate  Intrinsic Value** | ** ** |
|----------------------------------------------------|------------|--------------------------------|------------|--------------------------------------------|------------|--------------------------------------------|------------|-------------------------------------|------------|
| ** **                                         | ** ** | **(in thousands)**        | ** ** | ** **                                 | ** ** | **(in years)**                        | ** ** | **(in thousands)**             | ** ** |
| Balance outstanding at December 28, 2008      |       | 7,367                          |       | $                                          | 4.13       |                                       |       |                                |       |   |
| Granted                                            |       | 36                             |       | 0.94                                       |       |                                       |       |                                |       |
| Forfeited or expired                               |       | (355                           | )          | 2.80                                       |       |                                       |       |                                |       |
| Exercised                                          |       | —                         |       | —                                     |       |                                       |       |                                |       |
| Balance outstanding at March 29, 2009         |       | 7,048                          |       | $                                          | 4.18       |                                       | 5.85       |                                | $          | 800 |   |
| Exercisable at March 29, 2009                 |       | 4,609                          |       | $                                          | 5.20       |                                       | 4.25       |                                | $          | 22 |   |
| Vested and expected to vest at March 29, 2009 |       | 7,048                          |       | $                                          | 4.18       |                                       | 5.85       |                                | $          | 800 |   |

 

The aggregate intrinsic value in the table aboverepresents the total pretax intrinsic value, based on the Company’s closingstock price of $1.56 as of the end of the Company’s current reporting period,which would have been received by the option holders had all option holdersexercised their options as of that date.

 

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**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

There were no stock option exercises during the firstquarter of 2009. The total intrinsic value of options exercised during thefirst quarter of 2008 was $10,000. Total cash received from employees as aresult of employee stock option exercises during the first quarter of 2008 wasapproximately $50,000. The Company settles employee stock option exercises withnewly issued common shares. In connection with these exercises, there was notax benefit realized by the Company due to its current loss position.

 

*Restricted Stock Awards and Restricted Stock Units*

 

The Company began issuing RSAs in the second quarterof 2007 and RSUs in the third quarter of 2007. RSAs entitle the holder topurchase shares of common stock at par value during a short period of time, andpurchased shares are held in escrow until they vest. RSUs entitle the holder toreceive, at no cost, one common share for each restricted stock unit as itvests. A summary of the Company’s RSA and RSU activity and related informationare as follows:

 
| ** **                          | ** ** | **RSAs and RSUs Outstanding** | ** ** |
|-------------------------------------|------------|------------------------------------|------------|
| ** **                          | ** ** | **Number of Shares**     | ** ** | **Weighted Average  Grant Date Fair Value** | ** ** |
| ** **                          | ** ** | **(in thousands)**            | ** ** | ** ** | ** ** |
| Nonvested at December 28, 2008 |       | 654                                |       | $ | 3.35 |   |
| Granted                             |       | —                             |       | — |   |
| Vested                              |       | —                             |       | — |   |
| Forfeited                           |       | (599                               | )          | 3.45 |   |
| Nonvested at March 29, 2009    |       | 55                                 |       | $ | 2.26 |   |

 

As of March 29, 2009, the unrecognizedstock-based compensation expense related to outstanding performance based RSUswhich are not currently expected to vest, was $26,000. The Company willrecognize this expense to the extent it determines these performance based RSUsare likely to vest.

 

*Employee Stock Purchase Plan*

 

The weighted average estimated fair value, as definedby SFAS 123(R), of rights issued pursuant to the Company’s ESPP during thefirst quarter of 2009 and 2008 was $0.33 and $1.15 per right, respectively.

 

The following weighted averageassumptions are included in the estimated fair value calculations for rights topurchase stock under the ESPP as of the grant date:

 
| ** **              | ** ** | **Three Months Ended**  | ** ** |
|-------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **March 29, 2009** | ** ** | **March 30, 2008** | ** ** |
| Expected life (months)  |       | 6.00                    |       | 6.00 |   |
| Risk-free interest rate |       | 0.90                    | %          | 3.56 | % |
| Volatility              |       | 112.92                  | %          | 50.00 | % |
| Dividend yield          |       | —                  |       | — |   |

 

As of March 29, 2009, the unrecognizedstock-based compensation expense relating to the Company’s ESPP was $11,000 andis expected to be recognized over a weighted average period of approximately1.5 months.

 

**Note 10—Income Taxes**

 

In the first quarter of 2009 and 2008, the Companyrecorded income tax expense of $4,000 and $34,000, respectively, which consisted primarily of income taxes onforeign operations offset by the monetization of prior year federal researchcredits.

 

Dueto the uncertainties surrounding the realization of the deferred tax assetsresulting from the Company’s accumulated deficit and net tax losses in previousyears, the Company has provided a full valuation allowance against theassociated deferred tax assets. The Company will continue to assess therealizability of the deferred tax assets in future periods.

 

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**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

TheCompany had approximately $70,000 and $66,000 of unrecognized tax benefits atMarch 29, 2009 and December 28, 2008, respectively. The Companyrecognizes interest and penalties related to uncertain tax positions in incometax expense. As of March 29, 2009, the Company had approximately $9,000 ofaccrued interest and penalties related 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 11—Information Concerning Product Lines,Geographic Information and Revenue Concentration**

 

The Company identifies itsbusiness segments based on business activities, management responsibility andgeographic location. For all periods presented, the Company operated in a singlebusiness segment.

 

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

 
| ** **                    | ** ** | **Three Months Ended**  | ** ** |
|-------------------------------|------------|-------------------------|------------|
| ** **                    | ** ** | **March 29, 2009** | ** ** | **March 30, 2008** | ** ** |
| *Revenue by product line(1):* |       |                    |       |   |   |
| New products                  |       | $                       | 658        |   | $ | 2,598 |   |
| Mature products               |       | 3,606                   |       | 4,324 |   |
| End-of-life products          |       | 288                     |       | 4,101 |   |
| Total revenue                 |       | $                       | 4,552      |   | $ | 11,023 |   |

 

----

(1)            For allperiods presented: New products include ArcticLink, PolarPro II, PolarPro,EclipseTM II and QuickPCI® II products. Mature products include pASIC® 3, QuickRAM®, Eclipse, QuickDSP and QuickFC products, as well as royaltyrevenue, programming hardware and software. End-of-life products includepASIC 1, pASIC 2, V3, QuickMIPS and QuickPCI products.

 

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

 
| ** **              | ** ** | **Three Months Ended**  | ** ** |
|-------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **March 29, 2009** | ** ** | **March 30, 2008** | ** ** |
| *Revenue by geography:* |       |                    |       |   |   |
| United States           |       | $                       | 2,210      |   | $ | 4,543 |   |
| Europe                  |       | 997                     |       | 1,769 |   |
| Taiwan                  |       | (5                      | )          | 2,059 |   |
| Japan                   |       | 366                     |       | 874 |   |
| China                   |       | 320                     |       | 1,236 |   |
| Rest of North America   |       | 217                     |       | 385 |   |
| Rest of Asia Pacific    |       | 447                     |       | 157 |   |
| Total revenue           |       | $                       | 4,552      |   | $ | 11,023 |   |

 

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

 
| ** **                | ** ** | **Three Months Ended**  | ** ** |
|---------------------------|------------|-------------------------|------------|
| ** **                | ** ** | **March 29, 2009** | ** ** | **March 30, 2008** | ** ** |
| Distributor “A” |       | 29                      | %          | 16 | % |
| Distributor “B” |       | 14                      | %          | 18 | % |
| Customer “A”    |       | *                       |       | 17 | % |
| Customer “B”    |       | 18                      | %          | 12 | % |
| Customer “C”    |       | *                       |       | 11 | % |

 

----

*Represents less than 10% of revenue for the period presented.

 

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**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

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

 
| ** **                | ** ** | **March 29,  2009** | ** ** | **December 28,  2008** | ** ** |
|---------------------------|------------|--------------------------|------------|-----------------------------|------------|
| Distributor “A” |       | 15                       | %          | 20                          | %          |
| Distributor “B” |       | 17                       | %          | 13                          | %          |
| Customer “C”    |       | 17                       | %          | *                           |       |
| Customer “D”    |       | *                        |       | 12                          | %          |
| Customer “E”    |       | 13                       | %          | *                           |       |

 

----

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

 

Asof March 29, 2009, less than 10% of the Company’s long-lived assets,including property and equipment and other assets, were located outside theUnited States.

 

**Note 12—Commitments and Contingencies**

 

Certain of the Company’s wafer manufacturers require theCompany to forecast wafer starts several months in advance. The Company iscommitted to take delivery of and pay for a portion of forecasted wafervolume. As of March 29, 2009 and December 28, 2008, the Companyhad $4.7 million and $4.8 million, respectively, of outstandingcommitments for the purchase of wafer inventory.

 

The Company leases, with an option to renew, its primaryfacility under a non-cancelable operating lease that expires in 2012. TheCompany has subleased a portion of its primary facilities to a tenant untilMarch 2009. In addition, the Company rents development facilities inCanada and India as well as sales offices in Europe and Asia. Total rentexpense, net of sublease income, during the first quarter of 2009 and 2008 was approximately$145,000 and $180,000, respectively.

 

Future minimum lease commitmentsunder the Company’s operating leases, net of sublease income and excludingproperty taxes and insurance are as follows:

 
| ** **          | ** ** | **Operating Leases** | ** ** |
|---------------------|------------|----------------------|------------|
| ** **          | ** ** | **(in  thousands)**  | ** ** |
| Fiscal Years        |       |                 |       |
| Rest of 2009        |       | $                    | 422        |   |
| 2010                |       | 416                  |       |
| 2011                |       | 396                  |       |
| 2012                |       | 396                  |       |
| 2013 and thereafter |       | —               |       |
|                |       | $                    | 1,630      |   |

 

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**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

**Note 13—Litigation**

 

On October 26, 2001, a putative securities class actionwas filed in the U.S. District Court for the Southern District of New Yorkagainst certain investment banks that underwrote QuickLogic’s initial publicoffering, QuickLogic and some of QuickLogic’s officers and directors. Thecomplaint alleges excessive and undisclosed commissions in connection with theallocation of shares of common stock in QuickLogic’s initial and secondarypublic offerings and artificially high prices through “tie-in” arrangementswhich required the underwriters’ customers to buy shares in the aftermarket atpre-determined prices in violation of the federal securities laws. Plaintiffsseek an unspecified amount of damages on behalf of persons who purchasedQuickLogic’s stock pursuant to the registration statements betweenOctober 14, 1999 and December 6, 2000. Various plaintiffs have filedsimilar actions asserting virtually identical allegations against over 300other public companies, their underwriters, and their officers and directorsarising out of each company’s public offering. These actions, including theaction against QuickLogic, have been coordinated for pretrial purposes andcaptioned *In re Initial Public OfferingSecurities Litigation, 21 MC 92*.

