Zoran (ZRAN) 10-Q 2008 Q2 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

x	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2008
OR
o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934

For the transition period from                                          to

Commission File No. 0-27246

ZORAN CORPORATION

(Exact name of registrant as specified in its charter)

Delaware	94-2794449
(State or other jurisdiction	(I.R.S. Employer
of incorporation or organization)	Identification Number)

1390 Kifer Road

Sunnyvale, California 94086

(Address of principal executive offices, including zip code)

(408) 523-6500

(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 filing requirements for the past 90 days.  Yes x   No o

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company.  See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.  (Check one):

Large accelerated filer x Accelerated filer o Non-accelerated filer o(Do not check if a smaller
reporting company) Smaller reporting company o

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

As of August 6, 2008, there were outstanding 51,874,521 shares of the registrant’s Common Stock, par value $0.001 per share.

ZORAN CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX

For the Quarter Ended June 30, 2008

		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of June 30, 2008 and December 31, 2007	3
	Condensed Consolidated Statements of Operations for the Three Months and Six Months Ended June 30, 2008 and 2007	4
	Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2008 and 2007	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	18
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	25
Item 4.	Controls and Procedures	26
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	27
Item 1A.	Risk Factors	27
Item 4.	Submission of Matters to a Vote of Security Holders	40
Item 6.	Exhibits	41
Signatures		42

2

PART I. FINANCIAL INFORMATION

Item 1.  Financial Statements:

ZORAN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	June 30, 2008			December 31, 2007
ASSETS
Current assets:
Cash and cash equivalents	$	85,742		$	97,377
Short-term investments	216,654			222,432
Accounts receivable, net	57,877			58,220
Inventories	60,603			48,992
Prepaid expenses and other current assets	25,412			25,189
Total current assets	446,288			452,210
Property and equipment, net	17,805			17,636
Deferred income taxes	45,289			43,218
Other assets and long-term investments	84,453			112,632
Goodwill	168,691			168,691
Intangible assets, net	8,757			25,945
Total assets	$	771,283		$	820,332
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	44,157		$	67,836
Accrued expenses and other current liabilities	46,793			43,968
Total current liabilities	90,950			111,804
Other long-term liabilities	25,092			20,756
Contingencies (Note 12)
Stockholders’ equity:
Common stock, $0.001 par value; 105,000,000 shares authorized at June 30, 2008 and December 31, 2007; 51,840,769 shares issued and outstanding as of June 30, 2008; and 51,407,860 shares issued and outstanding as of December 31, 2007	52			51
Additional paid-in capital	858,263			847,597
Accumulated other comprehensive income (loss)	(905		)	995
Accumulated deficit	(202,169		)	(160,871		)
Total stockholders’ equity	655,241			687,772
Total liabilities and stockholders’ equity	$	771,283		$	820,332

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ZORAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended						Six Months Ended
	June 30,						June 30,
	2008			2007			2008			2007
Revenues:
Hardware product revenues	$	113,606		$	114,508		$	207,903		$	201,690
Software and other revenues	15,079			15,395			29,813			29,872
Total revenues	128,685			129,903			237,716			231,562
Costs and expenses:
Cost of hardware product revenues	68,360			60,178			126,149			104,376
Research and development	30,797			29,976			58,684			54,964
Selling, general and administrative	24,260			28,414			49,899			57,007
Amortization of intangible assets	9,256			12,169			18,493			24,338
In-process research and development	22,383			—			22,383			—
Total costs and expenses	155,056			130,737			275,608			240,685
Operating loss	(26,371		)	(834		)	(37,892		)	(9,123		)
Interest income	3,265			3,845			7,776			7,448
Other income (expense), net	(434		)	37			(1,132		)	639
Income (loss) before income taxes	(23,540		)	3,048			(31,248		)	(1,036		)
Provision for income taxes	13,080			2,850			10,050			4,650
Net income (loss)	$	(36,620	)	$	198		$	(41,298	)	$	(5,686	)
Basic net income (loss) per share	$	(0.71	)	$	0.00		$	(0.80	)	$	(0.11	)
Diluted net income (loss) per share	$	(0.71	)	$	0.00		$	(0.80	)	$	(0.11	)
Shares used to compute basic net income (loss) per share	51,707			49,600			51,576			49,527
Shares used to compute diluted net income (loss) per share	51,707			51,187			51,576			49,527

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

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ZORAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Six Months Ended
	June 30,
	2008			2007
Cash flows from operating activities:
Net loss	$	(41,298	)	$	(5,686	)
Adjustments to reconcile net loss to net cash provided by (used in) operations:
Depreciation	4,032			4,021
Amortization of intangible assets	18,493			24,338
Stock-based compensation expense	6,584			7,032
In-process research and development	22,383			—
Deferred income taxes	6,440			—
Gain on sale of short-term investments	(115		)	(809		)
Changes in assets and liabilities, net of acquisition:
Accounts receivable	343			(6,408		)
Inventories	(11,611		)	(2,021		)
Prepaid expenses and other current assets and other assets	979			(1,791		)
Accounts payable	(23,922		)	14,871
Accrued expenses and other current liabilities and long-term liabilities	(3,621		)	8,731
Net cash provided by (used in) operating activities	(21,313		)	42,278
Cash flows from investing activities:
Purchases of property and equipment	(3,700		)	(3,960		)
Purchases of investments	(98,997		)	(204,086		)
Sales and maturities of investments	131,059			160,546
Acquisition of Let It Wave, net of cash acquired of $1,261	(22,767		)	—
Net cash provided by (used in) investing activities	5,595			(47,500		)
Cash flows from financing activities:
Proceeds from issuance of common stock	4,083			3,682
Net cash provided by financing activities	4,083			3,682
Net decrease in cash and cash equivalents	(11,635		)	(1,540		)
Cash and cash equivalents at beginning of period	97,377			100,034
Cash and cash equivalents at end of period	$	85,742		$	98,494

The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.

5

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Zoran Corporation and its subsidiaries (“Zoran” or “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America.  However, certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, the condensed consolidated financial statements reflect all necessary adjustments, consisting only of normal recurring adjustments, for a fair statement of the consolidated financial position, operating results and cash flows for the periods presented.  The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year or in any future period.  This Quarterly Report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2007, included in the Company’s 2007 Annual Report on Form 10-K filed with the SEC.

Revenues

On January 25, 2006, the Company entered into an agreement with MediaTek to settle patent litigation between the companies. In consideration for licenses granted by Zoran, MediaTek agreed to pay Zoran $55 million, of which $44 million was paid in February 2006 and $11 million was paid in April 2006.  These two payments, net of amounts attributable to a holder of rights under patents involved in the litigation, and amounts payable as legal fees, were recognized as license revenues related to litigation settlement. MediaTek was required to pay quarterly royalties totaling $30 million over a 30-month period that commenced on the date of the agreement based on future sales of covered MediaTek products.  These royalty payments, net of amounts payable by Zoran to a holder of rights under patents involved in the litigation, and amounts payable as legal fees, are recognized as software and other revenues as they are received.

2.Stock-based compensation

The following table summarizes stock-based compensation expense related to employee stock options, employee stock purchases and restricted stock unit grants for the three and six month periods ended June 30, 2008 and 2007 as recorded in accordance with SFAS 123(R) (revised 2004), Share-Based Payment (“SFAS 123(R)”) (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Cost of hardware product revenues	$	105	$	116	$	200	$	176
Research and development	1,305		1,468		2,464		2,163
Selling, general and administrative	2,231		2,936		3,920		4,693
Total costs and expenses	$	3,641	$	4,520	$	6,584	$	7,032

The income tax benefit for share-based compensation expense was $378,000 and $829,000 for the three and six month periods ended June 30, 2008. The Company recognized no tax benefit during the three and six month periods ended June 30, 2007 due to the Company’s full valuation on its deferred tax assets, which was released in December 2007.

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Valuation Assumptions

The Company estimates the fair value of stock options using the Black-Scholes valuation model with the following assumptions:

	Stock Option Plans
	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Average expected term (years)	5.5		5.5		5.4		5.5
Expected volatility	54	%	60	%	54	%	60	%
Risk-free interest rate	3.2	%	4.8	%	3.0	%	4.8	%
Dividend yield	0	%	0	%	0	%	0	%

	Employee Stock Purchase Plans
	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Average expected term (years)	1.25		1.27		1.36		1.28
Expected volatility	53	%	46	%	53	%	47	%
Risk-free interest rate	1.8	%	4.9	%	3.3	%	4.8	%
Dividend yield	0	%	0	%	0	%	0	%

Expected Term:  The expected term represents the period that the Company’s stock-based awards are expected to be outstanding and was determined based on the Company’s historical experience with similar awards, giving consideration to the contractual terms of the stock-based awards and vesting schedules.

Expected Volatility:  The Company uses historical volatility in deriving its volatility assumption.  Management believes that historical volatility appropriately reflects the market’s expectations of future volatility.

Risk-Free Interest Rate:  Management bases its assumptions regarding the risk-free interest rate on U.S. Treasury zero-coupon issues with an equivalent remaining term.

Expected Dividend: The Company has not paid and does not anticipate paying any dividends in the near future.

Stock Option Activity

The following is a summary of stock option activities:

	Shares Underlying Outstanding Options		Weighted Average Exercise Price
Outstanding at January 1, 2008	7,703,071		$	17.92
Granted	1,478,930		$	14.12
Exercised	(80,515	)	$	8.88
Canceled	(157,836	)	$	17.54
Outstanding at June 30, 2008	8,943,650		$	17.38

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Significant option groups outstanding as of June 30, 2008 and the related weighted average exercise price and contractual life information, are as follows:

	Options Outstanding						Options Exercisable
Exercise Prices	Shares Underlying Options at June 30, 2008	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Aggregate intrinsic value (‘000)		Shares Underlying Options at June 30, 2008	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Aggregate intrinsic value (‘000)
$0.00 to $9.99	328,809	3.95	$	6.69	$	1,648	321,309	3.88	$	6.63	$	1,628
$10.00 to $11.99	895,988	5.83	$	10.55	1,027		895,988	5.83	$	10.55	1,027
$12.00 to $14.99	2,715,950	7.63	$	13.78	—		1,144,733	4.88	$	13.36	—
$15.00 to $19.99	2,662,613	6.89	$	18.23	—		1,819,405	6.03	$	17.60	—
$20.00 to $25.99	1,958,133	5.69	$	23.96	—		1,755,951	5.31	$	23.99	—
$26.00 to $46.53	382,157	2.21	$	28.59	—		380,173	2.18	$	28.60	—
Total	8,943,650	6.44	$	17.38	$	2,675	6,317,559	5.25	$	17.71	$	2,655

Of the 8,943,650 stock options outstanding as of June 30, 2008, the Company estimates that 8,585,000 will fully vest over the remaining contractual term.  As of June 30, 2008, these options had a weighted average remaining contractual life of 6.31 years, a weighted average exercise price of $17.43 and aggregate intrinsic value of $2,664,000.

The weighted average grant date fair value of options, as determined under SFAS No. 123(R), granted during the three and six month periods ended June 30, 2008 was $7.31 and $7.28 per share, respectively.  The weighted average grant date fair value of options, as determined under SFAS No. 123(R), granted during the three and six month periods ended June 30, 2007 was $11.47 per share.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $11.70 as of June 30, 2008, which would have been received by the option holders had all option holders exercised their options as of that date.  The total number of shares of common stock underlying in-the-money options exercisable as of June 30, 2008 was 1,215,000.  The total intrinsic value of options exercised during the three and six month periods ended June 30, 2008 was $307,000 and $432,000 respectively.  There was no excess tax benefit realized by the Company in 2008 and 2007 for option exercises due to the availability of non stock related net operating loss carry forwards which fully offset our taxable income.

As of June 30, 2008, the Company had $19,400,000 of unrecognized stock-based compensation cost related to stock options after estimated forfeitures, which are expected to be recognized over the weighted average remaining term of 2.86 years.

The Company settles employee stock option exercises with newly issued common shares.

