SECURITIES AND EXCHANGE
COMMISSION

WASHINGTON, D.C. 20549





FORM 10-Q







|x | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ---------------------------------------------------------------------------------------

For the Quarterly Period Ended March 31, 2010

OR



| ̈ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
|- | ----------------------------------------------------------------------------------------

For the transition period from  to

Commission File No. 0-27246





ZORAN CORPORATION

(Exact name of registrant as specified in its charter)







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

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files).    Yes   ̈    No   ̈

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act.



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

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

As of April 30, 2010, there were outstanding 51,246,336 shares of the registrants Common Stock, par value $0.001 per share.









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ZORAN CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX

For the Quarter Ended March 31, 2010



|                              |  |                                                                                                    |  |     
|----------------------------- |  | -------------------------------------------------------------------------------------------------- |  | ----
|                              |  |                                                                                                    |  | Page
|PART I. FINANCIAL INFORMATION
|                              |  |                                                                                                   
|Item 1.                       |  | Financial Statements (Unaudited):                                                                  |  |     
|                              |  |                                                                                                   
|                              |  | Condensed Consolidated Balance Sheets as of March 31, 2010 and December 31, 2009                   |  | 3   
|                              |  |                                                                                                   
|                              |  | Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2010 and 2009 |  | 4   
|                              |  |                                                                                                   
|                              |  | Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2010 and 2009 |  | 5   
|                              |  |                                                                                                   
|                              |  | Notes to Condensed Consolidated Financial Statements                                               |  | 6   
|                              |  |                                                                                                   
|Item 2.                       |  | Managements Discussion and Analysis of Financial Condition and Results of Operations              |  | 19  
|                              |  |                                                                                                   
|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 5.                       |  | Exhibits                                                                                           |  | 39  
|                              | 
|Signatures                    |  | 40                                                                                                



2



---

PART I. FINANCIAL INFORMATION



|Item 1. | Financial Statements:
|------- | ---------------------

ZORAN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)



|                                                                                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------ |  | ------------- | -------- | - | ---------------- | - | -------- | -
|                                                                                                                                                                                                                                           |  | March 31,2010 |          |   | December 31,2009 |  
|ASSETS                                                                                                                                                                                                                                     |  |               |          |   |                  |   |          |  
|Current assets:                                                                                                                                                                                                                            |  |               |          |   |                  |   |          |  
|Cash and cash equivalents                                                                                                                                                                                                                  |  | $             | 95,671   |   |                  | $ | 89,318   |  
|Short-term investments                                                                                                                                                                                                                     |  |               | 304,338  |   |                  |   | 309,368  |  
|Accounts receivable, net                                                                                                                                                                                                                   |  |               | 27,035   |   |                  |   | 21,997   |  
|Inventories                                                                                                                                                                                                                                |  |               | 29,516   |   |                  |   | 27,162   |  
|Prepaid expenses and other current assets                                                                                                                                                                                                  |  |               | 21,238   |   |                  |   | 20,519   |  
|                                                                                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total current assets                                                                                                                                                                                                                       |  |               | 477,798  |   |                  |   | 468,364  |  
|Property and equipment, net                                                                                                                                                                                                                |  |               | 11,629   |   |                  |   | 12,456   |  
|Deferred income taxes                                                                                                                                                                                                                      |  |               | 35,315   |   |                  |   | 38,173   |  
|Other assets                                                                                                                                                                                                                               |  |               | 28,074   |   |                  |   | 28,631   |  
|Goodwill                                                                                                                                                                                                                                   |  |               | 4,197    |   |                  |   | 4,197    |  
|Intangible assets, net                                                                                                                                                                                                                     |  |               | 526      |   |                  |   | 635      |  
|                                                                                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total assets                                                                                                                                                                                                                               |  | $             | 557,539  |   |                  | $ | 552,456  |  
|                                                                                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|LIABILITIES AND STOCKHOLDERS EQUITY                                                                                                                                                                                                       |  |               |          |   |                  |   |          |  
|Current liabilities:                                                                                                                                                                                                                       |  |               |          |   |                  |   |          |  
|Accounts payable                                                                                                                                                                                                                           |  | $             | 33,113   |   |                  | $ | 29,090   |  
|Accrued expenses and other current liabilities                                                                                                                                                                                             |  |               | 32,870   |   |                  |   | 30,701   |  
|                                                                                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total current liabilities                                                                                                                                                                                                                  |  |               | 65,983   |   |                  |   | 59,791   |  
|                                                                                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Other long-term liabilities                                                                                                                                                                                                                |  |               | 32,777   |   |                  |   | 32,397   |  
|Commitments and Contingencies (Note 12)                                                                                                                                                                                                    |  |               |          |   |                  |   |          |  
|Stockholders equity:                                                                                                                                                                                                                      |  |               |          |   |                  |   |          |  
|Common stock, $0.001 par value; 105,000,000 shares authorized at March 31, 2010 and December 31, 2009; 51,180,993
shares issued and outstanding as of March 31, 2010; and 51,150,969 shares issued and outstanding as of December 31, 2009 |  |               | 51       |   |                  |   | 51       |  
|Additional paid-in capital                                                                                                                                                                                                                 |  |               | 869,627  |   |                  |   | 867,139  |  
|Accumulated other comprehensive income                                                                                                                                                                                                     |  |               | 2,626    |   |                  |   | 2,634    |  
|Accumulated deficit                                                                                                                                                                                                                        |  |               | (413,525 | ) |                  |   | (409,556 | )
|                                                                                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total stockholders equity                                                                                                                                                                                                                 |  |               | 458,779  |   |                  |   | 460,268  |  
|                                                                                                                                                                                                                                           |  |               |          |   |                  |   |          |  
|Total liabilities and stockholders equity                                                                                                                                                                                                 |  | $             | 557,539  |   |                  | $ | 552,456  |  
|                                                                                                                                                                                                                                           |  |               |          |   |                  |   |          |  

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



3



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ZORAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share amounts)

(unaudited)



|                                                            |  |                             |        |   |      |   |         |  
|----------------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                            |  | Three Months EndedMarch 31, |       
|                                                            |  | 2010                        |        |   | 2009 |  
|Revenues:                                                   |  |                             |        |   |      |   |         |  
|Hardware product revenues.                                  |  | $                           | 79,050 |   |      | $ | 55,961  |  
|Software and other revenues                                 |  |                             | 11,401 |   |      |   | 12,526  |  
|                                                            |  |                             |        |   |      |   |         |  
|Total revenues                                              |  |                             | 90,451 |   |      |   | 68,487  |  
|                                                            |  |                             |        |   |      |   |         |  
|                                                            |  |                            
|Costs and expenses:                                         |  |                             |        |   |      |   |         |  
|Cost of hardware product revenues                           |  |                             | 43,720 |   |      |   | 35,998  |  
|Research and development                                    |  |                             | 26,114 |   |      |   | 29,547  |  
|Selling, general and administrative                         |  |                             | 24,126 |   |      |   | 24,612  |  
|Amortization of intangible assets                           |  |                             | 109    |   |      |   | 109     |  
|                                                            |  |                             |        |   |      |   |         |  
|Total costs and expenses                                    |  |                             | 94,069 |   |      |   | 90,266  |  
|                                                            |  |                             |        |   |      |   |         |  
|                                                            |  |                            
|Operating loss                                              |  |                             | (3,618 | ) |      |   | (21,779 | )
|Interest income                                             |  |                             | 2,063  |   |      |   | 2,622   |  
|Other income, net                                           |  |                             | 286    |   |      |   | 830     |  
|                                                            |  |                             |        |   |      |   |         |  
|Loss before income taxes                                    |  |                             | (1,269 | ) |      |   | (18,327 | )
|Provision for income taxes                                  |  |                             | 2,700  |   |      |   | 2,740   |  
|                                                            |  |                             |        |   |      |   |         |  
|Net loss                                                    |  | $                           | (3,969 | ) |      | $ | (21,067 | )
|                                                            |  |                             |        |   |      |   |         |  
|Basic and diluted net loss per share                        |  | $                           | (0.08  | ) |      | $ | (0.41   | )
|                                                            |  |                             |        |   |      |   |         |  
|Shares used to compute basic and diluted net loss per share |  |                             | 51,174 |   |      |   | 51,176  |  
|                                                            |  |                             |        |   |      |   |         |  