 

In June 2004, a stipulation of settlement and release ofclaims against the issuer defendants, including QuickLogic, was submitted tothe court for approval. On August 31, 2005, the Court preliminarilyapproved the settlement. In December 2006, the appellate Court overturnedthe certification of classes in the six test cases that were selected by theunderwriter defendants and plaintiffs in the coordinated proceedings. Becauseclass certification was a condition of the settlement, it was unlikely that thesettlement would receive final Court approval. On June 25, 2007, the Courtentered an order terminating the proposed settlement based upon a stipulationamong the parties to the settlement. Plaintiffs have filed amended masterallegations and amended complaints, in the six test cases. On March 26,2008, the Court denied the defendants’ motion to dismiss the amendedcomplaints.

 

The parties recently reached a global settlement of thelitigation. On April 2, 2009, plaintiffs filed a motion for preliminaryapproval of the settlement. Under the settlement, which remains subject toCourt approval, the insurers would pay the full amount of settlement shareallocated to the Company, and the Company would bear no financial liability.The Company, as well as the officer and director defendants who were previouslydismissed from the action pursuant to tolling agreements, would receivecomplete dismissals from the case. It is uncertain whether the settlement willreceive final Court approval. If the settlement does not receive final Courtapproval, and litigation against the Company continues, the Company believes ithas meritorious defenses and intends to defend the action vigorously.

 

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

 

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

 

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**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS — (Continued)**

 

**Note 14—Restructuring Charges**

 

In April 2008, the Company decided to outsource certaindevelopment functions that were previously performed in-house. Thisreorganization resulted in a headcount reduction of approximately 13% ofemployees worldwide. In June 2008, the Company announced the completion ofits CSSP focused operational realignment which included an additional 17%reduction in headcount worldwide, resulting in a total reduction in worldwideheadcount of approximately 30%. The purpose of the operational realignment isto lower fixed costs in order to conserve cash, to reduce the Company’sbreak-even revenue level and enable a quicker return to profitability, toprovide optimal profitability scaling with revenue growth and to providegreater headroom for discretionary costs to enable new product revenue growth.Our restructuring liabilities were included in the “Accrued Liabilities” lineitem in our consolidated balance sheets as of March 29, 2009 andDecember 28, 2008, and the remaining balance is expected to be paid by theend of fiscal year 2009.

 

| ** **                        | ** ** | **Restructuring  Liabilities** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **(in thousands)**        | ** ** |
| Balance at December 28, 2008 |       | $                              | 121        |   |
| Payments                          |       | (20                            | )          |
| Balance at March 29, 2009    |       | $                              | 101        |   |

 

**Note 15—Subsequent Events**

 

OnApril 22, 2009, the stockholders approved the 2009 Stock Plan and the 2009Employee Stock Purchase Plan at the Annual Meeting of Stockholders. EffectiveApril 22, 2009, no further equity awards may be granted under the 1999Stock Plan. The 1999 ESPP will expire after the final share purchase is made onMay 14, 2009.

 

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**Item 2.    Management’sDiscussion and Analysis of Financial Condition and Results of Operations**

 

*The followingManagement’s Discussion and Analysis of Financial Condition and Results ofOperations, as well as information contained in “Risk Factors” in Part II,Item 1A and elsewhere in this Quarterly Report on Form 10-Q, contains“forward-looking statements” within the meaning of Section 27A of theSecurities Act of 1933, as amended, and Section 21E of the SecuritiesExchange Act of 1934, as amended.**We intend that these forward-looking statements besubject to the safe harbors created by those provisions. Forward-lookingstatements are generally written in the future tense and/or are preceded bywords such as “will,” “may,” “should,” “forecast,” “could,” “expect,”“suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words.Forward-looking statements include statements regarding (1) the conversionof our design opportunities into revenue, (2)  our revenue levels,including the commercial success of our Customer Specific Standard Products, or**CSSPs, and new products,and the effect of our end-of-life products, (3) ourliquidity, (4) our gross profit and factors that affect gross profit,(5) our level of operating expenses, (6) our research and developmentefforts, (7) our partners and suppliers and (8) industry trends. The following discussion should be read inconjunction with the attached condensed unaudited consolidated financialstatements and notes thereto, and with our audited consolidated financialstatements and notes thereto for the fiscal year ended December 28, 2008,found in our Annual Report on Form 10-K filed with the Securities and ExchangeCommission, or SEC, on March 11, 2009.*

 

**Overview**

 

QuickLogic Corporation was founded in 1988 andreincorporated in Delaware in 1999. We develop and market low powercustomizable semiconductor solutions that enable customers to adddifferentiated features and capabilities to their mobile, prosumer (derivedfrom the term “professional consumer”), consumer and industrialproducts. We are a fabless semiconductor company that operates in a singleindustry segment where we design, market and support primarily CustomerSpecific Standard Products, or CSSPs, and, secondarily, Field Programmable GateArrays, or FPGAs, associated design software and programming hardware. OurCSSPs are customized semiconductor building blocks created from our newsolution platforms including ArcticLink® II, ArcticLink,PolarPro® II, PolarPro, EclipseTM II and QuickPCI® II (all of which fall into our new productcategory); our mature product family includes pASIC® 3, QuickRAM®, Eclipse, and EclipsePlus, as wellas royalty revenue, programming hardware and design software; our end-of-lifeproduct family includes pASIC 1, pASIC 2, V3, QuickMIPS, QuickPCI and QuickFC.

 

We are marketing CSSPs to OriginalEquipment Manufacturers, or OEMs, and Original Design Manufactures, or ODMs,offering differentiated mobile products. Our target mobile markets include:

 

*·*                  Cellular— includingmultimedia and smartphones;

* *

*·*                  Computing — including MobileInternet Devices, or MIDs, Netbooks, Ultra Mobile PCs, or UMPCs, industrialpersonal digital assistants, or PDAs, handheld point-of-sales, or POS,terminals and broadband 3G data cards; and

* *

*·*                  ConsumerElectronics —including portable media players, or PMPs, personal navigation devices, orPNDs, and wireless hard disk drives or wireless storage devices.

* *

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

 

In addition to working directly with our customers, wepartner with other companies with expertise in certain technologies to developadditional intellectual property, reference platforms and system software toprovide application solutions. We also work with mobile processormanufacturers, and companies that supply storage, networking or graphicscomponents for embedded systems. The depth of these relationships variesdepending on the partner and the dynamics of the end market being targeted, butis typically a co-marketing program that includes joint account calls,promotional activities and/or engineering collaboration and developments, suchas reference designs.

 

During the first quarter we worked with our partnersto finish development of our latest ArcticLink II VX4 solution platform. The VXfamily embeds the second generation Visual Enhancement Engine, or VEETM, ProvenSystem Block (PSB), which improves the user’s video viewing experience whileextending system battery life by allowing reduction in the power used by amobile device’s single biggest consumer of power, the backlight. The VX4platform also embeds the Qualcomm developed MDDI serial interface for ease ofconnection with their mobile processors.

 

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

 

Although the semiconductor industry as a whole isexpected to decline in 2009 with modest growth in 2010, consumer products are astrong driver for semiconductor sales, and the needs of the consumer markethave a unique set of requirements. One important trend in the consumer marketis towards mobile, handheld devices. The market for mobile, handheld devices islarge. In 2008, more than 1.2 billion cellular phones, ranging from multimediato ultra low cost phones, were sold (according to iSuppli, a marketintelligence company).  More importantly,iSuppli predicts that the smartphone segment of the overall cellular phonesegment will increase 62% over the next three years, from 219 million units in2008 to 356 million units, by the end of 2011. In fact, the smartphone segmentis predicted to be one of the higher growth segments during the currenteconomic downturn.

 

Important industry trends affecting the large marketfor mobile devices include the use of platforms to enable rapid productproliferation, the need for high bandwidth solutions enabling mobile Internetand streaming video, miniaturization and the need to increase battery life.Another important trend is shrinking product life cycles, which drives a needfor faster, lower risk product development. There is intense pressure on thetotal product cost of these devices, including per unit component costs andnon-recurring development costs. As more people experience the advantages of amobile lifestyle at home, they demand the same advantages in their professionallives, and while they are “on the go”, or mobile. Therefore, we believe thatthese trends toward mobile, handheld products which have a small form factorand maximize battery life will also be evident in other segments such asindustrial, medical and military.

 

**Critical Accounting Estimates**

 

Themethods, estimates and judgments we use in applying our most criticalaccounting policies have a significant impact on the results we report in ourconsolidated financial statements. The SEC has defined critical accountingpolicies as those that are most important to the portrayal of our financialcondition and results of operations and require us to make our most difficultand subjective judgments, often as a result of the need to make estimatesof matters that are inherently uncertain. Based on this definition, ourcritical policies include revenue recognition, valuation of inventoriesincluding identification of excess quantities and product obsolescence,allowance for doubtful accounts, valuation of investments, valuation of long-livedassets, measurement of stock-based compensation, accounting for income taxes,fair value measurements of financial assets and liabilities, and measuringaccrued liabilities. We believe that we apply judgments and estimates in aconsistent manner and that such consistent application results in consolidatedfinancial statements and accompanying notes that fairly represent all periodspresented. However, any factual errors or errors in these judgments andestimates may have a material impact on our statements of operations andfinancial condition. For a discussion of critical accounting policies andestimates, please see Item 7 in our Annual Report on Form 10-K forthe fiscal year ended December 28, 2008 filed with the SEC on March 11,2009.