Stock Option Plans

As of June 30, 2008, the Company had outstanding options for the purchase of 8,943,650 shares of common stock held by employees and directors under the Company’s 2005 Equity Incentive Plan (the “2005 Plan”), 2005 Outside Directors Equity Plan, 2000 Nonstatutory Stock Option Plan, 1995 Outside Directors Stock Option Plan, the 1993 Stock Option Plan and other various plans the Company assumed as a result of acquisitions.  As of June 30, 2008, an aggregate of 3,670,941 shares remained available for future grants and awards.  Options and stock appreciation rights granted under the 2005 Plan must have exercise prices per share not less than the fair market value of Zoran common stock on the date of grant and may not be repriced without stockholder approval.  Such awards will vest and become exercisable upon conditions established by the Compensation Committee and may not have a term exceeding 10 years.

8

Restricted Shares and Restricted Stock Units

Restricted shares and restricted stock units are granted under the 2005 Plan.  As of June 30, 2008, we had $99,000 of unrecognized stock-based compensation cost related to restricted shares and restricted stock units, which are expected to be recognized over the weighted average remaining term of 1.51 years.

The following is a summary of restricted shares and restricted stock units activities:

	Outstanding Restricted Shares And Stock Units		Weighted- Average Grant- Date Fair Value
Balances, December 31, 2007	77,345		$	18.53
Granted	—		$	—
Released/vested	(51,316	)	$	20.29
Forfeited	(612	)	$	21.56
Balances, June 30, 2008	25,417		$	14.91

Employee Stock Purchase Plan

The Company’s 1995 Employee Stock Purchase Plan (“ESPP”) was adopted by the Company’s Board of Directors in October 1995 and approved by its stockholders in December 1995.  The ESPP enables employees to purchase shares through payroll deductions at approximately 85% of the lesser of the fair value of common stock at the beginning of a 24-month offering period or the end of each six-month segment within such offering period.  The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the U.S. Internal Revenue Code.  During the three month period ended June 30, 2008, 301,119 shares were purchased by employees under the terms of the plan agreements at a weighted average price of $11.19 per share.  As of June 30, 2008, 1,825,833 shares were reserved and available for issuance under the ESPP.

3.Comprehensive Loss

The following table presents the calculation of comprehensive loss as required by SFAS 130 “Reporting Comprehensive Income.”  The components of comprehensive loss, net of tax, are as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Net income (loss)	$	(36,620	)	$	198		$	(41,298	)	$	(5,686	)
Change in unrealized gain (loss) on investments, net of tax	(1,599		)	(907		)	(1,900		)	(2,349		)
Total comprehensive loss	$	(38,219	)	$	(709	)	$	(43,198	)	$	(8,035	)

The accumulated other comprehensive income (loss) is unrealized gain (loss), net of tax, on marketable securities.

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4.Marketable Securities

The Company’s portfolio of marketable securities as of June 30, 2008 was as follows (in thousands):

	Cost			Unrealized Gains		Unrealized Losses			Estimated Fair Value
Corporate notes and bonds	$	167,069		$	432	$	(1,334	)	$	166,167
Auction rate securities	57,775			—		—			57,775
U.S. government and agency securities	31,789			11		(159		)	31,641
Foreign and municipal bonds	15,804			59		(11		)	15,852
Certificates of deposit	1,997			11		—			2,008
Total fixed income securities	274,434			513		(1,504		)	273,443
Publicly traded equity securities	1,393			—		(407		)	986
	275,827			513		(1,911		)	274,429
Less: Auction rate securities included in other assets and long- term investments	(57,775		)	—		—			(57,775		)
Total short-term investments	$	218,052		$	513	$	(1,911	)	$	216,654

The Company’s portfolio of marketable securities as of December 31, 2007 was as follows (in thousands):

	Cost			Unrealized Gains		Unrealized Losses			Estimated Fair Value
Corporate notes and bonds	$	162,339		$	580	$	(305	)	$	162,614
Auction rate securities	85,350			—		—			85,350
U.S. government and agency securities	36,290			206		—			36,496
Foreign and municipal bonds	17,421			55		(1		)	17,475
Certificates of deposit	3,994			4		(1		)	3,997
Total fixed income securities	305,394			845		(307		)	305,932
Publicly traded equity securities	1,393			457		—			1,850
	306,787			1,302		(307		)	307,782
Less: Auction rate securities included in other assets and long- term investments	(85,350		)	—		—			(85,350		)
Total short-term investments	$	221,437		$	1,302	$	(307	)	$	222,432

The following table summarizes the maturities of the Company’s fixed income securities as of June 30, 2008 (in thousands):

	Cost		Estimated Fair Value
Less than 1 year	$	85,372	$	85,234
Due in 1 to 2 years	86,978		86,570
Due in 2 to 5 years	44,309		43,864
Greater than 5 years*	57,775		57,775
Total fixed income securities	$	274,434	$	273,443

*Comprised of auction rate securities which have reset dates of 90 days or less but final expiration dates over 5 years.  These securities are included in other assets and long-term investments as of June 30, 2008.

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5.Fair Value

Effective January 1, 2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually.  Therefore, the Company has adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only.  SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements.  Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.  Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs.  The standard describes a fair value hierarchy based on three levels of inputs that may be used to measure fair value, of which the first two are considered observable and the last unobservable:

·Level 1 - Quoted prices in active markets for identical assets or liabilities.

·Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of this statement did not have a material impact on the Company’s consolidated results of operations and financial condition.

Effective January 1, 2008, the Company adopted SFAS No. 159 “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”).  SFAS 159 allows an entity the irrevocable option to elect fair value for the initial and subsequent measurement for specified financial assets and liabilities on a contract-by-contract basis.  The Company did not elect to adopt the fair value option under this Statement.

In accordance with SFAS 157, the following table represents the Company’s fair value hierarchy for its financial assets (cash equivalents and investments) measured at fair value on a recurring basis as of June 30, 2008 (in thousands):

	Level 1		Level 2		Level 3		Total
Corporate notes and bonds	$	—	$	166,167	$	—	$	166,167
Auction rate securities	—		—		57,775		57,775
U.S. government and agency securities	—		31,641		—		31,641
Foreign and municipal bonds	—		15,852		—		15,852
Certificates of deposit	—		2,008		—		2,008
Total fixed income securities	—		215,668		57,775		273,443
Publicly traded equity securities	986		—		—		986
Total	$	986	$	215,668	$	57,775	$	274,429

The Company’s Level 3 investments as of June 30, 2008 include high-grade auction rate securities primarily consisting of government guaranteed student loans.  Auction rate securities are securities that are structured with short-term interest rates which periodically reset through auctions, typically within every 90 days.  At the end of each reset period, investors can sell or continue to hold the securities at par. During the current quarter, some of the auction rate securities were sold and others failed to auction successfully due to market supply exceeding market demand.  In the event of a failed auction, the notes continue to bear interest at a predetermined maximum rate based on the credit rating of notes as determined by one or more nationally recognized statistical rating organizations.  The funds associated with failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the securities or the underlying securities have matured.  As a result, the Company has classified all auction rate securities as long-term assets in the condensed consolidated balance sheets.

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Due to the current economic environment in which there is a lack of market activity for auction rate securities, the Company has been unable to obtain quoted prices or market prices for identical assets as of the measurement date resulting in significant unobservable inputs used in determining the fair value.  The Company estimated the fair value of these auction rate securities using the income approach based on the following: (i) the underlying structure and contractual provisions of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; and (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period.  These estimated fair values could change significantly based on future market conditions, which could result in recognizing an other-than-temporary impairment loss.

The fair value indicated by this approach yielded a value that approximated the par value of the respective securities.

The reconciliation of beginning and ending balances for auction rate securities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) during the period was as follows (in thousands):

	Fair Value Measurements using Significant Unobservable Inputs (Level 3)
	Auction rate securities
Balance at January 1, 2008	$	—
Total gains or losses (realized/unrealized)
Included in earnings	—
Included in other comprehensive income	—
Purchases, sales, issuances, and settlements	—
Transfers in and/or out of Level 3	62,775
Balance at March 31, 2008	62,775
Total gains or losses (realized/unrealized)
Included in earnings	—
Included in other comprehensive income	—
Purchases, sales, issuances, and settlements	(5,000		)
Transfers in and/or out of Level 3	—
Balance at June 30, 2008	$	57,775

6.Inventories

Inventories are stated at the lower of cost (first in, first out) or market and consisted of the following (in thousands):

	June 30,		December 31,
	2008		2007
Purchased parts and work in process	$	29,580	$	28,498
Finished goods	31,023		20,494
	$	60,603	$	48,992

7.Goodwill and Other Intangible Assets

The Company monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable.  The Company performed the annual analysis as of September 30, 2007 and concluded that goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value, including goodwill.

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Components of Acquired Intangible Assets (in thousands):

		June 30, 2008							December 31, 2007
	Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net  Balance		Gross Carrying Amount		Accumulated Amortization			Net  Balance
Amortized intangible assets:
Purchased technology	2-3	$	195,505	$	(189,741	)	$	5,764	$	195,505	$	(175,451	)	$	20,054
Patents	3-5	40,265		(39,661		)	604		40,265		(36,961		)	3,304
Customer base	3-5	13,860		(13,273		)	587		13,860		(12,043		)	1,817
Tradename and others	3-5	4,655		(2,853		)	1,802		3,350		(2,580		)	770
Total		$	254,285	$	(245,528	)	$	8,757	$	252,980	$	(227,035	)	$	25,945

Estimated future intangible amortization expense, based on current balances, as of June 30, 2008 is as follows (in thousands):

Remaining six months of 2008	$	5,058
Year ending December 31, 2009	2,255
Year ending December 31, 2010	1,245
Year ending December 31, 2011	199
	$	8,757

Goodwill by reporting unit was as follows (in thousands):

	June 30,		December 31,
	2008		2007
Consumer	$	164,494	$	164,494
Imaging	4,197		4,197
	$	168,691	$	168,691

8.Income Taxes

The Company follows the liability method of accounting for income taxes, which requires recognition of deferred tax liabilities and assets for the expected future tax consequence of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities.  Realization of deferred tax assets is based on the Company’s ability to generate sufficient future taxable income. As of December 31, 2007, historical operating income and projected future profits represented sufficient positive evidence that the Company’s deferred tax assets will more likely than not be realized and, accordingly, the valuation allowance was released.

Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses, the tax regulations and tax holiday benefits in certain jurisdictions, and the effectiveness of our tax planning strategies.  The provision for income taxes for the three and six month periods ended June 30, 2008 reflects the estimated annual tax rate applied to the year to date net loss, adjusted for certain discreet items that are fully recognized in the period they occur.  The Company benefits from our Israel based subsidiary’s status as an “Approved Enterprise” under Israeli law, which provides a ten-year tax holiday for income attributable to a portion of the Company’s operations in Israel.

On January 1, 2007, the Company adopted FASB Interpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”).  Under FIN 48, the impact of an uncertain income tax position on income tax expense must be recognized at the amount that is more-likely-than-not of being sustained.  As of December 31, 2007, the Company had $26.5 million of unrecognized tax benefits which have not materially changed during the current period.  The application of income tax law is inherently complex.  Laws and regulations in this area are voluminous and are often ambiguous and the Company is required to make many subjective assumptions and judgments regarding its income tax exposures.  In addition, interpretations of and guidance surrounding income tax laws and regulations are subject to change over time.  Any changes in our subjective assumptions and judgments could materially affect amounts recognized in

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the consolidated balance sheets and statements of income.  The Company’s ongoing tax audit in Israel may result in a positive or negative adjustment to the Company’s unrecognized tax benefits within the next 12 months.

9.Segment Reporting

The Company’s products are based on highly integrated application-specific integrated circuits, or ASICs, and system-on-a-chip, or SOC, solutions.  The Company also licenses certain software and other intellectual property.  The Company has two reportable segments — Consumer group and Imaging group.

The Consumer group provides products for use in DVD players, recordable DVD players, standard and high definition digital television products, digital camera products and multimedia mobile phone products.  The Imaging group provides products used in digital copiers, laser and inkjet printers as well as multifunction peripherals.

