Table ofContents

 

 

 

**UNITEDSTATES**

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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

######  

**(Mark One)**

 

| **x**                                                                                                                                                                                                                                                                                                          | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE  ACT OF 1934**  |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|----------------------------------------------------------------------------------------------------------|
| ** **                                                                                                                                                                                                                                                                                                     | ** **                                                                                               |
| **For the Quarterly Period Ended June 28, 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 ofincorporation 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, including areacode)

 

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

 

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

 

As of August 5, 2009, the registrant had outstanding 30,258,350shares of common stock, par value $0.001.

 

 

 

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**QUICKLOGIC CORPORATION**

**FORM 10-Q**

**June 28, 2009**

 
| ** **                                                                                                                                       | ** ** | **Page** |
|--------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------|
|                                                                                                                                             |       |     |
| **Part I. Financial Information**                                                                                                           | ** ** | 3        |
|                                                                                                                                             |       |     |
| **Item 1. Financial Statements**                                                                                                                 |       | 3        |
| Condensed Unaudited Consolidated Statements of  Operations for the three and six months ended June 28, 2009 and  June 29, 2008         |       | 3        |
| Condensed Unaudited Consolidated Balance Sheets as of  June 28, 2009 and December 28, 2008                                             |       | 4        |
| Condensed Unaudited Consolidated Statements of Cash  Flows for the six months ended June 28, 2009 and June 29, 2008                    |       | 5        |
| Condensed Unaudited Consolidated Statements of  Comprehensive Loss for the three and six months ended June 28, 2009 and  June 29, 2008 |       | 6        |
| Notes to Condensed Unaudited Consolidated Financial  Statements                                                                                  |       | 7        |
|                                                                                                                                             |       |     |
| **Item 2. Management’s  Discussion and Analysis of Financial Condition and Results of Operations**                                          |       | 22       |
|                                                                                                                                             |       |     |
| **Item 3. Quantitative  and Qualitative Disclosures about Market Risk**                                                                          |       | 34       |
|                                                                                                                                             |       |     |
| **Item 4. Controls and  Procedures**                                                                                                             |       | 34       |
|                                                                                                                                             |       |     |
| **Part II. Other Information**                                                                                                              | ** ** | 35       |
|                                                                                                                                             |       |     |
| **Item  1. Legal Proceedings**                                                                                                                   |       | 35       |
|                                                                                                                                             |       |     |
| **Item  1A. Risk Factors**                                                                                                                       |       | 35       |
|                                                                                                                                             |       |     |
| **Item 4. Submission of  Matters to a Vote of Security Holders**                                                                                 | ** ** | 46       |
|                                                                                                                                             |       |     |
| **Item 6. Exhibits**                                                                                                                             |       | 47       |
|                                                                                                                                             |       |     |
| Signatures                                                                                                                                       |       | 48       |

 

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Table of Contents

 

**PART I. Financial Information**

 

**Item 1. Financial Statements**

 

**QUICKLOGIC CORPORATION**

**CONDENSEDUNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

 
| ** **                                            | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended**   | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** |
|                                                  |       |                    |       |                    |       |   |   |   |   |
| Revenue                                               |       | $                       | 2,911      |                    | $          | 8,743 |   | $ | 7,463 |   | $ | 19,766 |   |
| Cost  of revenue                                      |       | 1,589                   |       | 3,982                   |       | 3,408 |   | 9,240 |   |
| Long-lived  asset impairment                          |       | —                  |       | 1,545                   |       | — |   | 1,545 |   |
| Gross  profit                                         |       | 1,322                   |       | 3,216                   |       | 4,055 |   | 8,981 |   |
| Operating  expenses:                                  |       |                    |       |                    |       |   |   |   |   |
| Research  and development                             |       | 1,877                   |       | 2,610                   |       | 3,489 |   | 5,431 |   |
| Selling,  general and administrative                  |       | 2,709                   |       | 3,970                   |       | 5,352 |   | 8,290 |   |
| Long-lived  asset impairment                          |       | —                  |       | 468                     |       | — |   | 468 |   |
| Restructuring  costs                                  |       | —                  |       | 452                     |       | — |   | 452 |   |
| Loss  from operations                                 |       | (3,264                  | )          | (4,284                  | )          | (4,786 | ) | (5,660 | ) |
| Write-down  of investment in Tower Semiconductor Ltd. |       | —                  |       | (417                    | )          | — |   | (417 | ) |
| Interest  expense                                     |       | (23                     | )          | (72                     | )          | (47 | ) | (143 | ) |
| Interest  income and other, net                       |       | 45                      |       | 30                      |       | (1 | ) | 134 |   |
| Loss  before income taxes                             |       | (3,242                  | )          | (4,743                  | )          | (4,834 | ) | (6,086 | ) |
| Provision  for (benefit from) income taxes            |       | (15                     | )          | —                  |       | (11 | ) | 34 |   |
| Net  loss                                             |       | $                       | (3,227     | )                       | $          | (4,743 | ) | $ | (4,823 | ) | $ | (6,120 | ) |
|                                                  |       |                    |       |                    |       |   |   |   |   |
| Net  loss per share:                                  |       |                    |       |                    |       |   |   |   |   |
| Basic                                                 |       | $                       | (0.11      | )                       | $          | (0.16 | ) | $ | (0.16 | ) | $ | (0.21 | ) |
| Diluted                                               |       | $                       | (0.11      | )                       | $          | (0.16 | ) | $ | (0.16 | ) | $ | (0.21 | ) |
|                                                  |       |                    |       |                    |       |   |   |   |   |
| Weighted  average shares:                             |       |                    |       |                    |       |   |   |   |   |
| Basic                                                 |       | 30,081                  |       | 29,589                  |       | 29,994 |   | 29,498 |   |
| Diluted                                               |       | 30,081                  |       | 29,589                  |       | 29,994 |   | 29,498 |   |

 

See accompanying Notes to Condensed Unaudited Consolidated FinancialStatements.

 

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**QUICKLOGIC CORPORATION**

**CONDENSEDUNAUDITED CONSOLIDATED BALANCE SHEETS**

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

 
| ** **                                                                                                                 | ** ** | **June 28,  2009** | ** ** | **December 28,  2008** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| **ASSETS**                                                                                                                 |       |                    |       |                        |       |
|                                                                                                                       |       |                    |       |                        |       |
| Current  assets:                                                                                                           |       |                    |       |                        |       |
| Cash  and cash equivalents                                                                                                 |       | $                       | 16,450     |                        | $          | 19,376 |   |
| Short-term  investment in Tower Semiconductor Ltd.                                                                         |       | 286                     |       | 116                         |       |
| Accounts  receivable, net of allowances for doubtful accounts of $10 and $10,  respectively                                |       | 1,468                   |       | 1,746                       |       |
| Inventories                                                                                                                |       | 2,042                   |       | 1,900                       |       |
| Other  current assets                                                                                                      |       | 721                     |       | 833                         |       |
| Total  current assets                                                                                                      |       | 20,967                  |       | 23,971                      |       |
| Property  and equipment, net                                                                                               |       | 3,465                   |       | 3,493                       |       |
| Investment  in Tower Semiconductor Ltd.                                                                                    |       | 144                     |       | 59                          |       |
| Other  assets                                                                                                              |       | 676                     |       | 903                         |       |
| TOTAL  ASSETS                                                                                                              |       | $                       | 25,252     |                        | $          | 28,426 |   |
|                                                                                                                       |       |                    |       |                        |       |
| **LIABILITIES  AND STOCKHOLDERS’ EQUITY**                                                                             |       |                    |       |                        |       |
|                                                                                                                       |       |                    |       |                        |       |
| Current  liabilities:                                                                                                      |       |                    |       |                        |       |
| Revolving  line of credit                                                                                                  |       | $                       | 2,000      |                        | $          | 2,000 |   |
| Trade  payables                                                                                                            |       | 2,224                   |       | 1,992                       |       |
| Accrued  liabilities                                                                                                       |       | 1,580                   |       | 1,537                       |       |
| Deferred  income on shipments to distributors                                                                              |       | 11                      |       | 282                         |       |
| Current  portion of debt and capital lease obligations                                                                     |       | 612                     |       | 753                         |       |
| Total  current liabilities                                                                                                 |       | 6,427                   |       | 6,564                       |       |
|                                                                                                                       |       |                    |       |                        |       |
| Long-term  liabilities:                                                                                                    |       |                    |       |                        |       |
| Debt  and capital lease obligations, less current portion                                                                  |       | 390                     |       | —                      |       |
| Total  liabilities                                                                                                         |       | 6,817                   |       | 6,564                       |       |
|                                                                                                                       |       |                    |       |                        |       |
| Commitments  and contingencies (see Notes 12 and 13)                                                                       |       |                    |       |                        |       |
|                                                                                                                       |       |                    |       |                        |       |
| Stockholders’  equity:                                                                                                |       |                    |       |                        |       |
| Common  stock, $0.001 par value; 100,000 shares authorized; 30,253 and 29,909 shares  issued and outstanding, respectively |       | 30                      |       | 30                          |       |
| Additional  paid-in capital                                                                                                |       | 170,987                 |       | 169,846                     |       |
| Accumulated  other comprehensive income                                                                                    |       | 255                     |       | —                      |       |
| Accumulated  deficit                                                                                                       |       | (152,837                | )          | (148,014                    | )          |
| Total  stockholders’ equity                                                                                           |       | 18,435                  |       | 21,862                      |       |
| TOTAL  LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                           |       | $                       | 25,252     |                        | $          | 28,426 |   |

 

See accompanying Notes to Condensed Unaudited Consolidated FinancialStatements.

 

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**QUICKLOGIC CORPORATION**

**CONDENSEDUNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

** **
| ** **                                                                        | ** ** | **Six  Months Ended**   | ** ** |
|-----------------------------------------------------------------------------------|------------|-------------------------|------------|
| ** **                                                                        | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** |
| Cash  flows from operating activities:                                            |       |                    |       |   |   |
| Net  loss                                                                         |       | $                       | (4,823     | ) | $ | (6,120 | ) |
| Adjustments  to reconcile net loss to net cash used for operating activities:     |       |                    |       |   |   |
| Depreciation  and amortization                                                    |       | 914                     |       | 1,182 |   |
| Loss  on disposal of property and equipment                                       |       | —                  |       | 15 |   |
| Stock-based  compensation                                                         |       | 951                     |       | 1,582 |   |
| Utilization  of wafer credits from Tower Semiconductor Ltd.                       |       | 213                     |       | 148 |   |
| Write-down  of inventories                                                        |       | 236                     |       | 1,128 |   |
| Long-lived  asset impairment                                                      |       | —                  |       | 2,013 |   |
| Write-down  of marketable securities                                              |       | —                  |       | 417 |   |
| Bad  debt expense                                                                 |       | —                  |       | 43 |   |
| Write-off  of long-lived asset                                                    |       | 13                      |       | — |   |
| Changes  in assets and liabilities:                                               |       |                    |       |   |   |
| Accounts  receivable                                                              |       | 278                     |       | 208 |   |
| Inventories                                                                       |       | (378                    | )          | 1,651 |   |
| Other  assets                                                                     |       | 228                     |       | 305 |   |
| Trade  payables                                                                   |       | 43                      |       | (2,720 | ) |
| Accrued  liabilities                                                              |       | 43                      |       | (219 | ) |
| Deferred  income on shipments to distributors                                     |       | (271                    | )          | — |   |
| Net  cash used for operating activities                                           |       | (2,553                  | )          | (367 | ) |
|                                                                              |       |                    |       |   |   |
| Cash  flows from investing activities:                                            |       |                    |       |   |   |
| Capital  expenditures for property and equipment                                  |       | (46                     | )          | (363 | ) |
| Net cash  used for investing activities                                           |       | (46                     | )          | (363 | ) |
|                                                                              |       |                    |       |   |   |
| Cash  flows from financing activities:                                            |       |                    |       |   |   |
| Payment  of debt and capital lease obligations                                    |       | (2,517                  | )          | (1,247 | ) |
| Proceeds  from debt obligations                                                   |       | 2,000                   |       | — |   |
| Proceeds  from issuance of common stock                                           |       | 190                     |       | 109 |   |
| Net  cash used for financing activities                                           |       | (327                    | )          | (1,138 | ) |
|                                                                              |       |                    |       |   |   |
| Net  decrease in cash and cash equivalents                                        |       | (2,926                  | )          | (1,868 | ) |
| Cash  and cash equivalents at beginning of period                                 |       | 19,376                  |       | 20,868 |   |
| Cash  and cash equivalents at end of period                                       |       | $                       | 16,450     |   | $ | 19,000 |   |
|                                                                              |       |                    |       |   |   |
| Supplemental  disclosures of cash flow information:                               |       |                    |       |   |   |
| Interest  paid                                                                    |       | $                       | 40         |   | $ | 148 |   |
| Income  taxes paid                                                                |       | $                       | —     |   | $ | 16 |   |
|                                                                              |       |                    |       |   |   |
| Supplemental  schedule of non-cash investing and financing activities :      |       |                    |       |   |   |
| Capital  lease obligation to finance capital expenditures and related maintenance |       | $                       | 632        |   | $ | — |   |
| Purchase  of equipment included in accounts payable                               |       | $                       | 189        |   | $ | — |   |

 

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** | ** ** | **Six  Months Ended**   | ** ** |
|-----------------------------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                                                | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** |
|                                                      |       |                    |       |                    |       |   |   |   |   |
| Net  loss                                                 |       | $                       | (3,227     | )                       | $          | (4,743 | ) | $ | (4,823 | ) | $ | (6,120 | ) |
| Other  comprehensive gain (loss), net of tax:             |       |                    |       |                    |       |   |   |   |   |
| Unrealized  gain (loss) on available-for-sale investments |       | 134                     |       | 161                     |       | 255 |   | (350 | ) |
| Total  comprehensive loss                                 |       | (3,093                  | )          | (4,582                  | )          | (4,568 | ) | (6,470 | ) |
|                                                           |            |                         |            |                         |            |  |  |  |  |  |  |  |  |

 

See accompanying Notes to Condensed Unaudited Consolidated FinancialStatements.

 

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**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITEDCONSOLIDATED FINANCIAL STATEMENTS**

 

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

 

QuickLogic Corporation,referenced herein as QuickLogic or the Company, was founded in 1988 andreincorporated in Delaware in 1999. The Company develops and markets low powerprogrammable solutions that enable customers to add differentiated features andcapabilities to their mobile, consumer and industrial products. The Company isa fabless semiconductor company that operates in a single industry segmentwhere it designs, markets and supports Customer Specific Standard Products, orCSSPs, Field Programmable Gate Arrays, or FPGAs, application solutions,associated design software and programming hardware.

 

The accompanying interimconsolidated financial statements are unaudited. In the opinion of management,these statements have been prepared in accordance with generally accepted accountingprinciples, or GAAP, and include all adjustments, consisting only of normalrecurring adjustments, necessary to provide a fair statement of results for theinterim periods presented. The Company recommends that these consolidatedfinancial statements be read in conjunction with the Company’s Form 10-Kfor the year ended December 28, 2008. Operating results for the three andsix months ended June 28, 2009 are not necessarily indicative of theresults that may be expected for the full year.

