QUICKLOGIC CORPORATION
10-Q, 2000-08-07
SEMICONDUCTORS & RELATED DEVICES
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<PAGE>


                                  UNITED STATES
                        SECURITIES AND EXCHANGE COMMISSION
                              WASHINGTON, D.C.  20549

                                     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 30, 2000 or

 [ ] 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

                             QUICKLOGIC CORPORATION
                (Exact name of registrant as specified in its charter)

                                   DELAWARE
          (State or other jurisdiction of incorporation or organization)

                                  77-0188504
                      (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 area code)

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such requirements
for the past 90 days.

                           YES  [ X ]        NO  [   ]

As of July 20, 2000, 19,987,712 shares of the Registrant's Common stock were
outstanding.

<PAGE>


                             QUICKLOGIC CORPORATION
                                   FORM 10-Q
                                 June 30, 2000

PART I. FINANCIAL INFORMATION                                               PAGE
-----------------------------------                                         ----
Item 1. Financial Statements

    Condensed Unaudited Consolidated Balance Sheets
    as of June 30, 2000 and December 31, 1999................................ 3

    Condensed Unaudited Consolidated Statements of Operations for the
    Three and Six month periods ended June 30, 2000 and 1999................. 4

    Condensed Unaudited Consolidated Statements of Cash Flows for the
    Six month periods ended June 30, 2000 and 1999........................... 5

    Notes to Condensed Unaudited Consolidated Financial Statements........... 6

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations....................................................10

Item 3. Quantitative and Qualitative Disclosures about Market Risk...........25

PART II. OTHER INFORMATION
--------------------------
Item 1. Legal Proceedings
Item 2. Changes In Securities and Use of Proceeds
Item 6. Exhibits and Reports on Form 8-K.....................................26

Signatures...................................................................26


                                        2
<PAGE>


PART  I.     FINANCIAL INFORMATION
Item  1.     Financial Statements


                             QUICKLOGIC CORPORATION
                CONDENSED UNAUDITED CONSOLIDATED BALANCE SHEETS
                                 (In thousands)


<TABLE>
<CAPTION>
                                                         June 30,    Dec. 31,
                                                           2000        1999
                                                         --------    --------
<S>                                                      <C>         <C>
ASSETS
Current assets:
    Cash and cash equivalents                            $ 73,988    $ 34,558
    Accounts receivable, net                                3,526       5,543
    Inventories                                             5,649       4,349
    Other current assets                                    1,407       1,467
                                                         --------    --------
Total current assets                                       84,570      45,917

Property and equipment, net                                 5,867       4,510
Other assets                                                1,055          55
                                                         --------    --------
TOTAL ASSETS                                             $ 91,492    $ 50,482
                                                         ========    ========
LIABILITIES AND STOCKHOLDERS' EQUITY

Current liabilities:
    Trade payables                                       $  4,559    $  5,202
    Accrued liabilities                                     2,599       2,405
    Deferred income on shipments to distributors            5,072       5,026
    Current portion of long-term obligations                  328         716
                                                         --------    --------
Total current liabilities                                  12,558      13,349

Long-term obligations                                         122         128

Stockholders' equity:
    Common stock, at par                                       20          18
    Additional paid-in capital                            133,635      96,599
    Stockholder note receivable                              (121)       (121)
    Deferred compensation                                  (1,173)     (1,480)
    Accumulated deficit                                   (53,549)    (58,011)
                                                         --------    --------
                Total stockholders' equity                 78,812      37,005
                                                         --------    --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY               $ 91,492    $ 50,482
                                                         ========    ========
</TABLE>


(See accompanying Notes to Condensed Unaudited Consolidated Financial
Statements.)



                                       3
<PAGE>

                             QUICKLOGIC CORPORATION
            CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF OPERATIONS
                    (In thousands, except per share amounts)


<TABLE>
<CAPTION>

                                       Three Months Ended      Six Months Ended
                                             June 30,              June 30,
                                         2000      1999         2000      1999
                                       --------  --------     --------  --------
<S>                                    <C>       <C>          <C>       <C>
Revenue                                $ 14,059  $  9,828     $ 26,275  $ 18,425

Cost of revenue                           5,703     4,236       10,718     7,958
                                       --------  --------     --------  --------
Gross profit                              8,356     5,592       15,557    10,467

     Research and development             2,367     1,787        4,520     3,567
     Sales, general and administrative    4,227     3,144        7,965     6,000
                                       --------  --------     --------  --------
          Operating expenses              6,594     4,931       12,485     9,567
                                       --------  --------     --------  --------
Operating income                          1,762       661        3,072       900

Interest income and other, net              954        44        1,390        87
                                       --------  --------     --------  --------
Net income                             $  2,716  $    705     $  4,462       987
                                       ========  ========     ========  ========
Net income per share:
     Basic                                $0.14     $0.16        $0.23     $0.23
     Diluted                              $0.12     $0.05        $0.21     $0.07
Shares used in per share calculations:
     Basic                               19,690     4,282       18,905     4,286
     Diluted                             22,174    15,150       21,263    15,041
</TABLE>


(See accompanying Notes to Condensed Unaudited Consolidated Financial
Statements.)



                                       4
<PAGE>


                             QUICKLOGIC CORPORATION
            CONDENSED UNAUDITED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (In thousands)

<TABLE>
<CAPTION>
                                                           Six Months Ended
                                                               June 30,
                                                            2000      1999
                                                          --------  --------
<S>                                                       <C>       <C>
Cash flows from operating activities:
    Net income                                            $  4,462  $    987
    Adjustments to reconcile net
      income to net cash provided
      by operating activities:
      Depreciation                                           1,044       761
      Provision for doubtful accounts and sales
        returns                                             12,642     3,399
      Amortization of deferred compensation                    307       235
    Changes in assets and liabilities:
        Accounts receivable                                (10,625)   (5,873)
        Inventory                                           (1,300)      264
        Prepaid and other assets                              (940)     (168)
        Accounts payable                                      (643)    1,913
        Accrued liabilities and other                          240       767
                                                          --------  --------
          Net cash provided by operating activities          5,187     2,285

Cash flows from investing activities:
  Capital expenditures for property and equipment           (2,401)   (1,031)
                                                           --------  --------
          Net cash used for investing activities            (2,401)   (1,031)

Cash flows from financing activities:
  Payment of debt obligations                                 (394)     (832)
  Proceeds from issuance of common stock, net               37,038        55
  Borrowing from bank                                           -        113
                                                          --------  --------
          Net cash provided by (used for)
             financing activities                           36,644      (664)

Net increase in cash and cash equivalents                   39,430       590
Cash and cash equivalents at beginning of period            34,558     7,595
                                                          --------  --------
Cash and cash equivalents at end of period                $ 73,988  $  8,185
                                                          ========  ========
</TABLE>

(See accompanying Notes to Condensed Unaudited Consolidated Financial
Statements.)



                                       5
<PAGE>

                             QUICKLOGIC CORPORATION
        NOTES TO CONDENSED UNAUDITED CONSOLIDATED FINANCIAL STATEMENTS


NOTE 1. BASIS OF PRESENTATION

The accompanying interim financial statements are unaudited. In the opinion of
management, these statements have been prepared in accordance with generally
accepted accounting principles and include all adjustments, consisting only of
normal recurring adjustments, necessary for the fair presentation of the results
of the interim periods. While our management believes that the disclosures are
adequate to make the financial information not misleading, it is suggested that
these financial statements be read in conjunction with our Form 10-K for the
year ended December 31, 1999. Operating results for the six months ended June
30, 2000 are not necessarily indicative of the results that may be expected for
the full year.