Information about reported segment income or loss is as follows for the three and six month periods ended June 30, 2008 and 2007 (in thousands):

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Net revenues:
Consumer	$	108,822		$	107,281	$	197,194		$	188,733
Imaging	19,863			22,622		40,522			42,829
	$	128,685		$	129,903	$	237,716		$	231,562
Operating expenses:
Consumer	$	108,926		$	102,230	$	205,473		$	184,516
Imaging	14,491			16,338		29,259			31,831
	$	123,417		$	118,568	$	234,732		$	216,347
Contribution margin:
Consumer	$	(104	)	$	5,051	$	(8,279	)	$	4,217
Imaging	5,372			6,284		11,263			10,998
	$	5,268		$	11,335	$	2,984		$	15,215

A reconciliation of the totals reported for the operating segments to the applicable line items in the condensed consolidated financial statements for the three and six month periods ended June 30, 2008 and 2007 is as follows (in thousands):

	Three Months Ended June 30,						Six Months Ended June 30,
	2008			2007			2008			2007
Contribution margin from operating segments	$	5,268		$	11,335		$	2,984		$	15,215
Amortization of intangible assets	9,256			12,169			18,493			24,338
In-process research and development	22,383			—			22,383			—
Total operating loss	$	(26,371	)	$	(834	)	$	(37,892	)	$	(9,123	)

Zoran maintains operations in Canada, China, France, Germany, India, Israel, Japan, Korea, Taiwan, the United Kingdom and United States.  Activities in Israel and the United States consist of corporate administration, product development, logistics and worldwide sales management.  Other foreign operations consist of sales, product development and technical support.

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The geographic distribution of total revenues for the three and six month periods ended June 30, 2008 and 2007 was as follows (in thousands):

	Three Months Ended June 30,				Six Months Ended June 30,
	2008		2007		2008		2007
Revenue from unaffiliated customers originating from:
China	$	54,945	$	51,866	$	94,505	$	82,379
Japan	18,353		21,807		40,241		46,905
Korea	15,816		3,932		30,829		9,999
Taiwan	27,171		35,983		47,149		61,652
United States	8,550		7,401		16,650		14,570
Other	3,850		8,914		8,342		16,057
Total revenues	$	128,685	$	129,903	$	237,716	$	231,562

For the three and six month periods ended June 30, 2008, three customers accounted for 11%, 11% and 10% of total revenues, respectively. For the same periods of 2007, one customer accounted for 14% of total revenues.

As of June 30, 2008, three customers accounted for approximately 13%, 13% and 12% of total net accounts receivable, respectively, and as of December 31, 2007 three customers accounted for approximately 11%, 11% and 10% of the net accounts receivable balance, respectively.

10.Acquisition

Let It Wave

On June 12, 2008, the Company completed the acquisition of Let It Wave, a fabless development-stage semiconductor company based in Paris, France. Under the terms of the acquisition agreement, the Company acquired Let It Wave in an all-cash transaction valued at $24.0 million, including approximately $650,000 of transaction costs.  The Company also agreed to make contingent payments up to $4.5 million in additional consideration, contingent upon completion of certain milestones, a portion of which is subject to continuous employment and will be expensed as incurred.

This acquisition’s primary purpose was to obtain Let It Wave’s in-process development of a video frame rate conversion and image enhancement product for flat panel televisions and other consumer electronics.  By acquiring Let It Wave, the Company intends to deliver high performance image processing that enables artifact-free true-Motion Compensated Frame Rate Conversion (MCFRC) for flat panel televisions and other video consumer electronics products.  Let It Wave is at least six to nine months from completing the development of its MCFRC product and currently has no other products, revenues or a customer base.  Upon completion of a finished product, the Company expects to market this technology for 120Hz LCD televisions within the Consumer segment group.

The Company accounted for this transaction as an asset acquisition in accordance with Statement of Financial Accounting Standard 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” and Emerging Issues Task Force No. 98-3 (“EITF 98-3”), “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.”  The results of operations of Let It Wave have been included in the condensed consolidated financial statements from the date of acquisition.

Allocation of the purchase price is as follows (in thousands):

In-process research and development	$	22,383
Assembled workforce	1,305
Net assets acquired	340
	$	24,028

Net assets acquired were recorded at net book value, which approximates their fair values.  The purchase price in excess of the fair values of net assets acquired was allocated to in-process research and development and assembled workforce based on the relative fair values.

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The in-process research and development has not yet reached technological feasibility and has no alternative future use.  Accordingly the amount allocated to in-process research and development was immediately expensed upon the acquisition date.  The value of in-process research and development was determined using the multi-period excess earnings method by estimating the expected net cash flows from the projects once commercially viable, discounting the net cash flows back to their present value using a discount rate of 15%.  This rate was based on the industry segment for the technology, nature of the products to be developed, relative risk of successful development, time-value of money, length of time to complete the project and overall maturity and history of the development team.  Revenues for the incremental core technology are expected to commence in 2009.  Revenue projections were based on estimates of market size and growth, expected trends in technology and the expected timing of new product introductions.

11.Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income (loss) available to common stockholders by the weighted average number of common shares outstanding during the period.  Diluted net income (loss) per share is calculated by using the weighted average number of common shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued.

The following table provides a reconciliation of the components of the basic and diluted net income (loss) per share computations (in thousands, except per share data):

	Three Months Ended June 30,					Six Months Ended June 30,
	2008			2007		2008			2007
Net income (loss)	$	(36,620	)	$	198	$	(41,298	)	$	(5,686	)
Weighted average shares outstanding	51,707			49,600		51,576			49,527
Effect of dilutive options, restricted shares, and restricted stock units	—			1,587		—			—
Dilutive weighted average shares	51,707			51,187		51,576			49,527
Net income (loss) per share:
Basic	$	(0.71	)	$	0.00	$	(0.80	)	$	(0.11	)
Diluted	$	(0.71	)	$	0.00	$	(0.80	)	$	(0.11	)

For the three month periods ended June 30, 2008 and 2007, outstanding options, restricted shares, and restricted stock units totaling 6.9 million and 3.3 million shares, respectively, were excluded from the computation of diluted net income (loss) per share as the inclusion of such shares would have had an anti-dilutive effect.

For the six month periods ended June 30, 2008 and 2007, outstanding options and restricted stock units totaling 6.3 million and 9.0 million shares, respectively, were excluded from the computation of diluted net income (loss) per share as the inclusion of such shares would have had an anti-dilutive effect.

12.Contingencies

Matters Related to Historical Stock Option Practices:  As discussed further below, certain persons and entities identifying themselves as shareholders of Zoran have filed derivative actions purporting to assert claims on behalf of and in the name of the Company against various of the Company’s current and former directors and officers relating to the Company’s historical accounting for stock options. The Company cannot quantify the extent of its potential liability, if any.

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Pfeiffer v. Zoran Corporation et al.  On September 7, 2006, a purported shareholder derivative action was filed by Milton Pfeiffer against Zoran as a nominal defendant and certain of its officers and directors in the United States District Court, Northern District of California, alleging, among other things, violations of federal securities laws and breaches of fiduciary duties.

Gerald del Rosario v. Aharon et al.  On September 26, 2006, a purported shareholder derivative action was filed by Gerald del Rosario against Zoran as a nominal defendant and certain of its current and former officers and directors in the United States District Court, Northern District of California, alleging, among other things, violations of federal securities laws and breaches of fiduciary duty. On December 8, 2006, the Court issued an order consolidating the Del Rosario action with the Pfeiffer action. The Court selected del Rosario as lead plaintiff and approved lead plaintiff’s selection of counsel for the consolidated derivative action. Plaintiffs filed a consolidated amended complaint on March 14, 2007. On June 5, 2007 the Court issued an order granting in part and denying in part defendants’ motion to dismiss.  On September 11, 2007, the parties participated in a court-ordered mediation session.  On April 7, 2008, the Court denied preliminary approval of the parties’ proposed settlement agreement.  On May 29, 2008, the parties reached a revised agreement in principle to settle the action.  On June 11, 2008, the Court granted preliminary approval of the settlement.  The settlement remains subject to final approval by the Court.

Barone v. Gerzberg et al.; Durco v. Gerzberg et al.  On October 23, 2006, two purported shareholder derivative actions were filed by Moshe Barone and John Durco against Zoran as a nominal defendant and certain of its current and former officers and directors in the California Superior Court of Santa Clara County, alleging, among other things, violations of state securities laws and breaches of fiduciary duty. On January 24, 2007 the Court consolidated the Barone and Durco actions, appointed Messrs. Barone and Durco as co-lead plaintiffs and approved their selection of counsel for the consolidated derivative action. The co-lead plaintiffs filed a consolidated amended complaint on March 26, 2007. On June 15, 2007 the Court issued an order staying all proceedings until further order of the Court.

U.S. Attorney Investigation:  On July 3, 2006, Zoran disclosed in a press release that it received and was responding to a grand jury subpoena from the office of the U.S. Attorney for the Northern District of California requesting documents relating to stock options.  Should any further such requests be made by the U.S. Attorney, Zoran intends to continue cooperating fully.

Zoran Corporation v. ArcSoft, Inc.  On February 20, 2007, the Company filed a complaint against ArcSoft Inc. in the California Superior Court for the County of Alameda, seeking payment of $4,000,000 in aggregate principal under four separate convertible promissory notes, together with accrued interest thereon in the amount of approximately $528,000.  The notes represented amounts loaned by the Company to ArcSoft in 2004.  At that time, the Company also entered into a business arrangement with ArcSoft involving the licensing and grant of certain rights to ArcSoft related to a product then under development and related agreements regarding the continued development and commercialization of the product.  On March 28, 2007, ArcSoft filed an answer denying liability under the notes and asserting various affirmative defenses.  ArcSoft also filed a cross-complaint alleging fraud in the inducement of the business arrangement, fraudulent and negligent misrepresentation, breach of contract and of the implied covenant of good faith and fair dealing, and unjust enrichment, and seeking monetary damages of more than $6,900,000.  The Company filed an answer to ArcSoft’s cross-complaint denying liability and asserting various affirmative defenses.  The Company also filed a cross-complaint alleging various breach of contract claims against ArcSoft.  On July 9, 2008, ArcSoft and the Company entered into a settlement agreement that resolved all claims between the parties.  The Company made no payment to ArcSoft related to the resolution of ArcSoft’s cross-complaint.

Indemnification Obligations.  Subject to certain limitations, the Company is obligated to indemnify its current and former directors, officers and employees in connection with the investigation of the Company’s historical stock option practices and related government inquiries and litigation. These obligations arise under the terms of the Company’s certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that the Company is required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. The Company is currently paying or reimbursing legal expenses being incurred in connection with these matters by a number of its current and former directors, officers and employees.

Other Legal Matters.  The Company is named from time to time as a party to lawsuits in the normal course of its business. Litigation, in general, and intellectual property and securities litigation in particular, can be expensive and disruptive to normal business operations. Moreover, the results of legal proceedings are difficult to predict.

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

This report includes a number of forward-looking statements which reflect the Company’s current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed in “Part II, Item 1A. Risk Factors” below. In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Overview

Our products consist of integrated circuits and related products used in digital versatile disc players, or DVDs, movie and home theater systems, digital cameras and video editing systems.  We also provide integrated circuits, software and platforms for standard and high definition digital television applications that enable the delivery and display of digital video content through a set-top box or television, demodulator IC technology for the global high definition television market.  We also provide digital imaging products consisting of semiconductor hardware and software that enable users to print, scan, process and transmit documents to computer peripherals that perform printing functions.  We also provide high performance, low-power application processors, technology and products for the multimedia mobile telephone market.

Revenues

We derive most of our revenues from the sale of our integrated circuit products.  Historically, average selling prices in the semiconductor industry in general, and for our products in particular, have decreased over the life of a particular product.  Average selling prices for our hardware products have fluctuated substantially from period to period, primarily as a result of changes in our customer mix of original equipment manufacturer, or OEM, sales versus sales to resellers and the transition from low-volume to high-volume production.  In the past, we have periodically reduced the prices of some of our products in order to better penetrate the consumer market.  We believe that, as our product lines continue to mature and competitive markets evolve, we are likely to experience further declines in the average selling prices of our products, although we cannot predict the timing and amount of such future changes with any certainty.