 

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

 

**Results of Operations**

 

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

 
| ** **                          | ** ** | **Three Months Ended**  | ** ** |
|-------------------------------------|------------|-------------------------|------------|
| ** **                          | ** ** | **March 29, 2009** | ** ** | **March 30, 2008** | ** ** |
| Revenue                             |       | 100.0                   | %          | 100.0 | % |
| Cost of revenue (1)                 |       | 40.0                    |       | 47.7 |   |
| Gross profit                        |       | 60.0                    |       | 52.3 |   |
| Operating expenses:                 |       |                    |       |   |   |
| Research and development            |       | 35.4                    |       | 25.6 |   |
| Selling, general and administrative |       | 58.0                    |       | 39.2 |   |
| Loss from operations                |       | (33.4                   | )          | (12.5 | ) |
| Interest expense                    |       | (0.5                    | )          | (0.6 | ) |
| Interest income and other, net      |       | (1.0                    | )          | 0.9 |   |
| Loss before income taxes            |       | (34.9                   | )          | (12.2 | ) |
| Provision for income taxes          |       | (0.1                    | )          | 0.3 |   |
| Net loss                            |       | (35.0                   | )%         | (12.5 | )% |

 

----

(1) Includes $178,000 and$956,000 of costs for the write-down of inventories and related charges, whichrepresents 3.9% and 8.7% of revenue for the first quarter of 2009 and 2008,respectively.

 

**Three Months Ended March 29, 2009 and March 30,2008**

 

*Revenue*

 

The table below sets forththe changes in revenue from the three months ended March 29, 2009 to thethree months ended March 30, 2008 (in thousands, except percentage data):

 
| ** **           | ** ** | **Three Months Ended** | ** ** | **Three Months Ended**               | ** ** | ** ** | ** ** | ** **                           | ** ** |
|----------------------|------------|----------------------------------|------------|--------------------------------------|------------|------------|------------|--------------------------------------|------------|
| ** **           | ** ** | **March 29, 2009**          | ** ** | **March 30, 2008**              | ** ** | ** ** | ** ** | ** **                           | ** ** |
| ** **           | ** ** | **Amount**                       | ** ** | **% of Total****Revenues** | ** ** | **Amount** | ** ** | **% of Total****Revenues** | ** ** | **Year-Over-Year Change** | ** ** |
| ** **           | ** ** | ** **                       |       |                                 |       |       |       |                                 |       |   |   |   |   |
| New products         |       | $                                | 658        |                                 | 15%        |       | $          | 2,598                                |       | 24% |   | $ | (1,940 | ) | (75 | )% |
| Mature products      |       | 3,606                            |       | 79%                                  |       | 4,324      |       | 39%                                  |       | (718 | ) | (17 | )% |
| End-of-life products |       | 288                              |       | 6%                                   |       | 4,101      |       | 37%                                  |       | (3,813 | ) | (93 | )% |
|                 |       |                             |       |                                 |       |       |       |                                 |       |   |   |   |   |
| Total revenue        |       | $                                | 4,552      |                                 | 100%       |       | $          | 11,023                               |       | 100% |   | $ | (6,471 | ) | (59 | )% |

 

Forall periods presented, new products include ArcticLink, PolarPro, Eclipse IIand 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.

 

 Thedecline in revenue was due to declines in both our legacy and new productlines. Our end-of-life product revenue decreased as a result of the end-of-lifeof our pASIC 1, V3, QuickMIPS and QuickPCI products which was announced in2007. The decline in new product revenue was caused by the expected end of lifeof a product family of a personal navigation device, or PND, manufacturer andby delays in new product production ramp-up with several major customers. Thedecline in mature product revenue resulted from the general economic slowdown.Our mature product revenue decreased as a result of lower customer demand forpASIC 3 and QuickRAM products. One international customer, purchasing primarilypASIC 3 devices, accounted for 18% and 12% of total revenue in the firstquarters of 2009 and 2008, respectively.

 

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

 

Our decision to end-of-life our pASIC 1, pASIC 2 andV3 products was driven by the decision of certain of our suppliers not to renewsupply agreements for these products. We announced additional end-of-lifeproducts in 2007 as a result of our decision to focus on customers in thehandheld mobile and military markets. In the second quarter of 2007, weannounced the end-of-life of our QuickPCI products due to assembly capacityconsiderations and asked customers to take delivery of lifetime buy ordersbefore the end of 2007. In the fourth quarter of 2007, we announced theend-of-life of our QuickMIPS products due to a small customer base and askedcustomers to take delivery of these products between now and the first half of2008. We currently expect that revenue from end-of-life products will continueto decline and will not be significant in future quarters.

 

In order to grow our revenue from its current level,we are dependent upon increased revenue from our existing products, especiallyrevenue from CSSPs designed using our ArcticLink and PolarPro solutionplatforms and the development of additional new products and CSSPs.

 

We continue to seek to expand our revenue, includingthe pursuit of high volume sales opportunities in the consumer market segment,by providing CSSPs incorporating intellectual property such as boot frommanaged NAND or industry standard interfaces such as USB 2.0 OTG, SDIO andintegrated drive electronics, or IDE. Our industry is characterized by intenseprice competition and by lower margins as order volumes increase. While winninglarge volume sales opportunities will increase our revenue, we believe theseopportunities may decrease our gross profit as a percentage of revenue.

 

*Gross Profit*

 

The table below sets forththe changes in gross profit from the three months ended March 29, 2009 tothe three months ended March 30, 2008 (in thousands, except percentagedata):

 
| ** **      | ** ** | **Three Months Ended** | ** ** | **Three Months Ended**               | ** ** | ** ** | ** ** | ** **                           | ** ** |
|-----------------|------------|----------------------------------|------------|--------------------------------------|------------|------------|------------|--------------------------------------|------------|
| ** **      | ** ** | **March 29, 2009**          | ** ** | **March 30, 2008**              | ** ** | ** ** | ** ** | ** **                           | ** ** |
| ** **      | ** ** | **Amount**                       | ** ** | **% of Total****Revenues** | ** ** | **Amount** | ** ** | **% of Total****Revenues** | ** ** | **Year-Over-Year Change** | ** ** |
| ** **      | ** ** | ** **                       |       |                                 |       |       |       |                                 |       |   |   |   |   |
| Revenue         |       | $                                | 4,552      |                                 | 100%       |       | $          | 11,023                               |       | 100% |   | $ | (6,471 | ) | (59 | )% |
| Cost of revenue |       | 1,819                            |       | 40%                                  |       | 5,258      |       | 48%                                  |       | (3,439 | ) | (65 | )% |
|            |       |                             |       |                                 |       |       |       |                                 |       |   |   |   |   |
| Gross Profit    |       | $                                | 2,733      |                                 | 60%        |       | $          | 5,765                                |       | 52% |   | $ | (3,032 | ) | (53 | )% |

 

The decline in revenue accounted for $4.7 million ofthe decline in gross profit in the first quarter of 2009 as compared to thefirst quarter of 2008. The first quarter 2009 revenue decline was offset by$637,000 due to a change in product mix towards mature products which carryhigher gross margins than new products; $778,000 due to a reduction of excessand obsolescence provisions to $178,000 in the first quarter of 2009 from$956,000 in the first quarter of 2008; and $250,000 due to a change tofavorable purchase price variances of $7,000 in the first quarter of 2009 fromunfavorable purchase price variances of $243,000 in the first quarter of2008.  The sale of previously reservedinventories contributed $121,000, or 2.7% of revenue, to gross profit in thefirst quarter of 2009 and $230,000, or 2.1% of revenue, in the first quarter of2008.

 

Our semiconductor products have historically had along product life cycle and obsolescence has not been a significant factor inthe valuation of inventories. However, as we pursue opportunities in the mobilemarket and continues to develop new CSSPs and products, we believe our productlife cycle will be shorter and increase the potential for obsolescence. We alsoregularly review the cost of inventories against estimated market value andrecord a lower of cost or market reserve for inventories that have a cost inexcess of estimated market value, which could have a material impact on ourgross margin and inventory balances based on additional write-downs to netrealizable value or a benefit from inventories previously written down.

 

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

 

*Operating Expenses*

 

The table below sets forththe changes in operating expenses from the three months ended March 29,2009 to the three months ended March 30, 2008 (in thousands, exceptpercentage data):

 
| ** **               | ** ** | **Three Months Ended  March 29, 2009** | ** ** | **Three Months Ended  March 30, 2008** | ** ** | ** ** | ** ** | ** **               | ** ** |
|--------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|------------|------------|--------------------------|------------|
| ** **               | ** ** | ** **                                                 | ** ** | **% of Total**                                   | ** ** | ** ** | ** ** | **% of Total** | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **               | ** ** | **Amount**                                                 | ** ** | **Revenues**                                               | ** ** | **Amount** | ** ** | **Revenues**             | ** ** | **Year-Over-Year Change** | ** ** |
| R&D expense          |       | $                                                          | 1,612      |                                                       | 35%        |       | $          | 2,821                    |       | 26% |   | $ | (1,209 | ) | (43 | )% |
| SG&A expense         |       | 2,643                                                      |       | 58%                                                        |       | 4,320      |       | 39%                      |       | (1,677 | ) | (39 | )% |
|                     |       |                                                       |       |                                                       |       |       |       |                     |       |   |   |   |   |
| Total operating expenses |       | $                                                          | 4,255      |                                                       | 93%        |       | $          | 7,141                    |       | 65% |   | $ | (2,886 | ) | (40 | )% |

 

*Research and Development*

 

Ourresearch and development expenses consist primarily of personnel, overhead andother costs associated with engineering process improvements, programmablelogic design, ASSP design and software development. The decrease in R&Dexpenses results primarily from measures undertaken in the second quarter of2008 to change certain development activities to an on-demand, outsourced modelfrom an in-house, fixed cost model. As a result of this decision, our researchand development staffing in Toronto, Canada was reduced during the secondquarter of 2008. The $1.2 million quarter to quarter decrease in R&Dexpenses is attributable primarily to a $710,000 or 56% decrease incompensation expenses due to reduced headcount; a $421,000 or 46% decrease inexpense allocations to R&D such as facilities and other corporate commoncosts; and an $89,000 or 47% decrease in equipment and supplies.