 

QuickLogic’s fiscal yearends on the Sunday closest to December 31.  QuickLogic’s secondfiscal quarter for 2009 and 2008 ended Sunday, June 28, 2009 and June 29,2008, respectively.

 

Subsequent events havebeen disclosed through August 7, 2009, the date of the issuance of theseCondensed Unaudited Consolidated Financial Statements.

 

*Liquidity*

 

We have financed ouroperating losses and capital investments through sales of common stock, privateequity investments, capital and operating leases, bank lines of credit and cashflow from operations. As of June 28, 2009, our principal sources ofliquidity consisted of our cash and cash equivalents of $16.4 million,available credit under our revolving line of credit with Silicon Valley Bank of$4.0 million, and our investment in Tower with a market value ofapproximately $430,000. As of June 28, 2009, there is no materialdifference between the fair value and the carrying amount of the debtoutstanding under the Company’s line of credit and capital leasingarrangements.

 

The Company anticipatesthat its existing cash resources will fund operations, finance purchases ofcapital equipment and provide adequate working capital for the next twelvemonths. The Company’s liquidity is affected by many factors including, amongothers, the level of revenue and gross profit as a result of the cyclicality ofthe semiconductor industry and the current global economic crisis, theconversion of design opportunities into revenue, market acceptance of existingand new products including CSSPs based on our ArcticLinkTM and PolarPro® solutionplatforms, fluctuations in revenue as a result of product end-of-life,fluctuations in revenue as a result of the stage in the product life cycle ofits customers’ products, costs of securing access to and availability ofadequate manufacturing capacity, levels of inventories, wafer purchasecommitments, customer credit terms, the amount and timing of research anddevelopment expenditures, the timing of new product introductions, productionvolumes, product quality, sales and marketing efforts, the value and liquidityof its investment portfolio, the amount and financing arrangements forpurchases of capital equipment, changes in operating assets and liabilities,the ability to obtain or renew debt financing and to remain in compliance withthe terms of existing credit facilities, the ability to raise funds from thesale of shares of Tower Semiconductor Ltd., or Tower, and equity in theCompany, the issuance and exercise of stock options and participation in the Company’semployee stock purchase plan, and other factors related to the uncertainties ofthe industry and global economics. Accordingly, there can be no assurance thatevents in the future will not require the Company to seek additional capitalor, if so required, that such capital will be available on terms acceptable tothe Company.

 

*Principles of Consolidation*

 

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

 

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**QUICKLOGICCORPORATION**

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

 

*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 and non-monetaryassets and related elements of expense are translated using historical rates ofexchange. Income and expense elements are translated to U.S. dollars usingaverage exchange rates in effect during the period. Gains and losses from theforeign currency transactions of these subsidiaries are recorded as interestincome and other, net in the statement of operations.

 

*Uses of Estimates*

 

The preparation of theseconsolidated financial statements in conformity with generally acceptedaccounting principles, or GAAP, requires management to make estimates andassumptions that affect the reported amounts of assets and liabilities, thedisclosures of contingent assets and liabilities and the reported amounts ofrevenue and expenses during the period. Actual results could differ from thoseestimates, particularly in relation to revenue recognition, the allowance fordoubtful accounts, sales returns, valuation of investments, valuation oflong-lived assets, valuation of inventories including identification of excessquantities, market value and obsolescence, measurement of stock-basedcompensation awards, accounting for income taxes and measuring accruedliabilities.

 

*Concentration of Risk*

 

The Company’s accountsreceivable are denominated in U.S. dollars and are derived primarily from salesto customers located in North America, Europe and Asia Pacific. The Companyperforms ongoing credit evaluations of its customers and generally does notrequire collateral. See Note 11 for information regarding concentrations associatedwith accounts receivable. The Company’s investment in Tower is subject toequity risk. See Note 4 for information regarding the Company’s investment inTower Semiconductor Ltd.

 

**Note 2—SignificantAccounting Policies**

 

There have been nomaterial changes in the Company’s significant accounting policies for thesecond quarter of 2009 from its disclosure in the Annual Report on Form 10-Kfor the year ended December 28, 2008, except as described below. For adiscussion of the significant accounting policies, please see the Annual Reporton Form 10-K for the fiscal year ended December 28, 2008 filed withthe Securities Exchange Commission, or SEC, on March 11, 2009.

 

*RevenueRecognition*

 

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

 

The Company generallyrecognizes revenue as products are shipped if evidence of an arrangementexists, delivery has occurred, the sales price is fixed or determinable,collection of the resulting receivable is reasonably assured and product returnsare reasonably estimable.

 

Revenue is recognizedupon shipment of both programmed and unprogrammed parts to original equipmentmanufacturer, or OEM, customers, provided that legal title and risk ofownership have transferred.

 

A significant portion ofour sales is made through distributors. In the case of programmed parts andunprogrammed, end-of-life products, it is the Company’s practice to agree uponthe sales price with a distributor prior to shipment. Furthermore, distributorsare not allowed any future price adjustments and have no rights of return.Accordingly, the sales price is fixed or determinable and revenue is recognizedupon shipment if persuasive evidence of an arrangement exists, delivery hasoccurred, collection of the resulting receivable is reasonably assured andtitle and risk of loss have been transferred.

 

Until the first quarterof 2009 in the case of unprogrammed, other than end-of-life parts, which may beused by multiple end-customers, the distribution agreements allowed for rightsof return and post shipment price adjustments such as Ship from Stock andDebits, or SSDs. These rights of return and SSD provisions prevented us

 

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**QUICKLOGICCORPORATION**

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

 

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 quarterof 2008, the Company renegotiated the majority of its agreements with itsdistributors. Under the new agreements, post shipment price adjustments such asSSDs have been eliminated and parts held by distributors may only be returnedfor quality reasons under the Company’s standard warranty policy. Revenue isrecognized upon shipment of both programmed and unprogrammed parts todistributors if persuasive evidence of an arrangement exists, delivery hasoccurred, the sales price is fixed or determinable, collection of the resultingreceivable is reasonably assured and risk of loss has been transferred. As ofthe end of the first quarter of 2009, all of the Company’s distributors hadsigned the new agreements.

 

*New Accounting Pronouncements*

 

In April 2009, theFinancial Accounting Standards Board, or FASB, issued three FASB StaffPositions, or FSPs, related to fair value measurements, disclosures andother-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 DisclosuresAbout Fair Value of Financial Instruments*, amends SFAS No. 107,*Disclosures about Fair Value of FinancialInstruments*, to require disclosures about fair value of financialinstruments in interim financial statements as well as in annual financialstatements and also amends APB Opinion No. 28, *Interim Financial Reporting*, to require those disclosures inall interim financial statements. These FSPs are effective for periods endingafter June 15, 2009. Early adoption is permitted for periods ending after March 15,2009. The Company adopted the FSPs during the second quarter of 2009. The FSPshave no impact on the Company’s consolidated results of operations or financialcondition.

 

In May 2009, theFASB issued SFAS No. 165, “Subsequent Events”, which established generalstandards of accounting for and disclosure of events that occur after thebalance sheet date but before financial statements are issued or are availableto be issued. This standard required the Company to disclose the date throughwhich the Company has evaluated subsequent events and the basis for the date.This standard was effective for interim periods which ended after June 15,2009. See Note 1, “Basis of Presentation,” for disclosure of the date to whichsubsequent events are disclosed and Note 15, “Subsequent Events,” fordisclosure of subsequent events.

 

In June 2009, theFASB issued SFAS No. 168, *The FASBAccounting Standards Codification and the Hierarchy of Generally AcceptedAccounting Principles — a replacement of FASB Statement No. 162*.SFAS No. 168 replaces SFAS No. 162, *TheHierarchy of Generally Accepted Accounting Principles*, andestablishes the FASB Accounting Standards Codification, or Codification, as thesource of authoritative accounting principles recognized by the FASB to beapplied by nongovernmental entities in the preparation of financial statementsin conformity with generally accepted accounting principles in the UnitedStates. All guidance contained in the Codification carries an equal level ofauthority. On the effective date of SFAS No. 168, the Codificationsuperseded all then-existing non-SEC accounting and reporting standards. Allother non-grandfathered non-SEC accounting literature not included in theCodification will become non-authoritative. SFAS No. 168 is effective forfinancial statements issued for interim and annual periods ending after September 15,2009. The Company has evaluated this new statement, and determined that it willnot have a significant impact on the determination or reporting of ourfinancial results.

 

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**QUICKLOGIC CORPORATION**

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

 

**Note 3—NetLoss Per Share**

 

Basic net loss per shareis computed by dividing net loss available to common stockholders by theweighted average number of common shares outstanding during the period. Dilutednet loss per share was computed using the weighted average number of commonshares outstanding during the period plus potentially dilutive common sharesoutstanding during the period under the treasury stock method. In computing dilutednet loss per share, the average stock price for the period is used indetermining the number of shares assumed to be purchased from the exercise ofstock options.

 

For the second quarterand first half of 2009 and 2008, 9.5 million and 8.2 million shares,respectively, associated with equity awards outstanding and the estimatednumber of shares to be purchased under the current offering period of the 2009Employee Stock Purchase Plan were not included in the calculation of dilutednet loss per share, as they were considered antidilutive due to the net lossthe Company experienced during these periods.

 

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

 

On December 12,2000, the Company entered into several agreements with Tower, as amended, underwhich the Company agreed to make a strategic investment in Tower of up to$25 million as part of Tower’s plan to build and equip a new waferfabrication facility. During 2001 and 2002, the Company paid a total of$21.3 million to Tower to fulfill its investment requirements under theagreement. In partial consideration for the investment, the Company received1,757,368 Tower ordinary shares with an original cost of $16.6 million.The Company sold approximately 413,000 of the Tower ordinary shares in fiscal 2003.

 

During 2008 the Companywrote down the value of its investment in Tower shares by $1.4 million due toan “other than temporary” decline in market value, resulting in a carryingvalue of $0.13 per share for the period ended December 28, 2008. Thisdetermination included factors such as market value and the period of time thatthe market had been below the carrying value of the shares.

 

As of June 28, 2009,the Company held 1,344,543 available-for-sale Tower ordinary shares with anunrealized gain of $255,000 recorded in accumulated other comprehensive incomeon the balance sheet, representing the difference between the carrying valueper share and $0.32 per share, their market value on the last trading day ofthe reporting period. Pursuant to SFAS 157, the fair value of the Company’smarketable securities as of June 28, 2009 was determined based on “Level 1”inputs as described in Note 7. The Company plans to continue to hold 450,000 ofthe Tower ordinary shares in order to receive preferred product pricing underthe agreements with Tower and has recorded these shares as a long-terminvestment on the balance sheets. The remaining 894,543 shares are classifiedas a short-term investment on the balance sheets.

 

During the years of 2001and 2002, the Company also received $4.7 million in prepaid wafer creditsin partial consideration for the investment. During 2008, the Company assessedthe value of its Tower wafer credit and incurred a long-lived asset impairmentof $1.3 million. As of June 28, 2009, the prepaid wafer credits balancewas $634,000. The Company has guaranteed capacity at Tower through at least2010. These credits are recorded within long-term other assets on the balancesheets and can be applied toward wafer purchases from Tower at 15% of the valueof purchases made through 2010.

 

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**QUICKLOGICCORPORATION**

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

 

**Note 5—Balance Sheet Components**

** **
| ** **                                 | ** ** | **June 28,  2009** | ** ** | **December 28,  2008** | ** ** |
|--------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                 | ** ** | **(in  thousands)**     | ** ** |
| Inventories:                               |       |                    |       |                        |       |
| Raw  materials                             |       | $                       | 8          |                        | $          | 75 |   |
| Work-in-process                            |       | 1,809                   |       | 1,579                       |       |
| Finished  goods                            |       | 225                     |       | 246                         |       |
|                                       |       | $                       | 2,042      |                        | $          | 1,900 |   |
|                                       |       |                    |       |                        |       |
| Other  current assets:                     |       |                    |       |                        |       |
| Prepaid  expenses                          |       | $                       | 575        |                        | $          | 743 |   |
| Other                                      |       | 146                     |       | 90                          |       |
|                                       |       | $                       | 721        |                        | $          | 833 |   |
|                                       |       |                    |       |                        |       |
| Property  and equipment:                   |       |                    |       |                        |       |
| Equipment                                  |       | $                       | 13,563     |                        | $          | 13,881 |   |
| Software                                   |       | 8,696                   |       | 8,030                       |       |
| Furniture  and fixtures                    |       | 781                     |       | 840                         |       |
| Leasehold  improvements                    |       | 800                     |       | 800                         |       |
|                                       |       | 23,840                  |       | 23,551                      |       |
| Accumulated  depreciation and amortization |       | (20,375                 | )          | (20,058                     | )          |
|                                       |       | $                       | 3,465      |                        | $          | 3,493 |   |
|                                       |       |                    |       |                        |       |
| Other  assets:                             |       |                    |       |                        |       |
| Prepaid  wafer credits                     |       | $                       | 634        |                        | $          | 846 |   |
| Other                                      |       | 42                      |       | 57                          |       |
|                                       |       | $                       | 676        |                        | $          | 903 |   |
|                                       |       |                    |       |                        |       |
| Accrued  liabilities:                      |       |                    |       |                        |       |
| Employee  related accruals                 |       | $                       | 983        |                        | $          | 1,047 |   |
| Other                                      |       | 597                     |       | 490                         |       |
|                                       |       | $                       | 1,580      |                        | $          | 1,537 |   |

 

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**QUICKLOGICCORPORATION**

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

 

**Note 6—Obligations**

** **
| ** **                                             | ** ** | **June 28,  2009** | ** ** | **December 28,  2008** | ** ** |
|--------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                             | ** ** | **(in  thousands)**     | ** ** |
| Debt  and capital lease obligations:                   |       |                    |       |                        |       |
| Revolving  line of credit                              |       | $                       | 2,000      |                        | $          | 2,000 |   |
| Capital  leases                                        |       | 1,002                   |       | 753                         |       |
|                                                   |       | 3,002                   |       | 2,753                       |       |
| Current  portion of debt and capital lease obligations |       | (2,612                  | )          | (2,753                      | )          |
|                                                   |       | $                       | 390        |                        | $          | — |   |

 

*Revolving Line of Credit*

 

Effective August 2008,the Company amended its Second Amended and Restated Loan and Security Agreementwith Silicon Valley Bank. Terms of the amended agreement include a$6.0 million revolving line of credit available through June 2010, aslong as the Company is in compliance with the loan covenants. 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 isLIBOR plus 3.50%. During the second quarter of 2009, the Company repaid $2.0million of revolving debt and borrowed $2.0 million of revolving debt with avariable interest rate of 6.0% as of June 28, 2009.

 

The bank has a firstpriority security interest in substantially all of the Company’s tangible andintangible assets to secure any outstanding amounts under the agreement. Underthe terms of the agreement, except as noted above, the Company must maintain aminimum tangible net worth and adjusted quick ratio. The agreement also hascertain restrictions including, among others, on the incurrence of otherindebtedness, the maintenance of depository accounts, the disposition ofassets, mergers, acquisitions, investments, the granting of liens and thepayment of dividends. The Company was in compliance with the financialcovenants of the agreement as of the end of the current reporting period.

