The following Management's Discussion and Analysis of Financial Condition and Results 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-looking statements" within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. We intend that these forward-looking statements be subject to the safe harbors created by those provisions. Forward-looking statements are generally 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 include statements regarding (1) the conversion of our design opportunities into revenue, (2) our revenue levels, including the commercial success of our Customer Specific Standard Products, or CSSPs, and new products, and the effect of our end-of-life products, (3) our liquidity, (4) our gross profit and factors that affect gross profit, (5) our level of operating expenses, (6) our research and development efforts, (7) our partners and suppliers and (8) industry trends. The following discussion should be read in conjunction with the attached condensed unaudited consolidated financial statements and notes thereto, and with our audited consolidated financial statements and notes thereto for the fiscal year ended December 28, 2008, found in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC, on March 11, 2009.

Overview

QuickLogic Corporation was founded in 1988 and reincorporated in Delaware in 1999. We develop and market low power customizable semiconductor solutions that enable customers 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 that operates in a single industry segment where we design, market and support primarily Customer Specific Standard Products, or CSSPs, and, secondarily, Field Programmable Gate Arrays, or FPGAs, associated design software and programming hardware. Our CSSPs are customized semiconductor building blocks created from our new solution platforms including ArcticLink® II, ArcticLink, PolarPro® II, PolarPro, EclipseTM II and QuickPCI® II (all of which fall into our new product category); our mature product family includes pASIC® 3, QuickRAM®, Eclipse, and EclipsePlus, as well as royalty revenue, programming hardware and design software; our end-of-life product family includes pASIC 1, pASIC 2, V3, QuickMIPS, QuickPCI and QuickFC.

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

† Cellular - including multimedia and smartphones;

† Computing - including Mobile Internet Devices, or MIDs, Netbooks, Ultra Mobile PCs, or UMPCs, industrial personal digital assistants, or PDAs, handheld point-of-sales, or POS, terminals and broadband 3G data cards; and

† Consumer Electronics - including portable media players, or PMPs, personal navigation devices, or PNDs, and wireless hard disk drives or wireless storage devices.

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

In addition to working directly with our customers, we partner with other companies with expertise in certain technologies to develop additional intellectual property, reference platforms and system software to provide application solutions. We also work with mobile processor manufacturers, and companies that supply storage, networking or graphics components for embedded systems. The depth of these relationships varies depending on the partner and the dynamics of the end market being targeted, but is typically a co-marketing program that includes joint account calls, promotional activities and/or engineering collaboration and developments, such as reference designs.

During the first quarter we worked with our partners to finish development of our latest ArcticLink II VX4 solution platform. The VX family embeds the second generation Visual Enhancement Engine, or VEE™, Proven System Block (PSB), which improves the user's video viewing experience while extending system battery life by allowing reduction in the power used by a mobile device's single biggest consumer of power, the backlight. The VX4 platform also embeds the Qualcomm developed MDDI serial interface for ease of connection with their mobile processors.

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (Continued)

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

Important industry trends affecting the large market for mobile devices include the use of platforms to enable rapid product proliferation, the need for high bandwidth solutions enabling mobile Internet and streaming video, miniaturization and the need to increase battery life. Another important trend is shrinking product life cycles, which drives a need for faster, lower risk product development. There is intense pressure on the total product cost of these devices, including per unit component costs and non-recurring development costs. As more people experience the advantages of a mobile lifestyle at home, they demand the same advantages in their professional lives, and while they are "on the go", or mobile. Therefore, we believe that these trends toward mobile, handheld products which have a small form factor and maximize battery life will also be evident in other segments such as industrial, medical and military.

Critical Accounting Estimates

The methods, estimates and judgments we use in applying our most critical accounting policies have a significant impact on the results we report in our consolidated financial statements. The SEC has defined critical accounting policies as those that are most important to the portrayal of our financial condition and results of operations and require us to make our most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, our critical policies include revenue recognition, valuation of inventories including identification of excess quantities and product obsolescence, 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 and liabilities, and measuring accrued liabilities. We believe that we apply judgments and estimates in a consistent manner and that such consistent application results in consolidated financial statements and accompanying notes that fairly represent all periods presented. However, any factual errors or errors in these judgments and estimates may have a material impact on our statements of operations and financial condition. For a discussion of critical accounting policies and estimates, please see Item 7 in our Annual Report on Form 10-K for the fiscal year ended December 28, 2008 filed with the SEC on March 11, 2009.