 

*Selling, General and Administrative Expense*

 

Ourselling, general and administrative expenses consist primarily of personnel andrelated overhead costs for sales, marketing, finance, administration, humanresources and general management.  The $1.7 million quarter toquarter decrease in SG&A expenses resulted from our effort to realignresources with our expected revenue outlook and was primarily due to a $882,000or 33% decrease in compensation expenses as a result of headcount reductions; a$681,000 or 57% decrease in outside services such as consulting, temporary helpand legal, and a $115,000 or 42% decrease in travel and entertainment expenses.

 

*Interestand Other Income (Expense), net*

 

The table below sets forththe changes in Interest and Other Income (Expense), net, from the three monthsended March 29, 2009 to the three months ended March 30, 2008:

 
| ** **       | ** ** | **Three Months Ended** | ** ** |
|------------------|------------|----------------------------------|------------|
| ** **       | ** ** | **March 29,  2009**         | ** ** | **March 30,  2008** | ** ** |
| ** **       | ** ** | **(in thousands)**          | ** ** |
|             |       |                             |       |   |   |
| Interest expense |       | $                                | (24        | ) | $ | (71 | ) |
| Interest income  |       | 16                               |       | 113 |   |
| Other expense    |       | (62                              | )          | (9 | ) |
|             |       | $                                | (70        | ) | $ | 33 |   |

 

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

 

The decrease in interest expense is due primarily tothe reduction of our average debt obligation to $968,000 in the first quarterof 2009 from $4.7 million in the first quarter of 2008. The decrease ininterest income is due primarily to the drop in investment yields between the firstquarter of 2008 and the first quarter of 2009.

 

We conduct a portion of our research and developmentactivities in Canada and India and we have sales and marketing activities invarious countries outside of the United States. Most of these internationalexpenses are incurred in local currency. Foreign currency transaction gains andlosses are included in interest income and other, net, as they occur. We do notuse derivative financial instruments to hedge our exposure to fluctuations inforeign currency and, therefore, our results of operations are and willcontinue to be susceptible to fluctuations in foreign exchange gains or losses.

* *

*Provision forIncome Taxes.*

* *
| ** **           | ** ** | **Three Months Ended** | ** ** |
|----------------------|------------|----------------------------------|------------|
| ** **           | ** ** | **March 29,  2009**         | ** ** | **March 30,  2008** | ** ** |
| ** **           | ** ** | **(in thousands)**          | ** ** |
|                 |       |                             |       |   |   |
| Income tax provision |       | $                                | 4          |   | $ | 34 |   |
|                      |            |                                  |            |  |  |  |  |

 

The income tax provision for the first quarters of2009 and 2008 are primarily for our foreign operations which are cost-plusentities offset by the monetization ofprior year federal research credits. As of the end of the first quarterof 2009, our ability to utilize our income tax loss carryforwards in futureperiods is uncertain and, accordingly, we recorded a full valuation allowanceagainst the related US tax benefit. We will continue to assess therealizability of deferred tax assets in future periods.

##### *** ***

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

 

We have financed our operating losses and capitalinvestments through sales of common stock, private equity investments, capitaland operating leases, bank lines of credit and cash flow from operations. As ofMarch 29, 2009, our principal sources of liquidity consisted of our cashand cash equivalents of $18.2 million, available credit under our revolvingline of credit with Silicon Valley Bank of $4.0 million (assuming wecontinue to be in compliance with the loan covenant), and our investment inTower with a market value of approximately $296,000.

 

Most of our cash and cash equivalents were invested ina US Treasury money market fund rated AAAm/Aaa. Our interest-bearing debtconsisted of $2.0 million of revolving debt outstanding from SiliconValley Bank and $1.2 million outstanding under capital leases (see Note 6). Theterm of the revolving debt facility runs until June 2010. Upon eachadvance, the Company can elect a variable interest rate, which is the greaterof six percent or the prime rate plus one percent, or a fixed rate which is theLIBOR plus 3.50%. We were in compliance with all loan covenants as of the endof the current reporting period. Our investment in Tower had a market value ofapproximately $296,000 as of March 29, 2009. We intend to hold 450,000 ofthese shares, valued at $99,000 as of the end of the first quarter of 2009 inorder to obtain preferred wafer pricing from Tower.

* *

*Net cash from operating activities*

 

Net cash used for operating activities was $841,000 inthe first quarter of 2009. The cash used for operating activities resultedprimarily from a net loss of $1.6 million, which included $755,000 ofnon-cash charges. These non-cash charges included stock-based compensation of$384,000, depreciation and amortization of $468,000, a provision for inventoryexcess and obsolescence of $178,000, utilization of wafer credits of $106,000and an asset write-off of $13,000. In addition, changes in working capitalaccounts in the first quarter of 2009 accounted for used cash of $408,000 whichconsisted of a decline in current assets of $503,000,000 partially offset by anincrease in current liabilities of $95,000 in the first quarter of 2009. Thedecrease in current assets resulted from a decrease in accounts receivable of$405,000 due primarily to lower shipments in the last month of the quarter anda decrease in inventories of $211,000 partially offset by an increase in othercurrent assets of $113,000. The increase in current liabilities resulted froman increase in accounts payable of $117,000 and an increase in accruedliabilities of $255,000 partially offset by a decrease in deferred income onshipments to distributors of $277,000.

 

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

 

Net cash used for operating activities was $642,000 inthe first quarter of 2008. The cash used for operating activities resultedprimarily from a net loss of $1.4 million, which included $2.4 million ofnon-cash charges. These non-cash charges included the write-down ofinventories, primarily for excess quantities, in the amount of $956,000,stock-based compensation of $665,000, depreciation and amortization of $646,000and a decrease in wafer credits of $113,000. In addition, changes in workingcapital accounts used cash of $1.7 million as a result of a decrease inaccounts payable of $1.4 million due to timing of expenditures and purchases ofinventories and an increase in accounts receivable of $1.1 million dueprimarily to higher shipments in the last month of the quarter. These cash useswere partially offset by an increase in accrued liabilities of $447,000, adecrease in inventories of $245,000 and an increase in deferred income androyalty revenue of $92,000.

* *

*Net cash from investing activities*

 

Net cash used for investing activities for the firstquarter of 2009 and 2008 was $5,000 and $252,000, respectively, as a result ofcapital expenditures made primarily to acquire software used in the developmentand production of our products and solutions. Capital expenditures, which arelargely driven by the development of new products and manufacturing levels, areprojected to be less than $0.9 million during the rest of fiscal year2009.

 

*Net cash from financing activities*

 

Net cash used for financing activities was $336,000for the first quarter of 2009, resulting from scheduled payments under theterms of our debt and capital lease obligations. During the first quarter of2009, we repaid $2.0 million of revolving debt and borrowed $2.0 million ofrevolving debt with a variable interest rate of 5.0%.

 

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

 

We require substantial cash to fund our business.However, we believe that our existing cash resources will be sufficient to fundoperations and capital expenditures, and provide adequate working capital forat least the next twelve months. After the next twelve months, our cashrequirements will depend on many factors, including our level of revenue andgross profit, the market acceptance of our existing and new products, thelevels at which we maintain inventories and accounts receivable, costs ofsecuring access to adequate manufacturing capacity, new product developmentefforts, capital expenditures and the level of our operating expenses.

 

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

 

**Contractual Obligations and Commercial Commitments**

 

The following table summarizes our contractualobligations and commercial commitments as of March 29, 2009 and the effectsuch obligations and commitments are expected to have on our liquidity and cashflows in future fiscal periods (in thousands):

 
| ** **                                                   | ** ** | **Payments Due by Period** | ** ** |
|--------------------------------------------------------------|------------|-------------------------------------------|------------|
| ** **                                                   | ** ** | **Total**                                 | ** ** | **Less than  1 Year** | ** ** | **1-3**

**Years** | ** ** | **More than  3 Years** | ** ** |
| *Contractual cash obligations:*                              |       |                                      |       |   |   |   |   |   |   |
| Operating leases                                             |       | $                                         | 1,630      |   | $ | 541 |   | $ | 792 |   | $ | 297 |   |
| Wafer purchases(1)                                           |       | 4,681                                     |       | 4,681 |   | — |   | — |   |
| Other purchase commitments                                   |       | 2,196                                     |       | 2,046 |   | 150 |   | — |   |
| *Total contractual cash obligations*                         |       | 8,507                                     |       | 7,268 |   | 942 |   | 297 |   |
| * *                                                     |       |                                      |       |   |   |   |   |   |   |
| *Other commercial commitments*(2)*:*                         |       |                                      |       |   |   |   |   |   |   |
| Revolving line of credit                                     |       | 2,000                                     |       | 2,000 |   | — |   | — |   |
| Capital lease obligations                                    |       | 1,183                                     |       | 793 |   | 390 |   | — |   |
| *Total commercial commitments*                               |       | 3,183                                     |       | 2,793 |   | 390 |   | — |   |
| Total contractual obligations and commercial commitments (3) |       | $                                         | 11,690     |   | $ | 10,061 |   | $ | 1,332 |   | $ | 297 |   |

 

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| (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 $4.7 million  include both firm purchase commitments and a portion of our forecasted wafer  starts as of March 29, 2009. |
|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
|   |                                                                                                                                                                                                                                                                                                                                                         |
| (2)    | Other  commercial commitments are included as liabilities on our balance sheets as  of March 29, 2009.                                                                                                                                                                                                                                                  |
|   |                                                                                                                                                                                                                                                                                                                                                         |
| (3)    | Does  not include unrecognized tax benefits of $70,000 as of March 29, 2009.  See Note 10.                                                                                                                                                                                                                                                              |

 

*Concentration ofSuppliers*

 

Wedepend on a limited number of contract manufacturers, subcontractors, andsuppliers for wafer fabrication, assembly, programming and test of our devices,and for the supply of programming equipment, and these services are typicallyprovided by one supplier for each of our devices. We generally purchase thesesingle or limited source services through standard purchase orders or under ouragreement with Tower. Because we rely on independent subcontractors to performthese services, we cannot directly control product delivery schedules, costs orquality levels. Our future success also depends on the financial viability ofour independent subcontractors. These subcontract manufacturers produceproducts for other companies and we must place orders in advance of expecteddelivery. As a result, we have only a limited ability to react to fluctuationsin demand for our products, which could cause us to have an excess or ashortage of inventories of a particular product, and our ability to respond tochanges in demand is limited by these suppliers’ ability to provide productswith the quantity, quality, cost and timeliness that we require. The decisionnot to provide these services to us or the inability to supply these servicesto us, such as in the case of a natural or financial disaster, would have a significantimpact on our business. Increased demand from other companies could result inthese subcontract manufacturers allocating available capacity to customers thatare larger or have long-term supply contracts in place and we may be unable toobtain adequate foundry and other capacity at acceptable prices, or we mayexperience 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 our cost of revenue and could adversely affect ourbusiness, financial condition and results of operations.