We also derive revenues from licensing our software and other intellectual property.  Licensing revenues include one-time license fees and royalties based on the number of units distributed by the licensee.  Quarterly licensing revenue can be significantly affected by the timing of a small number of licensing transactions, each accounting for substantial revenues.  Accordingly, licensing revenues have fluctuated, and will continue to fluctuate, on a quarterly basis.  In addition, we have historically generated a portion of our total revenues from development contracts, primarily with key customers, although development revenue has declined substantially as a percentage of total revenues over the past several years.  These development contracts have provided us with partial funding for the development of some of our products.  These development contracts provide for license and milestone payments which are recorded as development revenue.  We classify all development costs, including costs related to these development contracts, as research and development expenses.  We retain ownership of the intellectual property developed by us under these development contracts.  While we intend to continue to enter into development contracts with certain strategic partners, we expect development revenue to continue to decline as a percentage of total revenues.

We recognize software license revenues in accordance with the provisions of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Our software license agreements typically include obligations to provide maintenance and other support over a fixed term and allow for renewal of maintenance services on an annual basis. We determine the fair value of our maintenance obligations with reference to substantive renewal rates within the agreement or objective evidence of fair value as required under SOP 97-2. Maintenance and support revenue is recognized ratably over the term of the arrangement.  We also receive royalty revenues based on per unit shipments of products embedding our software, which we recognize upon receipt of a royalty report from the customer, typically one quarter in arrears.

Cost of Hardware Product Revenues

Our cost of hardware product revenues consists primarily of fabrication costs, assembly and test costs, and the cost of materials and overhead from operations.  If we are unable to reduce our cost of hardware product revenues to offset anticipated decreases in average selling prices, our product gross margins will decrease.  We expect both product and customer mix to continue to fluctuate in future periods, causing fluctuations in margins.

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Research and Development

Our research and development expenses consist of salaries and related costs of employees engaged in ongoing research, design and development activities and costs of engineering materials and supplies.  We believe that significant investments in research and development are required for us to remain competitive, and we expect to continue to devote significant resources to product development, although such expenses as a percentage of total revenues may fluctuate.

Selling, General and Administrative

Our selling, general and administrative expenses consist primarily of employee-related expenses, sales commissions, product promotion and other professional services.  We expect that selling, general and administrative expenses will continue to increase to support our anticipated growth.

Income Taxes

Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses. The increase to our 2008 tax rate is primarily due to income in high tax jurisdictions which are only partially offset by losses in low tax jurisdiction. Our Israel based subsidiary is an “Approved Enterprise” under Israeli law, which provides a ten-year tax holiday for income attributable to a portion of our operations in Israel.  Our U.S. federal net operating losses expire at various times between 2017 and 2024, and the benefits from our subsidiary’s Approved Enterprise status expire at various times beginning in 2008.

We are currently under a tax audit in Israel for tax years 2003 through 2005.  We believe that we have adequately provided for any potential assessments associated with this audit.  It is possible that the amount of our liability for unrecognized income tax benefits may change within the next 12 months.  In addition, our income tax expense could be affected as other events occur, income tax audits conclude or statutes of limitations expire.  We cannot estimate at this time the range of possible changes in our tax expense.

Acquisitions

Let It Wave

On June 12, 2008, we completed the acquisition of Let It Wave, a fabless development-stage semiconductor company based in Paris, France. Under the terms of the acquisition agreement, we acquired Let It Wave in an all cash transaction valued at $24.0 million including approximately $650,000 of transaction costs.  We also agreed to make contingent payments of up to $4.5 million in additional consideration, contingent upon completion of certain milestones, a portion of which is subject to continuous employment and will be expensed as incurred.  We recorded an in-process research and development expense of $22.4 million in connection with the acquisition.

We accounted for this transaction as an asset acquisition in accordance with Statement of Financial Accounting Standard 142 (“SFAS 142”), “Goodwill and Other Intangible Assets” and Emerging Issues Task Force No. 98-3 (“EITF 98-3”), “Determining Whether a Nonmonetary Transaction Involves Receipt of Productive Assets or of a Business.”

Following the completion of the acquisition, the results of operations of Let It Wave have been included in our condensed consolidated financial statements.  Accordingly, our results of operations for the three and six month periods ended June 30, 2008 include Let It Wave’s operations from the acquisition date.

Segments

Our products are based on highly integrated application-specific integrated circuits, or ASICs, and system-on-a-chip, or SOC, solutions.  We also license certain software and other intellectual property.  We operate in two operating segments – Consumer group and Imaging group.  The Consumer group provides products for use in DVD players, recordable DVD players, standard and high definition digital television products, digital camera products and multimedia mobile phone products.  The Imaging group provides products used in digital copiers, laser and inkjet printers as well as multifunction peripherals.

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our

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critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2007 with the exception of the additional policy discussed below.

Fair value measurements

Effective January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  In February 2008, the FASB issued FASB Staff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,” which provides a one year deferral of the effective date of SFAS 157 for non-financial assets and non-financial liabilities, except those that are recognized or disclosed in the financial statements at fair value at least annually. Therefore, we have adopted the provisions of SFAS 157 with respect to its financial assets and liabilities only.  SFAS 157 defines fair value, establishes a framework for measuring fair value under generally accepted accounting principles and enhances disclosures about fair value measurements. Fair value is defined under SFAS 157 as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 must maximize the use of observable inputs and minimize the use of unobservable inputs. The standard describes a fair value hierarchy based on three levels of inputs, that may be used to measure fair value, of which the first two are considered observable and the last unobservable:

·Level 1 - Quoted prices in active markets for identical assets or liabilities.

·Level 2 - Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

·Level 3 - Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

The adoption of this statement did not have a material impact on our consolidated results of operations and financial condition.

Our Level 3 investments as of June 30, 2008 include high-grade auction rate securities primarily consisting of government guaranteed student loans.  Auction rate securities are securities that are structured with short-term interest rates which periodically reset through auctions, typically within every 90 days.  At the end of each reset period, investors can sell or continue to hold the securities at par. During the current quarter, some of the auction rate securities were sold and others failed to auction successfully due to market supply exceeding market demand.  In the event of a failed auction, the notes continue to bear interest at a predetermined maximum rate based on the credit rating of notes as determined by one or more nationally recognized statistical rating organizations. The funds associated with failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the securities or the underlying securities have matured.  As a result, we have classified all auction rate securities as long-term assets in the condensed consolidated balance sheets.

Due to the current economic environment in which there is a lack of market activity for auction rate securities, we have been unable to obtain quoted prices or market prices for identical assets as of the measurement date resulting in significant unobservable inputs used in determining the fair value.  We estimated the fair value of these auction rate securities using the income approach based on the following: (i) the underlying structure and contractual provisions of each security; (ii) the present value of future principal and interest payments discounted at rates considered to reflect current market conditions; and (iii) consideration of the probabilities of default, auction failure, or repurchase at par for each period. These estimated fair values could change significantly based on future market conditions, which could result in recognizing an other-than-temporary impairment loss.

The fair value indicated by this approach yielded a value that approximated the par value of the respective securities.

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Results of Operations

The following table summarizes selected consolidated statement of operations data and changes from the period to period (dollars in thousands, except for percentages):

	Three Months Ended June 30,						Change
	2008			2007			$			%
Revenues:
Hardware product revenues	$	113,606		$	114,508		$	(902	)	(0.8	)%
Software and other revenues	15,079			15,395			(316		)	(2.1	)%
Total revenues	128,685			129,903			(1,218		)	(0.9	)%
Cost and expenses:
Cost of hardware product revenues	68,360			60,178			8,182			13.6	%
Research and development	30,797			29,976			821			2.7	%
Selling, general and administrative	24,260			28,414			(4,154		)	(14.6	)%
Amortization of intangible assets	9,256			12,169			(2,913		)	(23.9	)%
In-process research and development.	22,383			—			22,383			100.0	%
Total costs and expenses	155,056			130,737			24,319			18.6	%
Operating loss	(26,371		)	(834		)	(25,537		)		*
Interest and other income (expense), net	2,831			3,882			(1,051		)	(27.1	)%
Provision for income taxes	13,080			2,850			10,230			*
Net income (loss)	$	(36,620	)	$	198		$	(36,818	)	*
Supplemental Operating Data:
Cost of hardware product as % of hardware product revenues	60.2		%	52.6		%

* not meaningful

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	Six Months Ended June 30,						Change
	2008			2007			$			%
Revenues:
Hardware product revenues	$	207,903		$	201,690		$	6,213		3.1	%
Software and other revenues	29,813			29,872			(59		)	(0.2	)%
Total revenues	237,716			231,562			6,154			2.7	%
Cost and expenses:
Cost of hardware product revenues	126,149			104,376			21,773			20.9	%
Research and development	58,684			54,964			3,720			6.8	%
Selling, general and administrative	49,899			57,007			(7,108		)	(12.5	)%
Amortization of intangible assets	18,493			24,338			(5,845		)	(24.0	)%
In-process research and development	22,383			—			22,383			100.0	%
Total costs and expenses	275,608			240,685			34,923			14.5	%
Operating loss	(37,892		)	(9,123		)	(28,769		)	*
Interest and other income (expense), net	6,644			8,087			(1,443		)	(17.8	)%
Provision for income taxes	10,050			4,650			5,400			116.1	%
Net loss	$	(41,298	)	$	(5,686	)	$	(35,612	)	*
Supplemental Operating Data:
Cost of hardware product as % of hardware product revenues	60.7		%	51.8		%

* not meaningful

Revenues

Total revenues were $128.7 million for the three months ended June 30, 2008 compared to $129.9 million for the three months ended June 30, 2007.  Consumer segment revenues increased by $1.5 million while Imaging segment revenues decreased $2.7 million.  The increase in Consumer segment revenues was a result of increases in revenues for DTV and Mobile products of $19.6 million and $2.0 million, respectively, which was partially offset by decrease in revenues for DVD products by $20.1 million. The decrease in Imaging segment revenues was primarily due to a reduction in Imaging hardware product revenues.

Total revenues were $237.7 million for the six months ended June 30, 2008 compared to $231.6 million for the six months ended June 30, 2007.  Consumer segment revenues increased by $8.4 million while Imaging segment revenues decreased $2.3 million.  The increase in Consumer segment revenues was primarily a result of increases in revenues for DTV products of $30.2 million which was partially offset by decrease in revenues for DVD products by $21.9 million.  The decrease in Imaging segment revenues was primarily due to a reduction in Imaging hardware product revenues.

Hardware product revenues for the three months ended June 30, 2008 were $113.6 million compared to $114.5 million for the comparable period of the prior year.  Hardware product revenues increased $1.6 million in the Consumer segment, offset by a $2.5 million decrease in the Imaging segment.  Within the Consumer segment, hardware product revenues increased by $19.5 million for DTV products, primarily due to increased unit shipments, and by $2.0 million in the Mobile products, also driven by increased unit shipments. Partially offsetting the increases for DTV and Mobile products was a decrease of $19.9 million for DVD products mainly attributable to a reduction in unit shipments.  The Imaging hardware product revenues decreased due to lower average selling prices and reduced unit shipments.

Hardware product revenues for the six months ended June 30, 2008 were $207.9 million compared to $201.7 million for the comparable period of the prior year.  Hardware product revenues increased $9.1 million in the Consumer segment, partially offset by a $2.9 million decrease in the Imaging segment.  Within the Consumer segment, hardware product revenues increased by $30.4 million for

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DTV products, which were primarily driven by increased unit shipments.  This increase was partially offset by a decrease of $21.4 million for DVD products, mainly attributable to an erosion of average selling price.  The decrease in Imaging hardware product revenues was due to lower average selling prices.

Software and other revenues were $15.1 million and $29.8 million for the three and six month periods ended June 30, 2008, respectively, compared to $15.4 million and $29.9 million for the three and six month periods ended June 30, 2007, respectively.  The changes in software and other revenues were primarily due to the timing of new agreements.

Cost of Hardware Product Revenues

The increase in hardware product costs as a percentage of hardware product revenues for the three and six month periods ended June 30, 2008, compared to the same period in 2007, was primarily a result of product mix – products with a higher percent of cost per revenue represented a greater proportion of products sold.  In the first half of 2008, we experienced initial cost challenges related to ramp in volume of new products.  As we move forward with these products’ volume ramp, we expect to see improvements in their cost structure.  Cost of hardware product revenues as a percentage to product revenue was also impacted by declines in average selling prices, particularly for our DVD products.

Research and Development

Research and development expenses increased by $0.8 million and $3.7 million for the three and six month periods ended June 30, 2008, respectively, compared to the same periods in 2007.  Research and development expenses tend to fluctuate based on the timing of major engineering-related expenses, such as tape-outs as well as continued investments in research and development across both of our segments.

