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, Eclipse™ 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, USB secure authenticated 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 third quarter of 2009, we received from our manufacturing partners the latest in our family of VEE-enabled solution platforms - ArcticLink II, VX2 and VX4. The engineering validation was completed for the VX2 platform, and the Company subsequently released engineering samples for lead customers. The VX4 is in the final stages of engineering validation and we expect to release engineering samples during the fourth quarter of 2009. 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. During the third quarter, we announced the availability of a CSSP containing our Visual Enhancement Engine, or VEE, technology tailored to Intel Atom-based netbooks that enabled reduced display backlight, delivering longer battery life to the consumer. Also in the third quarte of 2009, we announced a series of new Proven System Blocks targeted at augmenting the functionality of ARM-based processors in smartbooks including an I2C master controller, a pulse width modulator (PWM), a PS2 controller, and a low-power matrix keyboard controller. These new PSBs will be used by QuickLogic to deliver CSSPs for smartbooks.

• USB-Based Broadband Data Card: Consumer demand for USB -based broadband data cards are expected 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 the third quarter of 2009, 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 first reference design uses a wafer-level chip scale, or WLCSP, version of the ArcticLink solution platform to compliment its second-generation baseband chip design. Demonstrating a breadth of functionality and price points, Icera's next generation reference design uses a WLCSP version of the PolarPro II solution platform.

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                            Nine Months Ended
                                   September 27,          September 28,          September 27,          September 28,
                                       2009                   2008                   2009                   2008
Revenue                                    100.0 %                100.0 %                100.0 %                100.0 %
Cost of revenue (1)                         65.6                   44.6                   51.8                   46.2
Long-lived asset impairment                  4.5                     -                     1.4                    6.0

Gross profit                                29.9                   55.4                   46.8                   47.8
Operating expenses:
Research and development                    42.0                   21.7                   45.2                   26.1
Selling, general and
administrative                              75.8                   42.8                   73.0                   42.2
Long-lived asset impairment                   -                      -                      -                     1.8
Restructuring costs                           -                      -                      -                     1.7

Loss from operations                       (87.9 )                 (9.1 )                (71.4 )                (24.0 )
Write-down of investment in
Tower Semiconductor Ltd.                      -                      -                      -                    (1.6 )
Interest expense                            (0.9 )                 (1.0 )                 (0.7 )                 (0.8 )
Interest income and other,
net                                         (0.9 )                 (0.7 )                 (0.3 )                  0.4

Loss before income taxes                   (89.7 )                (10.8 )                (72.4 )                (26.0 )
Provision for (benefit from)
income taxes                                (0.2 )                  0.9                     -                     0.1

Net loss                                   (89.9 )%                (9.9 )%               (72.4 )%               (25.9 )%

(1) The third quarter of 2009 and 2008 includes $231,000 and $203,000, respectively, of costs for the write-down of inventories and related charges, which represents 7.0% and 3.3% of revenue, respectively. The first nine months of 2009 and 2008 includes $467,000 and $1.3 million, respectively, of costs for the write-down of inventories and related charges, which represents 4.0% and 5.1% of revenue, respectively.

Three Months Ended September 27, 2009 and September 28, 2008

Revenue

The table below sets forth the changes in revenue for the three months ended
September 28, 2008 as compared to the three months ended September 27 2009 (in
thousands, except percentage data):



                                                   Three Months Ended
                                     September 27, 2009         September 28, 2008
                                               % of Total                 % of Total
                                     Amount     Revenues        Amount     Revenues         Year-Over-Year Change
New products                        $  1,363           41 %    $  1,422           23 %    $         (59 )        (4 )%
Mature products                        1,908           57         4,619           74             (2,711 )       (59 )
End-of-life products                      61            2           189            3               (128 )       (68 )

Total revenue                       $  3,332          100 %    $  6,230          100 %    $      (2,898 )       (47 )%

For all periods presented, new products represent products introduced since 2005, and 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 mature 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 primarily resulted from the general economic slowdown, which caused lower customer demand for pASIC 3 and QuickRAM products. One of our U.S. customers, purchasing primarily pASIC 3 devices, accounted for 4% and 28% of total revenue in the third 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 new products; especially revenue from CSSPs designed using our ArcticLink, ArcticLink II, PolarPro and PolarPro II 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, PS2, I2C, SPI, PWM and keyboard controllers. 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 September 28, 2008 as compared to the three months ended September 27,
2009 (in thousands, except percentage data):