* *

***Off-Balance Sheet Arrangements***

 

Wedo not maintain any off-balance sheet partnerships, arrangements or otherrelationships with unconsolidated entities or others, often referred to asstructured finance or special purpose entities, which are established for thepurpose of facilitating off-balance sheet arrangements or other contractually narrowor limited purposes.

 

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

 

***Recently Issued AccountingPronouncements***

 

SeeNote 2 of the Consolidated Financial Statements for a description of recentaccounting pronouncements, including the respective dates of adoption andeffects on results of operations and financial condition.

 

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

* *

***Interest Rate Risk***

 

Our exposure to market rate risk for changes ininterest rates relates primarily to our investment portfolio and variable ratedebt. We do not use derivative financial instruments to manage our interestrate risk. We are adverse to principal loss and ensure the safety andpreservation of invested funds by limiting default, market risk andreinvestment risk. Our investment portfolio is generally comprised ofinvestments that meet high credit quality standards and have active secondaryand resale markets. Since these securities are subject to interest rate risk,they could decline in value if interest rates fluctuate or if the liquidity ofthe investment portfolio were to change. Due to the short duration andconservative nature of our investment portfolio, we do not anticipate anymaterial loss with respect to our investment portfolio. A 10% move in interestrates as of the end of the first quarter of 2009 would have an immaterialeffect on our financial position, results of operations and cash flows.

* *

***Foreign Currency Exchange Rate Risk***

 

All of our sales and cost of manufacturing aretransacted in U.S. dollars. We conduct a portion of our research anddevelopment activities in Canada and India and have sales and marketing officesin several locations outside of the United States. We use the U.S. dollar asour functional currency. Most of the costs incurred at these internationallocations are in local currency. If these local currencies strengthen againstthe U.S. dollar, our payroll and other local expenses will be higher than wecurrently anticipate. Since our sales are transacted in U.S. dollars, thisnegative impact on expenses would not be offset by any positive effect onrevenue. Operating expenses denominated in foreign currencies wereapproximately 20% and 24% of total operating expenses in the first quarter of2009 and 2008, respectively. A majority of these foreign expenses were incurredin Canada. A currency exchange rate fluctuation of 10% would have caused ouroperating expenses to change by approximately $84,000 in the first quarter of2009.

*** ***

***Equity Price Risk***

 

Our exposure to equity price risk for changes inmarket value relates primarily to our investment in Tower Semiconductor Ltd.,or Tower. Tower’s ordinary shares trade on the Nasdaq Global Market under thesymbol “TSEM”. Since these securities are publicly traded on the open market,they are subject to market fluctuations. Temporary market fluctuations arereflected by increasing or decreasing the presented value of the relatedsecurities and recording “accumulated other comprehensive income (loss)” in theequity section of the balance sheet. An “other than temporary” decline inmarket value is reflected by decreasing the carrying value of the relatedsecurities and recording a charge to operating expenses in the incomestatement. We wrote down the value of the Tower shares due to an “other thantemporary” decline in their market value by $15.1 million between 2001 and December 28,2008. 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.

 

There have been no changes since the end of the lastfiscal year, in the risk exposures described above or the management of suchexposures and there are no expected changes going forward.

** **

**Item 4. Controls and Procedures**

** **

**Evaluation of Disclosure Controls and Procedures**

 

We maintain disclosure controls and procedures designedto ensure that information required to be disclosed in the reports we file orsubmit pursuant to the Securities and Exchange Act of 1934, as amended, isrecorded, processed, summarized and reported within the time periods specifiedin the rules and forms of the Securities and Exchange Commission, and thatsuch information is accumulated and communicated to our management, includingour Chief Executive Officer and Chief Financial Officer, as appropriate, toallow timely decisions regarding required disclosure.

 

Management, with the participation of the ChiefExecutive Officer and Chief Financial Officer, has performed an evaluation ofour disclosure controls and procedures. Based on this evaluation, ourChief Executive Officer and Chief Financial Officer have concluded that, as of March 29,2009, our disclosure controls and procedures were effective.

 

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** **

**Changes in Internal 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**

 

SeeNote 13 of the Consolidated Financial Statements for a description of legalproceedings.

 

**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 2008 Annual Report on Form 10-K filed with the SEC on March 11,2009. 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 CSSP design opportunities may not result in the revenue we expect***

 

Wehave transitioned from being a broad-based supplier of FPGA devices to being asupplier of CSSPs primarily to the mobile market. We have developed asignificant pipeline of design opportunities for CSSPs in our target marketsand we are focused on converting these design opportunities into revenue.Revenue contributions from new mobile products will be important over the nexttwo to four quarters in order to grow our business, achieve profitability andmaintain or increase our cash and cash equivalent balances.  Mobile product life cycles are short and wemust replace revenue lost at the end of each product life cycle with sales fromnew design wins. In addition, we expect revenue from the rest of our businessto decline due to the stage of our customers’ product life cycles.

 

Thegeneration of revenue from mobile market design opportunities is influenced bya number of factors, such as our ability to supply solutions that meetcustomers’ cost targets and performance requirements, the value and price ofour solutions relative to competing solutions, our customers’ decisions whetherto produce in volume the products utilizing our solution, the timing of ourcustomers’ product introduction dates, the market success of our customers’products and general economic conditions. If these design opportunities resultin revenue that is later or significantly lower than we expect, our results ofoperations and financial condition will be adversely affected.

 

*Our business could be adverselyaffected by the current financial crisis*

 

The continued downturn in general worldwide economicconditions may cause a reduction in the consumption of the products that useour devices, cause the cancellation of or delay our customers’ introduction ofnew products using our devices, disrupt supply chains and affect the financialhealth of our customers or suppliers. As such, the financial crisis mayadversely impact our customer and supplier relationships, revenue level,product prices, the value of our inventories and long-lived assets, reservesfor excess and obsolete inventory, production capability, collectability ofaccounts receivable, access to inventory or equipment at suppliers andliquidity, which may materially harm our business.

 

# ***If we fail to successfully develop, introduce and sell CSSPs and newproducts, or if our CSSP design opportunities do not generate the revenue weexpect, we may be unable to compete effectively in the future***

 

The market for differentiated mobile devices is highlycompetitive and dynamic, with short end market product life cycles and rapidobsolescence of existing products. To compete successfully, we must obtainaccess to advanced fabrication capacity and dedicate significant resources tospecify, design, develop, manufacture and sell new or enhanced CSSPs thatprovide increasingly higher levels of performance, low power consumption, newfeatures, reliability and/or cost savings to our customers. Due to the shortproduct life cycle of these devices our revenue is subject to fluctuation in ashort period of time and our ability to grow our business depends on

 

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accelerating our design win activity.We often make significant investments in CSSP and silicon platform development,selling and marketing, long before we generate revenue, if any, from ourefforts. The markets we are targeting typically have higher volumes and greaterprice pressure than our traditional business. In addition we quoteopportunities in anticipation of future cost reductions and may aggressivelyprice products to gain market share. In order to react quickly to opportunitiesor to obtain favorable wafer prices, we make significant investments in andcommitments to purchase inventories and capital equipment before we have firmcommitments from customers. Our gross margin and valuation of inventories maybe affected by these strategies if, for instance, we generate significantrevenue before we are able to reduce our costs or if an opportunity priced togain market share becomes significant to our quarterly revenue.

 

We expect our business growth to be driven by CSSPs,and CSSP revenue growth needs to be strong enough to achieve profitabilitywhile offsetting expected declines in other parts of our business. The grossmargin associated with our CSSPs and new products is generally lower than thegross margin of our mature and end-of-life products, due primarily to the pricesensitive nature of the higher volume mobile consumer opportunities that we arepursuing with CSSPs. If our mature product revenue were to decline more quicklythan expected, it could have a significant effect on our results of operationsand cash flows. Because the product life cycle of mobile products is short, wemust replace revenue at the end of a product life cycle with sales from newdesign opportunities. In addition, sales of our mature product family could declineif competitors replace us in these design opportunities. While we expectrevenue and gross profit growth from CSSPs will offset the expected decline inrevenue and gross profit from our mature products and the effect of shortmobile product life cycles, there is no assurance whether or when this willoccur. In order to grow our revenue from its current level, we are dependentupon increased revenue from our existing products, especially CSSPs based onour ArcticLink and PolarPro solution platforms, and the development of CSSPs,additional new products and solutions.

 

If (i) we are unable to design, produce and sellnew CSSPs that meet design specifications, address customer requirements andgenerate sufficient revenue and gross profit; (ii) market demand for ourCSSPs and other products fails to materialize; (iii) we are unable toobtain adequate capacity on a timely basis; (iv) we are unable to developCSSPs or solutions in a timely manner; or (v) our customers do notsuccessfully introduce products incorporating our devices, our revenue andgross margin will be materially harmed, our liquidity and cash flows will bematerially 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 may be unable to accurately estimate quarterly revenue, which couldadversely affect the trading price of our stock***

 

Our current product delivery cycle can be longer thanour customers’ known requirements for product. As a result, we may have lowvisibility to product demand in any given quarter. If our customers cannotprovide us with accurate delivery lead times, we may not be able to deliverproduct to our customers in a timely fashion. Furthermore, our ability torespond to increased demand is limited to inventories on hand or on order, thecapacity available at our contract manufacturers and our capacity to programproducts to customer specifications. If we fail to accurately estimate customerdemand, record revenue, or if our available capacity is less than needed tomeet customer demand, our results of operations could be harmed and our stockprice could materially fluctuate.