Selling, General and Administrative

Selling, general and administrative expenses decreased by $4.2 million and $7.1 million for the three and six month periods ended June 30, 2008, respectively, compared to the same periods in 2007.  These decreases were primarily attributed to decreases in legal and accounting expenses which were higher in 2007 in connection with our review of historical stock option granting practices.  In addition, stock-based compensation expenses were lower for the three and six month periods ended June 30, 2008 compared to the same periods in 2007.

Amortization of Intangible Assets

During the three and six month periods ended June 30, 2008, we incurred charges of $9.3 and $18.5 million, respectively, related to the amortization of intangible assets compared to $12.2 million and $24.3 million of such charges for the three and six month periods ended June 30, 2007, respectively.  At June 30, 2008, we had approximately $8.8 million in net intangible assets acquired through the Oak, Emblaze, Oren and Let It Wave acquisitions, which we will continue to amortize on a straight line basis through 2011.

In-Process Research and Development

During the quarter ended June 30, 2008, the Company recorded an in-process research and development expense of $22.4 million as part of the June 2008 acquisition of Let It Wave.  There were no charges recorded for in-process research and development during 2007.

Interest and Other Income (Expense)

Interest and other income (expense) was $2.8 and $6.6 million for the three and six month periods ended June 30, 2008, respectively, compared to $3.9 million and $8.1 million for the same periods of 2007, respectively.   Interest income was $3.3 million and $7.8 million for the three and six month periods ended June 30, 2008, respectively, compared to $3.8 million and $7.4 million for the same period of 2007. The decrease in interest income for the three months ended June 30, 2008 was primarily due to lower average interest earned on our cash and short term investment balances due to declines in the interest rate.  The decreases in other income (expense) for the three and six month periods ended June 30, 2008 were primarily due to foreign currency remeasurement losses as a result of the decline in the value of the U.S. dollar in comparison to currencies in countries in which we operate and fluctuations in realized gains due to timing of sale of investments.

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Provision for Income Taxes

We recorded a tax provision of $13.1 and $10.0 million for the three and six month periods ended June 30, 2008, respectively, compared to a tax provision of $2.8 million and $4.6 million for the three and six month periods ended June 30, 2007, respectively.  The expense for the three and six month periods ended June 30, 2008 reflects the estimated annual tax rate applied to the year to date pre tax loss, adjusted for certain discrete items that are fully recognized in the period they occur.  The income tax expense for these periods was affected by the geographic distribution of our worldwide earnings or losses, the impact of recording a valuation allowance and the release of the valuation allowance at December 31, 2007, non-tax-deductible expenses such as SFAS 123R stock-based compensation expense, as well as the accrual of liabilities associated with unrecognized tax benefits.  In addition, our Israel based subsidiary is an “Approved Enterprise” under Israeli law, which provides a ten-year tax holiday for income attributable to a portion of our operations in Israel.

Liquidity and Capital Resources

At June 30, 2008, we had $85.7 million of cash and cash equivalents, $216.7 million of short term investments and $57.8 million of long term investments.  At June 30, 2008, we had $355.3 million of working capital.

Cash used in operating activities was $21.3 million during the first six months of 2008.  While we recorded a net loss of $41.3 million, this loss included non-cash items such as amortization of $18.5 million, depreciation of $4.0 million, in-process research and development expense of $22.4 million and stock-based compensation expense of $6.6 million.  Cash used in operations was primarily due to an increase in inventory by $11.6 million to meet the expected increase in demand for our newer products and decrease in accounts payable, accrued expenses and other liabilities totaling $27.6 million due to timing of payments.  These changes were partially offset by a decrease in accounts receivable, prepaid expenses and other current assets and other assets by $1.3 million due to the timing of collections and payments.

Cash provided by investing activities was $5.6 million during the six months ended June 30, 2008 principally reflecting the proceeds from sales and maturities of investments, net of purchases, of $32.1 million.  This was partially offset by $22.8 million used for the acquisition of Let It Wave and $3.7 million used for purchases of property and equipment.

Cash provided by financing activities during the six months ended June 30, 2008 was $4.1 million consisting of proceeds received from issuances of common stock through exercises of stock options and proceeds from the sale of stock under our employee stock purchase plan.

Our operating activities generated cash of $42.3 million during the first six months of 2007. While we recorded a net loss of $5.7 million, this loss included non-cash items such as amortization of $24.3 million, depreciation of $4.0 million and stock- based compensation expense of $7.0 million.  Cash provided by operations also increased due to an increase in accounts payable by $14.9 million; accrued expenses and other liabilities and other long term liabilities by $8.7 million due to timing of payments. These increases were partially offset by an increase in accounts receivable by $6.4 million due to increase in revenue, increase in inventory by $2.0 million and an increase in prepaid expenses and other current assets by $1.8 million.

Cash used in investing activities was $47.5 million during the six months ended June 30, 2007, principally reflecting the net purchase of investments of $43.5 million. In addition we spent $4.0 million for the purchases of property and equipment.

Cash provided by financing activities during the six months ended June 30, 2007 was $3.7 million consisting of proceeds received from issuances of common stock through exercises of stock options.

At June 30, 2008, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.  Accordingly, we are not exposed to the type of financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

We believe that our current balances of cash, cash equivalents and short-term investments, and anticipated cash flow from operations, will satisfy our anticipated working capital and capital expenditure requirements at least through the next 12 months.  We intend to hold our auction rate securities for the foreseeable future and have classified them as a long-term asset and do not expect this to have

24

an impact on our liquidity.  Nonetheless, our future capital requirements may vary materially from those now planned and will depend on many factors including, but not limited to:

·the levels at which we maintain inventories and accounts receivable;

·the market acceptance of our products;

·the levels of promotion and advertising required to launch our new products or to enter markets and attain a competitive position in the marketplace;

·our business, product, capital expenditure and research and development plans and technology roadmap;

·volume pricing concessions;

·capital improvements to new and existing facilities;

·technological advances;

·the response of competitors to our products; and

·our relationships with our suppliers and customers.

In addition, we may require an increase in the level of working capital to accommodate planned growth, hiring and infrastructure needs.  Additional capital may also be required for additional acquisitions of businesses, products or technologies.

To the extent that our existing resources and cash generated from operations are insufficient to fund our future activities, we may need to raise additional funds through public or private financings or borrowings.  If additional funds are raised through the issuance of debt securities, these securities could have rights, preferences and privileges senior to holders of common stock, and the terms of this debt could impose restrictions on our operations.  The sale of additional equity or convertible debt securities could result in additional dilution to our stockholders.  We cannot be certain that additional financing will be available in amounts or on terms acceptable to us, if at all.  If we are unable to obtain this additional financing, we may be required to reduce the scope of our planned product development and sales and marketing efforts, which could harm our business, financial condition and operating results.

Item 3.  Quantitative and Qualitative Disclosures About Market Risk

We are exposed to financial market risks, including changes in interest rates and foreign currency exchange rates.

Interest Rate Risk

We invest in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds, auction rate securities and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in United States dollars. We do not maintain derivative financial instruments. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines.

We account for our investment instruments in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treated as “available-for-sale” under SFAS 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our debt securities as “available-for-sale” no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other than temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders’ equity, net of tax.

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Due mainly to the short-term nature of the major portion of our investment portfolio, the fair value of our investment portfolio or related income would not be significantly impacted by either a 10% increase or decrease in interest rates.

Exchange Rate Risk

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States’ dollar relative to other currencies would make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States’ dollar relative to other currencies could result in our suppliers raising their prices in order to continue doing business with us.

A portion of the cost of our operations, relating mainly to our personnel and facilities in Israel, Asia and Europe, are transacted in foreign currencies. To date, we have not engaged in any currency hedging activities, although we may do so in the future. Significant fluctuations in currency exchange rates could impact our business in the future.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes to Internal Control Over Financial Reporting.  There were no changes in our internal control over financial reporting during the quarter ended June 30, 2008 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The discussion in Part I, Item 1, Note 12, “Contingencies” is incorporated herein by reference.  

Item 1A.   Risk Factors

Our future business, operating results and financial condition are subject to various risks and uncertainties, including those described below.

Our annual revenues and operating results fluctuate due to a variety of factors, which may result in volatility or a decline in the prices of our common stock.

Our historical operating results have varied significantly from period to period due to a number of factors, including:

fluctuation in demand for our products including reduced demand resulting from an economic slowdown;

the timing of new product introductions or enhancements by us and our competitors;

the level of market acceptance of new and enhanced versions of our products and our customers’ products;

the timing or cancellation of large customer orders;

the length and variability of the sales cycle for our products;

pricing policy changes by us and by our competitors and suppliers;

the cyclical nature of the semiconductor industry;

the availability of development funding and the timing of development revenue;

changes in the mix of products sold;

seasonality in demand for our products;

increased competition in product lines, and competitive pricing pressures; and

the evolving and unpredictable nature of the markets for products incorporating our integrated circuits and embedded software.

We expect that our operating results will continue to fluctuate in the future as a result of these factors and a variety of other factors, including:

the cost and availability of adequate foundry capacity;

fluctuations in manufacturing yields;

changes in or the emergence of new industry standards;

failure to anticipate changing customer product requirements;

the loss or gain of important customers;

product obsolescence; and

the amount of research and development expenses associated with new product introductions.

Our operating results could also be harmed by:

economic conditions generally or in various geographic areas where we or our customers do business (including recent events in the subprime mortgage market);

terrorism and international conflicts or other crises;

other conditions affecting the timing of customer orders;

changes in governmental regulations that could affect our products;

a downturn in the markets for our customers’ products, particularly the consumer electronics market;

disruption in commercial activities associated with heightened security concerns affecting international travel and commerce;

reduced demand for consumer electronic products due to an economic slowdown;

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an inability to hold our auction rate securities for a sufficient time to allow the market activity to recover;

tightened immigration controls that may adversely affect the residence status of key non-U.S. managers and technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities; or

potential expansion of armed conflict in the Middle East which could adversely affect our operations in Israel.

These factors are difficult or impossible to forecast. We place orders with independent foundries several months in advance of the scheduled delivery date, often in advance of receiving non-cancelable orders from our customers. This limits our ability to react to fluctuations in demand for their products. If anticipated shipments in any quarter are canceled or do not occur as quickly as expected, or if we fail to foresee a technology change that could render a product obsolete, expense and inventory levels could be disproportionately high. If anticipated license revenues in any quarter are canceled or do not occur, gross margins may be reduced.

A significant portion of our expenses are relatively fixed, and the timing of increases in expenses is based in large part on our forecast of future revenues. As a result, if revenues do not meet our expectations, we may be unable to quickly adjust expenses to levels appropriate to actual revenues, which could harm our operating results.

Our customers experience fluctuating product cycles and seasonality, which causes their sales to fluctuate.

Because the markets that our customers serve are characterized by numerous new product introductions and rapid product enhancements, our operating results may vary significantly from quarter to quarter. During the final production of a mature product, our customers typically exhaust their existing inventories of our products. Consequently, orders for our products may decline in those circumstances, even if the products are incorporated into both mature products and replacement products. A delay in a customer’s transition to commercial production of a replacement product would delay our ability to recover the lost sales from the discontinuation of the related mature product. Our customers also experience significant seasonality in the sales of their consumer products, which affects their orders of our products. Typically, the second half of the calendar year represents a disproportionate percentage of sales for our customers due to the holiday shopping period for consumer electronics products, and therefore, a disproportionate percentage of our sales. We expect these seasonal sales fluctuations to continue for the foreseeable future and an economic slowdown could increase the seasonal decline in sales that we typically see in the first half of the calendar year.

Our ability to match production mix with the product mix needed to fill current orders and orders to be delivered in the given quarter may affect our ability to meet that quarter’s revenue forecast. In addition, when responding to customers’ requests for shorter shipment lead times, we manufacture products based on forecasts of customers’ demands. These forecasts are based on multiple assumptions. If we inaccurately forecast customer demand, we may hold inadequate, excess or obsolete inventory that would reduce our profit margins and adversely affect our results of operations and financial condition.

Weak economic conditions could adversely impact consumer spending, which could affect our business.