Our fiscal years end on the Sunday closest to December 31. The six month periods
end on the Sunday after June 30. For presentation purposes, the financial
statements and notes have been presented as ending on the last day of the
nearest calendar month.

We exclusively use the U.S. dollar as our functional currency. Foreign
currency transaction gains and losses are included in income as they occur.
The effect of foreign currency exchange rate fluctuations was not
significant. We do not use derivative financial instruments.

During the three months and six months ended June 30, 1999, one distributor
accounted for 20% and 18% of total sales, respectively. During the three months
ended June 30, 2000, two distributors of our products accounted for 15% and 11%
of total sales. During the six months ended June 30, 2000, two distributors of
our products accounted for 15% and 12% of total sales. No end customer of our
products accounted for more than 10% of total sales.


NOTE 2. NET INCOME PER SHARE

Basic EPS is computed by dividing net income available to common stockholders
(numerator) by the weighted average number of common shares outstanding
(denominator) during the period. Diluted EPS is computed using the weighted
average number of common shares and dilutive potential common shares outstanding
during the period. In computing diluted EPS, the average stock price for the
period is used in determining the number of shares assumed to be purchased from
the exercise of stock options. A reconciliation of the numerators and
denominators of the basic and diluted per share computations is as follows (in
thousands, except per share amounts):



                                       6
<PAGE>

<TABLE>
<CAPTION>
                                          Three Months Ended   Six Months Ended
                                               June 30,            June 30,
                                             2000     1999       2000     1999
                                           -------  -------    -------  -------
<S>                                        <C>      <C>        <C>      <C>
Numerator:

  Net income                               $ 2,716  $   705    $ 4,462  $   987
                                           =======  =======    =======  =======
Denominator:
  Common stock                              19,691    4,290     18,906    4,294
  Unvested common stock option exercises        (1)      (8)        (1)      (8)
                                           -------  -------    -------  -------
Weighted average shares outstanding
  for basic                                 19,690    4,282     18,905    4,286

Convertible preferred stock                      -    9,911          -    9,911
Stock options                                2,483      949      2,357      836
Unvested common stock option exercises           1        8          1        8
                                           -------  -------    -------  -------
Weighted average shares outstanding
  for diluted                               22,174   15,150     21,263   15,041
                                           =======  =======    =======  =======

Net income per share
  Basic                                    $  0.14  $  0.16    $  0.23  $  0.23
                                           =======  =======    =======  =======
  Diluted                                  $  0.12  $  0.05    $  0.21  $  0.07
                                           =======  =======    =======  =======
</TABLE>


NOTE 3. BALANCE SHEET COMPONENTS

<TABLE>
<CAPTION>
(in thousands)                            June 30,   Dec. 31,
                                            2000       1999
                                          --------   --------
<S>                                       <C>        <C>
Inventory:
  Raw materials                           $     87    $    183
  Work-in-process                            5,131       3,642
  Finished goods                               431         524
                                          --------    --------
    Total inventory                       $  5,649    $  4,349
                                          ========    ========
</TABLE>

NOTE 4. LONG-TERM OBLIGATIONS

In the quarter ended June 30, 1999, we entered into an extension of our existing
bank facility to borrow up to $250,000 using bank installment notes which are
secured by the specific equipment financed. At June 30, 2000, we had borrowed
the entire facility. The related notes mature in 2002. At June 30, 2000, we were
in compliance with our covenants.


NOTE 5. DEFERRED COMPENSATION

In connection with certain stock option grants, we recorded aggregate deferred
compensation during the three and six months ended June 30, 1999 of $60,000 and
$287,000, respectively, net of reversals associated with unvested shares of
terminated employees. There was no deferred compensation recorded during the six
months ended June 30, 2000. Such deferred compensation is being amortized
ratably over the vesting period of the options.



                                       7
<PAGE>

NOTE 6. COMPREHENSIVE INCOME

Statement of Financial Accounting Standards No. 130, "Reporting Comprehensive
Income" establishes standards for reporting comprehensive income and its
components in financial statements. Comprehensive income as defined, includes
all changes in equity during a period from nonowner sources. No items were
included in other comprehensive income during the three and six months ended
June 30, 2000 and 1999.


NOTE 7. NEW ACCOUNTING PRONOUNCEMENTS

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
We have adopted SAB 101 effective the first quarter of fiscal year 2000.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the statement
of operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. SFAS No. 133, as amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of Effective Date of FASB Statement No. 133," is effective for all fiscal
quarters and years beginning after June 15, 2000. We do not currently, nor do we
plan to, enter into forward exchange contracts to hedge exposures denominated in
foreign currencies or any other derivative financial instruments for trading or
speculative purposes.

In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25." This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that became effective July 1, 2000. The adoption of
this interpretation does not have a material impact on the financial statements.


NOTE 8. INCOME TAXES

We account for income taxes under the provisions of Statement of Financial
Accounting Standards No. 109, "Accounting for Income Taxes" ("SFAS 109"). Under
SFAS 109, deferred tax liabilities and assets are determined based on the
differences between the financial statements and tax bases of assets and
liabilities, using enacted tax rates in effect for the year in which the
differences are expected to reverse. No provision for income taxes was recorded
for the periods presented due to our ability to utilize a portion of our state
and federal net operating loss carryforwards.


NOTE 9. LITIGATION

On March 29, 2000, Unisys Corporation filed a patent infringement lawsuit
against the Company alleging that the Company infringed upon three of Unisys'
patents. The Company does not believe that the resolution of this lawsuit will
have a material adverse impact on the Company's financial condition or results
of operations. No assurance can be given, however, that these matters will be


                                       8
<PAGE>

resolved without the Company becoming obligated to make payments or to pay other
costs to the opposing party, with the potential for having an adverse effect on
the Company's financial position or its results of operations.

In September 1999, we received an offer to license a patent related to field
programmable gate array architecture. It is too early for us to determine
whether this license would be necessary or useful, or whether a license would be
obtainable at a reasonable price. Offers such as this may lead to litigation if
we reject the opportunity to obtain the license. We believe that the resolution
of this matter will not have a material adverse effect on our financial
condition or results of operations.

The semiconductor industry has experienced a substantial amount of litigation
regarding patent and other intellectual property rights. From time to time, we
have received and may receive in the future, communications alleging that our
products or our processes may infringe on product or process technology rights
held by others. We may in the future be involved in litigation with respect to
alleged infringement by us of another party's patents. In the future, we may be
involved with litigation to:

        Enforce our patents or other intellectual property rights.

        Protect our trade secrets and know-how.

        Determine the validity or scope of the proprietary rights of others.

        Defend against claims of infringement or invalidity.

Such litigation has in the past, and could in the future, result in substantial
costs and diversion of management resources. Such litigation could also result
in payment of substantial damages and/or royalties or prohibitions against
utilization of essential technologies, and could have a material adverse effect
on our business, financial condition and results of operations.