 

*Capital Leases*

 

In 2007, the Companyleased design software and related maintenance under a two year capital leaseat an imputed interest rate of 7.1% per annum. Terms of the agreement requirethe Company to make quarterly payments of approximately $190,000 through November 2009.The Company recorded a capital asset of $1.2 million and prepaidmaintenance of $256,000 that is being amortized over the term of the agreementand a capital lease obligation of $1.4 million. As of June 28, 2009,$370,000 was outstanding under the capital lease, all of which was classifiedas a current liability.

 

In January 2009, theCompany leased design software tools and related maintenance under a three-yearcapital lease at an imputed interest rate of 5.75% per annum. Terms of theagreement require the Company to make semi-annual payments of approximately$138,000 through August 2011, for a total of approximately $825,000 overthe three years period. As of June 28, 2009, $632,000 was outstandingunder the capital lease, of which $242,000 was classified as a currentliability.

 

**Note7—Fair Value Measurements**

 

EffectiveDecember 31, 2007, the Company adopted the provisions of SFAS No. 157,*Fair Value Measurements*, asamended by FSP FAS 157-1, *Application ofFASB Statement 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 assets andliabilities. The adoption of SFAS 157

 

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**QUICKLOGICCORPORATION**

**NOTESTO CONDENSED 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 theadoption did 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 liabilities inmarkets 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 June 28, 2009 consistent with thefair value hierarchy provisions of SFAS No. 157 (in thousands):

 
| ** **                              | ** ** | **As  of June 28, 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)                 |       | $                             | 12,714     |                              | $          | 12,714 |   | $ | — |   | $ | — |   | $ | 19,376 |   | $ | 19,376 |   | $ | — |   | $ | — |   |
| Investment  in Tower Semiconductor Ltd. |       | 430                           |       | 430                               |       | — |   | — |   | 175 |   | 175 |   | — |   | — |   |
| Total  assets                           |       | $                             | 13,144     |                              | $          | 13,144 |   | $ | — |   | $ | — |   | $ | 19,551 |   | $ | 19,551 |   | $ | — |   | $ | — |   |

 

----

(1)             Money market funds are presented as apart of cash and cash equivalents on the accompanying consolidated balancesheets.

 

The Company does not haveany financial liabilities that are subject to the provision of SFAS No. 157.

 

**Note8—Employee Stock Plans**

 

*1989 Stock Option Plan*

 

The 1989 Stock OptionPlan, or 1989 Plan, provided for the issuance of incentive and nonqualifiedoptions for the purchase of up to 4.6 million shares of common stock. Optionsgranted under the 1989 Plan have a term of up to ten years, and typicallyvest at a rate of 25% of the total grant per year over a four year period. In September 1999,the Company adopted the 1999 Stock Plan and no further stock option grants weremade under the 1989 Plan.

 

*1999 Stock Plan*

 

The 1999 Stock Plan, or1999 Plan, provided for the issuance of incentive and nonqualified options,restricted stock units and restricted stock. Equity awards granted under the1999 Plan have a term of up to ten years. Options typically vest at arate of 25% one year after the vesting commencement date, and one forty-eighthfor each month of service thereafter. In March 2009, the Board adopted the2009 Stock Plan which was approved by the

 

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**QUICKLOGICCORPORATION**

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

 

Company’s stockholders onApril 22, 2009.  Effective April 22,2009, no further stock options may be granted under the 1999 Plan.

 

*2009Stock Plan*

 

The 2009 Stock Plan, or2009 Plan, was adopted by the Board of Directors in March 2009 andapproved by the Company’s stockholders on April 22, 2009. As of June 28,2009, approximately 2.5 million shares were reserved for issuance under the2009 Plan. Equity awards that are cancelled, forfeited or repurchased under the1999 Plan also become available for grant under the 2009 Plan, up toa maximum of an additional 7,500,000 shares. Equity awards granted under the2009 Plan have a term of up to ten years. Options typically vest at arate of 25% one year after the vesting commencement date, and one forty-eighthfor each month of service thereafter. The Company may implement differentvesting schedules in the future with respect to any new equity awards.

 

*Employee Stock Purchase Plan*

 

The 1999 Employee StockPurchase Plan, or 1999 ESPP, was adopted by the Board of Directors in August 1999and was approved by the Company’s stockholders in September 1999.  The 1999 ESPP provided for standard six monthoffering periods.

 

In April 2009, theCompany adopted the 2009 Employee Stock Purchase Plan, or 2009 ESPP, and thelast purchase under the 1999 ESPP was made on May 15, 2009. The 2009 ESPP,was adopted by the Board of Directors in March 2009 and approved by theCompany’s stockholders in April 2009. 2.3 million shares have beenreserved for issuance under the 2009 ESPP. The 2009 ESPP provides for six monthoffering periods. Participants purchase shares through payroll deductions of upto 20% of an employee’s total compensation (maximum of 20,000 shares peroffering period). The 2009 ESPP permits the Board of Directors to determine,prior to each offering period, whether participants purchase shares at: (i) 85%of the fair market value of the common stock at the end of the offering period;or (ii) 85% of the lower of the fair market value of the common stock atthe beginning or the end of an offering period. The Board of Directors hasdetermined that, until further notice, future offering periods will be made at85% of the lower of the fair market value of the common stock at the beginningor the end of an offering period.

 

**Note9—Stock-Based Compensation**

 

Under SFAS 123(R), stock-based compensation expense is recognized inthe Company’s consolidated statements of operations and includes: (i) compensationexpense for stock-based compensation awards granted prior to, but not yetvested as of January 1, 2006, based on the grant date fair value estimatedand re-measured upon modification in accordance with the pro forma provisionsof SFAS 123, and (ii) compensation expense for the stock-basedcompensation awards granted or modified subsequent to January 1, 2006,based on the grant date fair value estimated in accordance with the provisionsof SFAS 123(R). The impact of SFAS 123(R) on the Company’s consolidatedfinancial statements for the second quarter and first half of 2009 and 2008 wasas follows (in thousands):

 
| ** **                           | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended**   | ** ** |
|--------------------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **                           | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** |
| Cost  of revenue                     |       | $                       | 71         |                    | $          | 106 |   | $ | 122 |   | $ | 171 |   |
| Research  and development            |       | 138                     |       | 196                     |       | 226 |   | 354 |   |
| Selling,  general and administrative |       | 358                     |       | 615                     |       | 603 |   | 1,057 |   |
| Total  costs and expenses            |       | $                       | 567        |                    | $          | 917 |   | $ | 951 |   | $ | 1,582 |   |

 

Theamount of stock-based compensation included in inventories as of June 28,2009 and December 28, 2008 was not significant.

 

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**QUICKLOGICCORPORATION**

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

 

*ValuationAssumptions*

 

Thefollowing weighted average assumptions are included in the estimated fair valuecalculations for stock option grants:

 
| ** **               | ** ** | **Three  Months Ended** | ** ** | **Six  Months Ended**   | ** ** |
|--------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **               | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** |
| Expected  term (years)   |       | 5.15                    |       | 6.28                    |       | 5.14 |   | 5.65 |   |
| Risk-free  interest rate |       | 1.98                    | %          | 3.16                    | %          | 1.97 | % | 2.91 | % |
| Expected  volatility     |       | 51.04                   | %          | 55.95                   | %          | 51.00 | % | 52.77 | % |
| Expected  dividend       |       | —                  |       | —                  |       | — |   | — |   |

 

The weighted averageestimated fair value for options granted during the second quarter of 2009 and2008 was $0.75 and $1.39 per option, respectively. The weighted averageestimated fair value for options granted during the first half of 2009 and 2008was $0.74 and $1.40 per option, respectively. As of June 28, 2009, thefair value of unvested stock options, net of expected forfeitures, wasapproximately $4.1 million. This unrecognized stock-based compensation expenseis expected to be recorded over a weighted average period of 2.94 years.

 

*Stock-BasedCompensation Award Activity*

 

The following tablesummarizes the shares available for grant under the 2009 Plan for the firsthalf of 2009:

 
| ** **                         | ** ** | **Shares  Available for Grant** | ** ** |
|------------------------------------|------------|-------------------------------------------|------------|
| ** **                         | ** ** | **(in thousands)**                   | ** ** |
| Balance  at December 28, 2008 |       | 8,313                                     |       |
| Authorized                         |       | 2,500                                     |       |
| Options  granted                   |       | (2,095                                    | )          |
| Options  forfeited or expired      |       | (6,964                                    | )          |
| RSAs  granted                      |       | —                                    |       |
| RSUs  granted                      |       | —                                    |       |
| RSUs  forfeited or expired         |       | 599                                       |       |
| Balance  at June 28, 2009     |       | 2,353                                     |       |

 

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**QUICKLOGIC CORPORATION**

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

 

*StockOptions*

 

Thefollowing table summarizes stock options outstanding and stock option activityunder the 1989 Plan, the 1999 Plan and the 2009 Plan, and the related weightedaverage exercise price, for the first half 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                                           |       | 2,095                   |       | 1.60                                  |       |                                  |       |                           |       |
| Forfeited or expired                              |       | (416                    | )          | 3.28                                  |       |                                  |       |                           |       |
| Exercised                                         |       | —                  |       | —                                |       |                                  |       |                           |       |
| Balance outstanding at June 28, 2009         |       | 9,046                   |       | $                                     |  3.58 |                                  | 6.56       |                           | $          |  573 |   |
| Exercisable at June 28, 2009                 |       | 4,754                   |       | $                                     |  5.10 |                                  | 4.20       |                           | $          |  13 |   |
| Vested and expected to vest at June 28, 2009 |       | 9,046                   |       | $                                     |  3.58 |                                  | 6.56       |                           | $          |  573 |   |

 

Theaggregate intrinsic value in the table above represents the total pretax intrinsicvalue, based on the Company’s closing stock price of $1.37 as of the end of theCompany’s current reporting period, which would have been received by theoption holders had all option holders exercised their options as of that date.

 

Therewere no stock option exercises during the first half of 2009. The totalintrinsic value of options exercised during the first half of 2008 was $30,000.Total cash received from employees as a result of employee stock optionexercises during the first half of 2008 was approximately $96,000. The Companysettles employee stock option exercises with newly issued common shares. Inconnection with these exercises, there was no tax benefit realized by theCompany due to its current loss position.

 

*Restricted Stock Awards and Restricted Stock Units*

 

TheCompany began issuing RSAs in the second quarter of 2007 and RSUs in the thirdquarter of 2007 under the 1999 Plan. RSAs entitle the holder to purchase sharesof common stock at par value during a short period of time, and purchasedshares are held in escrow until they vest. RSUs entitle the holder to receive,at no cost, one common share for each restricted stock unit as it vests. Asummary of the Company’s RSA and RSU activity and related information are asfollows:

 
| ** **                          | ** ** | **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                               | )          | 3.57 |   |
| Nonvested at June 28, 2009     |       | 55                                 |       | $ |  0.96 |   |

 

As of June 28,2009, the unrecognized stock-based compensation expense related to outstandingperformance based RSUs which are not currently expected to vest, was $15,000.The Company will recognize this expense to the extent it determines theseperformance based RSUs are likely to vest.

 

*EmployeeStock Purchase Plan*

 

Underthe 2009 ESPP, the Company issued 343,491 shares at a price of $0.55 per shareduring the six months ended June 28, 2009. As of June 28, 2009,2,300,000 shares under the 2009 ESPP remained available for issuance. For thethree and six months ended June 28, 2009, the Company recordedcompensation expense related to the ESPP of $105,000 and $127,000,respectively.

 

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**QUICKLOGIC CORPORATION**

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

 

Thefair value of rights issued pursuant to the Company’s ESPP was estimated on thecommencement date of each offering period using the following weighted averageassumptions:

 
| ** **              | ** ** | **Three Months Ended**  | ** ** | **Six Months Ended**    | ** ** |
|-------------------------|------------|-------------------------|------------|-------------------------|------------|
| ** **              | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** |
| Expected term (months)  |       | 6.00                    |       | 6.00                    |       | 6.00 |   | 6.00 |   |
| Risk-free interest rate |       | 0.29                    | %          | 3.56                    | %          | 0.29 | % | 3.56 | % |
| Expected volatility     |       | 126.98                  | %          | 49.57                   | %          | 126.98 | % | 49.57 | % |
| Expected dividend       |       | —                  |       | —                  |       | — |   | — |   |

 

As of June 28,2009, the unrecognized stock-based compensation expense relating to the Company’sESPP was $109,000 and is expected to be recognized over a weighted averageperiod of approximately 4.5 months.

 

**Note 10—Income Taxes**

 

In the second quarter of 2009 and 2008, the Companyrecorded an income tax benefit of $15,000 and $0, respectively, which consistedprimarily of income taxes on foreign operations offset by the monetization ofprior year federal research credits. In the first half of 2009 and 2008, theCompany recorded an income tax benefit of $11,000 and an income tax expense of$34,000, respectively, which consisted primarily of income taxes on foreignoperations offset by the monetization of prior year federal research credits.

 

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

 

TheCompany had approximately $68,000 and $66,000 of unrecognized tax benefits at June 28,2009 and December 28, 2008, respectively. The Company recognizes interestand penalties related to uncertain tax positions in income tax expense. As of June 28,2009, the Company had approximately $11,000 of accrued interest and penaltiesrelated to uncertain tax positions.

 

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

 

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

 

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

 

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**QUICKLOGIC CORPORATION**

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

 

The following is a breakdown of revenue by productline (in thousands):

 
| ** **                     | ** ** | **Three Months Ended**  | ** **  | **Six Months Ended**    | ** ** |
|--------------------------------|------------|-------------------------|-------------|-------------------------|------------|
| ** **                     | ** ** | **June 28,  2009** | ** **  | **June 29,  2008** | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** |
| *Revenue by product line (1):* |       |                    |        |                    |       |   |   |   |   |
| New products                   |       | $                       |  816   |                    | $          |  2,564 |   | $ |  1,474 |   | $ |  5,162 |   |
| Mature products                |       | 1,879                   |        | 4,591                   |       | 5,485 |   | 8,915 |   |
| End-of-life products           |       | 216                     |        | 1,588                   |       | 504 |   | 5,689 |   |
| Total revenue                  |       | $                       |  2,911 |                    | $          |  8,743 |   | $ |  7,463 |   | $ |  19,766 |   |

 

----

(1)             For all periods presented: New products includeArcticLink, PolarPro II, PolarPro, EclipseTM II and QuickPCI® II products.Mature products include pASIC® 3, QuickRAM®,Eclipse, QuickDSP and QuickFC products, as well as royalty revenue, programminghardware and software. End-of-life products include pASIC 1, pASIC 2,V3, QuickMIPS and QuickPCI products.