A further slowdown in the economy, or other economic conditions affecting disposable consumer income such as employment levels, inflation, business conditions, fuel and energy costs, consumer debt levels, interest rates and tax rates, may reduce overall consumer spending or shift consumer spending to products other than digital entertainment and digital imaging products.  The resulting reduced sales by our customers could adversely affect our business by slowing new product introductions by our customers and by us, lowering net sales of our products, decreasing our inventory turnover, and/or reducing profitability.

Our products are characterized by average selling prices that typically decline over relatively short time periods; if we are unable to reduce our costs or introduce new products with higher average selling prices, our financial results will suffer.

Average selling prices for our products typically decline over relatively short time periods, while many of our manufacturing costs are fixed. When our average selling prices decline, our revenues decline unless we are able to sell more units and our gross margins decline unless we are able to reduce our manufacturing costs by a commensurate amount. Our operating results suffer when gross margins decline. We have experienced these problems, and we expect to continue to experience them in the future, although we cannot predict when they may occur or how severe they will be.

Product supply and demand in the semiconductor industry is subject to cyclical variations.

The semiconductor industry is subject to cyclical variations in product supply and demand. Downturns in the industry often occur in connection with, or anticipation of, maturing product cycles for both semiconductor companies and their customers and declines in

28

general economic conditions. These downturns have been characterized by abrupt fluctuations in product demand, production over-capacity and accelerated decline of average selling prices. In some cases, these downturns have lasted more than one year. The recent emergence of a number of negative economic factors, including heightened fears of a recession, could lead to such a downturn. We cannot predict whether we will achieve timely, cost-effective access to that capacity when needed, or when there will be a capacity shortage again in the future. A downturn in the semiconductor industry could harm our sales and revenues if demand drops, or our gross margins if average selling prices decline.

Our success for the foreseeable future will depend on demand for integrated circuits for a limited number of applications.

In recent years, we have derived a substantial majority of our product revenues from the sale of integrated circuits for DVD and digital camera applications. We expect that sales of our products for these applications will continue to account for a significant portion of our revenues for the foreseeable future. Our future financial performance will also depend on our ability to successfully develop and market new products in the digital television, HDTV and digital imaging markets. If the markets for these products and applications decline or fail to develop as expected, or we are not successful in our efforts to market and sell our products to manufacturers who incorporate integrated circuits into these products, our financial results will be harmed.

Our financial performance is highly dependent on the timely and successful introduction of new and enhanced products.

Our financial performance depends in large part on our ability to successfully develop and market next-generation and new products in a rapidly changing technological environment. If we fail to successfully identify new product opportunities and timely develop and introduce new products that achieve market acceptance, we may lose our market share and our future revenues and earnings may suffer.

In the consumer electronic market, our performance has been dependent on our successful development and timely introduction of integrated circuits for DVD players, digital cameras, multimedia accelerators for mobile phones, broadband digital television and HDTV. These markets are characterized by the incorporation of a steadily increasing level of integration and numbers of features on a chip at the same or lower system cost, enabling original equipment manufacturers, or OEMs, to continually improve the features or reduce the prices of the systems they sell. If we are unable to continually develop and introduce integrated circuits with increasing levels of integration and new features at competitive prices, our operating results will suffer.

In the Imaging market, our performance has been dependent on our successful development and timely introduction of integrated circuits for printers and multi-function peripherals. These markets are characterized by the incorporation of a steadily increasing level of integration and higher speeds on a chip at the same or lower system cost, enabling OEMs to improve the performance and features or reduce the prices of the systems they sell. If we are unable to develop and introduce integrated circuits with increasing levels of integration, performance and new features at competitive prices, our operating results will suffer. The performance of our software licensing business is dependent on our ability to develop and introduce new releases of our software, which incorporate new or enhanced printing standards, as well as performance enhancements required by our OEM customers. If we are unable to develop and release versions of our software supporting required standards and offering enhanced performance, our operating results will suffer.

We face competition or potential competition from companies with greater resources than ours, and if we are unable to compete effectively with these companies, our market share may decline and our business could be harmed.

The markets in which we compete are intensely competitive and are characterized by rapid technological change, declining average unit selling prices and rapid product obsolescence. We expect competition to increase in the future from existing competitors and from other companies that may enter our existing or future markets with solutions which may be less costly or provide higher performance or more desirable features than our products. Competition typically occurs at the design stage, when customers evaluate alternative design approaches requiring integrated circuits. Because of short product life cycles, there are frequent design win competitions for next-generation systems.

Our existing and potential competitors include many large domestic and international companies that have substantially greater financial, manufacturing, technological, market, distribution and other resources. These competitors may also have broader product lines and longer standing relationships with customers and suppliers than we have.

Some of our principal competitors maintain their own semiconductor foundries and may therefore benefit from capacity, cost and technical advantages. Our principal competitors in the integrated audio and video devices for DVD applications include MediaTek, and Sunplus. In the markets for digital cameras, our principal competitors are in-house solutions developed and used by major

29

Japanese OEMs, as well as products sold by Ambarella, Fujitsu, MediaTek, Novatech, Sunplus and Texas Instruments. In the market for multimedia acceleration for Mobile phones, our principal competitors include AMD, Broadcom, CoreLogic, MtekVision, Nvidia and Telechips.  In the market for JPEG-based products for desktop video editing applications, our principal competitor is Sunplus. Cirrus Logic (Crystal Semiconductor), Freescale Semiconductor, Fujitsu, STMicroelectronics and Yamaha are currently shipping Dolby Digital-based audio compression products. Our principal competitors for digital semiconductor devices in the digital television market include Broadcom, M-Star, Mediatek and ST Microelectronics. Others who also participate in this market are Micronass, NXP and Trident Microsystems.  Competitors in the printer and multifunction peripheral space include Freescale, Global Graphics, Marvell Semiconductor, Peerless Systems and in-house captive suppliers.

We believe that growth of the DVD player market will be modest in the foreseeable future, and that continued strong competition will lead to further price reductions, and reduced profit margins. We also face significant competition in the digital imaging and digital camera markets. The future growth of both markets is highly dependent on OEMs continuing to outsource an increasing portion of their product development work. Many of our existing competitors, as well as OEM customers that are expected to compete with us in the future, have substantially greater financial, manufacturing, technical, marketing, distribution and other resources, broader product lines and longer standing relationships with customers than we have. In addition, much of our future success is dependent on the success of our OEM customers. If we or our OEM customers are unable to compete successfully against current and future competitors, we could experience price reductions, order cancellations and reduced gross margins, any one of which could harm our business.

We must keep pace with rapid technological changes and evolving industry standards to remain competitive.

Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards and our customers’ changing demands. The consumer electronics market, in particular, is characterized by rapidly changing technology, evolving industry standards, frequent new product introductions, short product life cycles and increasing demand for higher levels of integration. Our ability to adapt to these changes and to anticipate future standards, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. If new industry standards emerge, our products or the products of our customers could become unmarketable or obsolete, and we could lose market share or be required to incur substantial unanticipated costs to comply with these new standards.

Our success will also depend on the successful development of new markets and the application and acceptance of new technologies and products in those new markets. For example, our success will depend on the ability of our customers to develop new products and enhance existing products in the DVD player market and products for the broadband digital television and HDTV markets and to introduce and promote those products successfully. These markets may not continue to develop to the extent or in the time periods that we currently anticipate due to factors outside our control, such as delays in implementation of FCC 02-320 requiring all new televisions to include a digital receiver by February 2009. If new markets do not develop as we anticipate, or if our products do not gain widespread acceptance in these markets, our business, financial condition and results of operations could be harmed. The emergence of new markets for our products is also dependent in part upon third parties developing and marketing content in a format compatible with commercial and consumer products that incorporate our products. If this content is not available, manufacturers may not be able to sell products incorporating our products, and our sales would suffer.

Our new frame rate conversion technology remains unproven, and if it is not accepted by our customers, our financial results and ability to compete could be harmed.

Through our acquisition of Let It Wave in June 2008, we acquired a frame rate conversion technology that is currently under development.  We plan to continue to invest in developing this technology and to make it available for customer integration in the future.  There is no assurance, however, that this new technology will be accepted by our customers.  In addition, our competitors may develop a superior performance image processing technology and introduce it on the market before us.  If we can not successfully market and sell our new frame rate conversion technology, we will not be able to recoup our costs of acquiring Let It Wave and further development costs for this technology, and our financing results and ability to compete could be adversely affected.

We rely on independent foundries and contractors for the manufacture, assembly and testing of our integrated circuits and other hardware products, and the failure of any of these third parties to deliver products or otherwise perform as requested could damage our relationships with our customers and harm our sales and financial results.

We do not operate any manufacturing facilities, and we rely on independent foundries to manufacture substantially all of our products. These independent foundries fabricate products for other companies and may also produce products of their own design. From time

30

to time, there are manufacturing capacity shortages in the semiconductor industry. We do not have long-term supply contracts with any of our suppliers, including our principal supplier Taiwan Semiconductor Manufacturing Company, or TSMC, and our principal assembly houses. Therefore, TSMC and our other suppliers are not obligated to manufacture products for us for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order.

Our reliance on independent foundries involves a number of risks, including:

the inability to obtain adequate manufacturing capacity;

the unavailability of or interruption in access to certain process technologies necessary for manufacture of our products;

lack of control over delivery schedules;

lack of control over quality assurance;

lack of control over manufacturing yields and cost; and

potential misappropriation of our intellectual property.

In addition, TSMC and some of our other foundries are located in areas of the world that are subject to natural disasters such as earthquakes. While the 1999 earthquake in Taiwan did not have a material impact on our independent foundries, a similar event centered near TSMC’s facility could severely reduce TSMC’s ability to manufacture our integrated circuits. The loss of any of our manufacturers as a supplier, our inability to expand the supply of their products in response to increased demand, or our inability to obtain timely and adequate deliveries from our current or future suppliers due to a natural disaster or any other reason could delay or reduce shipments of our products. Any of these circumstances could damage our relationships with current and prospective customers and harm our sales and financial results.

We also rely on a limited number of independent contractors for the assembly and testing of our products. Our reliance on independent assembly and testing houses limits our control over delivery schedules, quality assurance and product cost. Disruptions in the services provided by our assembly or testing houses or other circumstances that would require them to seek alternative sources of assembly or testing could lead to supply constraints or delays in the delivery of our products. These constraints or delays could damage our relationships with current and prospective customers and harm our financial results.

Because foundry capacity is limited from time to time, we may be required to enter into costly long-term supply arrangements to secure foundry capacity.

If we are not able to obtain additional foundry capacity as required, our relationships with our customers would be harmed and our sales would likely be reduced. In order to secure additional foundry capacity, we have considered, and may in the future need to consider, various arrangements with suppliers, which could include, among others:

option payments or other prepayments to a foundry;

nonrefundable deposits with or loans to foundries in exchange for capacity commitments;

contracts that commit us to purchase specified quantities of silicon wafers over extended periods;

issuance of our equity securities to a foundry;

investment in a foundry;

joint ventures; or

other partnership relationships with foundries.

We may not be able to make any such arrangement in a timely fashion or at all, and such arrangements, if any, may not be on terms favorable to us. Moreover, if we are able to secure foundry capacity, we may be obligated to utilize all of that capacity or incur penalties. Such penalties may be expensive and could harm our financial results.

If our independent foundries do not achieve satisfactory yields, our relationships with our customers may be harmed.

The fabrication of silicon wafers is a complex process. Minute levels of contaminants in the manufacturing environment, defects in photo masks used to print circuits on a wafer, difficulties in the fabrication process or other factors can cause a substantial portion of

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the integrated circuits on a wafer to be non-functional. Many of these problems are difficult to detect at an early stage of the manufacturing process and may be time consuming and expensive to correct. As a result, foundries often experience problems achieving acceptable yields, which are represented by the number of good integrated circuits as a proportion of the number of total integrated circuits on any particular wafer. Poor yields from our independent foundries would reduce our ability to deliver our products to customers, harm our relationships with our customers and harm our business.

We are dependent upon our international sales and operations; economic, political or military events in a country where we make significant sales or have significant operations could interfere with our success or operations there and harm our business.

During 2007, only 7% of our total revenues were derived from North America sales. We anticipate that international sales will continue to account for a substantial majority of our total revenues for the foreseeable future. Substantially all of our semiconductor products are manufactured, assembled and tested outside of the United States by independent foundries and subcontractors.  Let It Wave, which we acquired in June 2008, operates in France.