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



4



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ZORAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)



|                                                                                |  |                             |         |   |      |   |         |  
|------------------------------------------------------------------------------- |  | --------------------------- | ------- | - | ---- | - | ------- | -
|                                                                                |  | Three Months EndedMarch 31, |        
|                                                                                |  | 2010                        |         |   | 2009 |  
|Cash flows from operating activities:                                           |  |                             |         |   |      |   |         |  
|Net loss                                                                        |  | $                           | (3,969  | ) |      | $ | (21,067 | )
|Adjustments to reconcile net loss to net cash provided by (used in) operations: |  |                             |         |   |      |   |         |  
|Depreciation                                                                    |  |                             | 1,574   |   |      |   | 1,956   |  
|Amortization of intangible assets                                               |  |                             | 109     |   |      |   | 109     |  
|Stock-based compensation expense                                                |  |                             | 2,196   |   |      |   | 2,922   |  
|Deferred income taxes                                                           |  |                             | 3,049   |   |      |   | 492     |  
|Realized gain on sale of short-term investments, net                            |  |                             | (391    | ) |      |   |        |  
|Changes in assets and liabilities:                                              |  |                             |         |   |      |   |         |  
|Accounts receivable                                                             |  |                             | (5,038  | ) |      |   | (13,142 | )
|Inventories                                                                     |  |                             | (2,354  | ) |      |   | 3,522   |  
|Prepaid expenses and other current assets and other assets                      |  |                             | (348    | ) |      |   | 1,117   |  
|Accounts payable                                                                |  |                             | 4,023   |   |      |   | 9,147   |  
|Accrued expenses, other current liabilities and other long-term liabilities     |  |                             | 2,549   |   |      |   | 1,225   |  
|                                                                                |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) operating activities                             |  |                             | 1,400   |   |      |   | (13,719 | )
|                                                                                |  |                             |         |   |      |   |         |  
|                                                                                |  |                            
|Cash flows from investing activities:                                           |  |                             |         |   |      |   |         |  
|Purchases of property and equipment, net                                        |  |                             | (748    | ) |      |   | (65     | )
|Purchases of investments                                                        |  |                             | (47,751 | ) |      |   | (51,275 | )
|Sales and maturities of investments                                             |  |                             | 53,160  |   |      |   | 40,053  |  
|                                                                                |  |                             |         |   |      |   |         |  
|Net cash provided by (used in) investing activities                             |  |                             | 4,661   |   |      |   | (11,287 | )
|                                                                                |  |                             |         |   |      |   |         |  
|Cash flows from financing activities:                                           |  |                             |         |   |      |   |         |  
|Proceeds from issuance of common stock                                          |  |                             | 292     |   |      |   | 35      |  
|                                                                                |  |                             |         |   |      |   |         |  
|Net cash provided by financing activities                                       |  |                             | 292     |   |      |   | 35      |  
|                                                                                |  |                             |         |   |      |   |         |  
|Net increase (decrease) in cash and cash equivalents                            |  |                             | 6,353   |   |      |   | (24,971 | )
|Cash and cash equivalents at beginning of period                                |  |                             | 89,318  |   |      |   | 110,643 |  
|                                                                                |  |                             |         |   |      |   |         |  
|Cash and cash equivalents at end of period                                      |  | $                           | 95,671  |   |      | $ | 85,672  |  
|                                                                                |  |                             |         |   |      |   |         |  
|Supplemental cash flow information:                                             |  |                             |         |   |      |   |         |  
|Cash payment for income taxes, net of refunds                                   |  | $                           | 403     |   |      | $ | 303     |  
|                                                                                |  |                             |         |   |      |   |         |  

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



5



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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 the 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, 2009, included in the Companys 2009 Annual Report on Form 10-K filed with the SEC.

Recent accounting pronouncements

With the exception of those discussed below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the three
months ended March 31, 2010, as compared to the recent accounting pronouncements described in the Companys Annual Report on Form 10-K for the fiscal year ended December 31, 2009, that are of significance, or potential significance to
the Company.

In April, 2010, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-13,
Compensation-Stock Compensation (Topic 718)  Effect of Denominating the Exercise Price of a Share-Based Payment Award in the Currency of the Market in Which the Underlying Equity Security Trades  a consensus of the FASB Emerging
Issues Task Force (ASU 2010-13). ASU 2010-13 provides amendments to Topic 718 to clarify that an employee share-based payment award with an exercise price denominated in the currency of a market in which a substantial portion of the
entitys equity securities trades should not be considered to contain a condition that is not a market, performance, or service condition. Therefore, an entity would not classify such an award as a liability if it otherwise qualifies as equity.
The amendments in this update do not expand the recurring disclosures required by Topic 718. Disclosures currently required under Topic 718 are applicable to a share-based payment award, including the nature and the term of share-based payment
arrangements. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2010. The Company is currently assessing the future impact of this new accounting
update to its consolidated financial statements.

In March, 2010, the FASB issued ASU No. 2010-11, Derivative and Hedging (Topic
815)  Scope Exception Related to Embedded Credit Derivatives (ASU 2010-11). ASU 2010-11 provides amendments to Subtopic 815-15 to clarify the scope exception for embedded credit derivative features related to the transfer of credit risk
in the form of subordination of one financial instrument to another. In initially adopting the amendments in this update, an entity may elect the fair value option for any investment in a beneficial interest in a securitized financial asset. The
election of the fair value option should be determined on an instrument by instrument basis at the beginning of the fiscal quarter of initial adoption. An entity must ensure that an impairment analysis of the investment has been performed before the
initial adoption of the amendment in this update. The amendments in this update are effective for each reporting entity at the beginning of its first fiscal quarter beginning after June 15, 2010. The Company is currently assessing the future
impact of this new accounting update to its consolidated financial statements.

2. Stock-based compensation

Stock Option Plans

As of March 31, 2010, the Company had outstanding options for the purchase of 6,938,845 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 Non-statutory Stock Option Plan, 1995 Outside Directors Stock Option Plan, 1993 Stock Option Plan and various other plans the Company
assumed as a result of acquisitions. As of March 31, 2010, 3,321,930 shares remained available for future grants and awards under the 2005 Plan and the 2005 Outside Directors Equity Plan. Options and stock appreciation rights granted under the
2005 Plan must have exercise prices per share not less than the fair market value of the Companys 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.



6



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ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The following table summarizes the stock-based compensation expense related to employee stock options,
employee stock purchases and restricted stock unit grants for the three months ended March 31, 2010 and 2009 (in thousands):



|                                    |  |                              |       |      |   |      
|----------------------------------- |  | ---------------------------- | ----- | ---- | - | -----
|                                    |  | Three Months EndedMarch 
31,
|                                    |  | 2010                         |       | 2009
|Cost of hardware product revenues   |  | $                            | 76    |      | $ | 111  
|Research and development            |  |                              | 790   |      |   | 1,303
|Selling, general and administrative |  |                              | 1,330 |      |   | 1,508
|                                    |  |                              |       |      |   |      
|Total costs and expenses            |  | $                            | 2,196 |      | $ | 2,922
|                                    |  |                              |       |      |   |      

The income tax benefit for share-based compensation expense was
$272,000 and $294,000 for the three months ended March 31, 2010 and 2009, respectively.