# *** ***

# ***We may not have the liquidity to support our future operations andcapital requirements***

 

As a result of potential investments, current revenueand operating expense levels, changes in working capital and interest and debtpayments, we will need to generate significantly higher revenue and grossprofit, especially from our ArcticLink and PolarPro solution platforms andproducts currently under development, to generate positive cash flow. Inaddition, these new products have been generating lower gross margin as apercentage of revenue than the rest of our historical business due to themarkets that we have targeted and the larger order quantities associated withthese applications. Whether we can achieve cash flow levels sufficient tosupport our operations cannot be accurately predicted, and our investmentportfolio is subject to a degree of interest rate and liquidity risk. Unlesssuch cash flow levels are achieved and our investment portfolio remains liquidand its capital is preserved, we may need to borrow additional funds or selldebt or equity securities, or some combination thereof, to provide funding forour operations. Such additional funding source may not be available oncommercially reasonable terms, or at all. If adequate funds are not availablewhen needed, our financial condition and operating results would be materiallyand adversely affected and we may not be able to operate our business withoutsignificant changes in our operations, or at all.

 

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# ***We have a limited number of significant customers and limitedvisibility into the long-term demand for our products from these customers***

 

A few end-customers can represent a significantportion of our total revenue in a given reporting period and the likelihood ofthis occurring will increase in the future as we target market leadingmanufacturers of high volume mobile applications. As in the past, future demandfrom these customers may fluctuate significantly from quarter to quarter. Thesecustomers typically order products with short requested delivery lead times,and do not provide a commitment to purchase product past the period covered bypurchase orders, which may be rescheduled or cancelled. In addition, ourmanufacturing lead times are longer than the delivery lead times requested bythese customers, and we make significant purchases of inventory and capitalexpenditures in anticipation of future demand. If revenue from any significantcustomer were to decline substantially, we may be unable to offset this declinewith increased revenue and gross margin from other customers and we maypurchase excess inventories. These factors could severely harm our business.

 

In addition, we may make a significant investment inlong-lived assets for the production of our products based upon historical andexpected demand. If demand for our products or gross margin generated from ourproducts does not meet our expectations or if we are unable to collect amountsdue from significant customers, we may be required to write-off inventories,provide for uncollectible accounts receivable or incur charges againstlong-lived assets, which would materially harm our business.

# ** **

# ***We depend upon third parties to fabricate, assemble, test and programour products, and they may discontinue manufacturing our products, fail to giveour products priority, be unable to successfully manufacture our products tomeet performance, volume or cost targets, or inaccurately report inventories tous***

 

We contract with third parties to fabricate, assemble,test and program our devices. Our devices are generally fabricated, assembledand programmed by single suppliers, and the loss of a supplier, transfer ofmanufacturing to a new location, expiration of a supply agreement or the inabilityof our suppliers to manufacture our products to meet volume, performance andcost targets could have a material adverse effect on our business. Ourrelationship with our suppliers could change as a result of a merger oracquisition. If for any reason these suppliers or any other vendor becomesunable or unwilling to continue to provide services of acceptable quality, atacceptable costs and in a timely manner, our ability to operate our business ordeliver our products to our customers could be severely impaired. We would haveto identify and qualify substitute suppliers, which could be time consuming,difficult and result in unforeseen operational problems, or we could announcean end-of-life program for these products. Alternate suppliers might not beavailable to fabricate, assemble, test and program our devices or, ifavailable, might be unwilling or unable to offer services on acceptable terms.

 

In addition, if competition for wafer manufacturingcapacity increases, if we need to migrate to more advanced wafer manufacturingtechnology, or if competition for assembly services increases, we may berequired to pay or invest significant amounts to secure access to thiscapacity. For example, between 2001 and 2002 we invested $21.3 million inequity and prepaid wafer credits to obtain guaranteed wafer fabricationcapacity at Tower Semiconductor until at least 2010. The number of companiesthat provide these services is limited and some of them have limited operatinghistories and financial resources. In the event our current suppliers refuse orare unable to continue to provide these services to us, or if we are unable tosecure sufficient capacity from our current suppliers on commerciallyreasonable terms, we may be unable to procure services from alternate suppliersin a timely manner, if at all. Moreover, our reliance on a limited number ofsuppliers subjects us to reduced control over delivery schedules, qualityassurance and costs. This lack of control may cause unforeseen productshortages or may increase our cost to manufacture and test our products, whichwould adversely affect our operating results and cash flows.

 

We record a majority of our inventory transactionsbased on information from our subcontractors. If we do not receive prompt andaccurate information from our suppliers, we could be unable to meet ourdelivery commitments to customers or commit to manufacturing inventories thatare not required to meet customer delivery commitments, which could materiallyharm our business.

 

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# ***Our future results depend on our relationship with Tower***

 

We have invested approximately $21.3 million inTower. In return for our investment, we received equity, prepaid wafer credits,favorable wafer pricing and committed production capacity in Tower’s foundryfacility. We believe that Tower’s long-term operation of this fabricationfacility depends on its ability to attract sufficient customer demand, toobtain additional financing, to increase capacity, to obtain the release ofgrants and approvals for changes in grant programs from the Israeli government’sInvestment Center and its ability to remain in compliance with the terms of itsgrant and credit agreements. The current political uncertainty and securitysituation in the Middle East where Tower’s fabrication facility is located, thecyclical nature of the market for foundry manufacturing services, Tower’sfinancial condition, or other factors may adversely impact Tower’s businessprospects and may discourage future investments in Tower from outside sources.If Tower is unable to obtain adequate financing and increase production outputin a timely manner, the value of our investment in Tower may 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 primary manufacturer of our new products.

 

The value of our investment in Tower and itscorresponding wafer credits may also be adversely affected by a deteriorationof conditions in the market for foundry manufacturing services, the market forsemiconductor products, Tower’s financial health and Tower’s ability to remain incompliance with Nasdaq listing standards. If Tower does not remain incompliance with Nasdaq listing standards, or if Tower’s financial position isdetermined to be significantly impaired, the liquidity of our investment andour ability to utilize the remaining prepaid wafer credits may be adverselyaffected.

# ** **

# ***We will be unable to compete effectively if we fail to anticipateproduct opportunities based upon emerging technologies and standards or fail todevelop products and solutions that incorporate these technologies andstandards in a timely manner***

 

We spend significant time and money designing anddeveloping silicon solution platforms such as ArcticLink and PolarPro andproven system blocks, such as our VEE, USB and IDE, or emerging technologies,such as low power programmable logic, advanced process technology or small formfactor packaging. We intend to develop additional products and solutions and toadopt new technologies in the future. If system manufacturers adopt alternativestandards or technologies, if an industry standard or emerging technology thatwe have targeted fails to achieve broad market acceptance, if customers chooselow power offerings from our competitors, or if we are unable to bring thetechnologies or solutions to market in a timely and cost-effective manner, wemay be unable to generate significant revenue from our research and developmentefforts. As a result, our business would be materially harmed and we may berequired to write-off related inventories and long-lived assets.

# ** **

# ***Our customers may cancel or change their product plans after we haveexpended substantial time and resources in the design of their products***

 

Our customers often evaluate our products for sixmonths or more before designing them into their systems, and they may notcommence volume shipments for up to an additional six to twelve months, if atall. During this lengthy sales cycle, our potential customers may cancel orchange their product plans. Customers may also discontinue productsincorporating our devices at any time or they may choose to replace ourproducts 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 fail to adequately forecast demand for our products, we may incurproduct shortages or excess product inventories***

 

Our agreements with certain suppliers require us toprovide forecasts of our anticipated manufacturing orders, and place bindingmanufacturing commitments in advance of receiving purchase orders from ourcustomers. We are limited in our ability to increase or decrease our forecastsunder such agreements. Other manufacturers

 

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supply us with product on a purchaseorder basis. The allocation of capacity is determined solely by our suppliersover which we have no direct control. Additionally, we may place orders withour suppliers in advance of customer orders to allow us to quickly respond tochanging customer demand or to obtain favorable product costs. Furthermore, weprovide our suppliers with equipment which is used to program our products tocustomer specifications. The programming equipment is manufactured to ourspecifications and has significant order lead times. These factors may resultin product shortages or excess product inventories. Obtaining additional supplyin the face of product, programming equipment or capacity shortages may becostly, or not possible, especially in the short term since most of ourproducts and programming equipment are supplied by a single supplier. Ourfailure to adequately forecast demand for our products could materially harmour business.

# ** **

# ***We are expending substantial time and effort to develop solutions withpartners that depend on the availability and success of technology owned by thepartner***

# ** **

# ***Our approach to developingsolutions for potential customers involves: (i) embedded processorsdeveloped by other companies; (ii) peripheral devices developed by otherparties such as micro hard disk drives, Wi-Fi devices and NAND flash memory; (iii) proprietaryintellectual property such as key elements of our VEE; and (iv) specificindustry standards such as USB 2.0 OTG, Secure 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 integrate our solutioninto their product offerings, or if the informal partnerships do not grow asexpected or if they are significantly reduced or terminated by acquisition orother means, our revenue and gross margin will be materially harmed and we maybe required to write-off related inventories and long-lived assets.****Fluctuationsin our manufacturing processes, yields and quality, especially for newproducts, may increase our costs*

 

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

 

Yield fluctuations frequently occur in connection withthe manufacture of newly introduced products, with changes in productarchitecture, with manufacturing at new facilities, on new fabricationprocesses or in conjunction with new backend manufacturing processes. Newlyintroduced solutions and products, such as our CSSPs and ArcticLink andPolarPro solution platforms, are often more complex and more difficult toproduce, increasing the risk of manufacturing related defects. Newmanufacturing facilities or processes are often more complex and take a periodof time to achieve expected quality levels and manufacturing efficiencies.While we test our products, including our software development tools, they maystill contain errors or defects that are found after we have commencedcommercial production. Undetected errors or defects may also result from newmanufacturing processes or when new intellectual property is incorporated intoour products. If our products or software development tools contain undetectedor unresolved defects, we may lose market share, experience delays in or lossof market acceptance, reserve or scrap inventories or be required to issue aproduct recall. In addition, we would be at risk of product liabilitylitigation if defects in our products were discovered. Although we attempt tolimit our liability to end users through disclaimers of special, consequentialand indirect damages and similar provisions, we cannot assure you that suchlimitations of liability will be legally enforceable.

# ** **

# ***We have a history of losses and cannot assure you that we will again beprofitable in the future***

 

We incurred significant losses to date. Ouraccumulated deficit as of March 29, 2009 was $150.0 million. Werecorded a net loss of $9.4 million in 2008, $11.1 million in 2007, and$9.2 million in 2006, and we may not return to profitability in any futureperiods.