                                                  Three Months Ended
                                    September 27, 2009         September 28, 2008
                                              % of Total                 % of Total
                                    Amount     Revenues        Amount     Revenues         Year-Over-Year Change
Revenue                            $  3,332          100 %    $  6,230          100 %    $     (2,898 )         (47 )%
Cost of revenue                       2,186           66         2,778           45              (592 )         (21 )
Long-lived asset impairment             150            5            -            -                150          (100 )%

Gross Profit                       $    996           29 %    $  3,452           55 %    $     (2,456 )         (71 )%

The decline in gross profit was mainly due to the decline in revenue and the long-lived asset impairment charges of $150,000 in the third quarter of 2009 as compared to the third quarter of 2008. The sale of previously reserved inventories contributed $98,000, or 2.9% of revenue, to gross profit in the third quarter of 2009 and $57,000, or 0.9% of revenue, in the third 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 September 28, 2008 as compared to the three months ended
September 27 2009 (in thousands, except percentage data):



                                                  Three Months Ended
                                    September 27, 2009           September 28, 2008
                                              % of Total                   % of Total
                                   Amount      Revenues         Amount      Revenues          Year-Over-Year Change
R&D expense                       $  1,400            42 %     $  1,354            22 %     $          46            3 %
SG&A expense                         2,525            76          2,666            43                (141 )         (5 )

Total operating expenses          $  3,925           118 %     $  4,020            65 %     $         (95 )         (2 )%

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 third 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 third quarter of 2008. The $46,000 decrease in R&D expenses in the third quarter of 2009 as compared to the third quarter of 2008 is attributable primarily to a $129,000 or 25% decrease in compensation expenses due to reduced headcount; a $94,000 or 24% decrease in expense allocations to R&D such as facilities and other corporate costs; offset by an increase of $101,000 or 142% in outside services, and $124,000 or 139% increase in stock based compensation expenses. The increase in stock based compensation expenses were due to the issuance of RSUs to employees in lieu of 10% of their cash compensation.

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 $141,000 decrease in SG&A expenses in the third quarter of 2009 as compared to the third quarter of 2008 resulted from our effort to realign resources with our expected revenue outlook and was primarily due to a $323,000 or 24% decrease in cash compensation expenses as a result of headcount reductions; a $113,000 or 17% decrease in outside services such as consulting, temporary help and legal, a $125,000 or 31% decrease in expense allocation, offset by $283,000 or 113% increase in stock based compensation expenses. The increase in stock based compensation expenses were due to the issuance of RSUs to employees in lieu of 10% of their cash compensation.

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 September 28, 2008 as compared to the three
months ended September 27, 2009:



                                                  Three Months Ended
                                         September 27,          September 28,
                                             2009                   2008
                                                    (in thousands)
       Interest expense                             (31 )                  (59 )
       Interest income and other, net               (30 )                  (46 )

                                        $           (61 )      $          (105 )

The decrease in interest expense is due primarily to the reduction of our average debt obligation to $2.9 million in the third quarter of 2009 from $3.4 million in the third quarter of 2008. The decrease in interest income is due primarily to the drop in investment yields between the third quarter of 2008 and the third 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



                                                 Three Months Ended
                                          September 27,       September 28,
                                              2009                2008
                                                   (in thousands)
        Income tax provision (benefit)   $             7     $           (58 )

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

Nine Months Ended September 27, 2009 and September 28, 2008

Revenue

The table below sets forth the changes in revenue for the nine months ended
September 28, 2008 as compared to the nine months ended September 27, 2009 (in
thousands, except percentage data):



                                                 Nine Months Ended
                                   September 27, 2009         September 28, 2008
                                             % of Total                 % of Total
                                   Amount     Revenues        Amount     Revenues         Year-Over-Year Change
New products                      $  2,837           26 %    $  6,584           25 %    $       (3,747 )      (57 )%
Mature products                      7,393           68        13,533           52              (6,140 )      (45 )
End-of-life products                   565            6         5,879           23              (5,314 )      (90 )

Total revenue                     $ 10,795          100 %    $ 25,996          100 %    $      (15,201 )      (58 )%

For all periods presented, new products represent products introduced since 2005, and 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 mature 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 . . .