Valuation Assumptions

The Company estimates the fair value of stock options using the Black-Scholes option pricing model with the following weighted-average
assumptions:



|                              |  |                             |   |  |                               |   |  |      |   |  |      |  
|----------------------------- |  | --------------------------- | - |  | ----------------------------- | - |  | ---- | - |  | ---- | -
|                              |  | Stock Option Plans          |   |  | Employee Stock Purchase Plans |  
|                              |  | Three Months EndedMarch 31, |   |  | Three Months EndedMarch 31,   |  
|                              |  | 2010                        |   |  | 2009                          |   |  | 2010 |   |  | 2009 |  
|Average expected term (years) |  | 5.5                         |   |  | 5.6                           |   |  | 1.25 |   |  | 1.25 |  
|Expected volatility           |  | 54                          | % |  | 55                            | % |  | 56   | % |  | 55   | %
|Risk-free interest rate       |  | 2.4                         | % |  | 1.8                           | % |  | 1.4  | % |  | 1.5  | %
|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.



7



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ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Stock Option Activity

The following is a summary of stock option activities:



|                               |  |                                      |   |  |                                |      
|------------------------------ |  | ------------------------------------ | - |  | ------------------------------ | -----
|                               |  | Shares UnderlyingOptions Outstanding |   |  | Weighted AverageExercise Price
|Outstanding at January 1, 2010 |  | 7,057,012                            |   |  | $                              | 15.17
|Granted                        |  | 12,040                               |   |  | $                              | 11.02
|Exercised                      |  | (29,399                              | ) |  | $                              | 9.92 
|Cancelled                      |  | (100,808                             | ) |  | $                              | 16.98
|                               |  |                                      |   |  |                                |      
|Outstanding at March 31, 2010  |  | 6,938,845                            |   |  | $                              | 15.15
|                               |  |                                      |   |  |                                |      

Significant option groups outstanding as of March 31, 2010, and the related weighted average exercise price
and contractual life information, are as follows:



|                 |  |                                         |  |                                                |  |                              |       |                                |   |                                         |  |                                                |  |                              |  |                                |       |  |   |      
|---------------- |  | --------------------------------------- |  | ---------------------------------------------- |  | ---------------------------- | ----- | ------------------------------ | - | --------------------------------------- |  | ---------------------------------------------- |  | ---------------------------- |  | ------------------------------ | ----- |  | - | -----
|                 |  | Options Outstanding                     |  | Options Exercisable                           
|Exercise Prices  |  | SharesUnderlyingOptions atMarch
31,2010 |  | WeightedAverageRemainingContractualLife(Years) |  | WeightedAverageExercisePrice |       | AggregateIntrinsicValue (000) |   | SharesUnderlyingOptions atMarch
31,2010 |  | WeightedAverageRemainingContractualLife(Years) |  | WeightedAverageExercisePrice |  | AggregateIntrinsicValue (000)
|$0.00 to $9.99   |  | 1,380,218                               |  | 7.95                                           |  | $                            | 8.34  |                                | $ | 3,346                                   |  | 301,819                                        |  | 3.90                         |  | $                              | 6.97  |  | $ | 1,145
|$10.00 to $11.99 |  | 860,952                                 |  | 4.74                                           |  | $                            | 10.58 |                                |   | 271                                     |  | 758,912                                        |  | 4.13                         |  | $                              | 10.55 |  |   | 271  
|$12.00 to $14.99 |  | 2,298,855                               |  | 6.04                                           |  | $                            | 13.91 |                                |   |                                        |  | 1,694,147                                      |  | 5.33                         |  | $                              | 13.82 |  |   |     
|$15.00 to $19.99 |  | 978,032                                 |  | 4.87                                           |  | $                            | 17.93 |                                |   |                                        |  | 888,197                                        |  | 4.65                         |  | $                              | 17.75 |  |   |     
|$20.00 to $25.99 |  | 1,223,888                               |  | 3.72                                           |  | $                            | 23.93 |                                |   |                                        |  | 1,216,901                                      |  | 3.70                         |  | $                              | 23.93 |  |   |     
|$26.00 to $38.74 |  | 196,900                                 |  | 0.29                                           |  | $                            | 29.04 |                                |   |                                        |  | 196,896                                        |  | 0.29                         |  | $                              | 29.04 |  |   |     
|                 |  |                                         |  |                                                |  |                              |       |                                |   |                                         |  |                                                |  |                              |  |                                |       |  |   |      
|Total            |  | 6,938,845                               |  | 5.52                                           |  | $                            | 15.15 |                                | $ | 3,617                                   |  | 5,056,872                                      |  | 4.74                         |  | $                              | 16.64 |  | $ | 1,416
|                 |  |                                         |  |                                                |  |                              |       |                                |   |                                         |  |                                                |  |                              |  |                                |       |  |   |      

Of the 6,938,845 stock options outstanding as of March 31, 2010,
the Company estimates that approximately 6,762,448 will fully vest over the remaining contractual term. As of March 31, 2010, these options had a weighted average remaining contractual life of 5.44 years, a weighted average exercise price
of $15.27 and aggregate intrinsic value of $3.4 million.

The weighted average grant date fair value of options, granted during the three
months ended March 31, 2010 and 2009 was $5.59 and $3.22 per share, respectively.

The aggregate intrinsic value of options outstanding
and exercisable in the table above represents the total pretax intrinsic value, based on the Companys closing stock price of $10.76 as of March 31, 2010, 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 March 31, 2010 was 905,559. The total intrinsic value of options exercised during the three months ended
March 31, 2010 was $54,000. There was no excess tax benefit realized by the Company for the three months ended March 31, 2010 and 2009 for option exercises.

As of March 31, 2010, the Company had $11.4 million of unrecognized stock-based compensation cost related to stock options after estimated
forfeitures, which are expected to be recognized over an estimated period of 2.45 years.

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

Restricted Shares and Restricted Stock Units

Restricted shares and restricted stock units are granted under the 2005 Plan. As of March 31, 2010, there was $4.6 million of total 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 2.90 years.



8



---

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



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



|                          |  |                                              |   |  |                                         |      
|------------------------- |  | -------------------------------------------- | - |  | --------------------------------------- | -----
|                          |  | OutstandingRestricted 
Sharesand Stock Units |   |  | Weighted-Average 
Grant-Date Fair Value
|Balances, January 1, 2010 |  | 799,858                                      |   |  | $                                       | 9.95 
|Granted                   |  |                                             |   |  | $                                       |     
|Released                  |  | (625                                         | ) |  | $                                       | 20.31
|Forfeited                 |  | (6,339                                       | ) |  | $                                       | 9.79 
|                          |  |                                              |   |  |                                         |      
|Balances, March 31, 2010  |  | 792,894                                      |   |  | $                                       | 9.94 
|                          |  |                                              |   |  |                                         |      



9



---

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



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. There were no purchases during the quarter ended
March 31, 2010. As of March 31, 2010, 3,489,082 shares were reserved and available for issuance under the ESPP.

Stock Repurchase Program

In March 2008, the Companys Board of Directors authorized a stock repurchase program under which the Company may repurchase up to $100.0 million of
outstanding shares of Company common stock. The amount and timing of specific repurchases under this program are subject to market conditions, applicable legal requirements and other factors, including managements discretion. Repurchases may
be in open-market transactions or through privately negotiated transactions, and the repurchase program may be modified, extended or terminated by the Board of Directors at any time. There is no guarantee of the exact number of shares that will be
repurchased under the program.

As of March 31, 2010 and 2009, the authorized amount that remained available under the Companys
stock repurchase program was $80.2 million and $90.0 million, respectively. The Company retires all shares repurchased under the stock repurchase program. There were no repurchases in the three months ended March 31, 2010 and 2009. The purchase
price for the repurchased shares of the Companys common stock is reflected as a reduction of common stock and additional paid-in capital.