NOTE 10. STOCKHOLDER'S EQUITY

The Company completed a public offering of its common stock on April 12, 2000.
The underwriters' over-allotment option was exercised and QuickLogic sold a
total of 1,629,269 common shares at $23.50 per share. Proceeds, net of
underwriting discounts and commissions and estimated related offering expenses,
of $35.5 million were received.


                                       9
<PAGE>


Item 2. Management's Discussion and Analysis of Financial Condition and Results
of Operations

The following discussion should be read in conjunction with the attached
condensed consolidated financial statements and notes thereto, and with our
audited financial statements and notes thereto for the fiscal year ended
December 31, 1999, found in our Annual Report on Form 10-K filed March 30, 2000.

This report on Form 10-Q contains forward-looking statements, including, but not
limited to, those specifically identified as such, that involve risks and
uncertainties. The statements contained in this report on Form 10-Q that are not
purely historical are 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, including without limitation statements
regarding our expectations, beliefs, intentions or strategies regarding the
future. All forward-looking statements included in this report on Form 10-Q are
based on information available to us on the date hereof, and we assume no
obligation to update any such forward-looking statements. Our actual results
could differ materially from those anticipated in these forward-looking
statements as a result of a number of factors, including, but not limited to,
those set forth in the section entitled "Risk Factors" contained in this
management's discussion and analysis of financial condition and results of
operation and elsewhere in this report on Form 10-Q.

Overview

We design and sell field programmable gate arrays, embedded standard products
and associated software and programming hardware. From our inception in April
1988 through the third quarter of 1991, we were primarily engaged in product
development. In 1991, we introduced our first line of field programmable gate
array products, or FPGAs, based upon our ViaLink technology. FPGAs have
accounted for substantially all of our product revenue to date. We currently
have three FPGA product families: pASIC1, introduced in 1991; pASIC2, introduced
in 1996; and pASIC3, introduced in 1997. We announced our most recent family of
FPGAs, Eclipse, in April 2000. The newer product families generally contain
greater logic capacity, but do not necessarily replace sales of older generation
products.

In September 1998, we introduced QuickRAM, our first line of embedded standard
products, or ESPs. Our ESPs are based on our FPGA technology. In April 1999, we
introduced QuickPCI, our second line of ESPs. We announced our third line of
ESPs, QuickDSP in January 2000. In May 2000, we announced QuickFC, our fourth
line of ESPs. We also license our QuickWorks and QuickTools design software and
sell our programming hardware, which together have typically accounted for less
than 5% of total revenue.

We sell our products through two channels. First, we sell the majority of our
products through distributors who have contractual rights to earn a negotiated
margin on the sale of our products and who have limited rights to return unsold
product. We defer recognition of revenue for sales to these distributors until
they have sold our products to systems manufacturers. We sell our products
directly to systems manufacturers and recognize revenue at the time of shipment
to these systems manufacturers.

Average selling prices for our products typically decline rapidly during the
first six to 12 months after their introduction, then decline less rapidly as
the products mature. We attempt to maintain gross margins even as average
selling prices decline through the introduction of new products with higher
margins and through manufacturing efficiencies and cost reductions. However, the
markets in which we operate are highly competitive, and there can be no


                                       10
<PAGE>

assurance that we will be able to successfully maintain gross margins. Any
significant decline in our gross margins will materially harm our business.

We outsource the wafer manufacturing, assembly and test of all of our products.
Under certain of our arrangements with these manufacturers, we are obligated to
provide forecasts and enter into binding obligations for anticipated purchases.
This limits our ability to react to fluctuations in demand for our products,
which could lead to excesses or shortages of wafers for a particular product.

Results of Operations

The following data has been derived from unaudited financial statements that, in
our opinion, include all adjustments necessary for a fair presentation of the
information. Our quarterly results have been in the past, and in the future may
be, subject to fluctuations. As a result, we believe that results of operations
for the interim periods are not necessarily indicative of results for any future
period.

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

<TABLE>
<CAPTION>
(Unaudited)                              Three Months Ended   Six Months Ended
                                              June 30,            June 30,
                                            2000     1999       2000     1999
                                          -------  -------    -------  -------
<S>                                       <C>      <C>        <C>      <C>
Revenue                                       100%     100%       100%     100%

Cost of revenue                                41       43         41       43
                                          -------  -------    -------  -------
Gross profit                                   59       57         59       57

     Research and development                  17       18         17       19
     Sales, general and administrative         30       32         30       33
                                          -------  -------    -------  -------
          Operating expenses                   47       50         47       52
                                          -------  -------    -------  -------
Operating income                               12        7         12        5
Interest income and other, net                  7        -          5        -
                                          -------  -------    -------  -------
Net income                                     19%       7%        17%       5%
                                          =======  =======    =======  =======
</TABLE>

Three and Six Months Ended June 30, 2000 and June 30, 1999

Revenue. Revenue increased 43% from $18.4 million for the six months ended June
30, 1999 to $26.3 million for the six months ended June 30, 2000. Revenue
increased 43% from $9.8 million for the three months ended June 30, 1999 to
$14.1 million for the three months ended June 30, 2000. These increases in
revenue resulted primarily from increased sales of our mature products including
pASIC1 and pASIC2 and our new products including pASIC3 and ESPs, Sales of new
products represented 18% of sales for the six months in 1999 and 31% in the six
months of 2000. ESP revenue was 5% in 1999 and grew to 9% of sales in the six
months of 2000. Sales of new products represented 21% of sales for the three
months in 1999 and 33% in the three months of 2000. ESP revenue was 6% in the
three months ended June 30, 1999 and grew to 9% of sales in the three months
ended June 30, 2000. We expect this trend in product mix change to continue.
During the six months ended June 30, 2000, two distributors of our products
accounted for 15% and 12% of total sales. No end customer of our products
accounted for more than 10% of total sales. The foregoing expectation is a


                                       11
<PAGE>

forward-looking statement that involves risks and uncertainties and the actual
results could vary materially as a result of a number of factors, including
those set forth under "Factors Affecting Future Operating Results."

Gross Profit. Gross profit increased 49% from $10.5 million for the six months
ended June 30, 1999 to $15.6 million for the six months ended June 30, 2000.
Gross margin improved between those periods from 57% to 59%. Gross profit
increased 49% from $5.6 million for the three months ended June 30, 1999 to $8.4
million for the three months ended June 30, 2000. Gross margin improved between
those periods from 57% to 59%. This increase in gross profit was primarily due
to higher revenue. The gross margin improvement was primarily due to increased
sales of our higher margin new products including pASIC3 and ESPs and higher
revenue over certain relatively-fixed production costs.

Research and Development Expense. Research and development expense includes
personnel and other costs associated with the development of product designs,
process technology, software and programming hardware. Research and development
expense increased from $3.6 million for the six months ended June 30, 1999 to
$4.5 million for the six months ended June 30, 2000. As a percentage of revenue,
research and development expense declined from 19% to 17% for the same periods.
Research and development expense increased from $1.8 million for the three
months ended June 30, 1999 to $2.4 million for the three months ended June 30,
2000. As a percentage of revenue, research and development expense declined from
18% to 17% for the same periods. The increase in dollars spent on research and
development was primarily due to investments in the development of our new ESP
products. These efforts required the use of consultants and the hiring of
additional personnel, which increased costs. We believe that continued
investments in process technology and product development are essential for us
to remain competitive in the markets we serve. Specifically in regard to our
ESPs, we expect to continue to increase research and development spending.