We are subject to a variety of risks inherent in doing business internationally, including:

operating in new countries where we have limited or no experience;

unexpected changes in regulatory requirements;

fluctuations in exchange rates;

political and economic instability;

imposition of tariffs and other barriers and restrictions;

the burdens of complying with a variety of foreign laws; and

health risks in a particular region.

A material amount of our research and development personnel and facilities and a portion of our sales and marketing personnel are located in Israel. Political, economic and military conditions in Israel directly affect our operations. Some of our employees in Israel are obligated to perform up to 36 days of military reserve duty annually. The absence of these employees for significant periods during the work week may cause us to operate inefficiently during these periods.

Our operations in China are subject to the economic and political uncertainties affecting that country. For example, the Chinese economy has experienced significant growth in the past decade, but such growth has been uneven across geographic and economic sectors. This growth may decrease and any slowdown may have a negative effect on our business.

We also maintain offices in Canada, England, France, Germany, Hong Kong, India, Israel, Japan, Korea and Taiwan, and our operations are subject to the economic and political uncertainties affecting these countries as well.

The significant concentration of our manufacturing activities with third party foundries in Taiwan exposes us to the risk of political instability in Taiwan, including the potential for conflict between Taiwan and China. We have several significant OEM customers in Japan, Korea and other parts of Asia. Adverse economic circumstances in Asia could affect these customers’ willingness or ability to do business with us in the future or their success in developing and launching devices containing our products.

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The complexity of our international operations may increase our operating expenses and disrupt our revenues and business.

We transact business and have operations worldwide.  For example, international transactions form a substantial majority of our sales, our semiconductor products are manufactured, assembled and tested outside of the United States, and in June 2008 we acquired a foreign corporation.  Our global operations involve significant complexity and difficulties, including:

monitoring and complying with applicable laws and regulatory requirements;

staffing and managing global operations;

complying with statutory equity requirements; and

managing tax consequences.

If we are unable to manage the complexity of our global operations successfully, our financial performance and operating results could suffer.

The prices of our products may become less competitive due to foreign exchange fluctuations.

Foreign currency fluctuations may affect the prices of our products. Prices for our products are currently denominated in U.S. dollars for sales to our customers throughout the world. If there is a significant devaluation of the currency in a specific country, the prices of our products will increase relative to that country’s currency, our products may be less competitive in that country and our revenues may be adversely affected. Also, we cannot be sure that our international customers will continue to be willing to place orders denominated in U.S. dollars. If they do not, our revenue and operating results will be subject to foreign exchange fluctuations.

Because we have significant operations in Israel, our business and future operating results could be harmed by future terrorist activity or military conflict.

We conduct a significant portion of our research and development and engineering activities at our design center in Haifa, Israel, a 109,700 square foot facility where we employ approximately 400 people. We also conduct a portion of our sales and marketing operations at our Haifa facility. We have an additional 16,100 square foot facility in Kfar Netter, Israel, where we conduct research and development activities.

In addition, military conflict in the Middle East or future terrorist activities there or elsewhere in the world could harm our business as a result of a disruption in commercial activity affecting international commerce or a general economic slowdown and reduced demand for consumer electronic products.

The inflation in foreign countries or the decline in the value of United States dollar compared to those foreign currencies may negatively impact our costs.

A portion of the cost of our operations, relating mainly to our personnel and facilities is incurred in foreign currencies. As a result, we bear the risk that the rate of inflation in those foreign countries or the decline in the value of United States dollar compared to those foreign currencies will increase our costs as expressed in United States dollars. To date, we have not engaged in hedging transactions. In the future, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the United States dollar against foreign currencies. These measures may not adequately protect us from the impact of inflation in foreign countries.

We derive most of our revenue from sales to a small number of large customers, and if we are not able to retain these customers, or they reschedule, reduce or cancel orders, our revenues would be reduced and our financial results would suffer.

Our largest customers have accounted for a substantial percentage of our revenues. In 2007, one customer accounted for 13% of our total revenues, while sales to our ten largest customers accounted for 60% of our total revenues. In 2006, one customer accounted for 12% of our total revenues, and sales to our ten largest customers accounted for 58% of our total revenues. Sales to these large customers have varied significantly from year to year and will continue to fluctuate in the future. These sales also may fluctuate significantly from quarter to quarter. We may not be able to retain our key customers, or these customers may cancel purchase orders or reschedule or decrease their level of purchases from us. Any substantial decrease or delay in sales to one or more of our key customers could harm our sales and financial results. In addition, any difficulty in collecting amounts due from one or more key customers could harm our financial results. As of December 31, 2007 three customers accounted for approximately 11%, 11% and 10% of the net accounts receivable balance, respectively.

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Our products generally have long sales cycles and implementation periods, which increases our costs in obtaining orders and reduces the predictability of our operating results.

Our products are technologically complex. Prospective customers generally must make a significant commitment of resources to test and evaluate our products and to integrate them into larger systems. As a result, our sales processes are often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new products. The sales cycles of our products often last for many months. Longer sales cycles require us to invest significant resources in attempting to make sales and delay the generation of revenue.

Long sales cycles also subject us to other risks, including customers’ budgetary constraints, internal acceptance reviews and cancellations. In addition, orders expected in one quarter could shift to another because of the timing of customers’ purchase decisions.

The time required for our customers to incorporate our products into their own can vary significantly with the needs of our customers and generally exceeds several months, which further complicates our planning processes and reduces the predictability of our operating results.

We are not protected by long-term contracts with our customers.

We generally do not enter into long-term purchase contracts with our customers, and we cannot be certain as to future order levels from our customers. Customers generally purchase our products subject to cancelable short-term purchase orders. We cannot predict whether our current customers will continue to place orders, whether existing orders will be canceled, or whether customers who have ordered products will pay invoices for delivered products. When we do enter into a long-term contract, the contract is generally terminable at the convenience of the customer. Early termination by one of our major customers would harm our financial results.

Our products could contain defects, which could reduce sales of those products or result in claims against us.

We develop complex and evolving products. Despite testing by us and our customers, errors may be found in existing or new products. This could result in, among other things, a delay in recognition or loss of revenues, loss of market share or failure to achieve market acceptance. These defects may cause us to incur significant warranty, support and repair costs, divert the attention of our engineering personnel from our product development efforts and harm our relationships with customers. The occurrence of these problems could result in the delay or loss of market acceptance of our products and would likely harm our business. Defects, integration issues or other performance problems in our products could result in financial or other damages to customers or could damage market acceptance of such products. Our customers could also seek damages from us for their losses. A product liability claim brought against us, even if unsuccessful, would likely be time consuming and costly to defend.

Regulation of our customers’ products may slow the process of introducing new products and could impair our ability to compete.

The Federal Communications Commission, or FCC, has broad jurisdiction over our target markets in the digital television business. Various international entities or organizations may also regulate aspects of our business or the business of our customers. Although our products are not directly subject to regulation by any agency, the transmission pipes, as well as much of the equipment into which our products are incorporated, are subject to direct government regulation. For example, before they can be sold in the United States, advanced televisions and emerging interactive displays must be tested and certified by Underwriters Laboratories and meet FCC regulations. Accordingly, the effects of regulation on our customers or the industries in which our customers operate may in turn harm our business. FCC regulatory policies affecting the ability of cable operators or telephone companies to offer certain services and other terms on which these companies conduct their business may impede sales of our products. In addition, our digital television business may also be adversely affected by the imposition of tariffs, duties and other import restrictions on our suppliers or by the imposition of export restrictions on products that we sell internationally. Changes in current laws or regulations or the imposition of new laws or regulations in the United States or elsewhere could harm our business. For example, any delays by the FCC in imposing its pending requirement that all new televisions have a digital receiver could have an adverse effect on our HDTV business.

Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights.

Our success and ability to compete depend in large part upon protection of our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, non-disclosure and other contractual agreements and technical measures to protect our proprietary rights. These agreements and measures may not be sufficient to protect our technology from third-party infringement,

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or to protect us from the claims of others. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. The laws of certain foreign countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of our technology and products more likely in these countries. If competitors are able to use our technology, our ability to compete effectively could be harmed.

The protection offered by patents is subject to numerous uncertainties. For example, our competitors may be able to effectively design around our patents, or the patents may be challenged, invalidated or circumvented. Those competitors may also independently develop technologies that are substantially equivalent or superior to our technology. Moreover, while we hold, or have applied for, patents relating to the design of our products, some of our products are based in part on standards, for which we do not hold patents or other intellectual property rights.

We have generally limited access to and distribution of the source and object code of our software and other proprietary information. With respect to our page description language software, System On a Chip platform firmware and drivers for the digital office market and in limited circumstances with respect to firmware and platforms for our DTV, DVDR products, we grant licenses that give our customers access to and restricted use of the source code of our software. This access increases the likelihood of misappropriation or misuse of our technology.

Claims and litigation regarding intellectual property rights and breach of contract claims could seriously harm our business and require us to incur significant costs.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. In the past, we have been subject to claims and litigation regarding alleged infringement of other parties’ intellectual property rights, and we have been parties to a number of patent-related lawsuits, both as plaintiff and defendant. We could become subject to additional litigation in the future, either to protect our intellectual property or as a result of allegations that we infringe others’ intellectual property rights or have breached our contractual obligations to others. Claims that our products infringe proprietary rights or that we have breached contractual obligations would force us to defend ourselves and possibly our customers or manufacturers against the alleged infringement or breach. Future litigation against us, if successful, could subject us to significant liability for damages or invalidation of our proprietary rights. These lawsuits, regardless of their success, are time-consuming and expensive to resolve and require significant management time and attention. Future intellectual property and breach of contract litigation could force us to do one or more of the following:

stop selling products that incorporate the challenged intellectual property;

obtain from the owner of the infringed intellectual property right a license to sell or use the relevant technology, which license may not be available on reasonable terms or at all;

pay damages; or

redesign those products that use such technology.

Although patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements, we may not be able in any or every instance to settle an alleged patent infringement claim through a cross-licensing arrangement. We have a more limited patent portfolio than many of our competitors. If a successful claim is made against us or any of our customers and a license is not made available to us on commercially reasonable terms or we are required to pay substantial damages or awards, our business, financial condition and results of operations would be materially adversely affected.

If necessary licenses of third-party technology are not available to us or are very expensive, our products could become obsolete.

From time to time, we may be required to license technology from third parties to develop new products or product enhancements. Third party licenses may not be available on commercially reasonable terms, if at all. If we are unable to obtain any third-party license required to develop new products and product enhancements, we may have to obtain substitute technology of lower quality or performance standards or at greater cost, either of which could seriously harm the competitiveness of our products.

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We rely on licenses to use various technologies that are material to our products. We do not own the patents that underlie this license. Our rights to use these technologies and employ the inventions claimed in the licensed patents are subject to our abiding by the terms of the licenses. Under the license agreements we must fulfill confidentiality obligations and pay royalties. If we fail to abide by the terms of the license, we would be unable to sell and market the products under license. In addition, we do not control the prosecution of the patents subject to this license or the strategy for determining when such patents should be enforced. As a result, we are dependent upon our licensor to determine the appropriate strategy for prosecuting and enforcing those patents.

If we are not able to apply our net operating losses against taxable income in future periods, our financial results will be harmed.

Our future net income and cash flow will be affected by our ability to apply our net operating loss carryforwards, or NOLs, against taxable income in future periods. Our NOLs totaled approximately $141 million for federal and $32 million for state tax reporting purposes as of December 31, 2007. The Internal Revenue Code contains a number of provisions that limit the use of NOLs under certain circumstances. In 2006, we reduced the NOL deferred tax asset for amounts which we believe will expire before they become available for utilization. Changes in tax laws in the United States may further limit our ability to utilize these NOLs. Any further limitation on our ability to utilize these respective NOLs could harm our financial condition.

Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.

Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities. While we believe our tax reserves adequately provide for any tax contingencies, the ultimate outcomes of any future tax audits are uncertain, and we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our operating results and financial position.

Any acquisitions we make could disrupt our business and severely harm our financial condition.