3. Comprehensive Loss

The following
table presents the calculation of comprehensive loss. The components of comprehensive loss, net of tax, are as follows (in thousands):



|                                                     |  |                             |        |   |      |   |         |  
|---------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                     |  | Three Months EndedMarch 31, |       
|                                                     |  | 2010                        |        |   | 2009 |  
|Net loss                                             |  | $                           | (3,969 | ) |      | $ | (21,067 | )
|Change in unrealized gain on investments, net of tax |  |                             | (8     | ) |      |   | (206    | )
|                                                     |  |                             |        |   |      |   |         |  
|Total comprehensive loss                             |  | $                           | (3,977 | ) |      | $ | (21,273 | )
|                                                     |  |                             |        |   |      |   |         |  

The components of accumulated other comprehensive income are unrealized gains on marketable securities, net of related
taxes.



10



---

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



4. Marketable Securities

The Companys portfolio of available for sale and trading securities, as of March 31, 2010 was as follows (in thousands):



|                                                           |  |      |         |                 |   |                  |  |   |                     |   |  |   |        
|---------------------------------------------------------- |  | ---- | ------- | --------------- | - | ---------------- |  | - | ------------------- | - |  | - | -------
|                                                           |  | Cost |         | UnrealizedGains |   | UnrealizedLosses |  |   | EstimatedFair Value
|Corporate notes and bonds                                  |  | $    | 210,655 |                 | $ | 3,911            |  | $ | (91                 | ) |  | $ | 214,475
|U.S. government and agency securities                      |  |      | 38,214  |                 |   | 52               |  |   | (25                 | ) |  |   | 38,241 
|Foreign and municipal bonds                                |  |      | 14,069  |                 |   | 117              |  |   | (67                 | ) |  |   | 14,119 
|Certificates of deposit                                    |  |      | 1,750   |                 |   | 1                |  |   |                    |   |  |   | 1,751  
|                                                           |  |      |         |                 |   |                  |  |   |                     |   |  |   |        
|Total fixed income securities                              |  |      | 264,688 |                 |   | 4,081            |  |   | (183                | ) |  |   | 268,586
|Publicly traded equity securities                          |  |      | 1,091   |                 |   | 229              |  |   | (93                 | ) |  |   | 1,227  
|                                                           |  |      |         |                 |   |                  |  |   |                     |   |  |   |        
|Total available for sale securities                        |  |      | 265,779 |                 |   | 4,310            |  |   | (276                | ) |  |   | 269,813
|Auction rate securities (classified as trading securities) |  |      | 34,525  |                 |   |                 |  |   |                    |   |  |   | 34,525 
|                                                           |  |      |         |                 |   |                  |  |   |                     |   |  |   |        
|Total available for sale and trading securities            |  | $    | 300,304 |                 | $ | 4,310            |  | $ | (276                | ) |  | $ | 304,338
|                                                           |  |      |         |                 |   |                  |  |   |                     |   |  |   |        

The Companys portfolio of available for sale and trading
securities as of December 31, 2009 was as follows (in thousands):



|                                                           |  |      |         |                 |   |                  |  |   |                     |   |  |   |        
|---------------------------------------------------------- |  | ---- | ------- | --------------- | - | ---------------- |  | - | ------------------- | - |  | - | -------
|                                                           |  | Cost |         | UnrealizedGains |   | UnrealizedLosses |  |   | EstimatedFair Value
|Corporate notes and bonds                                  |  | $    | 229,466 |                 | $ | 4,480            |  | $ | (391                | ) |  | $ | 233,555
|U.S. government and agency securities                      |  |      | 31,472  |                 |   | 50               |  |   | (8                  | ) |  |   | 31,514 
|Foreign and municipal bonds                                |  |      | 6,554   |                 |   | 70               |  |   | (2                  | ) |  |   | 6,622  
|Certificates of deposit                                    |  |      | 1,750   |                 |   |                 |  |   | (8                  | ) |  |   | 1,742  
|                                                           |  |      |         |                 |   |                  |  |   |                     |   |  |   |        
|Total fixed income securities                              |  |      | 269,242 |                 |   | 4,600            |  |   | (409                | ) |  |   | 273,433
|Publicly traded equity securities                          |  |      | 1,092   |                 |   |                 |  |   | (82                 | ) |  |   | 1,010  
|                                                           |  |      |         |                 |   |                  |  |   |                     |   |  |   |        
|Total available for sale securities                        |  |      | 270,334 |                 |   | 4,600            |  |   | (491                | ) |  |   | 274,443
|Auction rate securities (classified as trading securities) |  |      | 34,925  |                 |   |                 |  |   |                    |   |  |   | 34,925 
|                                                           |  |      |         |                 |   |                  |  |   |                     |   |  |   |        
|Total available for sale and trading securities            |  | $    | 305,259 |                 | $ | 4,600            |  | $ | (491                | ) |  | $ | 309,368
|                                                           |  |      |         |                 |   |                  |  |   |                     |   |  |   |        

The following table summarizes the maturities of the Companys
fixed income securities, including auction rate securities (ARS) classified as trading securities, as of March 31, 2010 (in thousands):



|                                                                |  |      |         |                     |   |        
|--------------------------------------------------------------- |  | ---- | ------- | ------------------- | - | -------
|                                                                |  | Cost |         | EstimatedFair Value
|Less than 1 year                                                |  | $    | 85,280  |                     | $ | 86,286 
|Due in 1 to 2 years                                             |  |      | 97,698  |                     |   | 99,803 
|Due in 2 to 5 years                                             |  |      | 81,710  |                     |   | 82,497 
|Greater than 5 years*                                           |  |      | 34,525  |                     |   | 34,525 
|                                                                |  |      |         |                     |   |        
|Total fixed income securities including auction rate securities |  | $    | 299,213 |                     | $ | 303,111
|                                                                |  |      |         |                     |   |        



|* | Comprised of ARS with UBS, which have reset dates of 90 days or less but final expiration dates over 5 years.
|- | -------------------------------------------------------------------------------------------------------------



11



---

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The table below shows the fair value of investments in available for sale securities that have been in
an unrealized loss position for less than 12 months or for 12 months or longer as of March 31, 2010 (in thousands):



|                                      |  |                     |        |                  |                     |      |            |       |                  |     |  |            |     |                  |  |   |        |  |   |      |  
|------------------------------------- |  | ------------------- | ------ | ---------------- | ------------------- | ---- | ---------- | ----- | ---------------- | --- |  | ---------- | --- | ---------------- |  | - | ------ |  | - | ---- | -
|                                      |  | Less than 12 months |        |                  | 12 months or longer |      |            | Total |                 
|                                      |  | Fair Value          |        | Unrealizedlosses |                     |      | Fair Value |       | Unrealizedlosses |     |  | Fair Value |     | Unrealizedlosses | 
|Corporate notes and bonds             |  | $                   | 28,338 |                  | $                   | (91  | )          |       | $                |    |  | $          |    |                  |  | $ | 28,338 |  | $ | (91  | )
|U.S. government and agency securities |  |                     | 5,475  |                  |                     | (25  | )          |       |                  |    |  |            |    |                  |  |   | 5,475  |  |   | (25  | )
|Foreign and municipal bonds           |  |                     | 5,458  |                  |                     | (67  | )          |       |                  |    |  |            |    |                  |  |   | 5,458  |  |   | (67  | )
|Certificates of deposit               |  |                     |       |                  |                     |     |            |       |                  |    |  |            |    |                  |  |   |       |  |   |     |  
|                                      |  |                     |        |                  |                     |      |            |       |                  |     |  |            |     |                  |  |   |        |  |   |      |  
|Total fixed income securities         |  |                     | 39,271 |                  |                     | (183 | )          |       |                  |    |  |            |    |                  |  |   | 39,271 |  |   | (183 | )
|Publicly traded equity securities     |  |                     |       |                  |                     |     |            |       |                  | 167 |  |            | (93 | )                |  |   | 167    |  |   | (93  | )
|                                      |  |                     |        |                  |                     |      |            |       |                  |     |  |            |     |                  |  |   |        |  |   |      |  
|Total available for sale securities   |  | $                   | 39,271 |                  | $                   | (183 | )          |       | $                | 167 |  | $          | (93 | )                |  | $ | 39,438 |  | $ | (276 | )
|                                      |  |                     |        |                  |                     |      |            |       |                  |     |  |            |     |                  |  |   |        |  |   |      |  