 

Thefollowing is a breakdown of revenue by shipment destination (in thousands):

 
| ** **              | ** ** | **Three Months Ended**  | ** **  | **Six Months Ended**    | ** ** |
|-------------------------|------------|-------------------------|-------------|-------------------------|------------|
| ** **              | ** ** | **June 28,  2009** | ** **  | **June 29,  2008** | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** |
| *Revenue by geography:* |       |                    |        |                    |       |   |   |   |   |
| United States           |       | $                       |  1,245 |                    | $          |  3,148 |   | $ |  3,455 |   | $ |  7,691 |   |
| Europe                  |       | 564                     |        | 1,376                   |       | 1,561 |   | 3,145 |   |
| Taiwan                  |       | 16                      |        | 1,917                   |       | 11 |   | 3,976 |   |
| Japan                   |       | 449                     |        | 684                     |       | 815 |   | 1,558 |   |
| China                   |       | 353                     |        | 940                     |       | 673 |   | 2,176 |   |
| Rest of North America   |       | 111                     |        | 172                     |       | 328 |   | 557 |   |
| Rest of Asia Pacific    |       | 173                     |        | 506                     |       | 620 |   | 663 |   |
| Total revenue           |       | $                       |  2,911 |                    | $          |  8,743 |   | $ |  7,463 |   | $ |  19,766 |   |

 

The following distributors and customers accountedfor 10% or more of the Company’s revenue for the periods presented:

 
| ** **                | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|---------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                | ** ** | **June 28, 2009** | ** ** | **June 29, 2008** | ** ** | **June 28, 2009** | ** ** | **June 29, 2008** | ** ** |
| Distributor “A” |       | 19                     | %          | 11                     | %          | 25 | % | 14 | % |
| Distributor “B” |       | 20                     | %          | *                      |       | 16 | % | 13 | % |
| Distributor “C” |       | 11                     | %          | *                      |       | * |   | * |   |
| Customer “A”    |       | *                      |       | 21                     | %          | * |   | 19 | % |
| Customer “B”    |       | *                      |       | 17                     | %          | 14 | % | 12 | % |

 

----

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

 

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**QUICKLOGIC CORPORATION**

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

 

The following distributors and customers accountedfor 10% or more of the Company’s accounts receivable as of the dates presented:

 
| ** **                | ** ** | **June 28, 2009** | ** ** | **December 28, 2008** | ** ** |
|---------------------------|------------|------------------------|------------|----------------------------|------------|
| Distributor “A” |       | 16                     | %          | 20                         | %          |
| Distributor “B” |       | 19                     | %          | *                          |       |
| Distributor “C” |       | 11                     | %          | 13                         | %          |
| Distributor “D” |       | *                      |       | 12                         | %          |
| Distributor “E” |       | 10                     | %          | *                          |       |

 

----

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

 

As of June 28, 2009, less than 10% of theCompany’s long-lived assets, including property and equipment and other assets,were located outside the United States.

 

**Note 12—Commitments and Contingencies**

 

Certainof the Company’s wafer manufacturers require the Company to forecast waferstarts several months in advance. The Company is committed to take delivery ofand pay for a portion of forecasted wafer volume. As of June 28, 2009and December 28, 2008, the Company had $3.5 million and$4.8 million, respectively, of outstanding commitments for the purchase ofwafer inventory.

 

TheCompany leases, with an option to renew, its primary facility under anon-cancelable operating lease that expires in 2012. In addition, the Companyrents development facilities in Canada and India as well as sales offices inEurope and Asia. Total rent expense for the second quarter of 2009 and 2008 wasapproximately $145,000 and $180,000, respectively, and rent expense for thefirst half of 2009 and 2008 was approximately $290,000 and $360,000,respectively.

 

Futureminimum lease commitments under the Company’s operating leases, and excludingproperty taxes and insurance are as follows:

 
| ** **          | ** ** | **Operating  Leases** | ** **  |
|---------------------|------------|-----------------------|-------------|
| ** **          | ** ** | **(in thousands)**    | ** **  |
| Fiscal Years        |       |                  |        |
| Rest of 2009        |       | $                     |  297   |   |
| 2010                |       | 429                   |        |
| 2011                |       | 396                   |        |
| 2012                |       | 396                   |        |
| 2013 and thereafter |       | —                |        |
|                |       | $                     |  1,518 |   |

 

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**QUICKLOGIC CORPORATION**

**NOTES TO CONDENSED UNAUDITED CONSOLIDATEDFINANCIAL STATEMENTS — (Continued)**

 

**Note 13—Litigation**

 

On October 26,2001, a putative securities class action was filed in the U.S. District Courtfor the Southern District of New York against certain investment banks thatunderwrote QuickLogic’s initial public offering, QuickLogic and some ofQuickLogic’s officers and directors. The complaint alleges excessive andundisclosed commissions in connection with the allocation of shares of commonstock in QuickLogic’s initial and secondary public offerings and artificiallyhigh prices through “tie-in” arrangements which required the underwriters’customers to buy shares in the aftermarket at pre-determined prices inviolation of the federal securities laws. Plaintiffs seek an unspecified amountof damages on behalf of persons who purchased QuickLogic’s stock pursuant tothe registration statements between October 14, 1999 and December 6,2000. Various plaintiffs have filed similar actions asserting virtuallyidentical allegations against over 300 other public companies, theirunderwriters, and their officers and directors arising out of each company’spublic offering. These actions, including the action against QuickLogic, havebeen coordinated for pretrial purposes and captioned *In re Initial Public Offering Securities Litigation, 21 MC 92*.

 

In June 2004,a stipulation of settlement and release of claims against the issuerdefendants, including QuickLogic, was submitted to the court for approval. On August 31,2005, the Court preliminarily approved the settlement. In December 2006,the appellate Court overturned the certification of classes in the six testcases that were selected by the underwriter defendants and plaintiffs in thecoordinated proceedings. Because class certification was a condition of thesettlement, it was unlikely that the settlement would receive final Courtapproval. On June 25, 2007, the Court entered an order terminating theproposed settlement based upon a stipulation among the parties to thesettlement. Plaintiffs have filed amended master allegations and amendedcomplaints, in the six test cases. On March 26, 2008, the Court denied thedefendants’ motion to dismiss the amended complaints.

 

Theparties recently reached a global settlement of the litigation. On June 9,2009, the Court issued an order granting preliminary approval of thesettlement. The final approval hearing has been set for September 10,2009. Under the settlement, the insurers would pay the full amount ofsettlement share allocated to the Company, and the Company would bear nofinancial liability. The Company, as well as the officer and directordefendants who were previously dismissed from the action pursuant to tollingagreements, would receive complete dismissals from the case. If the settlementdoes not receive final Court approval, and litigation against the Companycontinues, the Company believes it has meritorious defenses and intends todefend the action vigorously.

 

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

 

Fromtime to time, the Company is involved in legal actions arising in the ordinarycourse of business, including but not limited to intellectual property infringementand collection matters. Absolute assurance cannot be given that thirdparty assertions will be resolved without costly litigation in a manner that isnot adverse to the Company’s financial position, results of operations or cashflows or without requiring royalty or other payments in the future which mayadversely impact gross profit.

 

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**QUICKLOGIC CORPORATION**

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

 

**Note 14—Restructuring Charges**

 

In April 2008,the Company decided to outsource certain development functions that werepreviously performed in-house. This reorganization resulted in a headcountreduction of approximately 13% of employees worldwide. In June 2008, theCompany announced the completion of its CSSP focused operational realignmentwhich included an additional 17% reduction in headcount worldwide, resulting ina total reduction in worldwide headcount of approximately 30%. The purpose ofthe operational realignment is to lower fixed costs in order to conserve cash,to reduce the Company’s break-even revenue level and enable a quicker return toprofitability, to provide optimal profitability scaling with revenue growth andto provide greater headroom for discretionary costs to enable new productrevenue growth. Our restructuring liabilities were included in the “AccruedLiabilities” line item in our consolidated balance sheets as of June 28,2009 and December 28, 2008, and the remaining balance is expected to bepaid by the end of fiscal year 2009.

 

| ** **                        | ** ** | **Restructuring  Liabilities** | ** ** |
|-----------------------------------|------------|--------------------------------|------------|
| ** **                        | ** ** | **(in thousands)**        | ** ** |
| Balance at December 28, 2008 |       | $                              |  121  |   |
| Payments                          |       | (73                            | )          |
| Balance at June 28, 2009     |       | $                              |  48   |   |

 

**Note 15—Subsequent Events**

 

Effective in July 2009, the Company implementedan across the board salary reduction plan for the second half of 2009.  Asa result, all executives and most of the Company’s employees will take a 10%reduction of cash based compensation and, in its place, receive RSUs that vestin two tranches over a four month period. Our Chief Executive Officer will takea 20% reduction in salary for the second half of 2009 and will receive RSUs onthe same basis as the other employees.

 

Effective in the third quarter of 2009, the Boardmembers will take a 20% reduction in their cash compensation and the Companywill substitute the reduction amount with fully vested RSUs.

 

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

 

*Thefollowing Management’s Discussion and Analysis of Financial Condition andResults of Operations, as well as information contained in “Risk Factors” in Part II,Item 1A and elsewhere in this Quarterly Report on Form 10-Q, contains “forward-lookingstatements” within the meaning of Section 27A of the Securities Act of1933, as amended, and Section 21E of the Securities Exchange Act of 1934,as amended. We intend that these forward-looking statements be subject to thesafe harbors created by those provisions. Forward-looking statements aregenerally written in the future tense and/or are preceded by words such as “will,”“may,” “should,” “forecast,” “could,” “expect,” “suggest,” “believe,” “anticipate,”“intend,” “plan,” or other similar words. Forward-looking statements includestatements regarding (1) the conversion of our design opportunities intorevenue, (2)  our revenue levels, including the commercial success ofour Customer Specific Standard Products, or**CSSPs, and newproducts, 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. Thefollowing discussion should be read in conjunction with the attached condensedunaudited consolidated financial statements and notes thereto, and with ouraudited consolidated financial statements and notes thereto for the fiscal yearended December 28, 2008, found in our Annual Report on Form 10-Kfiled with the Securities and Exchange Commission, or SEC, on March 11,2009.*

 

**Overview**

 

QuickLogicCorporation was founded in 1988 and reincorporated in Delaware in 1999. Wedevelop and market low power customizable semiconductor solutions that enablecustomers to add differentiated features and capabilities to their mobile,prosumer (derived from the term “professional consumer”),consumer and industrial products. We are a fabless semiconductor company thatoperates in a single industry segment where we design, market and supportprimarily Customer Specific Standard Products, or CSSPs, and, secondarily,Field Programmable Gate Arrays, or FPGAs, associated design software andprogramming hardware. Our CSSPs are customized semiconductor building blockscreated from our new solution platforms including ArcticLink® II, ArcticLink,PolarPro® II, PolarPro, EclipseTM II and QuickPCI® II (all ofwhich fall into our new product category); our mature product family includespASIC® 3,QuickRAM®, Eclipse, and EclipsePlus, as well asroyalty revenue, programming hardware and design software; our end-of-lifeproduct family includes pASIC 1, pASIC 2, V3, QuickMIPS, QuickPCI and QuickFC.

 

We aremarketing CSSPs to Original Equipment Manufacturers, or OEMs, and OriginalDesign Manufactures, or ODMs, offering differentiated mobile products. Ourtarget mobile markets include:

 

·                  *Cellular*— including multimedia and smartphones;

 

·                  *Computing* — including Mobile Internet Devices, orMIDs, Netbooks, Smartbooks, Ultra Mobile PCs, or UMPCs, industrial personaldigital assistants, or PDAs, handheld point-of-sales, or POS, terminals andbroadband 3G data cards; and

 

·                  *Consumer Electronics*— including portable media players, orPMPs, personal navigation devices, or PNDs, and wireless hard disk drives orwireless storage devices.

 

Inaddition to working directly with our customers, we partner with othercompanies with expertise in certain technologies to develop additionalintellectual property, reference platforms and system software to provideapplication solutions. We also work with mobile processor manufacturers andcompanies that supply storage, networking or graphics components for embeddedsystems. The depth of these relationships varies depending on the partner andthe dynamics of the end market being targeted, but is typically a co-marketingprogram that includes joint account calls, promotional activities and/orengineering collaboration and developments, such as reference designs.

 

Duringthe second quarter we completed development, and released for manufacturing thelatest in our family of VEE-enabled solution platforms - ArcticLink II, VX2 andVX4. The VX family embeds the second generation Visual Enhancement Engine, orVEETM, Proven System Block (PSB), which improves the user’s video viewingexperience while extending system battery life by allowing reduction in thepower used by a mobile device’s single biggest consumer of power, thebacklight. The VX4 platform also embeds the Qualcomm developed MDDI serialinterface for ease of connection with their mobile processors. The VX2 platformalso embeds an LCD Controller and optional CellularRAM frame buffer for storingdisplay content.  By embedding the framebuffer, the mobile processor can be powered down more frequently, savingprevious energy and extending battery life. Both

 

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the VX2 and VX4 embed aprogrammable fabric for integrating additional PSBs that can reduce BOM cost,reduce PCB space, and can optimize system power consumption.

 

Althoughthe semiconductor industry as a whole has seen a dramatic decline in 2009 withmodest growth predicted in 2010, consumer products remain a strong driver forsemiconductor sales.  We believe that thetarget mobile markets for our CSSPs continue to provide growth potential.  Trends in the rapidly growing sub-segments ofthe consumer market in which we participate include:

 

·                  Mobile, Handheld Devices:  In2008, more than 1.2 billion cellular phones, ranging from multimedia to ultralow cost phones, were sold (according to iSuppli, a market intelligencecompany).  More importantly, iSupplipredicts that the smartphone segment of the overall cellular phone segment willincrease 62% over the next three years, from 219 million units in 2008 to 356million units, by the end of 2011. In fact, the smartphone segment is predictedto be one of the higher growth segments during the current economic downturn.

 

·                  Netbook/Smartbook Category:  iSupplipredicts shipments of wirelessly-enabled netbooks will more than triple by2012, rising to 36.3 million units, up from 10.3 million in 2008. This segmentis largely driven by the desire for a consumer platform that combines themobile computing and Internet experience of Notebooks with the day-long batterylife of Multimedia and Smartphones.

 

·                  USB-Based Broadband Data Card: Mobile data service providers anticipate consumer demand for these datacards to reach nearly 40 million units in 2009, according to the marketresearch firm ABI Research.  These datacards enable consumers to connect their Notebook, Netbook, Smartbook or PC tothe cellular network as a broadband internet connection.  During our second quarter, QuickLogicannounced the selection of a CSSP, based on the ArcticLink solution platform,for the Icera Espresso® 300 3G soft modem platform.  Icera is a leader in software-definedwireless chipsets and is the only company to deliver software-based cellular modemsfor broadband data cards, USB sticks, and mobile internet devices. Icera’sreference design uses a wafer-level chip scale (WLCSP) version of theArcticLink solution platform to compliment its second-generation baseband chipdesign.

 

Underlyingindustry trends affecting the large market for mobile devices include the useof platforms to enable rapid product proliferation, the need for high bandwidthsolutions enabling mobile Internet and streaming video, miniaturization and theneed to increase battery life. Another important trend is shrinking productlife cycles, which drives a need for faster, lower risk product development.There is intense pressure on the total product cost of these devices, includingper unit component costs and non-recurring development costs. As more peopleexperience the advantages of a mobile lifestyle at home, they demand the sameadvantages in their professional lives, and while they are “on the go”, ormobile. Therefore, we believe that these trends toward mobile, handheld productswhich have a small form factor and maximize battery life will also be evidentin other segments such as industrial, medical and military.