Selling, General and Administrative Expense. Selling expense consists primarily
of personnel, commissions and other costs associated with the marketing and sale
of our products. General and administrative expense consists primarily of
personnel and other costs associated with the management of our business.
Selling, general and administrative expense increased from $6.0 million for the
six months ended June 30, 1999 to $8.0 million for the six months ended June 30,
2000. Selling, general and administrative expense as a percentage of revenue
decreased from 33% to 30% for the first six months of 1999 and 2000,
respectively. Selling, general and administrative expense increased from $3.1
million for the three months ended June 30, 1999 to $4.2 million for the three
months ended June 30, 2000. Selling, general and administrative expense
decreased as a percentage of revenue from 32% for the three months of 1999 to
30% for the three months of 2000. The increase in dollars spent was primarily
due to hiring of additional sales, marketing, finance and administrative
personnel. We anticipate that selling, general and administrative expense will
continue to increase in absolute dollars as we invest in our business and seek
to find new customers for our products.

Interest and Other Income, Net. Interest income, interest expense and other
income, net was $87,000 in the six months ended June 30, 1999 compared to
$1,390,000 for the six months ended June 30, 2000. Interest income, interest
expense and other income, net was $44,000 in the three months ended June 30,
1999 compared to $954,000 for the three months ended June 30, 2000. The increase
in 2000 is due to the interest earned on the cash raised in our initial public
offering on October 15, 1999 and our public offering on April 12, 2000.

Deferred Compensation. In connection with certain stock option grants, we
recorded aggregate deferred compensation of approximately $287,000 and $122,000
during the six and three months ended June 30, 1999, respectively. There was no
deferred compensation recorded during the six months ended June 30, 2000.


                                       12
<PAGE>

Provision for Income Taxes. No provision for income taxes was recorded for the
periods presented due to our ability to utilize a portion of our state and
federal net operating loss carryforwards.

Liquidity and Capital Resources

We have been profitable since the third quarter of 1998. At June 30, 2000, we
had $74.0 million in cash, an increase of $39.4 million from cash held at
December 31, 1999. As of June 30, 2000, we had an accumulated deficit of $53.5
million.

We have an equipment financing line with a commercial bank. At June 30, 2000, we
had obligations of $192,000 outstanding under this equipment line. The
outstanding obligations under the equipment line are due over the next one to
three years. The interest rate on these borrowings is at the bank's prime
interest rate plus 0.5%.

Net cash provided by operating activities was $5.2 million and $2.3 million in
the first six months of 2000 and 1999, respectively. For the six months ended
June 30, 2000, the cash flow was generated primarily from the net income of $4.5
million. For the six months ended June 30, 1999, the cash flow was generated
primarily by an increase in accounts payable, accrued liabilities, and net
income, mostly offset by an increase in net accounts receivable.

Net cash used for investing activities was $2.4 million, and $1.0 million for
the first six months of 2000 and 1999, respectively. The increases in property
and equipment were comprised primarily of computers, purchased software,
networking equipment, and test equipment.

Net cash provided by (used for) financing activities was $36.6 million and
$(664,000) in the first six months of 2000 and 1999, respectively. The six
months ended June 30, 2000 amount is primarily due to the estimated $35.5
million received from the public offering on April 12, 2000. The six months
ended June 30, 1999 utilization included $832,000 in debt repayments partially
offset by $113,000 of bank borrowings.

We require substantial working capital to fund our business, particularly to
finance inventories and accounts receivable. Our future capital requirements
will depend on many factors, including the rate of sales growth, market
acceptance of our existing and new products, the amount and timing of research
and development expenditures, the timing of the introduction of new products and
expansion of sales and marketing efforts. There can be no assurance that
additional equity or debt financing, if required, will be available on
satisfactory terms. We believe the net proceeds of our recent public offering
combined with existing capital resources and cash generated from operations will
be sufficient to meet our needs for the next 12 months, although we could seek
to raise additional capital during that period. After the next 12 months, our
capital and operating requirements will depend on many factors, including the
levels at which we maintain inventory and accounts receivable, costs of securing
access to adequate manufacturing capacity and increases in our operating
expenses.

The Company completed a public offering of its common stock on April 12, 2000.
The underwriters' over-allotment option was exercised and QuickLogic sold a
total of 1,629,269 common shares at $23.50 per share. Proceeds, net of
underwriting discounts and commissions and estimated related offering expenses,
of $35.5 million were received.


                                       13
<PAGE>

New Accounting Pronouncements

In December 1999, the Securities and Exchange Commission ("SEC") issued Staff
Accounting Bulletin No. 101 ("SAB 101"), "Revenue Recognition in Financial
Statements." SAB 101 summarizes certain of the SEC's views in applying generally
accepted accounting principles to revenue recognition in financial statements.
We have adopted SAB 101 effective the first quarter of fiscal year 2000.

In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." SFAS No. 133 established a model for
accounting for derivatives and hedging activities and supersedes and amends a
number of existing accounting standards. SFAS No. 133 requires that all
derivatives be recognized in the balance sheet at their fair market value, and
the corresponding derivative gains or losses be either reported in the statement
of operations or as a deferred item depending on the type of hedge relationship
that exists with respect to such derivative. SFAS No. 133, as amended by SFAS
No. 137, "Accounting for Derivative Instruments and Hedging Activities--Deferral
of Effective Date of FASB Statement No. 133," is effective for all fiscal
quarters and years beginning after June 15, 2000. We do not currently, nor do we
plan to, enter into forward exchange contracts to hedge exposures denominated in
foreign currencies or any other derivative financial instruments for trading or
speculative purposes.

In March 2000, the Financial Accounting Standards Board ("FASB") issued FASB
Interpretation No. 44 "Accounting for Certain Transactions Involving Stock
Compensation, an interpretation of APB Opinion No. 25." This interpretation has
provisions that are effective on staggered dates, some of which began after
December 15, 1998 and others that became effective July 1, 2000. The adoption of
this interpretation does not have a material impact on the financial statements.

Inflation

The impact of inflation on our business has not been material for the periods
presented.

Year 2000 Compliance

We have not had any disruption to our computer programs or business as a result
of year 2000 problems. However, if our customers or suppliers encounter any year
2000 problems, our business could be disrupted as well.


                                       14
<PAGE>

FACTORS AFFECTING FUTURE OPERATING RESULTS
--------------------------------------------

OUR FUTURE OPERATING RESULTS ARE LIKELY TO FLUCTUATE AND THEREFORE MAY FAIL
TO MEET EXPECTATIONS WHICH COULD CAUSE OUR STOCK PRICE TO DECLINE

Our operating results have varied widely in the past and are likely to do so in
the future. In addition, our operating results may not follow any past trends.
Our future operating results will depend on many factors and may fail to meet
our expectations for a number of reasons, including those set forth in these
risk factors. Any failure to meet expectations could cause our stock price to
significantly fluctuate or decline.

Factors that could cause our operating results to fluctuate that relate to our
internal operations include:

     -    the need for continual, rapid new product introductions;

     -    changes in our product mix; and

     -    our inability to adjust our fixed costs in the face of any declines in
          sales.