The table below shows the fair value of investments in available for sale securities that have been in an unrealized loss
position for less than 12 months or for 12 months or longer as of December 31, 2009 (in thousands):



|                                      |  |                     |       |                  |                     |    |            |       |                  |        |  |            |      |                  |  |   |        |  |   |      |  
|------------------------------------- |  | ------------------- | ----- | ---------------- | ------------------- | -- | ---------- | ----- | ---------------- | ------ |  | ---------- | ---- | ---------------- |  | - | ------ |  | - | ---- | -
|                                      |  | Less than 12 months |       |                  | 12 months or longer |    |            | Total |                 
|                                      |  | Fair Value          |       | Unrealizedlosses |                     |    | Fair Value |       | Unrealizedlosses |        |  | Fair Value |      | Unrealizedlosses | 
|Corporate notes and bonds             |  | $                   | 1,521 |                  | $                   | (2 | )          |       | $                | 26,670 |  | $          | (389 | )                |  | $ | 28,191 |  | $ | (391 | )
|U.S. government and agency securities |  |                     |      |                  |                     |   |            |       |                  | 4,485  |  |            | (8   | )                |  |   | 4,485  |  |   | (8   | )
|Foreign and municipal bonds           |  |                     |      |                  |                     |   |            |       |                  | 4,074  |  |            | (2   | )                |  |   | 4,074  |  |   | (2   | )
|Certificates of deposit               |  |                     |      |                  |                     |   |            |       |                  | 1,742  |  |            | (8   | )                |  |   | 1,742  |  |   | (8   | )
|                                      |  |                     |       |                  |                     |    |            |       |                  |        |  |            |      |                  |  |   |        |  |   |      |  
|Total fixed income securities         |  |                     | 1,521 |                  |                     | (2 | )          |       |                  | 36,971 |  |            | (407 | )                |  |   | 38,492 |  |   | (409 | )
|Publicly traded equity securities     |  |                     |      |                  |                     |   |            |       |                  | 1,010  |  |            | (82  | )                |  |   | 1,010  |  |   | (82  | )
|                                      |  |                     |       |                  |                     |    |            |       |                  |        |  |            |      |                  |  |   |        |  |   |      |  
|Total available for sale securities   |  | $                   | 1,521 |                  | $                   | (2 | )          |       | $                | 37,981 |  | $          | (489 | )                |  | $ | 39,502 |  | $ | (491 | )
|                                      |  |                     |       |                  |                     |    |            |       |                  |        |  |            |      |                  |  |   |        |  |   |      |  

5.Fair Value

When determining the fair value measurements for assets and liabilities required or permitted to be recorded at fair value, the Company considers the
principal or most advantageous market in which it would transact and it considers assumptions that market participants would use when pricing the asset or liability.

The Company values its investments 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 1 consists of publicly traded equity securities which are valued
primarily using quoted market prices utilizing market observable inputs as they are traded in an active market with sufficient volume and frequency of transactions.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 2 - includes fixed income securities of the Company (other than auction rate securities) for which there are inputs other than quoted prices
included within Level 1 that are observable, either directly or indirectly, such as quoted prices for similar instruments in active markets, nonbinding market prices that are corroborated by observable market data, quoted prices for identical or
similar instruments in markets with insufficient volume or infrequent transactions (less active markets).
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | Level 3 - The Companys investments in auction rate securities are classified within Level 3 because there are no active markets for the auction
rate securities and therefore the Company is unable to obtain independent valuations from market sources. The Company estimated the fair value of the ARS 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.
| | - |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



12



---

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The following table represents the Companys fair value hierarchy for its financial assets
(investments) measured at fair value on a recurring basis as of March 31, 2010 (in thousands):



|                                      |  |         |       |         |   |         |  |       |        |  |   |        
|------------------------------------- |  | ------- | ----- | ------- | - | ------- |  | ----- | ------ |  | - | -------
|                                      |  | Level 1 |       | Level 2 |   | Level 3 |  | Total
|Corporate notes and bonds             |  | $       |      |         | $ | 214,475 |  | $     |       |  | $ | 214,475
|Auction rate securities               |  |         |      |         |   |        |  |       | 33,350 |  |   | 33,350 
|ARS Rights                            |  |         |      |         |   |        |  |       | 1,175  |  |   | 1,175  
|U.S. government and agency securities |  |         |      |         |   | 38,241  |  |       |       |  |   | 38,241 
|Foreign and municipal bonds           |  |         |      |         |   | 14,119  |  |       |       |  |   | 14,119 
|Certificates of deposit               |  |         |      |         |   | 1,751   |  |       |       |  |   | 1,751  
|                                      |  |         |       |         |   |         |  |       |        |  |   |        
|Total fixed income securities         |  |         |      |         |   | 268,586 |  |       | 34,525 |  |   | 303,111
|Publicly traded equity securities     |  |         | 1,227 |         |   |        |  |       |       |  |   | 1,227  
|                                      |  |         |       |         |   |         |  |       |        |  |   |        
|Total                                 |  | $       | 1,227 |         | $ | 268,586 |  | $     | 34,525 |  | $ | 304,338
|                                      |  |         |       |         |   |         |  |       |        |  |   |        

At March 31, 2010 and December 31, 2009, the Company held
ARS with a par value of $34.5 and $34.9 million, respectively. The Companys ARS are high grade long-term debt instruments backed by student loans which are guaranteed by the United States government. All of the Companys ARS
have credit ratings of AAA or AA, and none are mortgage-backed debt obligations. The Company also holds Series C-2 Auction Rate Securities Rights (ARS Rights) that entitle the Company to sell its eligible ARS to UBS affiliates
during the period from June 30, 2010 to July 2, 2012 for a price equal to par value. In exchange for the issuance of the ARS Rights, the UBS affiliates have the discretionary right to sell the Companys eligible ARS on the
Companys behalf, without prior notification, at any time during a two-year period beginning June 30, 2010. The total fair value of the ARS, combined with the fair value of the ARS Rights, approximates the par value of the ARS.

The enforceability of the ARS Rights results in a put option and should be recognized as a free standing asset separate from the related ARS. The Company
measures the ARS Rights at fair value under the Financial Instruments-Overall-Scope Section of the Accounting Standard Codification (ASC), which permits an entity to elect the fair value option for recognized financial assets, in order to match the
changes in the fair value of the related ARS. As a result, unrealized gains and losses are included in earnings in future periods. The Company expects that future changes in the fair value of the ARS Rights will approximate fair value movements in
the related ARS. The Company valued the ARS Rights using a discounted cash flow approach including estimates based on data available as of March 31, 2010, of interest rates, timing and amount of cash flow, adjusted for any bearer risk
associated with the financial ability of UBS to repurchase the ARS beginning June 30, 2010. These assumptions are volatile and subject to change as the underlying sources of these assumptions and market conditions change. Due to the current
economic environment in which there is a lack of market activity for ARS, 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 the ARS 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 other-than-temporary impairment loss.

The
Company continues to monitor the market for ARS and consider its impact (if any) on the fair market value of its investments. If the market conditions deteriorate further, the Company may be required to record additional unrealized losses in
earnings, offset by corresponding increases in the value of the ARS Rights. The Company believes that, based on its current cash and cash equivalents balance, the current lack of liquidity in the credit and capital markets will not have a material
impact on its liquidity, cash flows or ability to fund its operations.