 

**Critical Accounting Estimates**

 

The methods, estimates and judgments we use inapplying our most critical accounting policies have a significant impact on theresults we report in our consolidated financial statements. The SEC has definedcritical accounting policies as those that are most important to the portrayalof our financial condition and results of operations and require us to make ourmost difficult and subjective judgments, often as a result of the need tomake estimates of matters that are inherently uncertain. Based on thisdefinition, our critical policies include revenue recognition, valuation ofinventories including identification of excess quantities and productobsolescence, allowance for doubtful accounts, valuation of investments,valuation of long-lived assets, measurement of stock-based compensation,accounting for income taxes, fair value measurements of financial assets andliabilities, and measuring accrued liabilities. We believe that we applyjudgments and estimates in a consistent manner and that such consistent applicationresults in consolidated financial statements and accompanying notes that fairlyrepresent all periods presented. However, any factual errors or errors in thesejudgments and estimates may have a material impact on our statements ofoperations and financial condition. For a discussion of critical accountingpolicies and estimates, please see Item 7 in our Annual Report on Form 10-Kfor the fiscal year ended December 28, 2008 filed with the SEC on March 11,2009.

 

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**Results of Operations**

 

The following table sets forth the percentage ofrevenue for certain items in our statements of operations for the periodsindicated:

 
| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Six Months Ended**   | ** ** |
|------------------------------------------------------|------------|------------------------|------------|------------------------|------------|
| ** **                                           | ** ** | **June 28, 2009** | ** ** | **June 29, 2008** | ** ** | **June 28, 2009** | ** ** | **June 29, 2008** | ** ** |
| Revenue                                              |       | 100.0                  | %          | 100.0                  | %          | 100.0 | % | 100.0 | % |
| Cost of revenue (1)                                  |       | 54.6                   |       | 45.5                   |       | 45.7 |   | 46.7 |   |
| Long-lived asset impairment                          |       | —                 |       | 17.7                   |       | — |   | 7.8 |   |
| Gross profit                                         |       | 45.4                   |       | 36.8                   |       | 54.3 |   | 45.5 |   |
| Operating expenses:                                  |       |                   |       |                   |       |   |   |   |   |
| Research and development                             |       | 64.5                   |       | 29.8                   |       | 46.8 |   | 27.5 |   |
| Selling, general and administrative                  |       | 93.0                   |       | 45.4                   |       | 71.7 |   | 42.0 |   |
| Long-lived asset impairment                          |       | —                 |       | 5.4                    |       | — |   | 2.4 |   |
| Restructuring costs                                  |       | —                 |       | 5.2                    |       | — |   | 2.3 |   |
| Loss from operations                                 |       | (112.1                 | )          | (49.0                  | )          | (64.2 | ) | (28.7 | ) |
| Write-down of investment in Tower Semiconductor Ltd. |       | —                 |       | (4.7                   | )          |   |   | (2.1 | ) |
| Interest expense                                     |       | (0.8                   | )          | (0.8                   | )          | (0.6 | ) | (0.7 | ) |
| Interest income and other, net                       |       | 1.5                    |       | 0.3                    |       | — |   | 0.7 |   |
| Loss before income taxes                             |       | (111.4                 | )          | (54.2                  | )          | (64.8 | ) | (30.8 | ) |
| Provision for (benefit from) income taxes            |       | (0.5                   | )          | —                 |       | (0.1 | ) | 0.2 |   |
| Net loss                                             |       | (110.9                 | )%         | (54.2                  | )%         | (64.7 | )% | (31.0 | )% |

 

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(1) The second quarter of 2009 and 2008includes $58,000 and $172,000, respectively, of costs for the write-down ofinventories and related charges, which represents 2.0% and 2.0% of revenue,respectively. The first half of 2009 and 2008 includes $236,000 and $1.1million, respectively, of costs for the write-down of inventories and relatedcharges, which represents 3.2% and 5.7% of revenue, respectively.

 

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**Three Months Ended June 28, 2009 and June 29, 2008**

 

*Revenue*

 

Thetable below sets forth the changes in revenue for the three months ended June 29,2008 as compared to the three months ended June 28, 2009 (in thousands,except percentage data):

 
| ** **            | ** ** | **Three Months Ended** | ** ** | ** **                         | ** ** | ** ** | ** ** |
|-----------------------|------------|----------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **            | ** ** | **June 28,  2009**          | ** ** | **June 29,  2008**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | **Amount**                       | ** ** | **% of Total  Revenues** | ** ** | **Amount** | ** ** | **% of Total  Revenues** | ** ** | **Year-Over-  Year Change** | ** ** |
| New  products         |       | $                                | 816        |                               | 28         | %          | $          | 2,564 |   | 29 | % | $ | (1,748 | ) | (68 | )% |
| Mature  products      |       | 1,879                            |       | 65                                 |       | 4,591      |       | 53 |   | (2,712 | ) | (59 | ) |
| End-of-life  products |       | 216                              |       | 7                                  |       | 1,588      |       | 18 |   | (1,372 | ) | (86 | ) |
| Total  revenue        |       | $                                | 2,911      |                               | 100        | %          | $          | 8,743 |   | 100 | % | $ | (5,832 | ) | (67 | )% |

 

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. The decline in new product revenue was caused by the expected end oflife by the manufacturer of a product family of a personal navigation device,or PND, and by delays in new product production ramp-up with several majorcustomers. The decline in mature product revenue resulted from the generaleconomic slowdown. Our mature product revenue decreased as a result of lowercustomer demand for pASIC 3 and QuickRAM products. One of our U.S. customers,purchasing primarily pASIC 3 devices, accounted for 8% and 17% of total revenuein the second quarters of 2009 and 2008, respectively.

 

In order to grow ourrevenue from its current level, we are dependent upon increased revenue fromour existing products, especially revenue from CSSPs designed using ourArcticLink and PolarPro solution platforms and the development of additionalnew products and CSSPs.

 

We continue to seek toexpand our revenue, including the pursuit of high volume sales opportunities inthe consumer market segment, by providing CSSPs incorporating intellectualproperty such as boot from managed NAND or industry standard interfaces such asUSB 2.0 OTG, SDIO and integrated drive electronics, or IDE. Our industry ischaracterized by intense price competition and by lower margins as ordervolumes increase. While winning large volume sales opportunities will increaseour revenue, we believe these opportunities may decrease our gross profit as apercentage of revenue.

 

*GrossProfit*

 

Thetable below sets forth the changes in gross profit for the three months ended June 29,2008 as compared to the three months ended June 28, 2009 (in thousands,except percentage data):

 

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| ** **                   | ** ** | **Three Months Ended** | ** ** | ** **                         | ** ** | ** ** | ** ** |
|------------------------------|------------|----------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                   | ** ** | **June 28,  2009**          | ** ** | **June 29,  2008**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Amount**                       | ** ** | **% of Total  Revenues** | ** ** | **Amount** | ** ** | **% of Total  Revenues** | ** ** | **Year-Over-Year Change** | ** ** |
| Revenue                      |       | $                                | 2,911      |                               | 100        | %          | $          | 8,743 |   | 100 | % | $ | (5,832 | ) | (67 | )% |
| Cost  of revenue             |       | 1,589                            |       | 55                                 |       | 3,982      |       | 46 |   | (2,393 | ) | (60 | ) |
| Long-lived  asset impairment |       | —                           |       | —                             |       | 1,545      |       | 18 |   | (1,545 | ) | (100 | )% |
| Gross  Profit                |       | $                                | 1,322      |                               | 45         | %          | $          | 3,216 |   | 36 | % | $ | (1,894 | ) | (59 | )% |

 

The decline in grossprofit was mainly due to the decline in revenue in the second quarter of 2009as compared to the second quarter of 2008. The second quarter 2009 gross profitdecline was partially offset by the absence in the second quarter of 2009 oflong-lived asset impairments which accounted for $1.5 million of gross profitcharges in the second quarter of 2008; a change in product mix towards matureproducts which carry higher gross margins than new products; and a reduction ofexcess and obsolescence provisions in the second quarter of 2009 as compared tothe second quarter of 2008.  The sale ofpreviously reserved inventories contributed $94,000, or 3.2% of revenue, togross profit in the second quarter of 2009 and $153,000, or 1.7% of revenue, inthe second quarter of 2008.

 

Our semiconductorproducts have historically had a long product life cycle and obsolescence hasnot been a significant factor in the valuation of inventories. However, as wepursue opportunities in the mobile market and continue to develop new CSSPs andproducts, we believe our product life cycle will be shorter and increase thepotential for obsolescence. We also regularly review the cost of inventoriesagainst estimated market value and record a lower of cost or market reserve forinventories that have a cost in excess of estimated market value, which couldhave a material impact on our gross margin and inventory balances based onadditional write-downs to net realizable value or a benefit from inventoriespreviously written down.

 

*OperatingExpenses*

 

Thetable below sets forth the changes in operating expenses for the three monthsended June 29, 2008 as compared to the three months ended June 28,2009 (in thousands, except percentage data):

 
| ** **                   | ** ** | **Three Months Ended** | ** ** | ** **                         | ** ** | ** ** | ** ** |
|------------------------------|------------|----------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                   | ** ** | **June 28,  2009**          | ** ** | **June 29,  2008**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Amount**                       | ** ** | **% of Total  Revenues** | ** ** | **Amount** | ** ** | **% of Total  Revenues** | ** ** | **Year-Over-Year Change** | ** ** |
| R&D  expense             |       | $                                | 1,877      |                               | 64         | %          | $          | 2,610 |   | 30 | % | $ | (733 | ) | (28 | )% |
| SG&A  expense            |       | 2,709                            |       | 93                                 |       | 3,970      |       | 45 |   | (1,261 | ) | (32 | ) |
| Long-lived  asset impairment |       | —                           |       | —                             |       | 468        |       | 5 |   | (468 | ) | (100 | ) |
| Restructuring  costs         |       | —                           |       | —                             |       | 452        |       | 5 |   | (452 | ) | (100 | ) |
| Total  operating expenses    |       | $                                | 4,586      |                               | 157        | %          | $          | 7,500 |   | 85 | % | $ | (2,914 | ) | (39 | )% |

 

*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 $0.7 million decrease in R&D expenses in the secondquarter of 2009 as compared to the second quarter of 2008 is attributableprimarily to a $540,000 or 56% decrease in compensation expenses due to reducedheadcount; a $280,000 or 47% decrease in expense allocations to R&D such asfacilities and other corporate costs; a $60,000 or 30% decrease in stock basedcompensation expenses, and a $30,000 or 64% decrease in travel andentertainment expenses, offset by an increase of $230,000 or 51% in outsideservices.

 

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*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 $1.3 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 $430,000or 24% decrease in compensation expenses as a result of headcount reductions; a$520,000 or 48% decrease in outside services such as consulting, temporary helpand legal, a $110,000 or 21% decrease in occupancy costs including rent,utilities and insurance expenses, and $260,000 or 42% decrease in stock basedcompensation expenses.

 

*Long-Lived Assets Impairment*

 

In the second quarter of2008, we recorded a $468,000 long-lived asset impairment charge to operatingexpenses as a result of our decision to outsource design implementationactivity, which resulted in unutilized EDA software licenses. There were nolong-lived asset impairment charges in the second quarter of 2009.

 

*Restructuring Costs*

 

Inthe second quarter of 2008, we reduced our worldwide headcount by approximately30% in order to: lower fixed cost; enable a lower break-even revenue level andoptimal profitability scaling with revenue growth; provide greater headroom fordiscretionary costs, resulting in the agility to pursue new product marketopportunities; conserve cash by reducing operating expenses; and enable aquicker return to profitability. In connection with this decision, we recordeda $452,000 restructuring charge for employee severance benefits in the secondquarter of 2008; these benefits are expected to be paid by the end of fiscal2009.

 

*Interest and Other Income (Expense), net*

 

Thetable below sets forth the changes in Interest and Other Income (Expense), net,from the three months ended June 29, 2008 as compared to the three monthsended June 28, 2009:

 
| ** **                                            | ** ** | **Three  Months Ended** | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** |
| ** **                                            | ** ** | **(in  thousands)**     | ** ** |
| * *                                              | * *   | * *                | * *   | * * | * * |
| Write-down of investment  in Tower Semiconductor Ltd. |       | $                       | —     |   | $ | (417 | ) |
| Interest  expense                                     |       | (23                     | )          | (72 | ) |
| Interest  income and other, net                       |       | 45                      |       | 30 |   |
|                                                  |       | $                       | 22         |   | $ | (459 | ) |

 

Inthe second quarter of 2008, we determined that our investment in Tower hadsuffered a decline in value that was determined to be “other than temporary.”This determination included factors such as market value and the period of timethat the market value has been below the carrying value. Accordingly, werecorded a write-down of $417,000 in the second quarter of 2008 based on thequoted market price of the stock on the last day of the reporting period. Therewere no write-downs of marketable securities in the second quarter of 2009.

 

The decrease in interestexpense is due primarily to the reduction of our average debt obligation to$3.1 million in the second quarter of 2009 from $4.1 million in the second quarterof 2008. The decrease in interest income is due primarily to the drop ininvestment yields between the second quarter of 2008 and the second quarter of2009.

 

We conduct a portion ofour research and development activities in Canada and India and we have salesand marketing activities in various countries outside of the United States.Most of these international expenses are incurred in local currency. Foreigncurrency transaction gains and losses are included in interest income andother,

 

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net, as they occur. We donot use derivative financial instruments to hedge our exposure to fluctuationsin foreign currency and, therefore, our results of operations are and willcontinue to be susceptible to fluctuations in foreign exchange gains or losses.

 

*Provisionfor (Benefit from) Income Taxes*

 
| ** **                      | ** ** | **Three  Months Ended** | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** |
| ** **                      | ** ** | **(in thousands)**      | ** ** |
| * *                        | * *   | * *                | * *   | * * | * * |
| Income  tax provision (benefit) |       | $                       | (15        | ) | $ | — |   |
|                                 |            |                         |            |  |  |  |  |

 

The income tax provision(benefit) for the second quarters of 2009 and 2008 are primarily for ourforeign operations which are cost-plus entities offset by the monetization ofprior year federal research credits. As of the end of the second quarter of2009, 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.

 

**Six Months Ended June 28, 2009 and June 29, 2008**

 

*Revenue*

 

Thetable below sets forth the changes in revenue for the six months ended June 29,2008 as compared to the six months ended June 28, 2009 (in thousands,except percentage data):

 
| ** **            | ** ** | **Six Months Ended** | ** ** | ** **                         | ** ** | ** ** | ** ** |
|-----------------------|------------|--------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **            | ** ** | **June 28,  2009**        | ** ** | **June 29,  2008**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **            | ** ** | **Amount**                     | ** ** | **% of Total  Revenues** | ** ** | **Amount** | ** ** | **% of Total  Revenues** | ** ** | **Year-Over-  Year Change** | ** ** |
| New  products         |       | $                              | 1,474      |                               | 20         | %          | $          | 5,162 |   | 26 | % | $ | (3,688 | ) | (71 | )% |
| Mature  products      |       | 5,485                          |       | 73                                 |       | 8,915      |       | 45 |   | (3,430 | ) | (38 | ) |
| End-of-life  products |       | 504                            |       | 7                                  |       | 5,689      |       | 29 |   | (5,185 | ) | (91 | ) |
| Total  revenue        |       | $                              | 7,463      |                               | 100        | %          | $          | 19,766 |   | 100 | % | $ | (12,303 | ) | (62 | )% |

 

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. The decline in new product revenue was caused by the expected end oflife of a product family of a personal navigation device, or PND, manufacturerand by delays in new product production ramp-up with several major customers.The decline in mature product revenue resulted from the general economicslowdown. Our mature product revenue decreased as a result of lower customerdemand for pASIC 3 and QuickRAM products. One of our U.S. customers, purchasingprimarily pASIC 3 devices, accounted for 14% and 12% of total revenue in thefirst half of 2009 and 2008, respectively.