We have made investments in, and acquisitions of other complementary companies, products and technologies, and we may acquire additional businesses, products or technologies in the future. In the event of any future acquisitions, we could:

issue stock that would dilute its current stockholders’ percentage ownership;

incur debt;

use a significant amount of our cash;

assume liabilities;

incur expenses related to the future impairment of goodwill and the amortization of other intangible assets; or

incur other large write-offs immediately or in the future.

Our operation of acquired business will also involve numerous risks, including:

problems combining the purchased operations, technologies or products;

acquisition of unproven technologies under development;

unanticipated costs;

diversion of management’s attention from our core business;

adverse effects on existing business relationships with customers;

risks associated with entering markets in which we have no or limited prior experience; and

potential loss of key employees, particularly those of the purchased organizations.

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In June 2008 we acquired Let It Wave, a French company, and its frame rate conversion technology, which is still in development.  There is no assurance that we will be able to integrate Let It Wave with our business, or complete the development of this technology and bring it to market.

We may not be able to successfully complete the integration of the business, products or technologies or personnel that we have acquired in the past or might acquire in the future, and any failure to do so could disrupt our business and seriously harm our financial condition.

If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.

We review our goodwill and intangible assets for impairment, no less often than annually, when changes in circumstances indicate the carrying value may not be recoverable. A change in circumstances may be indicated, and the carrying value of our goodwill or intangible assets may be impaired (not be recoverable), where there are declines in our stock price and market capitalization, declines in expected future cash flows, or slower growth rates in our industry.  We may be required to record a significant charge to earnings for the period in which any impairment of our goodwill or intangible assets is determined, which would adversely affect our results of operations.  In addition, our impairment analysis involves determining the fair value of our business using a projected discounted cash flow analysis that is based on significant estimates, such as our projections of future sales volume and timing, margins and operating costs, and the discount rate we use to calculate present value of future cash flow.  Changes to these estimates may cause us to recognize an impairment loss that could be material to our financial results.

If we fail to manage our future growth, if any, our business would be harmed.

We anticipate that our future growth, if any, will require us to recruit and hire a substantial number of new engineering, managerial, sales and marketing personnel. Our ability to manage growth successfully will also require us to expand and improve administrative, operational, management and financial systems and controls. Many of our key operations, including a material portion of our research and development operations and a significant portion of our sales and administrative operations are located in Israel. A majority of our sales and marketing and certain of our research and development and administrative personnel, including our President and Chief Executive Officer and other officers, are based in the United States. The geographic separation of these operations places additional strain on our resources and our ability to manage growth effectively. If we are unable to manage growth effectively, our business will be harmed.

We are exposed to fluctuations in the market values of our portfolio investments and in interest rates.

At the end of June 2008, we had $360.2 million in cash, cash equivalents and investments. We invest our cash in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds, auction rate securities and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in U.S. dollars.

The Company’s investments at June 30, 2008 include $57.8 million of high-grade auction rate securities primarily consisting of government guaranteed student loans. Auction rate securities are securities that are structured with short-term interest rates which periodically reset through auctions, typically within every 90 days. At the end of each reset period, investors can sell or continue to hold the securities at par. During February 2008, some of the auction rate securities failed to auction successfully due to market supply exceeding market demand. In the event of a failed auction, the notes continue to bear interest at a predetermined maximum rate based on the credit rating of notes as determined by one or more nationally recognized statistical rating organizations. The funds associated with failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the securities or the underlying securities have matured. As a result, the Company has classified all auction rate securities as long-term assets in the condensed consolidated balance sheets as of June 30, 2008 and December 31, 2007.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded equity investments and auction rate securities is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as “available-for-sale,” generally no gains or

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losses are recognized due to changes in interest rates unless such securities are sold prior to maturity. Recent events in the subprime mortgage market and with auction rate securities could negatively impact our return on investment for these debt securities and thereby reduce the amount of cash and cash equivalents and long-term investments on our balance sheet.

We rely on the services of our executive officers and other key personnel, whose knowledge of our business and industry would be extremely difficult to replace.

Our success depends to a significant degree upon the continuing contributions of our senior management. Management and other employees may voluntarily terminate their employment with us at any time upon short notice. The loss of key personnel could delay product development cycles or otherwise harm our business. We believe that our future success will also depend in large part on our ability to attract, integrate and retain highly-skilled engineering, managerial, sales and marketing personnel, located in the United States and overseas. Competition for such personnel is intense, and we may not be successful in attracting, integrating and retaining such personnel. Failure to attract, integrate and retain key personnel could harm our ability to carry out our business strategy and compete with other companies.

Provisions in our charter documents and Delaware law could prevent or delay a change in control of Zoran.

Our certificate of incorporation and bylaws and Delaware law contain provisions that could make it more difficult for a third party to acquire us, even if doing so would be beneficial to our stockholders. These include provisions:

prohibiting a merger with a party that has acquired control of 15% or more of our outstanding common stock, such as a party that has completed a successful tender offer, until three years after that party acquired control of 15% of our outstanding common stock;

authorizing the issuance of up to 3,000,000 shares of “blank check” preferred stock;

eliminating stockholders’ rights to call a special meeting of stockholders; and

requiring advance notice of any stockholder nominations of candidates for election to our board of directors.

Our stock price has fluctuated and may continue to fluctuate widely.

The market price of our common stock has fluctuated significantly since our initial public offering in 1995. Between January 1, 2008 and June 30, 2008, the closing sale price of our common stock, as reported on the Nasdaq Global Select Market, ranged from a low of $11.49 to a high of $22.48. The market price of our common stock is subject to significant fluctuations in the future in response to a variety of factors, including:

announcements concerning our business or that of our competitors or customers;

annual and quarterly variations in our operating results;

changes in analysts’ earnings estimates;

announcements of technological innovations;

the introduction of new products or changes in product pricing policies by Zoran or its competitors;

loss of key personnel;

proprietary rights or other litigation;

general conditions in the semiconductor industry; and

developments in the financial markets.

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From time to time the stock market experiences extreme price and volume fluctuations that have particularly affected the market prices for semiconductor companies or technology companies generally and which have been unrelated to the operating performance of the affected companies. Broad market fluctuations of this type may reduce the future market price of our common stock.

The independent investigation of our historical stock option practices and resulting restatements and derivative lawsuits have been time consuming and expensive, and may continue to have an adverse effect on our financial performance.

The independent investigation of our historical stock option practices and resulting restatement activities and derivative lawsuits have required us to expend significant management time and incur significant accounting, legal and other expenses totaling $7.9 million in 2007 and $0.1 million and $1.6 million for the three and six month periods ended June 30, 2008. The resulting restatements recorded in the 2006 Annual Report on Form 10-K had a material adverse effect on our results of operations. We recorded additional stock-based compensation expense of $11.7 million for stock option grants, recognized over the periods from 1997 to 2005. There was no tax impact of these additional stock-based compensation expenses due to the full valuation allowance on our tax assets at the time of restatement. In addition, we recorded other adjustments previously considered to be immaterial totaling $1.3 million (net of tax of $0.2 million). As a result, our restated consolidated financial statements included in the 2006 Annual Report on Form 10-K reflected a decrease in net income of $13.0 million for the period of 1997 to 2005.  As a result of the amount of management attention and expenditure of funds on the investigation, restatement and litigation, we may have missed important market opportunities or our competitors may have gained advantages, and we may not find similar opportunities or adequately cope with those competitive challenges.

Ongoing government inquiries relating to our historical stock option practices are time consuming and expensive and could result in injunctions, fines and penalties that may have a material adverse effect on our financial condition and results of operations.

The inquiry by the United States Attorney’s Office for the Northern District of California (“USAO”) into our historical stock option practices is ongoing. We have cooperated with the USAO and intend to continue to do so. The period of time necessary to resolve this inquiry is uncertain, and we cannot predict the outcome of the inquiry or whether we will face additional government inquiries, investigations or other actions related to our historical stock option practices. This inquiry may require us to continue to expend significant management time and incur significant legal and other expenses, and could result in criminal actions against the Company which may have a material adverse effect on our business, financial condition, results of operations or cash flows.

During parts of 2006 and 2007, we were not timely in the filing of our periodic reports with the SEC, which led Nasdaq to warn us of a possible de-listing of our common stock. Should we have similar issues in the future, our listing on Nasdaq, and the availability of a liquid market for resale of your shares, could be at risk.

From August 2006 to April 2007, we were unable to file our periodic reports with the SEC on time and faced the possibility of delisting of our stock from the Nasdaq Global Select Market. As a result of our delay in filing periodic reports on a timely basis, we were not eligible to use a registration statement on Form S-3 to register offers and sales of our securities until all of our periodic reports were timely filed for at least 12 months, which occurred with the filing of this Quarterly Report on Form 10-Q. If in the future we have similar issues filing periodic reports and fail to comply with applicable listing requirements, then our common stock may be de-listed and the market for resales of our common stock may become less liquid. If this happens, the price of our stock and the ability of our stockholders to trade in our stock could be adversely affected. In addition, we would be subject to restrictions regarding the registration of our stock under federal securities laws, and we would not be able to issue stock options or other equity awards to our employees or allow them to exercise their outstanding options, which could adversely affect our business and results of operations.

We have been named as a party to stockholder derivative lawsuits relating to our historical stock option practices, and we may be named in additional lawsuits in the future. This litigation has become time consuming and expensive and may result in the payment of significant judgments and settlements, which could have a material adverse effect on our financial condition and results of operations.

In connection with our historical stock option practices and resulting restatements, a number of purported shareholder derivative actions were filed against certain of our current and former directors, officers and certain other individuals, which purport to assert claims on our behalf. There may be additional lawsuits of this nature filed in the future. We cannot predict the outcome of these lawsuits, nor can we predict the amount of time and expense that will be required to resolve these lawsuits.  These lawsuits are time consuming and expensive, and their outcomes may be unfavorable, which could have a material adverse effect on our business, financial condition, results of operations or cash flows.

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Our insurance coverage will not cover our total liabilities and expenses in these lawsuits, in part because we have a significant deductible on certain aspects of the coverage. In addition, we are obligated to indemnify our current and former directors, officers and employees in connection with the investigation of our historical stock option practices and the related government inquiries and litigation. We currently hold insurance policies for the benefit of our directors and officers, although our insurance coverage may not be sufficient in some or all of these matters. Furthermore, the insurers may seek to deny or limit coverage in some or all of these matters, in which case we may have to self-fund all or a substantial portion of our indemnification obligations.

It may be difficult or costly to obtain director and officer liability insurance coverage as a result of our stock options issues.

We expect that the issues arising from our historical stock option grant practices and the related accounting will make it more difficult to obtain director and officer insurance coverage in the future. If we are able to obtain this coverage, it could be significantly more costly than in the past, which would have an adverse effect on our financial results and cash flow. As a result of this and related factors, our directors and officers could face increased risks of personal liability in connection with the performance of their duties. As a result, we may have difficultly attracting and retaining qualified directors and officers, which could adversely affect our business.

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

Our 2008 Annual Meeting of Stockholders was held on June 12, 2008.  At the meeting, the following eight persons nominated by management were elected to serve as members of our Board of Directors:

	Shares
Nominee	Voted For	Withheld
Levy Gerzberg	47,238,690	634,793
Uzia Galil	42,669,151	5,204,332
Raymond A. Burgess	47,145,522	727,961
James D. Meindl	44,000,252	3,873,231
James B. Owens, Jr.	47,535,977	337,506
David Rynne	47,364,809	508,674
Arthur B. Stabenow	44,008,134	3,865,349
Philip M. Young	47,235,707	637,776

The following additional proposals were voted upon at the meeting:

Proposal to approve an increase in the maximum aggregate number of shares that may be issued under the Zoran Corporation 2005 Equity Incentive Plan by 2,500,000 shares was approved by a vote of 28,839,765 shares for; 12,870,582 shares against and 30,604 shares abstaining.  There were 6,132,532 broker non-votes with respect to this proposal.

Proposal to ratify the appointment of PricewaterhouseCoopers LLP as our independent registered public accounting firm for the fiscal year ending December 31, 2008 was approved by a vote of 47,504,366 shares for; 345,314 shares against and 23,803 shares abstaining. There were no broker non-votes with respect to this proposal.

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Item 6.  Exhibits

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a).
32.1	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.

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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.

	ZORAN CORPORATION
Dated: August 11, 2008	/s/ Karl Schneider
	Karl Schneider
	Senior Vice President, Finance
	and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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