13



---

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



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



|                                             |  |                                                                         |         |   |                                                                                |   |       |  
|-------------------------------------------- |  | ----------------------------------------------------------------------- | ------- | - | ------------------------------------------------------------------------------ | - | ----- | -
|                                             |  | Fair Value MeasurementsUsing SignificantUnobservable
Inputs(Level 3)ARS |         |   | Fair Value MeasurementsUsing
SignificantUnobservable Inputs(Level 3)ARS
Rights |  
|Balance at January 1, 2009                   |  | $                                                                       | 55,775  |   |                                                                                | $ | 2,000 |  
|Total gains or losses (realized/unrealized): |  |                                                                         |         |   |                                                                                |   |       |  
|Included in earnings                         |  |                                                                         | 250     |   |                                                                                |   | (250  | )
|Included in other comprehensive income       |  |                                                                         |        |   |                                                                                |   |      |  
|Purchases, sales, issuances, and settlements |  |                                                                         | (22,850 | ) |                                                                                |   |      |  
|Transfers in and/or out of Level 3           |  |                                                                         |        |   |                                                                                |   |      |  
|                                             |  |                                                                         |         |   |                                                                                |   |       |  
|Balance at December 31, 2009                 |  | $                                                                       | 33,175  |   |                                                                                | $ | 1,750 |  
|Total gains or losses (realized/unrealized): |  |                                                                         |         |   |                                                                                |   |       |  
|Included in earnings                         |  |                                                                         | 575     |   |                                                                                |   | (575  | )
|Included in other comprehensive income       |  |                                                                         |        |   |                                                                                |   |      |  
|Purchases, sales, issuances, and settlements |  |                                                                         | (400    | ) |                                                                                |   |      |  
|Transfers in and/or out of Level 3           |  |                                                                         |         |   |                                                                                |   |      |  
|                                             |  |                                                                         |         |   |                                                                                |   |       |  
|Balance at March 31, 2010                    |  | $                                                                       | 33,350  |   |                                                                                | $ | 1,175 |  
|                                             |  |                                                                         |         |   |                                                                                |   |       |  

6. Inventories

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



|                |  |               |        |                  |   |       
|--------------- |  | ------------- | ------ | ---------------- | - | ------
|                |  | March 31,2010 |        | December 31,2009
|Purchased parts |  | $             | 10,660 |                  | $ | 8,795 
|Work in process |  |               | 8,669  |                  |   | 5,065 
|Finished goods  |  |               | 10,187 |                  |   | 13,302
|                |  |               |        |                  |   |       
|                |  | $             | 29,516 |                  | $ | 27,162
|                |  |               |        |                  |   |       

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 conducted its annual impairment test of goodwill as of September 30, 2009.

As of September 30, 2009, the Company determined that the fair value of its Imaging segment reporting unit exceeded the carrying value and therefore
no goodwill impairment charge was recorded. In the first quarter of 2010, the Company reviewed the significant assumptions and key estimates used in the September 30, 2009 impairment analysis and concluded the judgments used in the analysis
remained appropriate. In addition, there were no triggering events or indicators of impairment during the first quarter of 2010 that would lead the Company to believe goodwill had been impaired as of March 31, 2010.



14



---

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



Components of Acquired Intangible Assets (in thousands):



|                             |  |             |  |                     |         |                         |   |          |            |  |                     |     |                         |   |         |            |   |          |   |  |   |    
|---------------------------- |  | ----------- |  | ------------------- | ------- | ----------------------- | - | -------- | ---------- |  | ------------------- | --- | ----------------------- | - | ------- | ---------- | - | -------- | - |  | - | ---
|                             |  |             |  | March 31, 2010      |         | December 31, 2009      
|                             |  | Life(Years) |  | GrossCarryingAmount |         | AccumulatedAmortization |   |          | NetBalance |  | GrossCarryingAmount |     | AccumulatedAmortization |   |         | NetBalance
|Amortized intangible assets: |  |             |  |                     |         |                         |   |          |            |  |                     |     |                         |   |         |            |   |          |   |  |   |    
|Purchased technology         |  | 2-3         |  | $                   | 193,132 |                         | $ | (193,132 | )          |  | $                   |    |                         | $ | 193,132 |            | $ | (193,132 | ) |  | $ |   
|Patents                      |  | 3-5         |  |                     | 40,265  |                         |   | (40,265  | )          |  |                     |    |                         |   | 40,265  |            |   | (40,265  | ) |  |   |   
|Customer base                |  | 3-5         |  |                     | 13,572  |                         |   | (13,572  | )          |  |                     |    |                         |   | 13,572  |            |   | (13,572  | ) |  |   |   
|Tradename and others         |  | 3-5         |  |                     | 4,231   |                         |   | (3,705   | )          |  |                     | 526 |                         |   | 4,231   |            |   | (3,596   | ) |  |   | 635
|                             |  |             |  |                     |         |                         |   |          |            |  |                     |     |                         |   |         |            |   |          |   |  |   |    
|Total                        |  |             |  | $                   | 251,200 |                         | $ | (250,674 | )          |  | $                   | 526 |                         | $ | 251,200 |            | $ | (250,566 | ) |  | $ | 635
|                             |  |             |  |                     |         |                         |   |          |            |  |                     |     |                         |   |         |            |   |          |   |  |   |    

Estimated future intangible amortization expense, based on current
balances, as of March 31, 2010 is as follows (in thousands):



|                              |  |   |    
|----------------------------- |  | - | ---
|Remaining nine months of 2010 |  | $ | 327
|Year ending December 31, 2011 |  |   | 199
|                              |  |   |    
|                              |  | $ | 526
|                              |  |   |    

Components of Goodwill (in thousands):



|         |  |                     |         |                       |   |          |            |  |                     |       |                       |   |         |            |   |          |   |  |   |      
|-------- |  | ------------------- | ------- | --------------------- | - | -------- | ---------- |  | ------------------- | ----- | --------------------- | - | ------- | ---------- | - | -------- | - |  | - | -----
|         |  | March 31, 2010      |         | December 31, 2009    
|         |  | GrossCarryingAmount |         | AccumulatedImpairment |   |          | NetBalance |  | GrossCarryingAmount |       | AccumulatedImpairment |   |         | NetBalance
|Goodwill |  | $                   | 168,691 |                       | $ | (164,494 | )          |  | $                   | 4,197 |                       | $ | 168,691 |            | $ | (164,494 | ) |  | $ | 4,197

Changes in the carrying amount of
goodwill for the three months ended March 31, 2010 and the year ended December 31, 2009 are as follows (in thousands):



|                             |  |         |      
|---------------------------- |  | ------- | -----
|                             |  | Imaging
|Balance at January 1, 2009   |  | $       | 4,197
|Impairment of goodwill       |  |         |     
|                             |  |         |      
|Balance at December 31, 2009 |  |         | 4,197
|Impairment of goodwill       |  |         |     
|                             |  |         |      
|Balance at March 31, 2010    |  | $       | 4,197
|                             |  |         |      



15



---

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



8. Other Long-Term Liabilities

The following is a summary of other long term liabilities as of March 31, 2010 and December 31, 2009 (in thousands):



|                                               |  |               |        |                  |   |       
|---------------------------------------------- |  | ------------- | ------ | ---------------- | - | ------
|                                               |  | March 31,2010 |        | December 31,2009
|Severance obligations, Israel (see note below) |  | $             | 14,744 |                  | $ | 14,409
|Other employment related obligations           |  |               | 2,995  |                  |   | 2,887 
|Income tax liability                           |  |               | 11,855 |                  |   | 11,823
|Deferred rent                                  |  |               | 1,703  |                  |   | 1,693 
|Other                                          |  |               | 1,480  |                  |   | 1,585 
|                                               |  |               |        |                  |   |       
|                                               |  | $             | 32,777 |                  | $ | 32,397
|                                               |  |               |        |                  |   |       

Severance obligations represent a liability for the Companys
employees in Israel. Under Israeli law, the Company is required to make severance payments to its retired or dismissed Israeli employees and Israeli employees leaving its employment in certain other circumstances. The Companys severance pay
liability to its Israeli employees, which is calculated based on the salary of each employee multiplied by the years of such employees employment, is reflected in the Companys balance sheet in other long-term liabilities on an accrual
basis, and is partially funded by the purchase of insurance policies in the name of the employees. The surrender value of the insurance policies is recorded in other assets.