 

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*GrossProfit*

 

Thetable below sets forth the changes in gross profit for the six months ended June 29,2008 as compared to the six months ended June 28, 2009 (in thousands,except percentage data):

 
| ** **                   | ** ** | **Six Months Ended** | ** ** | ** **                         | ** ** | ** ** | ** ** |
|------------------------------|------------|--------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                   | ** ** | **June 28,  2009**        | ** ** | **June 29,  2008**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Amount**                     | ** ** | **% of Total  Revenues** | ** ** | **Amount** | ** ** | **% of Total  Revenues** | ** ** | **Year-Over-Year Change** | ** ** |
| Revenue                      |       | $                              | 7,463      |                               | 100        | %          | $          | 19,766 |   | 100 | % | $ | (12,303 | ) | (62 | )% |
| Cost  of revenue             |       | 3,408                          |       | 46                                 |       | 9,240      |       | 47 |   | (5,832 | ) | (63 | ) |
| Long-lived  asset impairment |       | —                         |       | —                             |       | 1,545      |       | 8 |   | (1,545 | ) | (100 | )% |
| Gross  Profit                |       | $                              | 4,055      |                               | 54         | %          | $          | 8,981 |   | 45 | % | $ | (4,926 | ) | (55 | )% |

 

The decline in grossprofit was mainly due to the decline in revenue in the first half of 2009 ascompared to the first half of 2008. The gross profit decline during the firsthalf of 2009 was partially offset by the absence of long-lived assetimpairments which accounted for $1.5 million of gross profit charges in thefirst half of 2008; a change in product mix towards mature products which carryhigher gross margins than new products; a reduction of excess and obsolescenceprovisions in the first half of 2009 as compared to the first half of 2008; anda change to favorable purchase price variances in the first half of 2009 from unfavorablepurchase price variances in the first half of 2008.  The sale of previously reserved inventoriescontributed $215,000, or 2.9% of revenue, to gross profit in the first half of2009 and $384,000, or 1.9% of revenue, in the first half of 2008.

 

*OperatingExpenses*

 

Thetable below sets forth the changes in operating expenses for the six monthsended June 29, 2008 as compared to the six months ended June 28, 2009(in thousands, except percentage data):

 
| ** **                   | ** ** | **Six Months Ended** | ** ** | ** **                         | ** ** | ** ** | ** ** |
|------------------------------|------------|--------------------------------|------------|------------------------------------|------------|------------|------------|
| ** **                   | ** ** | **June 28,  2009**        | ** ** | **June 29,  2008**            | ** ** | ** ** | ** ** | ** ** | ** ** |
| ** **                   | ** ** | **Amount**                     | ** ** | **% of Total  Revenues** | ** ** | **Amount** | ** ** | **% of Total  Revenues** | ** ** | **Year-Over-Year Change** | ** ** |
| R&D  expense             |       | $                              | 3,489      |                               | 47         | %          | $          | 5,431 |   | 27 | % | $ | (1,942 | ) | (36 | )% |
| SG&A  expense            |       | 5,352                          |       | 72                                 |       | 8,290      |       | 42 |   | (2,938 | ) | (35 | ) |
| Long-lived  asset impairment |       | —                         |       | —                             |       | 468        |       | 2 |   | (468 | ) | (100 | ) |
| Restructuring  costs         |       | —                         |       | —                             |       | 452        |       | 2 |   | (452 | ) | (100 | ) |
| Total  operating expenses    |       | $                              | 8,841      |                               | 119        | %          | $          | 14,641 |   | 73 | % | $ | (5,800 | ) | (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 $1.9 million decrease in R&D expenses in the firsthalf of 2009 as compared to the first half of 2008 is attributable primarily toa $1.2 million or 57% decrease in compensation expenses due to reducedheadcount; a 

 

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$610,000or 47% decrease in expense allocations to R&D such as facilities and othercorporate costs; and a $130,000 or 36% decrease in stock based compensationexpenses.

 

*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 $2.9 million decrease inSG&A expenses in the first half of 2009 as compared to the first half of2008 resulted from our effort to realign resources with our expected revenueoutlook and was primarily due to a $1.1 million or 28% decrease in compensationexpenses as a result of headcount reductions; a $1.2 million or 53% decrease inoutside services such as consulting, temporary help and legal, and a $210,000or 22% decrease in occupancy costs including rent, utilities and insuranceexpenses, and a $450,000 or 43% decrease in stock based compensation expenses.

 

*Long-Lived Assets Impairment*

 

In the first half of2008, we recorded a $468,000 long-lived asset impairment charge to operatingexpenses as a result of our decision to outsource design implementationactivity, which resulted in unutilized EDA software licenses. There were nolong-lived asset impairment charges in the first half of 2009.

 

*Restructuring Costs*

 

Inthe first half of 2008, we reduced our worldwide headcount by approximately 30%in order to: lower fixed cost; enable a lower break-even revenue level andoptimal profitability scaling with revenue growth; provide greater headroom fordiscretionary costs, resulting in the agility to pursue new product marketopportunities; conserve cash by reducing operating expenses; and enable aquicker return to profitability. In connection with this decision, we recordeda $452,000 restructuring charge for employee severance benefits in the firsthalf of 2008; these benefits are expected to be paid by the end of fiscal 2009.

 

*Interest and Other Income (Expense), net*

 

Thetable below sets forth the changes in Interest and Other Income (Expense), net,for the six months ended June 29, 2008 as compared to the six months endedJune 28, 2009:

 
| ** **                                            | ** ** | **Six  Months Ended**   | ** ** |
|-------------------------------------------------------|------------|-------------------------|------------|
| ** **                                            | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** |
| ** **                                            | ** ** | **(in  thousands)**     | ** ** |
| * *                                              |       |                    |       |   |   |
| Write-down  of investment in Tower Semiconductor Ltd. |       | $                       | —     |   | $ | (417 | ) |
| Interest  expense                                     |       | (47                     | )          | (143 | ) |
| Interest  income and other, net                       |       | (1                      | )          | 134 |   |
|                                                  |       | $                       | (48        | ) | $ | (426 | ) |

 

Inthe first half of 2008, we determined that our investment in Tower had suffereda decline in value that was determined to be “other than temporary.” Thisdetermination included factors such as market value and the period of time thatthe market value has been below the carrying value. Accordingly, we recorded awrite-down of $417,000 in the first half of 2008 based on the quoted marketprice of the stock on the last day of the reporting period. There were nowrite-downs of marketable securities in the first half of 2009.

 

The decrease in interestexpense is due primarily to the reduction of our average debt obligation to$2.9 million in the first half of 2009 from $4.4 million in the first half of2008. The decrease in interest income is due primarily to the drop ininvestment yields between the first half of 2008 and the first half of 2009.

 

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*Provisionfor (benefit from) Income Taxes*

 
| ** **                      | ** ** | **Six  Months Ended**   | ** ** |
|---------------------------------|------------|-------------------------|------------|
| ** **                      | ** ** | **June 28,  2009** | ** ** | **June 29,  2008** | ** ** |
| ** **                      | ** ** | **(in thousands)**      | ** ** |
|                            |       |                    |       |   |   |
| Income  tax provision (benefit) |       | $                       | (11        | ) | $ | 34 |   |
|                                 |            |                         |            |  |  |  |  |

 

The income tax provision(benefit) for the second half of 2009 and 2008 are primarily for our foreignoperations which are cost-plus entities offset by the monetization of prioryear federal research credits. As of the end of the second half of 2009, ourability to utilize our income tax loss carryforwards in future periods isuncertain and, accordingly, we recorded a full valuation allowance against therelated US tax benefit. We will continue to assess the realizability ofdeferred tax assets in future periods.

 

**Liquidity and Capital Resources**

 

We have financed ouroperating losses and capital investments through sales of common stock, privateequity investments, capital and operating leases, bank lines of credit and cashflow from operations. As of June 28, 2009, our principal sources ofliquidity consisted of our cash and cash equivalents of $16.4 million,available credit under our revolving line of credit with Silicon Valley Bank of$4.0 million, and our investment in Tower with a market value ofapproximately $430,000. As of June 28, 2009, there is no materialdifference between the fair value and the carrying amount of the debtoutstanding under the Company’s line of credit and capital leasingarrangements.

 

Most of our cash and cashequivalents were invested in a US Treasury money market fund rated AAAm/Aaa.Our interest-bearing debt consisted of $2.0 million of revolving debtoutstanding from Silicon Valley Bank and $1.0 million outstanding under capitalleases (see Note 6 of the Condensed Unaudited Consolidated FinancialStatements). The term of the revolving debt facility runs until June 2010.Upon each advance, the Company can elect a variable interest rate, which is thegreater of six percent or the prime rate plus one percent, or a fixed ratewhich is the LIBOR plus 3.50%. We were in compliance with all loan covenants asof the end of the current reporting period. Our investment in Tower had amarket value of approximately $430,000 as of June 28, 2009. We intend tohold 450,000 of these shares, valued at $144,000 as of the end of the secondquarter of 2009 in order to obtain preferred wafer pricing from Tower.

 

*Net cash from operating activities*

 

Net cash used for operatingactivities was $2.6 million in the first half of 2009. The cash used foroperating activities resulted primarily from a net loss of $4.8 million,which included $2.3 million of non-cash charges. These non-cash chargesincluded stock-based compensation of $951,000, depreciation and amortization of$914,000, a write-down of inventory of $236,000 and utilization of wafercredits of $213,000. In addition, changes in working capital accounts in thefirst half of 2009 accounted for used cash of $71,000 which consisted of adecrease in current assets of $114,000 partially offset by a decrease incurrent liabilities of $185,000 in the first half of 2009. The decrease incurrent assets resulted from a decrease in accounts receivable of $278,000 dueprimarily to higher collection effort in the last month of the quarter and adecrease in other current assets of $228,000 partially offset by an increase ininventories of $378,000. The decrease in current liabilities resulted primarilyfrom a decrease in deferred income on shipments to distributors of $271,000.

 

Netcash used for operating activities was $367,000 in the first half of 2008. TheCompany’s net loss of $6.1 million, excluding non-cash charges of $6.5 million,provided $408,000 of cash flow. This was reduced by $775,000 for changes inworking capital accounts. The non-cash charges included $2.0 million oflong-lived asset impairment, stock-based compensation of $1.6 million,depreciation and amortization of $1.2 million, write-down of inventories of$1.1 million, write-down of marketable securities of $417,000 and decrease inwafer credits of $148,000.  Changes in working capital accounts usedcash as a result of a decrease in accounts payable of $2.7 million due totiming of expenditures and purchases of inventories and a decrease in deferredincome and royalty revenue of $210,000. These cash uses were partially offsetby a decrease in inventories of $1.7 million, decrease in other assets of$305,000 and a decrease in accounts receivable of $208,000.

 

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*Net cash from investing activities*

 

Net cash used forinvesting activities for the first half of 2009 and 2008 was $46,000 and$363,000, respectively, as a result of capital expenditures made primarily toacquire software used in the development and production of our products andsolutions. Capital expenditures, which are largely driven by the development ofnew products and manufacturing levels, are projected to be approximately$100,000 during the rest of fiscal year 2009.

 

*Net cash from financing activities*

 

Net cash used forfinancing activities was $327,000 for the first half of 2009, resulting fromscheduled payments under the terms of our debt and capital lease obligations,partially offset by $190,000 in proceeds related to the issuance of commonshares to employees under our equity plans. During the first half of 2009, werepaid $2.0 million of revolving debt and borrowed $2.0 million of revolvingdebt with a variable interest rate of 6.0%.

 

Netcash used for financing activities was $1.1 million for the first half of 2008,resulting from scheduled payments of $1.2 million under the terms of our debtand capital lease obligations, partially offset by $109,000 in proceeds relatedto the issuance of common shares to employees under our equity plans.

 

We require substantialcash to fund our business. However, we believe that our existing cash resourceswill be sufficient to fund operations and capital expenditures, and provideadequate working capital for at least the next twelve months. After the nexttwelve months, our cash requirements will depend on many factors,including our level of revenue and gross profit, the market acceptance of ourexisting and new products, the levels at which we maintain inventories andaccounts receivable, costs of securing access to adequate manufacturingcapacity, new product development efforts, capital expenditures and the levelof our operating expenses.

 

**Contractual Obligations and Commercial Commitments**

 

The following tablesummarizes our contractual obligations and commercial commitments as of June 28,2009 and the effect such obligations and commitments are expected to have onour liquidity and cash flows in future fiscal periods (in thousands):

 
| ** **                                                    | ** ** | **Payments  Due by Period** | ** ** |
|---------------------------------------------------------------|------------|-----------------------------|------------|
| ** **                                                    | ** ** | **Total**                   | ** ** | **Less  than  1 Year** | ** ** | **1-3  Years** | ** ** | **More  than  3 Years** | ** ** |
| *Contractual cash obligations:*                               |       |                        |       |   |   |   |   |   |   |
| Operating  leases                                             |       | $                           | 1,518      |   | $ | 528 |   | $ | 792 |   | $ | 198 |   |
| Wafer  purchases(1)                                           |       | 3,511                       |       | 3,511 |   | — |   | — |   |
| Other  purchase commitments                                   |       | 1,364                       |       | 1,264 |   | 100 |   | — |   |
| *Total contractual cash obligations*                          |       | 6,393                       |       | 5,303 |   | 892 |   | 198 |   |
| *Other commercial commitments*(2):                            |       |                        |       |   |   |   |   |   |   |
| Revolving  line of credit                                     |       | 2,000                       |       | 2,000 |   | — |   | — |   |
| Capital  lease obligations                                    |       | 1,002                       |       | 612 |   | 390 |   | — |   |
| *Total commercial commitments*                                |       | 3,002                       |       | 2,612 |   | 390 |   | — |   |
| Total  contractual obligations and commercial commitments (3) |       | $                           | 9,395      |   | $ | 7,915 |   | $ | 1,282 |   | $ | 198 |   |

 

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(1)         Certain of our wafer manufacturersrequire us to forecast wafer starts several months in advance. We are committedto take delivery of and pay for a portion of forecasted wafer volume. Waferpurchase 

 

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commitmentsof $3.5 million include both firm purchase commitments and a portion ofour forecasted wafer starts as of June 28, 2009.

 

(2)         Other commercial commitments are includedas liabilities on our balance sheets as of June 28, 2009.

 

(3)         Does not include unrecognized taxbenefits of $68,000 as of June 28, 2009. See Note 10 of the CondensedUnaudited Consolidated Financial Statements.