Factors that could cause our operating results to fluctuate that depend upon our
suppliers and customers include:

     -    the timing of significant product orders, order cancellations and
          reschedulings;

     -    the availability of production capacity and fluctuations in the
          manufacturing yields at the facilities that manufacture our devices;
          and

     -    the cost of raw materials and manufacturing services from our
          suppliers.

Factors that could cause our operating results to fluctuate that are industry
risks include:

     -    intense competitive pricing pressures;

     -    introductions of or enhancements to our competitors' products; and

     -    the cyclical nature of the semiconductor industry.

Our day-to-day business decisions are made with these factors in mind. Although
certain of these factors are out of our immediate control, unless we can
anticipate, and be prepared with contingency plans that respond to these
factors, we will be unsuccessful in carrying out our business plan.

WE CANNOT ASSURE YOU THAT WE WILL REMAIN PROFITABLE BECAUSE WE HAVE A HISTORY
OF LOSSES AND HAVE ONLY RECENTLY BECOME PROFITABLE

We incurred significant losses from our inception in 1988 through 1997. Our
accumulated deficit as of June 30, 2000 was $53.5 million. We cannot assure you
that we will be profitable in any future periods and you should not rely on the
historical growth of our revenue and our recent profitability as any indication
of our future operating results or prospects.

IF WE FAIL TO SUCCESSFULLY DEVELOP, INTRODUCE AND SELL NEW PRODUCTS, WE MAY
BE UNABLE TO COMPETE EFFECTIVELY IN THE FUTURE


                                       15
<PAGE>

We operate in a highly competitive, quickly changing environment marked by rapid
obsolescence of existing products. Our future success depends on our ability to
develop, introduce and successfully market new products, including embedded
standard products, or ESPs. We introduced our ESPs in September 1998. To date,
we have been selling our ESPs in limited quantities, and revenue from our ESPs
has been modest. If any of the following occur, our business will be materially
harmed:

     -    we fail to complete and introduce new product designs in a timely
          manner;

     -    we are unable to have these new products manufactured according to
          design specifications;

     -    our customers do not successfully introduce new systems or products
          incorporating our products;

     -    our sales force and independent distributors do not create adequate
          demand for our products; or

     -    market demand for our new products, such as ESPs, does not develop as
          anticipated.

WE HAVE ONLY RECENTLY INTRODUCED OUR EMBEDDED STANDARD PRODUCTS; THEREFORE, WE
CANNOT ACCURATELY PREDICT THEIR FUTURE LEVEL OF ACCEPTANCE BY OUR CUSTOMERS, AND
WE MAY NOT BE ABLE TO GENERATE ANTICIPATED REVENUE FROM THESE PRODUCTS

We have only recently started selling embedded standard products. In the first
six months of 2000, ESPs accounted for approximately 9% of our revenue. We do
not know the extent to which systems manufacturers will purchase or utilize our
ESPs. Since we anticipate that ESPs will become an increasingly larger component
of our business, their failure to gain acceptance with our customers would
materially harm our business. We cannot assure you that our ESPs will be
commercially successful or that these products will result in significant
additional revenues or improved operating margins in future periods.

IF THE MARKET IN WHICH WE SELL OUR EMBEDDED STANDARD PRODUCTS DOES NOT GROW AS
WE ANTICIPATE, IT WILL MATERIALLY AND ADVERSELY AFFECT OUR ANTICIPATED REVENUE

The market for embedded standard products is relatively new and still emerging.
If this market does not grow at the rate we anticipate, our business will be
materially harmed. One of the reasons that this market might not grow as we
anticipate is that many systems manufacturers are not yet fully aware of the
benefits provided by embedded standard products, in general, or the benefits of
our ESPs, specifically. Additionally, systems manufacturers may use existing
technologies other than embedded standard products or yet to be introduced
technologies to satisfy their needs. Although we have devoted and intend to
continue to devote significant resources promoting market awareness of the
benefits of embedded standard products, our efforts may be unsuccessful or
insufficient.

WE EXPEND SUBSTANTIAL RESOURCES IN DEVELOPING AND SELLING OUR PRODUCTS, AND
WE MAY BE UNABLE TO GENERATE SIGNIFICANT REVENUE AS A RESULT OF THESE EFFORTS

To establish market acceptance of our products, we must dedicate significant
resources to research and development, production and sales and marketing. We
experience a long delay between the time when we expend these resources and the
time when we begin to generate revenue, if any, from these expenditures.
Typically, this delay is one year or more. We record as expenses the costs
related to the development of new semiconductor products and software as these



                                       16
<PAGE>

expenses are incurred. As a result, our profitability from quarter to quarter
and from year to year may be materially and adversely affected by the number and
timing of our new product introductions in any period and the level of
acceptance gained by these products.

OUR CUSTOMERS MAY CANCEL OR CHANGE THEIR PRODUCT PLANS AFTER WE HAVE
EXPENDED SUBSTANTIAL TIME AND RESOURCES IN THE DESIGN OF THEIR PRODUCTS

If one of our potential customers cancels, reduces or delays product orders from
us or chooses not to release equipment that incorporates our products after we
have spent substantial time and resources in designing a product, our business
could be materially harmed. Our customers often evaluate our products for six to
twelve months or more before designing them into their systems, and they may not
commence volume shipments for up to an additional six to twelve months, if at
all. During this lengthy sales cycle, our potential customers may also cancel or
change their product plans. Even when customers incorporate one or more of our
products into their systems, they may ultimately discontinue the shipment of
their systems that incorporate our products. Customers whose products achieve
high volume production may choose to replace our products with lower cost
customized semiconductors.

WE WILL BE UNABLE TO COMPETE EFFECTIVELY IF WE FAIL TO ANTICIPATE PRODUCT
OPPORTUNITIES BASED UPON EMERGING TECHNOLOGIES AND STANDARDS AND FAIL TO DEVELOP
PRODUCTS THAT INCORPORATE THESE TECHNOLOGIES AND STANDARDS

We may spend significant time and money on research and development to design
and develop products around an emerging technology or industry standard. To
date, we have introduced only one product family, QuickPCI, that is designed to
support a specific industry standard. If an emerging technology or industry
standard that we have identified fails to achieve broad market acceptance in our
target markets, we may be unable to generate significant revenue from our
research and development efforts. Moreover, even if we are able to develop
products using adopted standards, our products may not be accepted in our target
markets. As a result, our business would be materially harmed.

We have limited experience in designing and developing products that support
industry standards. If systems manufacturers move away from the use of industry
standards that we support with our products and adopt alternative standards, we
may be unable to design and develop new products that conform to these new
standards. The expertise required is unique to each industry standard, and we
would have to either hire individuals with the required expertise or acquire
such expertise through a licensing arrangement or by other means. The demand for
individuals with the necessary expertise to develop a product relating to a
particular industry standard is generally high, and we may not be able to hire
such individuals. The cost to acquire such expertise through licensing or other
means may be high and such arrangements may not be possible in a timely manner,
if at all.