The severance pay detail is as follows (in thousands):



|                                            |  |               |         |   |                  |   |         |  
|------------------------------------------- |  | ------------- | ------- | - | ---------------- | - | ------- | -
|                                            |  | March 31,2010 |         |   | December 31,2009 |  
|Accrued severance                           |  | $             | 14,744  |   |                  | $ | 14,409  |  
|Less: amount funded                         |  |               | (14,330 | ) |                  |   | (14,019 | )
|                                            |  |               |         |   |                  |   |         |  
|Unfunded portion, net accrued severance pay |  | $             | 414     |   |                  | $ | 390     |  
|                                            |  |               |         |   |                  |   |         |  

9. Income Taxes

The Company follows the asset and 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.

The Company assesses, on a quarterly basis, the realizability of its deferred tax assets by evaluating all available evidence, both positive and
negative, including: (1) the cumulative results of operations in recent years, (2) the source of recent losses, (3) estimates of future taxable income and (4) the length of operating loss carryforward periods. Throughout 2009 and
for the first quarter of 2010, the Company reported a rolling three year cumulative loss in multiple foreign jurisdictions. The cumulative three-year loss was considered significant negative evidence which was objective and verifiable and thus was
heavily weighted. Additional negative evidence the Company considered included projections of future losses, the historical volatility of the semiconductor industry and the highly competitive nature of the DTV, DVD and Mobile markets in which the
Company operates. Positive evidence considered by the Company in its assessment included lengthy operating loss carryforward periods, and a lack of unused expired operating loss carryforwards in the Companys history. After considering both the
positive and negative evidence, the Company determined that it was still more-likely-than-not that it would not realize the full value of certain foreign jurisdiction deferred tax assets. As a result, the Company continues to record a valuation
allowance against those deferred tax assets to reduce them to their estimated net realizable value with a corresponding non-cash charge. It is possible that the Company will remove or record a valuation allowance on these or other jurisdictions in
the near future dependent primarily on the actual and projected results in each jurisdiction.

The calculation of the Companys tax
liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company records liabilities for anticipated tax audit issues based on its estimate of whether, and the extent to which, additional taxes may be due.
Actual tax liabilities may be different than the recorded estimates and could result in an additional charge or benefit to the tax provision in the period when the ultimate tax assessment is determined.



16



---

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The Companys effective tax rate is highly dependent upon the geographic distribution of its
worldwide earnings or losses, the tax regulations and tax holiday benefits in certain jurisdictions, and the effectiveness of its tax planning strategies. The Companys Israel based subsidiary is 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. The Companys U.S. federal net operating losses expire at various times between 2010 and 2024, and the benefits from the
Companys subsidiarys Approved Enterprise status expire at various times beginning in 2011.

The provision for income taxes for the
three months ended March 31, 2010 reflects the estimated annual tax rate applied to the year to date net earnings. As of December 31, 2009, the Company had $35.0 million of unrecognized tax benefits which have not materially changed during
the current period and all of which would benefit the Companys tax expense if realized in the future.

10. Segment Reporting

The Companys products consist of highly integrated application-specific integrated circuits and system-on-a-chip solutions licenses
certain software and other intellectual property. Operating segments are defined as components of an enterprise about which separate financial information is available, which the chief operating decision-maker evaluates regularly in determining
allocation of resources and assessing performance. The Company aggregates its operating segments into two reportable segments, Consumer and Imaging based on the guidance within ASC 280.

The Consumer group provides products for use in DVD and Multimedia Player products, standard and high definition digital televisions, set-top boxes,
digital cameras and multimedia mobile phones. The Imaging group provides products used in digital copiers, laser and inkjet printers, and multifunction peripherals.

Information about reported segment income or loss is as follows for the three months ended March 31, 2010 and 2009 (in thousands):



|                     |  |                             |        |   |      |   |         |  
|-------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                     |  | Three Months EndedMarch 31, |       
|                     |  | 2010                        |        |   | 2009 |  
|Net revenues:        |  |                             |        |   |      |   |         |  
|Consumer             |  | $                           | 75,625 |   |      | $ | 54,291  |  
|Imaging              |  |                             | 14,826 |   |      |   | 14,196  |  
|                     |  |                             |        |   |      |   |         |  
|                     |  | $                           | 90,451 |   |      | $ | 68,487  |  
|                     |  |                             |        |   |      |   |         |  
|Operating expenses:  |  |                             |        |   |      |   |         |  
|Consumer             |  | $                           | 83,680 |   |      | $ | 77,846  |  
|Imaging              |  |                             | 10,280 |   |      |   | 12,311  |  
|                     |  |                             |        |   |      |   |         |  
|                     |  | $                           | 93,960 |   |      | $ | 90,157  |  
|                     |  |                             |        |   |      |   |         |  
|Contribution margin: |  |                             |        |   |      |   |         |  
|Consumer             |  | $                           | (8,055 | ) |      | $ | (23,555 | )
|Imaging              |  |                             | 4,546  |   |      |   | 1,885   |  
|                     |  |                             |        |   |      |   |         |  
|                     |  | $                           | (3,509 | ) |      | $ | (21,670 | )
|                     |  |                             |        |   |      |   |         |  

A reconciliation of the totals reported for the operating segments to the applicable line items in the condensed
consolidated financial statements for the three months ended March 31, 2010 and 2009 is as follows (in thousands):



|                                            |  |                             |        |   |      |   |         |  
|------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                            |  | Three Months EndedMarch 31, |       
|                                            |  | 2010                        |        |   | 2009 |  
|Contribution margin from operating segments |  | $                           | (3,509 | ) |      | $ | (21,670 | )
|Amortization of intangible assets           |  |                             | 109    |   |      |   | 109     |  
|                                            |  |                             |        |   |      |   |         |  
|Total operating loss                        |  | $                           | (3,618 | ) |      | $ | (21,779 | )
|                                            |  |                             |        |   |      |   |         |  

The Company maintains operations in China, France, India, Israel, Japan, Korea, Sweden, Taiwan, the United Kingdom and the
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.



17



---

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS(Continued)

(unaudited)



The geographic distribution of total revenues for the three months ended March 31, 2010 and 2009
was as follows (in thousands):



|                                                       |  |                             |        |      |   |       
|------------------------------------------------------ |  | --------------------------- | ------ | ---- | - | ------
|                                                       |  | Three Months EndedMarch 31,
|                                                       |  | 2010                        |        | 2009
|Revenues from unaffiliated customers originating from: |  |                             |        |      |   |       
|China                                                  |  | $                           | 34,608 |      | $ | 28,543
|Taiwan                                                 |  |                             | 24,032 |      |   | 11,549
|Japan                                                  |  |                             | 20,485 |      |   | 13,156
|United States                                          |  |                             | 5,662  |      |   | 5,590 
|Korea                                                  |  |                             | 4,018  |      |   | 7,603 
|Other                                                  |  |                             | 1,646  |      |   | 2,046 
|                                                       |  |                             |        |      |   |       
|Total revenues                                         |  | $                           | 90,451 |      | $ | 68,487
|                                                       |  |                             |        |      |   |       

For the three months ended March 31, 2010, four customers
accounted for 16%, 13%, 11% and 11% of total revenues, respectively. For the same period of 2009, three customers accounted for 15%, 12% and 11% of total revenues, respectively.