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (Continued)

Results of Operations



The following table sets forth the percentage of revenue for certain items in
our statements of operations for the periods indicated:



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

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



Revenue



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



                          Three Months Ended       Three Months Ended
                            March 29, 2009           March 30, 2008
                                    % of Total               % of Total
                         Amount      Revenues      Amount     Revenues       Year-Over-Year Change

New products            $     658      15%        $  2,598      24%        $        (1,940 )      (75 )%
Mature products             3,606      79%           4,324      39%                   (718 )      (17 )%
End-of-life products          288       6%           4,101      37%                 (3,813 )      (93 )%

Total revenue           $   4,552      100%       $ 11,023      100%       $        (6,471 )      (59 )%

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

The decline in revenue was due to declines in both our legacy and new product lines. Our end-of-life product revenue decreased as a result of the end-of-life of our pASIC 1, V3, QuickMIPS and QuickPCI products which was announced in 2007. The decline in new product revenue was caused by the expected end of life of a product family of a personal navigation device, or PND, manufacturer and by delays in new product production ramp-up with several major customers. The decline in mature product revenue resulted from the general economic slowdown. Our mature product revenue decreased as a result of lower customer demand for pASIC 3 and QuickRAM products. One international customer, purchasing primarily pASIC 3 devices, accounted for 18% and 12% of total revenue in the first quarters of 2009 and 2008, respectively.

Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations - (Continued)

Our decision to end-of-life our pASIC 1, pASIC 2 and V3 products was driven by the decision of certain of our suppliers not to renew supply agreements for these products. We announced additional end-of-life products in 2007 as a result of our decision to focus on customers in the handheld mobile and military markets. In the second quarter of 2007, we announced the end-of-life of our QuickPCI products due to assembly capacity considerations and asked customers to take delivery of lifetime buy orders before the end of 2007. In the fourth quarter of 2007, we announced the end-of-life of our QuickMIPS products due to a small customer base and asked customers to take delivery of these products between now and the first half of 2008. We currently expect that revenue from end-of-life products will continue to decline and will not be significant in future quarters.

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

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

Gross Profit



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



                   Three Months Ended      Three Months Ended
                     March 29, 2009          March 30, 2008
                             % of Total              % of Total
                   Amount     Revenues     Amount     Revenues      Year-Over-Year Change

Revenue           $  4,552      100%      $ 11,023      100%      $        (6,471 )     (59 )%
Cost of revenue      1,819      40%          5,258      48%                (3,439 )     (65 )%

Gross Profit      $  2,733      60%       $  5,765      52%       $        (3,032 )     (53 )%

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

Our semiconductor products have historically had a long product life cycle and obsolescence has not been a significant factor in the valuation of inventories. However, as we pursue opportunities in the mobile market and continues to develop new CSSPs and products, we believe our product life cycle will be shorter and increase the potential for obsolescence. We also regularly review the cost of inventories against estimated market value and record a lower of cost or market reserve for inventories that have a cost in excess of estimated market value, which could have a material impact on our gross margin and inventory balances based on additional write-downs to net realizable value or a benefit from inventories previously written down.

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

Operating Expenses



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



                              Three Months Ended         Three Months Ended
                                March 29, 2009             March 30, 2008
                                         % of Total                % of Total
                             Amount       Revenues      Amount      Revenues        Year-Over-Year Change
R&D expense                 $   1,612       35%        $  2,821       26%        $        (1,209 )       (43 )%
SG&A expense                    2,643       58%           4,320       39%                 (1,677 )       (39 )%

Total operating expenses    $   4,255       93%        $  7,141       65%        $        (2,886 )       (40 )%

Research and Development

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

Selling, General and Administrative Expense

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

Interest and Other Income (Expense), net

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

Three Months Ended

                   March 29,     March 30,
                      2009          2008
                        (in thousands)

Interest expense   $      (24 )  $      (71 )
Interest income            16           113
Other expense             (62 )          (9 )
                   $      (70 )  $       33

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

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

We conduct a portion of our research and development activities in Canada and India and we have sales and marketing activities in various countries outside of the United States. Most of these international expenses are incurred in local currency. Foreign currency transaction gains and losses are included in interest income and other, net, as they occur. We do not use derivative financial instruments to hedge our exposure to fluctuations in foreign currency and, therefore, our results of operations are and will continue to be susceptible to fluctuations in foreign exchange gains or losses.

Provision for Income Taxes.



                           Three Months Ended
                        March 29,      March 30,
                          2009            2008
                             (in thousands)

Income tax provision   $         4     $       34

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

Liquidity and Capital Resources

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

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

Net cash from operating activities

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

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations - (Continued)

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

Net cash from investing activities

Net cash used for investing activities for the first quarter of 2009 and 2008 was $5,000 and $252,000, respectively, as a result of capital expenditures made primarily to acquire software used in the development and production of our products and solutions. Capital expenditures, which are largely driven by the development of new products and manufacturing levels, are projected to be less than $0.9 million during the rest of fiscal year 2009.

Net cash from financing activities

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

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

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

. . .