WE MAY ENCOUNTER PERIODS OF INDUSTRY-WIDE SEMICONDUCTOR OVERSUPPLY, RESULTING
IN PRICING PRESSURE AND UNDERUTILIZATION OF MANUFACTURING CAPACITY, AS WELL AS
UNDERSUPPLY, RESULTING IN A RISK THAT WE COULD BE UNABLE TO FULFILL OUR
CUSTOMERS' REQUIREMENTS

The semiconductor industry has historically been characterized by wide
fluctuations in the demand for, and supply of, its products. These fluctuations
have resulted in circumstances when supply and demand for the industry's
products have been widely out of balance. Our operating results may be
materially harmed by industry-wide semiconductor oversupply, which could result
in severe pricing pressure and underutilization of our manufacturing capacity.
In a market with undersupply, we would have to compete with larger foundry
customers for limited manufacturing capacity. In such an environment, we may be



                                       17
<PAGE>

unable to have our products manufactured in a timely manner or in quantities
necessary to meet our requirements. Since we outsource all of our manufacturing,
we are particularly vulnerable to such supply shortages. As a result, we may be
unable to fulfill orders and may lose customers. Any future industry-wide
oversupply or undersupply of semiconductors would materially harm our business.

NONE OF OUR PRODUCTS IS CURRENTLY MANUFACTURED BY MORE THAN ONE MANUFACTURER,
WHICH EXPOSES US TO THE RISK OF HAVING TO IDENTIFY AND QUALIFY ONE OR MORE
SUBSTITUTE SUPPLIERS

We depend upon independent third parties to manufacture, assemble and test our
semiconductor products. None of our products is currently manufactured by more
than one manufacturer. We have contractual arrangements with our two foundry
manufacturers of semiconductors, Taiwan Semiconductor Manufacturing Company and
Cypress Semiconductor Corporation, to provide us with specified manufacturing
capacity. Our assembly and test work is done on a purchase order basis. If we
are unable to secure adequate manufacturing capacity from TSMC or Cypress or
other suppliers to meet our supply requirements, our business will be materially
harmed. Processes used to manufacture our products are complex, customized to
our specifications and can only be performed by a limited number of
manufacturing facilities. If our current manufacturing suppliers are unable to
provide us with adequate manufacturing capacity, we would have to identify and
qualify one or more substitute suppliers for a substantial majority of our
products. Our manufacturers may experience unanticipated events, like the
September 1999 Taiwan earthquake, that could inhibit their abilities to provide
us with adequate manufacturing capacity on a timely basis, or at all.
Introducing new products or transferring existing products to a new third party
manufacturer would require significant development time to adapt our designs to
their manufacturing processes and could cause product shipment delays. In
addition, the costs associated with manufacturing our products may increase if
we are required to use a new third party manufacturer. If we fail to satisfy our
manufacturing requirements, our business would be materially harmed.

IF WE FAIL TO ADEQUATELY FORECAST DEMAND FOR OUR PRODUCTS, WE MAY INCUR
PRODUCT SHORTAGES OR EXCESS PRODUCT INVENTORY

Our agreements with third-party manufacturers require us to provide forecasts of
our anticipated manufacturing orders, and place binding manufacturing orders in
advance of receiving purchase orders from our customers. This may result in
product shortages or excess product inventory because we are not permitted to
increase or decrease our rolling forecasts under such agreements. Obtaining
additional supply in the face of product shortages may be costly or not
possible, especially in the short term. Our failure to adequately forecast
demand for our products would materially harm our business.

FLUCTUATIONS IN OUR PRODUCT YIELDS, ESPECIALLY OUR NEW PRODUCTS, MAY INCREASE
THE COSTS OF OUR MANUFACTURING PROCESS

Difficulties in the complex semiconductor manufacturing process can render a
substantial percentage of semiconductor wafers nonfunctional. We have, in the
past, experienced manufacturing runs that have contained substantially reduced
or no functioning devices. Varying degrees of these yield reductions occur
frequently in our manufacturing process. These yield reductions, which can occur
without warning, may result in substantially higher manufacturing costs and
inventory shortages to us. We may experience yield problems in the future which
may materially harm our business. In addition, yield problems may take a
significant period of time to analyze and correct. Our reliance on third party
suppliers may extend the period of time required to analyze and correct these
problems. As a result, if we are unable to respond rapidly to market demand, our
business would suffer.



                                       18
<PAGE>

Yield reductions frequently occur in connection with the manufacture of newly
introduced products. Newly introduced products, such as our QuickPCI family of
ESPs, are often more complex and more difficult to produce, increasing the risk
of manufacturing-related defects. While we test our products, these products may
still contain errors or defects that we find only after we have commenced
commercial production. Our customers may not place new orders for our products
if the products have reliability problems, which would materially harm our
business.

WE MAY BE UNABLE TO GROW OUR BUSINESS IF THE MARKETS IN WHICH OUR CUSTOMERS
SELL THEIR PRODUCTS DO NOT GROW

Our success depends in large part on the continued growth of various markets
that use our products. Any decline in the demand for our products in the
following markets could materially harm our business:

     -    telecommunications and data communications;

     -    video/audio, graphics and imaging;

     -    instrumentation and test;

     -    high-performance computing; or

     -    military systems.

Slower growth in any of the other markets in which our products are sold may
also materially harm our business. Many of these markets are characterized by
rapid technological change and intense competition. As a result, systems sold by
our customers that use our products may face severe price competition, become
obsolete over a short time period, or fail to gain market acceptance. Any of
these occurrences would materially harm our business.

IN ORDER TO REMAIN PROFITABLE, WE WILL NEED TO OFFSET THE GENERAL PATTERN
OF DECLINES AND FLUCTUATIONS IN THE PRICES OF OUR PRODUCTS

The average selling prices of our products historically have declined during the
products' lives by, on average, approximately 7% per year, and we expect this
trend to continue. If we are unable to achieve cost reductions, increase unit
demand or introduce new higher-margin products in a timely manner to offset
these price declines, our business would be materially harmed.

In addition, the selling prices for our products fluctuate significantly with
real and perceived changes in the balance of supply and demand for our products
and comparable products. The growth in the worldwide supply of field
programmable gate arrays in recent periods has added to the decrease in the
average selling prices for our products. In addition, we expect our competitors
to invest in new manufacturing process technologies and achieve significant
manufacturing yield improvements in the future. These developments could
increase the worldwide supply of field programmable gate arrays and alternate
products and create additional downward pressure on pricing. If the worldwide
supply of field programmable gate arrays grows faster than the demand for such
products in the future, the price for which we can sell such products may
decline, which would materially harm our business.

WE DEPEND UPON THIRD PARTY DISTRIBUTORS TO MARKET AND SELL OUR PRODUCTS, AND
THEY MAY DISCONTINUE SALE OF OUR PRODUCTS, FAIL TO GIVE OUR PRODUCTS PRIORITY OR
BE UNABLE TO SUCCESSFULLY MARKET, SELL AND SUPPORT OUR PRODUCTS

We employ independent, third-party distributors to market and sell a significant
portion of our products. During the six months ended June 30, 2000,
approximately 73% of our sales were made through our distributors. We rely on
three principal distributors to market and sell a majority of our products,
particularly in North America. Although we have contracts with our distributors,
any of them may terminate their relationship with us on short notice. The loss


                                       19
<PAGE>

of one or more of our principal distributors, or our inability to attract new
distributors, would materially harm our business. We may lose distributors in
the future and we may be unable to recruit additional or replacement
distributors. As a result, our future performance will depend in part on our
ability to retain our existing distributors and attract new distributors that
will be able to market, sell and support our products effectively.

Many of our distributors, including our principal distributors, market and sell
products for other companies, and many of these products may compete directly or
indirectly with our products. We generally are not one of the principal
suppliers of products to our distributors. If our distributors give higher
priority or greater attention to the products of other companies, including
products that compete with our products, our business would be materially
harmed.

