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, Smartbooks, 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.

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 second quarter we completed development, and released for manufacturing the latest in our family of VEE-enabled solution platforms - ArcticLink II, VX2 and VX4. 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. The VX2 platform also embeds an LCD Controller and optional CellularRAM frame buffer for storing display content. By embedding the frame buffer, the mobile processor can be powered down more frequently, saving previous energy and extending battery life. Both

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

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

† Mobile, Handheld Devices: 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.

† Netbook/Smartbook Category: iSuppli predicts shipments of wirelessly-enabled netbooks will more than triple by 2012, rising to 36.3 million units, up from 10.3 million in 2008. This segment is largely driven by the desire for a consumer platform that combines the mobile computing and Internet experience of Notebooks with the day-long battery life of Multimedia and Smartphones.

† USB-Based Broadband Data Card: Mobile data service providers anticipate consumer demand for these data cards to reach nearly 40 million units in 2009, according to the market research firm ABI Research. These data cards enable consumers to connect their Notebook, Netbook, Smartbook or PC to the cellular network as a broadband internet connection. During our second quarter, QuickLogic announced 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-defined wireless chipsets and is the only company to deliver software-based cellular modems for broadband data cards, USB sticks, and mobile internet devices. Icera's reference design uses a wafer-level chip scale (WLCSP) version of the ArcticLink solution platform to compliment its second-generation baseband chip design.

Underlying 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.

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                 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 )%

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



Revenue



The table 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
                                 % of Total             % of Total     Year-Over-
                       Amount     Revenues    Amount     Revenues     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 )%

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. The decline in new product revenue was caused by the expected end of life 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 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 of our U.S. customers, purchasing primarily pASIC 3 devices, accounted for 8% and 17% of total revenue in the second quarters of 2009 and 2008, respectively.

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 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
                                % of Total               % of Total
                      Amount     Revenues      Amount     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 gross profit was mainly due to the decline in revenue in the second quarter of 2009 as compared to the second quarter of 2008. The second quarter 2009 gross profit decline was partially offset by the absence in the second quarter of 2009 of long-lived asset impairments which accounted for $1.5 million of gross profit charges in the second quarter of 2008; a change in product mix towards mature products which carry higher gross margins than new products; and a reduction of excess and obsolescence provisions in the second quarter of 2009 as compared to the second quarter of 2008. The sale of previously reserved inventories contributed $94,000, or 3.2% of revenue, to gross profit in the second quarter of 2009 and $153,000, or 1.7% of revenue, in the second 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 continue 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.

Operating Expenses



The table below sets forth the changes in operating expenses 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
                                % of Total               % of Total
                      Amount     Revenues      Amount     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

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 $0.7 million decrease in R&D expenses in the second quarter of 2009 as compared to the second quarter of 2008 is attributable primarily to a $540,000 or 56% decrease in compensation expenses due to reduced headcount; a $280,000 or 47% decrease in expense allocations to R&D such as facilities and other corporate costs; a $60,000 or 30% decrease in stock based compensation expenses, and a $30,000 or 64% decrease in travel and entertainment expenses, offset by an increase of $230,000 or 51% in outside services.

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

Long-Lived Assets Impairment

In the second quarter of 2008, we recorded a $468,000 long-lived asset impairment charge to operating expenses as a result of our decision to outsource design implementation activity, which resulted in unutilized EDA software licenses. There were no long-lived asset impairment charges in the second quarter of 2009.

Restructuring Costs

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

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 June 29, 2008 as compared to the three months
ended 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 )

In the second quarter of 2008, we determined that our investment in Tower had suffered a decline in value that was determined to be "other than temporary." This determination included factors such as market value and the period of time that the market value has been below the carrying value. Accordingly, we recorded a write-down of $417,000 in the second quarter of 2008 based on the quoted market price of the stock on the last day of the reporting period. There were no write-downs of marketable securities in the second quarter of 2009.

The decrease in interest expense 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 quarter of 2008. The decrease in interest income is due primarily to the drop in investment yields between the second quarter of 2008 and the second 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 (Benefit from) Income Taxes

Income tax provision (benefit) $ (15 ) $ -

The income tax provision (benefit) for the second 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 second 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.

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



Revenue



The table 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
                                 % of Total              % of Total     Year-Over-
                       Amount     Revenues     Amount     Revenues      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 )%

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. 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 of our U.S. customers, purchasing primarily pASIC 3 devices, accounted for 14% and 12% of total revenue in the first half of 2009 and 2008, respectively.

Gross Profit



The table 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
. . .