 

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** **

*Our futureoperating results are likely to fluctuate and therefore may fail to meetexpectations, which could cause our stock price to decline*

** **

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

 

Factors that could cause our operating results tofluctuate include: (i) successful development and market acceptance of ourproducts and solutions; (ii) our ability to accurately forecast productvolumes and mix, and to respond to rapid changes in customer demand;(iii) changes in sales volume or expected sales volume, product mix,average selling prices or production variances that affect gross profit;(iv) the effect of end-of-life programs; (v) a significant change insales to, or the collectability of accounts receivable from, our largestcustomers; (vi) our ability to adjust our product features, manufacturingcapacity and costs in response to economic and competitive pressures;(vii) our reliance on subcontract manufacturers for product capacity,yield and quality; (viii) our competitors’ product portfolio and productpricing policies; (ix) timely implementation of efficient manufacturingtechnologies; (x) errors in applying or changes in accounting andcorporate governance rules;(xi) the issuance of equity compensation awards orchanges in the terms of our stock plan or employee stock purchase plan;(xii)mergers or acquisitions; (xiii) the impact of import and export laws andregulations; (xiv) the cyclical nature of the semiconductor industry andgeneral economic, market, political and social conditions in the countries wherewe sell our products and the related effect on our customers, distributors andsuppliers; and (xv) our ability to obtain capital, debt financing and insuranceon commercially reasonable terms*.*Althoughcertain of these factors are out of our immediate control, unless we cananticipate and be prepared with contingency plans that respond to thesefactors, our business may be materially harmed.

 

We may encounter periods of industry widesemiconductor oversupply, resulting in pricing pressure, as well as undersupply,resulting in a risk that we could be unable to fulfill our customers’requirements. The semiconductor industry has historically been characterized bywide fluctuations in the demand for, and supply of, its products. Thesefluctuations have resulted in circumstances when supply of and demand forsemiconductors have been widely out of balance. An industry wide semiconductoroversupply could result in severe downward pricing pressure from customers. Ina market with undersupply of manufacturing capacity, we would have to competewith larger foundry and assembly customers for limited manufacturing resources.In such an environment, we may be unable to have our products manufactured in atimely manner, at a cost that generates adequate gross profit or in sufficientquantities. Since we outsource all of our manufacturing and generally have asingle source of wafer supply, test, assembly and programming for our products,we are particularly vulnerable to such supply shortages and capacitylimitations. As a result, we may be unable to fulfill orders and may losecustomers. Any future industry wide oversupply or undersupply of semiconductorscould materially harm our business.

# *** ***

# ***We may be unable to successfully grow our business if we fail tocompete effectively with others to attract and retain key personnel***

 

We believe our future success depends upon our abilityto attract and retain highly competent personnel. Our employees are at-will andnot subject to employment contracts. Hiring and retaining qualified sales,technical and financial personnel is difficult due to the limited number ofqualified professionals, economic conditions and the size of our company.Competition for these types of employees is intense. In addition, new hiresfrequently require extensive training before they achieve desired levels ofproductivity. Failure to attract, hire, train and retain personnel couldmaterially harm our business.

# ** **

# ***Problems associated with international business operations could affectour ability to manufacture and sell our products***

 

Most of our products are manufactured outside of theUnited States at manufacturing facilities operated by our suppliers in Asia,South Asia and the Middle East regions. As a result, these manufacturingoperations and new product introductions are subject to risks of politicalinstability.

 

A significant portion of our totalrevenue comes from sales to customers located outside the United States. Weanticipate that sales to customers located outside the United States willcontinue 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

 

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andIndia. Accordingly, our operations and revenue are subject to a number of risksassociated with foreign commerce, including the following: (i) staffingand managing foreign offices; (ii) managing foreign distributors;(iii) collecting amounts due; (iv) political and economicinstability; (v) foreign currency exchange fluctuations; (vi) changesin tax laws, import and export regulations, tariffs and freight rates;(vii) timing and availability of export licenses; (viii) supplyingproducts that meet local environmental regulations; and (ix) inadequateprotection of intellectual property rights.

 

In the past, we have denominated sales of our productsto foreign countries exclusively in U.S. dollars. As a result, any increase inthe value of the U.S. dollar relative to the local currency of a foreigncountry will increase the price of our products in that country so that ourproducts become relatively more expensive to customers in their local currency.As a result, sales of our products in that foreign country may decline. If thelocal currency of a foreign country in which we conduct business strengthensagainst the U.S. dollar, our payroll and other local expenses will be higher,and since sales are transacted in U.S. dollars, would not be offset by any increasein revenue. To the extent any such risks materialize, our business could bematerially harmed.

 

In addition, we incur costs in foreign countries thatmay be difficult to reduce quickly because of employee related laws andpractices in those foreign countries.

# *** ***

# ***Our CSSPs face competition from suppliers of ASSPs, suppliers ofintegrated application processors, and suppliers of ASICs***

 

We face competition from companiesthat offer ASSPs such as Cypress Semiconductor. While it is difficult toprovide a unique solution through the use of ASSPs, they generally are costeffective standard products and have short lead times. In certain designopportunities, ASSPs can be combined to achieve system design objectives.Manufacturers of integrated application processors often integrate new featureswhen they introduce new products. A system designer could elect the use of anintegrated processor that includes the features offered in our CSSPs. Companiessuch as LSI Corporation supply ASICs, which may be purchased for a lower priceat higher volumes and typically have greater logic capacity, additionalfeatures and higher performance than our products. Our inability tosuccessfully compete in any of the following areas could materially harm ourbusiness: (i) the development of new products, CSSPs and advancedmanufacturing technologies; (ii) the quality, power characteristics,performance characteristics, price and availability of devices, programminghardware and software development tools; (iii) the ability to engage withcompanies that provide synergistic products and services; (iv) theincorporation of industry standards in our products and solutions; (v) thediversity of product offerings available to customers; or (vi) the qualityand cost effectiveness of design, development, manufacturing and marketingefforts.

# *** ***

# ***We may depend upon third party distributors and independent salesrepresentatives to market and sell our products, and they may discontinue saleof our products, fail to give our products priority or be unable tosuccessfully market, sell and support our products***

 

We contract with third party distributors andindependent sales representatives to market and sell a portion of our productsin certain geographies. Although we have contracts with our distributors andrepresentatives, our agreements with them may be terminated on short notice byeither party and, if terminated, we may be unable to recruit additional orreplacement distributors or representatives. As a result, our futureperformance will depend in part on our ability to retain our existingdistributors 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 distributors and representatives,including our principal distributors and representatives, market and sell productsfor other companies. Many of these products may compete directly or indirectlywith our products and solutions. Also, we generally are not one of theprincipal suppliers of products to our distributors or representatives. If ourdistributors or representatives give higher priority or greater attention tothe products of other companies, including products that compete with ourproducts and solutions, our business would be materially harmed.

 

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

 

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# ***We may be unable to adequately protect our intellectual property rightsand may face significant expenses as a result of future litigation***

 

Protection of intellectual property rights is crucialto our business, since that is how we keep others from copying the innovationsthat are central to our existing and future products. From time to time, wereceive letters alleging patent infringement or inviting us to license otherparties’ patents. We evaluate these requests on a case-by-case basis. Thesesituations may lead to litigation if we reject the offer to obtain the license.

 

In the past, we have been involved in litigationrelating to our alleged infringement of third party patents or other intellectualproperty rights. This type of litigation is expensive and consumes largeamounts of management time and attention. Additionally, matters that weinitially consider not material to our business could become costly. Inaddition, if the letters we sometimes receive alleging patent infringement orother similar matters result in litigation that we lose, a court could order usto pay substantial damages and/or royalties, and prohibit us from making,using, selling or importing essential technologies. For these and otherreasons, this type of litigation could materially harm our business.

 

Although we may seek to obtain a license under a thirdparty’s intellectual property rights in order to bring an end to certain claimsor actions asserted against us, we may not be able to obtain such a license onreasonable terms, or at all. We have entered into technology license agreementswith third parties which give those parties the right to use patents and othertechnology developed by us and which give us the right to use patents and othertechnology developed by them. We anticipate that we will continue to enter intothese kinds of licensing arrangements in the future; however, it is possiblethat desirable licenses will not be available to us on commercially reasonableterms. If we lose existing licenses to key technology, or are unable to enterinto new licenses that we deem important, our business could be materiallyharmed.

 

Because it is critical to our success that we continueto prevent competitors from copying our innovations, we intend to continue toseek patent and trade secret protection for our products. The process ofseeking patent protection can be long and expensive, and we cannot be certainthat any currently pending or future applications will actually result inissued patents or that, even if patents are issued, they will be of sufficientscope or strength to provide meaningful protection or any commercial advantageto us. Furthermore, others may develop technologies that are similar orsuperior to our technology or design around the patents we own. We also rely ontrade secret protection for our technology, in part through confidentialityagreements with our employees, consultants and other third parties. However,these parties may breach these agreements and we may not have adequate remediesfor any breach. In any case, others may come to know about or determine ourtrade secrets through a variety of methods. In addition, the laws of certainterritories in which we develop, manufacture or sell our products may notprotect our intellectual property rights to the same extent as the laws of theUnited States.

# ** **

# ***We may engage in manufacturing, distribution or technology agreementsthat involve numerous risks, including the use of cash, diversion of resourcesand significant write-offs***

 

We have entered into and, in the future, intend toenter into agreements that involve numerous risks, including the use ofsignificant amounts of our cash; diversion of resources from other developmentprojects or market opportunities; our ability to incorporate licensedtechnology in our products and solutions; our ability to introduce relatedproducts in a cost effective and timely manner; our ability to collect amountsdue under these contracts; and market acceptance of related products andsolutions. If we fail to recover the cost of these or other assets from thecash flow generated by the related products, our assets will become impairedand our financial results would be harmed.