WE MAY BE UNABLE TO ACCURATELY PREDICT QUARTERLY RESULTS IF DISTRIBUTORS ARE
INACCURATE OR UNTIMELY IN PROVIDING US WITH THEIR RESALE REPORTS, WHICH COULD
ADVERSELY AFFECT THE TRADING PRICE OF OUR STOCK

Since we generally recognize revenue from sales to our distributors only when
these distributors make sales to customers, we are highly dependent on the
accuracy and timeliness of their resale reports. Inaccurate resale reports
contribute to our difficulty in predicting and reporting our quarterly revenue
and results of operations, particularly in the last month of the quarter. If we
fail to accurately predict our revenue and results of operations on a quarterly
basis, our stock price could materially fluctuate. Distributors occasionally
increase their inventories of our products in anticipation of growth in the
demand for our products. If this growth does not occur, distributors will
decrease their orders for our products in subsequent periods, and our business
would be materially harmed.

CUSTOMERS MAY CANCEL OR DEFER SIGNIFICANT PURCHASE ORDERS OR OUR DISTRIBUTORS
MAY RETURN OUR PRODUCTS, WHICH WOULD CAUSE OUR INVENTORY LEVELS TO INCREASE AND
OUR REVENUES TO DECLINE

We sell our products on a purchase order basis through our distributors and
direct sales channels, and our distributors or customers may cancel purchase
orders at any time with little or no penalty. In addition, our distributor
agreements generally permit our distributors to return products to us.
Contractually, our distributors are permitted to return up to 10%, by value, of
the products they purchase from us every six months. In early 1998, for example,
a distributor cancelled a significant purchase order as a result of a customer
switching from a product we supply to a competitor's product. The distributor
also returned a significant amount of inventory of the product to us, which took
approximately 18 months for us to resell. If our customers cancel or defer
significant purchase orders or our distributors return our products, our
inventories would increase, which would materially harm our business.

MANY SYSTEMS MANUFACTURERS MAY BE UNWILLING TO SWITCH TO OUR PRODUCTS, BECAUSE
OF THEIR FAMILIARITY WITH THE PRODUCTS OFFERED BY OUR DIRECT COMPETITORS SUCH AS
XILINX AND ALTERA, WHICH DOMINATE THE PROGRAMMABLE LOGIC MARKET

The Semiconductor industry is intensely competitive and characterized by:

     -    erosion of selling prices over product lives;

     -    rapid technological change;

     -    short product life cycles; and

     -    strong domestic and foreign competition.



                                       20
<PAGE>

If we are not able to compete successfully in this environment, our business
will be materially harmed. A primary cause of this highly competitive
environment is the strengths of our competitors. Our industry consists of major
domestic and international semiconductor companies, many of which have
substantially greater financial, technical, marketing, distribution and other
resources than we do. Our current direct competitors include suppliers of
complex programmable logic devices and field programmable gate arrays, such as
Xilinx, Altera, Actel, Lattice Semiconductor and Lucent. Xilinx and Altera
together have a majority share of the programmable logic market. Many systems
manufacturers may be unwilling or unable to switch to our products due to their
familiarity with competitors' products or other inhibiting factors.

We also face competition from companies that offer application specific
integrated circuits, which may be obtained at lower costs for higher volumes and
typically have greater logic capacity, additional features and higher
performance than those of our products. We may also face competition from
suppliers of products based on new or emerging technologies, including ESPs. Our
inability to successfully compete in any of the following areas could materially
harm our business:

     -    the development of new products and manufacturing technologies;

     -    the quality and price of products and devices;

     -    the diversity of product lines; or

     -    the cost effectiveness of design, development, manufacturing and
          marketing efforts.

WE MAY BE UNABLE TO SUCCESSFULLY MANAGE OUR GROWTH IF WE FAIL TO COMPETE
EFFECTIVELY WITH OTHERS TO ATTRACT AND RETAIN KEY PERSONNEL

We believe our future success will depend upon our ability to successfully
manage our growth, including attracting and retaining engineers and other highly
skilled personnel. Our employees are at-will and not subject to employment
contracts. Hiring qualified sales and technical personnel will be difficult due
to the limited number of qualified professionals. Competition for these types of
employees is intense. We have in the past experienced difficulty in recruiting
and retaining qualified sales and technical personnel. For example, in the past
12 months, two of our executive officers resigned to pursue other opportunities.
Failure to attract and retain personnel, particularly sales and technical
personnel, would materially harm our business.

As we seek to expand our operations, we may also significantly strain our
management and financial systems and other resources. We cannot be certain that
our systems, procedures, controls and existing space will be adequate to support
our operations.

WE MAY BE UNABLE TO ADEQUATELY PROTECT OUR INTELLECTUAL PROPERTY RIGHTS,
AND MAY FACE SIGNIFICANT EXPENSES AS A RESULT OF FUTURE LITIGATION

Protection of intellectual property rights is crucial to our business, since
that is how we keep others from copying the innovations which are central to our
existing and future products. From time to time, we receive letters alleging
patent infringement or inviting us to take a license to other parties' patents.
We evaluate these letters on a case-by-case basis. In September 1999, we
received an offer to license a patent related to field programmable gate array
architecture. It is too early for us to determine whether this license would be
necessary or useful, or whether a license would be obtainable at a reasonable
price. Offers such as these may lead to litigation if we reject the opportunity


                                       21
<PAGE>

to obtain the license. We have in the past and may again become involved in
litigation relating to alleged infringement by us of others' patents or other
intellectual property rights. This kind of litigation is expensive to all
parties and consumes large amounts of management's time and attention. For
example, we incurred substantial costs associated with the litigation and
settlement of our dispute with Actel Corporation, which materially harmed our
business. In addition, if the September 1999 letter or other similar matters
result in litigation that we lose, a court could order us to pay substantial
damages and/or royalties, and prohibit us from making, using, selling or
importing essential technologies. For these and other reasons, this kind of
litigation would materially harm our business. Also, although we may seek to
obtain a license under a third party's intellectual property rights in order to
bring an end to certain claims or actions asserted against us, we may not be
able to obtain such a license on reasonable terms or at all.

We have entered into technology license agreements with third parties which give
those parties the right to use patents and other technology developed by us, and
which give us the right to use patents and other technology developed by them.
We anticipate that we will continue to enter into these kinds of licensing
arrangements in the future; however, it is possible that desirable licenses will
not be available to us on commercially reasonable terms. If we lose existing
licenses to key technology, or are unable to enter into new licenses which we
deem important, it could materially harm our business, and materially and
adversely affect our business.

Because it is critical to our success that we are able to prevent competitors
from copying our innovations, we intend to continue to seek patent and trade
secret protection for our products. The process of seeking patent protection can
be long and expensive, and we cannot be certain that any currently pending or
future applications will actually result in issued patents, or that, even if
patents are issued, they will be of sufficient scope or strength to provide
meaningful protection or any commercial advantage to us. Furthermore, others may
develop technologies that are similar or superior to our technology or design
around the patents we own. We also rely on trade secret protection for our
technology, in part through confidentiality agreements with our employees,
consultants and third parties. However, employees may breach these agreements,
and we may not have adequate remedies for any breach. In any case, others may
come to know about or determine our trade secrets through a variety of methods.
In addition, the laws of certain territories in which we develop, manufacture or
sell our products may not protect our intellectual property rights to the same
extent as do the laws of the United States.