 

*Concentration of Suppliers*

 

We depend on a limitednumber of contract manufacturers, subcontractors, and suppliers for waferfabrication, assembly, programming and test of our devices, and for the supplyof programming equipment, and these services are typically provided by onesupplier for each of our devices. We generally purchase these single or limitedsource services through standard purchase orders or under our agreement withTower. Because we rely on independent subcontractors to perform these services,we cannot directly control product delivery schedules, costs or quality levels.Our future success also depends on the financial viability of our independentsubcontractors. These subcontract manufacturers produce products for othercompanies and we must place orders in advance of expected delivery. As aresult, we have only a limited ability to react to fluctuations in demand forour products, which could cause us to have an excess or a shortage ofinventories of a particular product, and our ability to respond to changes indemand is limited by these suppliers’ ability to provide products with thequantity, quality, cost and timeliness that we require. The decision not toprovide these services to us or the inability to supply these services to us,such as in the case of a natural or financial disaster, would have asignificant impact on our business. Increased demand from other companies couldresult in these subcontract manufacturers allocating available capacity tocustomers that are larger or have long-term supply contracts in place and wemay be unable to obtain adequate foundry and other capacity at acceptableprices, or we may experience delays or interruption in supply. Additionally,volatility of economic, market, social and political conditions in countrieswhere these suppliers operate may be unpredictable and could result in areduction in product revenue or increase our cost of revenue and couldadversely affect our business, financial condition and results of operations.

 

**Off-BalanceSheet 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 contractuallynarrow or limited purposes.

 

**RecentlyIssued Accounting Pronouncements**

 

SeeNote 2 of the Condensed Unaudited Consolidated Financial Statements for adescription of recent accounting pronouncements, including the respective datesof adoption and effects on results of operations and financial condition.

 

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

 

**InterestRate Risk**

 

Our exposure to marketrate risk for changes in interest rates relates primarily to our investmentportfolio and variable rate debt. We do not use derivative financialinstruments to manage our interest rate risk. We 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 second quarter of 2009 would have an immaterialeffect on our financial position, results of operations and cash flows.

 

**ForeignCurrency Exchange Rate Risk**

 

All of our sales and costof manufacturing are transacted in U.S. dollars. We conduct a portion of ourresearch and development activities in Canada and India and have sales andmarketing offices in several locations outside of the United States. We use theU.S. dollar as our functional currency. Most of the costs incurred at theseinternational locations are in local currency. If these local currenciesstrengthen against the U.S. dollar, our payroll and other local expenses willbe higher than we currently anticipate. Since our sales are transacted in U.S.dollars, this negative impact on expenses would not be offset by any positiveeffect on revenue. Operating expenses denominated in foreign currencies wereapproximately 18% and 26% of total operating expenses for the first half 2009and 2008, respectively. A currency exchange rate fluctuation of 10% would havecaused our operating expenses to change by approximately $160,000 in the firsthalf of 2009.

 

**EquityPrice Risk**

 

Our exposure to equityprice risk for changes in market value relates primarily to our investment inTower Semiconductor Ltd., or Tower. Tower’s ordinary shares trade on the NasdaqGlobal Market under the symbol “TSEM”. Since these securities are publiclytraded on the open market, they are subject to market fluctuations. Temporarymarket fluctuations are reflected by increasing or decreasing the presentedvalue of the related securities and recording “accumulated other comprehensiveincome (loss)” in the equity section of the balance sheet. An “other thantemporary” decline in market value is reflected by decreasing the carryingvalue of the related securities and recording a charge to operating expenses inthe income statement. We wrote down the value of the Tower shares due to an “otherthan temporary” decline in their market value by $15.1 million between 2001 andDecember 28, 2008. The determination that the decline in market value was “otherthan temporary” 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 nochanges since the end of the last fiscal year, in the risk exposures describedabove or the management of such exposures and there are no expected changesgoing forward.

 

**Item 4. Controls and Procedures**

 

**Evaluation of Disclosure Controls and Procedures**

 

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

 

Management, with theparticipation of the Chief Executive Officer and Chief Financial Officer, hasperformed an evaluation of our disclosure controls and procedures. Basedon this evaluation, our Chief Executive Officer and Chief Financial Officerhave concluded that, as of June 28, 2009, our disclosure controls andprocedures were effective.

 

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**Changes in Internal Control Over Financial Reporting**

 

Therewere no changes in our internal control over financial reporting that occurredduring the period covered by this Quarterly Report on Form 10-Q that havematerially affected, or are reasonably likely to materially affect, ourinternal control over financial reporting.

 

**Part II. Other Information**

 

**Item 1. Legal Proceedings**

 

SeeNote 13 of the Condensed Unaudited Consolidated Financial Statements for adescription of legal proceedings.

 

**Item 1A. Risk Factors**

 

Thisdescription includes any material changes to and supersedes the description ofthe risk factors associated with our business previously disclosed in ourfilings made with SEC. Because of the following risk factors, as well as othervariables affecting our operating results, past financial performance may notbe a reliable indicator of future performance, and historical trends should notbe used to anticipate results or trends in future periods.

 

**Risk Factors**

 

# *OurCSSP 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 continue to 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.

 

*Ourbusiness could be adversely affected by the current financial crisis*

 

The downturn in general worldwide economicconditions may continue to cause a reduction in the consumption of the productsthat use our devices, cause the cancellation of or delay our customers’introduction of new products using our devices, disrupt supply chains andaffect the financial health of our customers or suppliers. As such, thefinancial crisis may continue to adversely impact our customer and supplierrelationships, revenue level, product prices, the value of our inventories andlong-lived assets, reserves for excess and obsolete inventory, productioncapability, collectability of accounts receivable, access to inventory orequipment at suppliers and liquidity, which may materially harm our business.

 

# *We maynot have the liquidity to support our future operations and capitalrequirements*

#  

As a result of currentrevenue and operating expense levels, changes in working capital and interestand debt payments, we will need to generate significantly higher revenue togenerate positive cash flow. In addition, our new products such as ourArcticLink and PolarPro solution platforms and products currently underdevelopment, have been generating lower gross margin as a percentage of revenuethan the rest of our historical business due to the markets that we havetargeted and the larger order quantities associated with these applications.Whether we can achieve cash flow levels sufficient to support our operationscannot be accurately predicted, and our investment portfolio is subject to adegree of interest rate and liquidity risk. Unless such cash flow levels areachieved and our

 

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investment portfolioremains liquid and its capital is preserved, we may need to borrow additionalfunds or sell debt or equity securities, or some combination thereof, toprovide funding for our operations. Such additional funding source may not beavailable on commercially reasonable terms, or at all. If adequate funds arenot available when needed, our financial condition and operating results wouldbe materially and adversely affected and we may not be able to operate ourbusiness without significant changes in our operations, or at all.

 

*Restrictive covenants in the indentures andagreements governing our current and future indebtedness could restrict our operatingflexibility*

 

Theindentures and agreements governing our existing debt, and debt we may incur inthe future, contain, or may contain, affirmative and negative covenants thatmaterially limit our ability to take certain actions, including our ability toincur debt, pay dividends and repurchase stock, make certain investments andother payments, enter into certain mergers and consolidations, engage in saleleaseback transactions and encumber and dispose of assets. In addition, ourfuture debt agreements may contain financial covenants and ratios.

 

Thebreach of any of these covenants by us or the failure by us to meet any ofthese ratios or conditions could result in a default under any or all of suchindebtedness. If a default occurs under any such indebtedness, all of theoutstanding obligations thereunder could become immediately due and payable,which could result in a default under our other outstanding debt and could leadto an acceleration of obligations related to other outstanding debt. The existenceof such a default or event of default could also preclude us from borrowingfunds under our revolving credit facilities. Our ability to comply with theprovisions of the indentures, credit facilities and other agreements governingour outstanding debt and indebtedness we may incur in the future can beaffected by events beyond our control and a default under any debt instrument,if not cured or waived, could have a material adverse effect on us.

 

# *If wefail to successfully develop, introduce and sell CSSPs and new products, or ifour CSSP design opportunities do not generate the revenue we expect, we may beunable to compete effectively in the future*

#  

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

 

We expect our businessgrowth to be driven by CSSPs, and CSSP revenue growth needs to be strong enoughto achieve profitability while offsetting expected declines in other parts ofour business. The gross margin associated with our CSSPs and new products isgenerally lower than the gross margin of our mature and end-of-life products,due primarily to the price sensitive nature of the higher volume mobileconsumer opportunities that we are pursuing with CSSPs. If our mature productrevenue were to decline more quickly than expected, it could have a significanteffect on our results of operations and cash flows. Because the product lifecycle of mobile products is short, we must replace revenue at the end of aproduct life cycle with sales from new design opportunities. In addition, salesof our mature product family could decline if competitors replace us in thesedesign opportunities. While we expect revenue and gross profit growth fromCSSPs will offset the expected decline in revenue and gross profit from ourmature products and the effect of short mobile product life cycles, there is noassurance whether or when this will occur. In order to grow our revenue fromits current level, we are dependent upon increased revenue from our existingproducts, especially CSSPs based on our ArcticLink and PolarPro solutionplatforms, and the development of CSSPs, additional new products and solutions.

 

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If (i) we are unableto design, produce and sell new CSSPs that meet design specifications, addresscustomer requirements and generate sufficient revenue and gross profit; (ii) marketdemand for our CSSPs and other products fails to materialize; (iii) we areunable to obtain adequate capacity on a timely basis; (iv) we are unableto develop CSSPs or solutions in a timely manner; or (v) our customers donot successfully 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 maybe unable to accurately estimate quarterly revenue, which could adverselyaffect the trading price of our stock*

#  

Our current productdelivery cycle can be longer than our customers’ known requirements forproduct. As a result, we may have low visibility to product demand in any givenquarter. If our customers cannot provide us with accurate delivery lead times,we may not be able to deliver product to our customers in a timely fashion.Furthermore, our ability to respond to increased demand is limited toinventories on hand or on order, the capacity available at our contractmanufacturers and our capacity to program products to customer specifications.If we fail to accurately estimate customer demand, record revenue, or if ouravailable capacity is less than needed to meet customer demand, our results ofoperations could be harmed and our stock price could materially fluctuate.

 

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

#  

A few end-customers canrepresent a significant portion of our total revenue in a given reportingperiod and the likelihood of this occurring will increase in the future as wetarget market leading manufacturers of high volume mobile applications. As inthe past, future demand from these customers may fluctuate significantly fromquarter to quarter. These customers typically order products with shortrequested delivery lead times, and do not provide a commitment to purchaseproduct past the period covered by purchase orders, which may be rescheduled orcancelled. In addition, our manufacturing lead times are longer than thedelivery lead times requested by these customers, and we make significantpurchases of inventory and capital expenditures in anticipation of future demand.If revenue from any significant customer were to decline substantially, we maybe unable to offset this decline with increased revenue and gross margin fromother customers and we may purchase excess inventories. These factors couldseverely harm our business.

 

In addition, we may makea significant investment in long-lived assets for the production of ourproducts based upon historical and expected demand. If demand for our productsor gross margin generated from our products does not meet our expectations orif we are unable to collect amounts due from significant customers, we may berequired to write-off inventories, provide for uncollectible accountsreceivable or incur charges against long-lived assets, which would materiallyharm our business.

#  

# *Wedepend upon third parties to fabricate, assemble, test and program ourproducts, and they may discontinue manufacturing our products, fail to give ourproducts priority, be unable to successfully manufacture our products to meetperformance, volume or cost targets, or inaccurately report inventories to us*

#  

We contract with thirdparties to fabricate, assemble, test and program our devices. Our devices aregenerally fabricated, assembled and programmed by single suppliers, and theloss of a supplier, transfer of manufacturing to a new location, expiration ofa supply agreement or the inability of our suppliers to manufacture ourproducts to meet volume, performance and cost targets could have a materialadverse effect on our business. Our relationship with our suppliers couldchange as a result of a merger or acquisition. If for any reason thesesuppliers or any other vendor becomes unable or unwilling to continue toprovide services of acceptable quality, at acceptable costs and in a timelymanner, our ability to operate our business or deliver our products to ourcustomers could be severely impaired. We would have to identify and qualifysubstitute suppliers, which could be time consuming, difficult and result inunforeseen operational problems, or we could announce an end-of-life programfor these products. Alternate suppliers might not be available to fabricate,assemble, test and program our devices or, if available, might be unwilling orunable to offer services on acceptable terms.

 

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In addition, ifcompetition for wafer manufacturing capacity increases, if we need to migrateto more advanced wafer manufacturing technology, or if competition for assemblyservices increases, we may be required to pay or invest significant amounts tosecure access to this capacity. For example, between 2001 and 2002 we invested$21.3 million in equity and prepaid wafer credits to obtain guaranteed waferfabrication capacity at Tower Semiconductor until at least 2010. The number ofcompanies that provide these services is limited and some of them have limitedoperating histories and financial resources. In the event our current suppliersrefuse or are unable to continue to provide these services to us, or if we areunable to secure 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 ofour inventory transactions based on information from our subcontractors. If wedo not receive prompt and accurate information from our suppliers, we could beunable to meet our delivery commitments to customers or commit to manufacturinginventories that are not required to meet customer delivery commitments, whichcould materially harm our business.

 

# *Ourfuture results depend on our relationship with Tower*

#  

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

 

The value of ourinvestment in Tower and its corresponding wafer credits may also be adverselyaffected by a deterioration of conditions in the market for foundrymanufacturing services, the market for semiconductor products, Tower’sfinancial health and Tower’s ability to remain in compliance with Nasdaqlisting standards. As of June 28, 2009, we held 1,344,543 available forsale Tower ordinary shares.  Tower’sshares have been trading below $1.00 for the past 52 weeks, if Tower does notremain in compliance with Nasdaq listing standards, or if Tower’s financialposition is determined to be significantly impaired, the liquidity of ourinvestment and our ability to utilize the remaining prepaid wafer credits maybe adversely affected.

 

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

#  

We spend significant timeand money designing and developing silicon solution platforms such asArcticLink and PolarPro and proven system blocks, such as our VEE, USB and IDE,or emerging technologies, such as low power programmable logic, advancedprocess technology or small form factor packaging. We intend to developadditional products and solutions and to adopt new technologies in the future.If system manufacturers adopt alternative standards or technologies, if anindustry standard or emerging technology that we have targeted fails to achievebroad market acceptance, if customers choose low power offerings from ourcompetitors, or if we are unable to bring the technologies or solutions tomarket in a timely and cost-effective manner, we may be unable to generatesignificant revenue from our research and development efforts. As a result, ourbusiness would be materially harmed and we may be required to write-off relatedinventories and long-lived assets.

 

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

#  

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

 

# *If wefail to adequately forecast demand for our products, we may incur productshortages or excess product inventories*

#  

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

 

Our approach todeveloping solutions for potential customers involves: (i) embeddedprocessors developed by other companies; (ii) peripheral devices developedby other parties such as micro hard disk drives, Wi-Fi devices and NAND flashmemory; (iii) proprietary intellectual property such as key elements ofour VEE technology; and (iv) specific industry standards such as USB 2.0OTG, Secure Digital High Capacity, or SDHC, IDE and SDIO. We have entered intoinformal partnerships with other parties that involve the development ofsolutions that interface with their devices or standards. These informalpartnerships also may involve joint marketing campaigns and sales calls. If oursolutions are not incorporated into customer products, if our partnersdiscontinue production of or integrate our solution into their productofferings, or if the informal partnerships do not grow as expected or if theyare significantly reduced or terminated by acquisition or other means, ourrevenue and gross margin will be materially harmed and we may be required towrite-off related inventories and long-lived assets. Fluctuations in ourmanufacturing processes, yields and quality, especially for new products, mayincrease our costs.