 

# ***Our business is subject to the risks of earthquakes, other catastrophicevents and business interruptions for which we may maintain limited insurance***

 

Our operations and the operations of our suppliers arevulnerable to interruption by fire, earthquake, power loss, flood, terroristacts and other catastrophic events beyond our control. In particular, ourheadquarters are located near earthquake fault lines in the San Francisco BayArea. In addition, we rely on sole suppliers to manufacture our products andwould not be able to qualify an alternate supplier of our products for severalquarters. Our suppliers often hold significant quantities of our inventorieswhich, in the event of a disaster, could be destroyed. In addition, ourbusiness processes and systems are vulnerable to computer viruses, break-insand similar disruptions from

 

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

 

We donot have a detailed disaster recovery plan. In addition, we do not maintainsufficient business interruption and other insurance policies to compensate usfor all losses that may occur. Any losses or damages incurred by us as a resultof a catastrophic event or any other significant uninsured loss could have amaterial adverse effect on our business.

# *** ***

# ***Our principal stockholders have significant voting power and may votefor actions that may not be in the best interests of our other stockholders***

 

Our officers, directors and principal stockholderstogether control a significant portion of our outstanding common stock. As aresult, these stockholders, if they act together, will be able to significantlyinfluence our operations, affairs and all matters requiring stockholderapproval, including the election of directors and approval of significantcorporate transactions. This concentration of ownership may have the effect ofdelaying or preventing a change in control and might affect the market price ofour common stock. This concentration of ownership may not be in the bestinterest of our other stockholders.

# ** **

# ***Our Shareholder Rights Plan, Certificate of Incorporation, Bylaws andDelaware law contain provisions that could discourage a takeover that isbeneficial to stockholders***

 

Our Shareholder Rights Plan as well as provisions ofour Certificate of Incorporation, our Bylaws and Delaware law could make itdifficult for a third party to acquire us, even if doing so would be beneficialto our stockholders.

 

*OurCommon Stock may become ineligible for listing on the Nasdaq Global Market oralternatively the NASDAQ Capital Market if it does not trade at or above $1.00,which would materially adversely affect the liquidity and price of our CommonStock.*

 

Weare listed on the Nasdaq Global Market. Our continued listing is contingent onmeeting specific quantitative standards, including a minimum closing bid priceof $1.00. Our Common Stock has at times traded below $1.00 since the fiscalfourth quarter of 2008. In the event that our stock fails to maintain a minimumclosing bid price of at least $1.00 for 30 consecutive business days, we mayreceive a deficiency notice from the Listing Qualifications Department of theNasdaq Stock Market. If we receive a deficiency notice, our stock will have toachieve a minimum closing bid price of at least $1.00 for at least 10consecutive business days within 180 calendar days, or else we may be delistedfrom the Nasdaq Global Market. Should we be delisted from the NASDAQ GlobalMarket, we may be eligible for listing on the Nasdaq Capital Market, subject tomeeting specific quantitative standards, including maintaining a minimumclosing bid price of $1.00, and would have to achieve that within the 180calendar days of initial listing on the Nasdaq Capital Market. The Nasdaq StockMarket suspended the minimum closing bid requirements until July 20, 2009.

 

Ifour Common Stock becomes ineligible for listing on either the Nasdaq GlobalMarket or the Nasdaq Capital Market, and is thereafter traded only on theover-the-counter market, our stockholders’ abilities to purchase and sell ourCommon Stock could be less orderly and efficient and more costly. Furthermore,a delisting of our Common Stock could have a materially adverse impact on ourbusiness operations by damaging our general business reputation, impairing ourability to obtain additional capital, reducing the incentives that equityownership is intended to provide to our employees, and causing a loss ofconfidence by investors, suppliers and employees. As a result of the negativeimpact on the liquidity of our Common Stock and on our business, a delistingwould also likely decrease the market price of our Common Stock and increasethe volatility of our stock price.

 

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

 

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

# *** ***

# ***Changes to existing accounting pronouncements or taxation rules orpractices may cause adverse revenue fluctuations, affect our reported financialresults or how we conduct our business***

 

Generally accepted accounting principles, or GAAP, arepromulgated by, and are subject to the interpretation of the FinancialAccounting Standards Board, or FASB, and the SEC. New accounting pronouncementsor taxation rules and varying interpretations of accounting pronouncementsor taxation practices have occurred and may occur in the future. Any futurechanges in accounting pronouncements or taxation rules or practices mayhave a significant effect on how we report our results and may even affect ourreporting of transactions completed before the change is effective. Inaddition, a review of existing or prior accounting practices may result in achange in previously reported amounts. This change to existing rules, futurechanges, if any, or the questioning of current practices may adversely affectour reported financial results, our ability to remain listed on the NasdaqGlobal Market, or the way we conduct our business and subject us to regulatoryinquiries or litigation.

* *

*Compliance with regulations related to corporategovernance and public disclosure may result in additional expenses*

 

Federal securities laws, rules and regulations, as wellas Nasdaq rules and regulations, require companies to maintain extensivecorporate governance measures, impose comprehensive reporting and disclosurerequirements, set strict independence and financial expertise standards foraudit and other committee members and impose civil and criminal penalties forcompanies and their chief executive officers, chief financial officers anddirectors for securities law violations. These laws, rules and regulationshave increased and will continue to increase the scope, complexity and cost ofour corporate governance, reporting and disclosure practices, which could harmour results of operations and divert management’s attention from businessoperations. We are committed to maintaining high standards of corporategovernance and public disclosure. If our efforts to comply with new or changedlaws, regulations and standards differ from the activities intended byregulatory or governing bodies due to ambiguities related to practice, ourreputation may be harmed and the market price of our common stock could beaffected.

# *** ***

# ***While we believe that we currently have adequate internal controlprocedures in place, we are still exposed to potential risks from legislationrequiring companies to evaluate controls under Section 404 of theSarbanes-Oxley Act of 2002***

 

Our management is responsible for establishing andmaintaining adequate internal control over financial reporting. Internal controlover financial reporting cannot provide absolute assurance of achievingfinancial reporting objectives because of its inherent limitations. Internalcontrol over financial reporting is a process that involves human diligence andcompliance and is subject to lapses in judgment and breakdowns resulting fromhuman failures. Internal control over financial reporting also can becircumvented by collusion or improper management override. Because of suchlimitations, there is a risk that material misstatements may not be preventedor detected on a timely basis by internal control over financial reporting.However, these inherent limitations are known features of the financialreporting process. Therefore, it is possible to design into the processsafeguards to reduce, though not eliminate, this risk.

 

As of December 2008, we have evaluated ourinternal control systems in order to allow management to report on our internalcontrol over financial reporting, as required by Section 404 of theSarbanes-Oxley Act. We performed the system and process evaluation and testingrequired in an effort to comply with the management certification ofSection 404. While we believe that our internal control procedures areadequate and we intend to continue to fully comply with the requirementsrelating to internal control and all other aspects of Section 404, ourcontrols necessary for continued compliance with the Sarbanes-Oxley Act may notoperate effectively at all times and may result in a material controldisclosure. The identification of a material weakness in internal control overfinancial reporting, if any, could indicate a lack of proper controls togenerate accurate consolidated financial statements. Furthermore, we cannot becertain as to the outcome of future evaluations, testing and remediationactions or the impact of the same on our operations. If we are not able toremain in compliance with the

 

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requirements of Section 404, wemight be subject to sanctions or investigation by regulatory authorities, suchas the SEC or the Nasdaq Global Market. Any such action could adversely affectour financial results and the market price of our common stock.

# *** ***

# ***We have implemented import and export control procedures to comply withUnited States regulations but we are still exposed to potential risks fromimport and export activity***

 

Our products, solutions, technology and software aresubject to import and export control laws and regulations which, in someinstances, may impose restrictions on business activities, or otherwise requirelicenses or other authorizations from agencies such as the U.S. Department ofState, U.S. Department of Commerce and U.S. Department of the Treasury. Theserestrictions may impact deliveries to customers or limit development andmanufacturing alternatives. We have import and export licensing and complianceprocedures in place for purposes of conducting our business consistent withU.S. and applicable international laws and regulations, and we periodicallyreview these procedures to maintain compliance with the requirements relatingto import and export regulations. If we are not able to remain in compliancewith import and export regulations, we might be subject to investigation,sanctions or penalties by regulatory authorities. Such penalties can includecivil, criminal or administrative remedies such as loss of export privileges.We cannot be certain as to the outcome of an evaluation, investigation, inquiryor other action or the impact of these items on our operations. Any such actioncould adversely affect our financial results and the market price of our commonstock.

# *** ***

# ***The Company, our directors and management have been named parties tolawsuits and may be subject to future litigation, which could result in anunfavorable outcome and have a material adverse effect on our business,financial condition, results of operations, cash flows and the trading pricefor our securities***

 

The Company and certain of our directors and officersare named in a lawsuit relating to the initial public offering ladderinglitigation. We may become the subject of other private or government actions inthe future. Litigation may be time consuming, expensive and disruptive tonormal business operations and the outcome of litigation is difficult topredict. Any expenses associated with litigation or the outcome relating to anysuch actions could have a material adverse effect on our business, financialcondition, results of operations, cash flows and the trading price for oursecurities.

 

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** **

**Item 6. Exhibits**

 

a.     Exhibits

 

The following Exhibits arefiled 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. |

 

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(1)          Incorporated by reference tothe Company’s Registration Statement on Form S-1 declared effectiveOctober 14, 1999 (Commission File No. 333-28833).

(2)          Incorporated by reference tothe Company’s Current Report on Form 8-K (Item 5.03) filed May 2,2005.

 

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**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/ Ralph S. Marimon                                                                                                                       |
| Date:  May 8, 2009 | Ralph S. Marimon                                                                                                                           |
| * *                | *Vice President, Finance and Chief Financial Officer*

*(as Principal Accounting and Financial Officer and  on behalf of the**Registrant)* |

 

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**EXHIBIT INDEX**

 
| **Exhibit  Number** | ** ** | **Description**                                                                                                                                       |
|---------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|
| 3.1(1)              |       | Amended  and Restated Certificate of Incorporation of Registrant.                                                                                     |
| 3.2(2)              |       | Bylaws  of Registrant.                                                                                                                                |
| 31.1                |       | CEO  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                    |
| 31.2                |       | CFO  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                                                    |
| 32                  |       | CEO  and CFO Certifications pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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(1)          Incorporated by reference tothe Company’s Registration Statement on Form S-1 declared effectiveOctober 14, 1999 (Commission File No. 333-28833).

(2)          Incorporated by reference tothe Company’s Current Report on Form 8-K (Item 5.03) filedMay 2, 2005.

 

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