PROBLEMS ASSOCIATED WITH INTERNATIONAL BUSINESS OPERATIONS COULD AFFECT OUR
ABILITY TO MANUFACTURE AND SELL OUR PRODUCTS

Most of our products are manufactured outside of the United States at
manufacturing facilities operated by our suppliers in Taiwan, South Korea and
the Philippines. As a result, our manufacturing operations are subject to risks
of political instability, including the risk of conflict between Taiwan and the
People's Republic of China and conflict between North Korea and South Korea.
Moreover, the majority of available manufacturing capacity for our products is
located in Taiwan and South Korea.

Sales to customers located outside the United States accounted for 43%, 47%, 48%
and 42% of our total sales in 1997, 1998, 1999 and the six months ended June 30,
2000, respectively. We anticipate that sales to customers located outside the
United States will continue to represent a significant portion of our total
sales in future periods and the trend of foreign customers accounting for an
increasing portion of our total sales may continue. In addition, most of our
domestic customers sell their products outside of North America, thereby
indirectly exposing us to risks associated with foreign commerce. Asian economic


                                       22
<PAGE>

instability could also materially and adversely affect our business,
particularly to the extent that this instability impacts the sales of products
manufactured by our customers. Accordingly, our operations and revenues are
subject to a number of risks associated with foreign commerce, including the
following:

     -    managing foreign distributors;

     -    staffing and managing foreign branch offices;

     -    political and economic instability;

     -    foreign currency exchange fluctuations;

     -    changes in tax laws, tariffs and freight rates;

     -    timing and availability of export licenses;

     -    inadequate protection of intellectual property rights in some
          countries; and

     -    obtaining governmental approvals for certain products.

In the past we have denominated sales of our products in foreign countries
exclusively in United States dollars. As a result, any increase in the value of
the United States dollar relative to the local currency of a foreign country
will increase the price of our products in that country so that our products
become relatively more expensive to customers in the local currency of that
foreign country. As a result, sales of our products in that foreign country may
decline. To the extent any such risks materialize, our business would be
materially harmed.

OUR PRINCIPAL STOCKHOLDERS HAVE SIGNIFICANT VOTING POWER AND MAY TAKE ACTIONS
THAT MAY NOT BE IN THE BEST INTERESTS OF OUR OTHER STOCKHOLDERS

Our officers, directors and principal stockholders together control
approximately 19% of our outstanding common stock. As a result, these
stockholders, if they act together, will be able to significantly influence the
management and affairs of QuickLogic and all matters requiring stockholder
approval, including the election of directors and approval of significant
corporate transactions. This concentration of ownership may have the effect of
delaying or preventing a change in control and might affect the market price of
our common stock. This concentration of ownership may not be in the best
interest of our other stockholders.

OUR CERTIFICATE OF INCORPORATION AND BYLAWS AND DELAWARE LAW CONTAIN PROVISIONS
THAT COULD DISCOURAGE A TAKEOVER

Our basic corporate documents and Delaware law contain provisions that might
enable our management to resist a takeover. These provisions might discourage,
delay or prevent a change in the control of QuickLogic or a change in our
management. Our certificate of incorporation provides that we will have a
classified board of directors, with each class of directors subject to
re-election every three years. This classified board when implemented will have
the effect of making it more difficult for third parties to insert their
representatives on our board of directors and gain control of QuickLogic. These
provisions could also discourage proxy contests and make it more difficult for
you and other stockholders to elect directors and take other corporate actions.
The existence of these provisions could limit the price that investors might be
willing to pay in the future for shares of the common stock.


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<PAGE>

Our certificate of incorporation also provides that our board of directors may,
without further action by the stockholders, issue shares of preferred stock in
one or more series and to fix the rights, preferences, privileges and
restrictions thereof. The issuance of preferred stock could adversely affect the
voting power of holders of common stock and the likelihood that such holders
will receive dividend payments and payments upon liquidation. In addition, the
issuance of preferred stock could have the effect of delaying, deferring or
preventing a change in control of QuickLogic. We have no present plan to issue
any shares of preferred stock.

A SALE OF A SUBSTANTIAL NUMBER OF SHARES OF OUR COMMON STOCK MAY CAUSE THE
PRICE OF OUR COMMON STOCK TO DECLINE

If our stockholders sell substantial amounts of our common stock, including
shares issued upon the exercise of outstanding options, the market price of our
common stock could fall. Such sales also might make it more difficult for us to
sell equity or equity-related securities in the future at a time and price that
we deem appropriate.

OUR COMMON STOCK HAS ONLY BEEN PUBLICLY TRADED FOR A SHORT TIME, AND WE EXPECT
THAT THE PRICE OF OUR COMMON STOCK WILL FLUCTUATE SUBSTANTIALLY

Prior to our initial public offering on October 15, 1999, there was no public
market for shares of our common stock. An active public trading market may not
develop for our stock or, if developed, may not be sustained. The market price
for our common stock may be affected by a number of factors, including:

     -    the announcement of new products or product enhancements by us or our
          competitors;

     -    quarterly variations in our or our competitors' results of operations;

     -    changes in earnings estimates or recommendations by securities
          analysts; developments in our industry; and

     -    general market conditions and other factors, including factors
          unrelated to our operating performance or the operating performance of
          our competitors.

In addition, stock prices for many companies in the technology and emerging
growth sectors have experienced wide fluctuations that have often been unrelated
to the operating performance of such companies. Such factors and fluctuations
may materially and adversely affect the market price of our common stock.


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<PAGE>

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Interest Rate Risk

We do not use derivative financial instruments in our investment portfolio. Our
investment portfolio is generally comprised of commercial paper. We place
investments in instruments that meet high credit quality standards. These
securities are subject to interest rate risk, and could decline in value if
interest rates fluctuate. Due to the short duration and conservative nature of
our investment portfolio, we do not expect any material loss with respect to our
investment portfolio. A 10% move in interest rates as of June 30, 2000 would
have an immaterial effect on our pretax earnings and the carrying value of our
investments over the next fiscal year.

Foreign Currency Exchange Rate Risk

All of our sales, cost of manufacturing and marketing are transacted in U.S.
dollars. Accordingly, our results of operations are not subject to foreign
exchange rate fluctuations.


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<PAGE>

PART  II.  OTHER INFORMATION

Item  1.   Changes In Securities and Use of Proceeds

From January 1, 2000 to June 30, 2000, we granted options to purchase an
aggregate of 1,181,250 shares of common stock to our directors, executive
officers, employees and consultants at a weighted exercise price of $20.24 per
share. During that same period, options to purchase 106,100 shares were
exercised at an aggregate exercise price of $3.05 per share.

Item  2.   Exhibits and Reports on Form 8-K.

        (a)    Exhibits

                27.1-Financial Data Schedule

        (b)    Reports on Form 8-K
                None


                             SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

                                         QUICKLOGIC CORPORATION

Dated: August 7, 2000                    /s/ Arthur O. Whipple
                                         -----------------------------
                                         Vice President of Finance and Chief
                                         Financial Officer (as principal
                                         accounting and financial officer and on
                                         behalf of Registrant)


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