 

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

 

Yield fluctuationsfrequently occur in connection with the manufacture of newly introducedproducts, with changes in product architecture, with manufacturing at newfacilities, on new fabrication processes or in conjunction with new backendmanufacturing processes. Newly introduced solutions and products, such as ourCSSPs and ArcticLink and PolarPro solution platforms, are often more complexand more difficult to produce, increasing the risk of manufacturing relateddefects. New manufacturing facilities or processes are often more complex andtake a period of time to achieve expected quality levels and manufacturingefficiencies. While we test our products, including our software developmenttools, they may still contain errors or defects that are found after we have

 

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commenced commercialproduction. Undetected errors or defects may also result from new manufacturingprocesses or when new intellectual property is incorporated into our products.If our products or software development tools contain undetected or unresolveddefects, we may lose market share, experience delays in or loss of marketacceptance, reserve or scrap inventories or be required to issue a productrecall. In addition, we would be at risk of product liability litigation ifdefects in our products were discovered. Although we attempt to limit ourliability to end users through disclaimers of special, consequential andindirect damages and similar provisions, we cannot assure you that suchlimitations of liability will be legally enforceable.

 

# *We havea history of losses and cannot assure you that we will again be profitable inthe future*

#  

We incurred significantlosses to date. Our accumulated deficit as of June 28, 2009 was$153.0 million. We recorded a net loss of $9.4 million in 2008, $11.1million in 2007, and $9.2 million in 2006, and we may not return toprofitability in any future periods.

 

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

#  

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

 

Factors that could causeour operating results to fluctuate include: (i) successful development andmarket acceptance of our products and solutions; (ii) our ability toaccurately forecast product volumes and mix, and to respond to rapid changes incustomer 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) ourreliance on subcontract manufacturers for product capacity, yield and quality; (viii) ourcompetitors’ product portfolio and product pricing policies; (ix) timelyimplementation of efficient manufacturing technologies; (x) errors inapplying or changes in accounting and corporate governance rules;(xi) theissuance of equity compensation awards or changes in the terms of our stockplan or employee stock purchase plan;(xii) mergers or acquisitions; (xiii) theimpact of import and export laws and regulations; (xiv) the cyclical nature ofthe semiconductor industry and general economic, market, political and socialconditions in the countries where we sell our products and the related effecton our customers, distributors and suppliers; and (xv) our ability to obtaincapital, debt financing and insurance on commercially reasonable terms*.*Although certain of these factors areout of our immediate control, unless we can anticipate and be prepared withcontingency plans that respond to these factors, our business may be materiallyharmed.

 

We may encounter periodsof industry wide semiconductor oversupply, resulting in pricing pressure, aswell as undersupply, resulting in a risk that we could be unable to fulfill ourcustomers’ requirements. The semiconductor industry has historically beencharacterized by wide fluctuations in the demand for, and supply of, itsproducts. These fluctuations have resulted in circumstances when supply of anddemand for semiconductors has been widely out of balance. An industry widesemiconductor oversupply could result in severe downward pricing pressure fromcustomers. In a market with undersupply of manufacturing capacity, we wouldhave to compete with larger foundry and assembly customers for limitedmanufacturing resources. In such an environment, we may be unable to have ourproducts manufactured in a timely manner, at a cost that generates adequategross profit or in sufficient quantities. Since we outsource all of ourmanufacturing and generally have a single source of wafer supply, test,assembly and programming for our products, we are particularly vulnerable tosuch supply shortages and capacity limitations. As a result, we may be unableto fulfill orders and may lose customers. Any future industry wide oversupplyor undersupply of semiconductors could materially harm our business.

 

# *We maybe unable to successfully grow our business if we fail to compete effectivelywith others to attract and retain key personnel*

#  

We believe our futuresuccess depends upon our ability to attract and retain highly competentpersonnel. Our employees are at-will and not subject to employment contracts.Hiring and retaining qualified sales, technical and financial personnel aredifficult due to the limited number of qualified professionals, economicconditions and the

 

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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.

#  

# *Problemsassociated with international business operations could affect our ability tomanufacture and sell our products*

#  

Most of our products aremanufactured outside of the United States at manufacturing facilities operatedby our suppliers in Asia, South Asia and the Middle East regions. As a result,these manufacturing operations and new product introductions are subject torisks of political instability.

 

A significant portion ofour total revenue comes from sales to customers located outside the UnitedStates. We anticipate that sales to customers located outside the United Stateswill continue to represent a significant portion of our total revenue in futureperiods. In addition, most of our domestic customers sell their productsoutside of North America, thereby indirectly exposing us to risks associatedwith foreign commerce and economic instability. In addition to overseas salesoffices, we have significant research and development activities in Canada andIndia. Accordingly, our operations and revenue are subject to a number of risksassociated with foreign commerce, including the following: (i) staffingand managing foreign offices; (ii) managing foreign distributors; (iii) collectingamounts due; (iv) political and economic instability; (v) foreigncurrency exchange fluctuations; (vi) changes in tax laws, import andexport regulations, tariffs and freight rates; (vii) timing andavailability of export licenses; (viii) supplying products that meet localenvironmental regulations; and (ix) inadequate protection of intellectualproperty rights.

 

In the past, we havedenominated sales of our products to foreign countries exclusively in U.S.dollars. As a result, any increase in the value of the U.S. dollar relative tothe local currency of a foreign country will increase the price of our productsin that country so that our products become relatively more expensive tocustomers in their local currency. As a result, sales of our products in thatforeign country may decline. If the local currency of a foreign country inwhich we conduct business strengthens against the U.S. dollar, our payroll andother local expenses will be higher, and since sales are transacted in U.S.dollars, would not be offset by any increase in revenue. To the extent any suchrisks materialize, our business could be materially harmed.

 

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

 

# *OurCSSPs face competition from suppliers of ASSPs, suppliers of integratedapplication processors, and suppliers of ASICs*

#  

We face competition fromcompanies that offer ASSPs such as Cypress Semiconductor. While it is difficultto provide 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 maydepend upon third party distributors and independent sales representatives tomarket and sell our products, and they may discontinue sale of our products,fail to give our products priority or be unable to successfully market, selland support our products*

#  

We contract with thirdparty distributors and independent sales representatives to market and sell aportion of our products in certain geographies. Although we have contracts withour distributors and representatives, our agreements with them may beterminated on short notice by either party and, if terminated, we may be unableto 

 

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

 

Individual distributorsand OEMs often represent a significant portion of our accounts receivable. Ifwe are unable to collect funds due from these distributors and customers, ourfinancial results may be materially harmed.

 

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

#  

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

 

In the past, we have beeninvolved in litigation relating to our alleged infringement of third partypatents or other intellectual property rights. This type of litigation isexpensive and consumes large amounts of management time and attention.Additionally, matters that we initially consider not material to our businesscould become costly. In addition, if the letters we sometimes receive allegingpatent infringement or other similar matters result in litigation that we lose,a court could order us to pay substantial damages and/or royalties, andprohibit us from making, using, selling or importing essential technologies.For these and other reasons, this type of litigation could materially harm our business.

 

Although we may seek toobtain a license under a third party’s intellectual property rights in order tobring an end to certain claims or actions asserted against us, we may not beable to obtain such a license on reasonable terms, or at all. We have enteredinto technology license agreements with third parties which give those partiesthe right to use patents and other technology developed by us and which give usthe right to use patents and other technology developed by them. We anticipatethat we will continue to enter into these kinds of licensing arrangements inthe future; however, it is possible that desirable licenses will not beavailable to us on commercially reasonable terms. If we lose existing licensesto key technology, or are unable to enter into new licenses that we deemimportant, our business could be materially harmed.

 

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

 

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# *We mayengage in manufacturing, distribution or technology agreements that involvenumerous risks, including the use of cash, diversion of resources and significantwrite-offs*

#  

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

 

# *Ourbusiness is subject to the risks of earthquakes, other catastrophic events andbusiness interruptions for which we may maintain limited insurance*

#  

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

 

We do not have a detaileddisaster recovery plan. In addition, we do not maintain sufficient businessinterruption and other insurance policies to compensate us for all losses thatmay occur. Any losses or damages incurred by us as a result of a catastrophicevent or any other significant uninsured loss could have a material adverseeffect on our business.

 

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

#  

Our officers, directorsand principal stockholders together control a significant portion of our outstandingcommon stock. As a result, these stockholders, if they act together, will beable to significantly influence our operations, affairs and all mattersrequiring stockholder approval, including the election of directors andapproval of significant corporate transactions. This concentration of ownershipmay have the effect of delaying or preventing a change in control and mightaffect the market price of our common stock. This concentration of ownershipmay not be in the best interest of our other stockholders.

 

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

#  

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

 

*Our Common Stock may become ineligible for listing on theNasdaq Global Market or alternatively the NASDAQ Capital Market if it does nottrade at or above $1.00, which would materially adversely affect the liquidityand price of our Common Stock.*

 

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 eventthat our stock fails to maintain a minimum closing bid price of at least $1.00for 30 consecutive business days, we may receive a deficiency notice from theListing Qualifications Department of the Nasdaq Stock Market.  If we receive a deficiency notice, our stockwill have to

 

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achievea minimum closing bid price of at least $1.00 for at least 10 consecutivebusiness days within 180 calendar days, or else we may be delisted from theNasdaq Global Market. Should we be delisted from the NASDAQ Global Market, wemay be eligible for listing on the Nasdaq Capital Market, subject to meetingspecific quantitative standards, including maintaining a minimum closing bidprice of $1.00, and would have to achieve that within the 180 calendar days ofinitial listing on the Nasdaq Capital Market.

 

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.

 

*The market price of our common stock may fluctuate significantlyand could lead to securities litigation*

 

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

 

# *Changesto existing accounting pronouncements or taxation rules or practices maycause adverse revenue fluctuations, affect our reported financial results orhow we conduct our business*

#  

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

 

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

 

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

 

# *Whilewe believe that we currently have adequate internal control procedures inplace, we are still exposed to potential risks from legislation requiringcompanies to evaluate controls under Section 404 of the Sarbanes-Oxley Actof 2002*

#  

Our management isresponsible for establishing and maintaining adequate internal control overfinancial reporting. Internal control over financial reporting cannot provideabsolute assurance of achieving financial reporting objectives because of itsinherent limitations. Internal control over financial reporting is a processthat

 

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involves human diligenceand compliance and is subject to lapses in judgment and breakdowns resultingfrom human 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 financial reportingprocess. Therefore, it is possible to design into the process safeguards toreduce, though not eliminate, this risk.

 

As of December 2008,we have evaluated our internal control systems in order to allow management toreport on our internal control over financial reporting, as required by Section 404of the Sarbanes-Oxley Act. We performed the system and process evaluation andtesting required in an effort to comply with the management certification of Section 404.While we believe that our internal control procedures are adequate and weintend to continue to fully comply with the requirements relating to internalcontrol and all other aspects of Section 404, our controls necessary forcontinued compliance with the Sarbanes-Oxley Act may not operate effectively atall times and may result in a material control disclosure. The identificationof a material weakness in internal control over financial reporting, if any,could indicate a lack of proper controls to generate accurate consolidatedfinancial statements. Furthermore, we cannot be certain as to the outcome offuture evaluations, testing and remediation actions or the impact of the sameon our operations. If we are not able to remain in compliance with therequirements of Section 404, we might be subject to sanctions orinvestigation by regulatory authorities, such as the SEC or the Nasdaq GlobalMarket. Any such action could adversely affect our financial results and themarket price of our common stock.

 

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

#  

Our products, solutions,technology and software are subject to import and export control laws andregulations which, in some instances, may impose restrictions on businessactivities, or otherwise require licenses or other authorizations from agenciessuch as the U.S. Department of State, U.S. Department of Commerce and U.S.Department of the Treasury. These restrictions may impact deliveries tocustomers or limit development and manufacturing alternatives. We have importand export licensing and compliance procedures in place for purposes ofconducting our business consistent with U.S. and applicable international lawsand regulations, and we periodically review these procedures to maintaincompliance with the requirements relating to import and export regulations. Ifwe are not able to remain in compliance with import and export regulations, wemight be subject to investigation, sanctions or penalties by regulatoryauthorities. Such penalties can include civil, criminal or administrativeremedies such as loss of export privileges. We cannot be certain as to theoutcome of an evaluation, investigation, inquiry or other action or the impactof these items on our operations. Any such action could adversely affect ourfinancial results and the market price of our common stock.

 

# *TheCompany, our directors and management have been named parties to lawsuits andmay be subject to future litigation, which could result in an unfavorableoutcome and have a material adverse effect on our business, financialcondition, results of operations, cash flows and the trading price for oursecurities*

#  

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

 

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

 

TheAnnual Meeting of Stockholders of QuickLogic was held on April 22,2009.  The following matters were voted upon at the meeting:

 

(i)                            The following nominees wereelected to hold office as a Class I director until 2012:

 
| **Nominee**         | ** ** | **Votes For** | ** ** | **Votes Withheld** | ** ** |
|---------------------|------------|--------------------|------------|-------------------------|------------|
| Michael J. Callahan |       | 26,806,013         |       | 546,279                 |       |
| Michael R. Farese   |       | 26,817,215         |       | 535,077                 |       |

 

E.Thomas Hart, Arturo Krueger, Christine Russell, Hide L. Tanigami and Gary H.Tauss will continue to serve as directors.

 

(ii)                         The approval of theQuickLogic Corporation 2009 Stock Plan.

 
| Votes For     |   | 6,894,539 |   |
|---------------|--------|-----------|--------|
| Votes Against |   | 1,301,418 |   |
| Abstentions   |   | 199,418   |   |

 

(iii)                      The approval of theQuickLogic Corporation 2009 Employee Stock Purchase Plan.

 
| Votes For     |   | 6,948,780 |   |
|---------------|--------|-----------|--------|
| Votes Against |   | 1,274,752 |   |
| Abstentions   |   | 171,843   |   |

 

iv)                         Theratification of PricewaterhouseCoopers LLP as the independent registered publicaccounting firm of QuickLogic for the fiscal year ending December 27,2009.

 
| Votes For     |   | 26,806,186 |   |
|---------------|--------|------------|--------|
| Votes Against |   | 99,005     |   |
| Abstentions   |   | 447,101    |   |

 

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**Item 6. Exhibits**

 

a.     Exhibits

 

Thefollowing Exhibits are filed with this report:

 
| **Exhibit********Number** | ** ** | **Description** |
|---------------------------|------------|-----------------|
| 3                         | .1(1)      |            | Amended  and Restated Certificate of Incorporation of Registrant. |
| 3                         | .2(2)      |            | Bylaws  of Registrant. |
| 31                        | .1         |            | CEO  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 31                        | .2         |            | CFO  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32                        |       |            | CEO  and CFO Certifications pursuant to 18 U.S.C. Section 1350, as  adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |

 

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(1)          Incorporated by reference tothe Company’s Registration Statement on Form S-1 declared effective October 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:  August 7, 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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**EXHIBITINDEX**

 
| **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 effective October 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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