As of March 31, 2010, four customers accounted for approximately 28%, 11%, 10% and 10% of the net accounts receivable balance, respectively, and as
of December 31, 2009, five customers accounted for approximately 23%, 15%, 13%, 13% and 10% of the net accounts receivable balance, respectively.

11. Net Loss Per Share

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



|                                                      |  |                             |        |   |      |   |         |  
|----------------------------------------------------- |  | --------------------------- | ------ | - | ---- | - | ------- | -
|                                                      |  | Three Months EndedMarch 31, |       
|                                                      |  | 2010                        |        |   | 2009 |  
|Net loss                                              |  | $                           | (3,969 | ) |      | $ | (21,067 | )
|                                                      |  |                             |        |   |      |   |         |  
|Basic and diluted weighted average shares outstanding |  |                             | 51,174 |   |      |   | 51,176  |  
|                                                      |  |                             |        |   |      |   |         |  
|Net loss per share:                                   |  |                             |        |   |      |   |         |  
|Basic and diluted                                     |  | $                           | (0.08  | ) |      | $ | (0.41   | )
|                                                      |  |                             |        |   |      |   |         |  

For the three months ended March 31, 2010 and 2009, outstanding options and restricted stock units were excluded from
the computation of diluted net loss per share as the inclusion of such shares would have had an anti-dilutive effect.

12. Commitments and
Contingencies

Legal Proceedings

Xpoint Technologies, Inc. v. Zoran CorporationOn September 18, 2009, Xpoint Technologies, Inc. filed an amended complaint against the Company
and 43 other defendants in the United States District Court for the District of Delaware. The complaint alleges that the Companys manufacture and sale of digital camera processors, including its Coach 9, Coach 10 and Coach 12 lines of
processors, infringe one or more of the claims of United States Patent No. 5,913,028. The complaint seeks unspecified damages, a preliminary and permanent injunction against further infringement, a finding of willful infringement, enhanced
damages, attorneys fees and costs. The Company filed an answer and a counterclaim. The Companys counterclaim seeks an order declaring that it did not infringe the patent and that the patent is invalid. The case is in its very early
stages. Discovery has just recently commenced and any potential loss, if any, is not reasonably estimable at this time. The Company intends to vigorously defend itself against the allegations made by Xpoint in this lawsuit. The Company cannot
provide any assurance that the ultimate outcome of the action will not have a material adverse effect on the Companys business, financial condition, results of operations or cash flows for a particular period or on the trading price of the
Companys Common Stock.

Indemnification Obligations

The Companys Amended and Restated Bylaws require the Company to indemnify its directors and authorize the Company to indemnify its officers to the
fullest extent permitted by the Delaware General Corporation Law (the DGCL). In addition, each of the Companys current directors and officers has entered into a separate indemnification agreement with the Company. The
Companys Restated Certificate of Incorporation limits the liability of directors to the Company or its stockholders to the fullest extent permitted by the DGCL. 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.

Other Legal Matters

The Company is
named from time to time as a party to lawsuits in the normal course of its business, such as the matters noted above. 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. The Company accrues for contingent liabilities when it determines that it is probable that a liability had been incurred at the date of the financial
statements and that the amount of such liability can be reasonably estimated. During the three months ended March 31, 2010 and 2009, the Company incurred costs of $1.1 million and $0 in connection with settlement of disputes, respectively.



18



---

|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 our current views with respect to future events and financial performance.
These forward-looking statements are subject to many 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

We provide integrated circuits, software and platforms for digital televisions, digital cameras, set-top boxes, DVD and HD media players, and digital
imaging products, consisting of semiconductor hardware and software that enable printing, scanning, processing and transmission of documents to computer peripherals that perform printing functions. Our products are used by the original equipment
manufacturers (OEMs) for consumer and commercial applications.

In 2009, our revenues were harmed by the poor macroeconomic environment which
had the effect of reducing consumer spending. As a result of those macroeconomic conditions, we continued several cost containment programs including realigning our resources to focus on our key priorities, reducing investments in certain areas and
scaling back travel, as well as other measures. In addition, we continued our focus on maintaining a strong balance sheet, and in particular, managing our cash and inventory balances very closely.

While the global economic downturn continues to affect consumer spending, we are seeing some indications that it may be stabilizing. In the first quarter
of 2010, we saw growth in our digital camera product line as a result of increased demand for low to mid-range models. Also, we had growth in our DVD and Multimedia player product lines as a result of increased demand for low to mid-range DVD and HD
multimedia players where we have a strong market position.

While we have seen some recent strength in demand for certain of our products,
consumer spending has not yet reached previous levels and we are continuing some of the cost containment measures as well as continuing our focus on maintaining a strong balance sheet.

Revenues

We
derive most of our revenues from the sale of our integrated circuit and system-on-a-chip products. Historically, average selling prices for our products, consistent with average selling prices for products in the semiconductor industry generally,
have decreased over time. Average selling prices for our products have fluctuated substantially from period to period, reflecting changes in our mix of product sold and transitions 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.



19



---

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 sold by the licensee. Quarterly licensing revenues 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. 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. In instances where we are unable to
determine the fair value of our maintenance obligations, revenue for the entire arrangement is recognized ratably over the term of the arrangement. We recognize maintenance and support revenue ratably over the term of the arrangement. We also
receive royalty revenues based on per unit shipments of products that include our software, which we recognize upon receipt of a royalty report from the customer, typically one quarter after the sales are made by our licensee.

We also generate a portion of our revenues from development contracts, primarily with key customers. Revenues from development contracts are generally
recognized as the services are performed based on the specific deliverables outlined in each contract. Amounts received in advance of performance under contracts are recorded as deferred revenue and are generally recognized within one year from
receipt.

Cost of Hardware Product Revenues

Our cost of hardware product revenues consists primarily of fabrication costs, assembly and test costs, the cost of materials and overhead from operations
and allocable facilities costs. 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.

Research and Development

Our research and development expenses consist of salaries and related costs of employees engaged in ongoing research, design and development activities,
costs of engineering materials and supplies and allocable facilities costs. 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, other professional services and allocable facilities costs.

Income Taxes

Our global effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses as our statutory tax rate varies
significantly by jurisdiction. Our current tax expense reflects taxes expected to be owed in our profitable jurisdictions. In addition, we identified certain foreign jurisdictions where it is more likely than not that we will not fully utilize our
deferred tax assets, and we continue to record a valuation allowance on the portion of those deferred tax assets for which future income is uncertain. The determination of when to record or remove a valuation allowance is highly subjective and is
done for each jurisdiction. We rely primarily on an analysis of cumulative earnings or losses and projected future earnings or losses. It is possible that we will remove or record a valuation allowance on these or other jurisdictions in the near
future dependent primarily on the actual and projected results in each jurisdiction.

Our Israeli 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 2010 and 2024, and the benefits from
our subsidiarys Approved Enterprise status expire at various times beginning in 2011.

Segments

Our products consist of application-specific integrated circuits, or ASICs, and system-on-a-chip, or SOC, products. We also license certain software and
other intellectual property. We have two reportable operating segments  Consumer and Imaging. The Consumer group provides products for use in DVD and Multimedia Player products, standard and high definition digital televisions, set-top boxes,
digital cameras and multimedia mobile phones. The Imaging group provides products used in digital copiers, laser and inkjet printers, and multifunction peripherals.



20



---

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 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, 2009.

Results of Operations

The following
table summarizes selected consolidated statement of operations data and changes for the periods presented (amounts in thousands, except for percentages):



|                                                           |  |                             |        |   |        |   |         |   |  |   |        |   |  |        |   
|---------------------------------------------------------- |  | --------------------------- | ------ | - | ------ | - | ------- | - |  | - | ------ | - |  | ------ | --
|                                                           |  | Three Months EndedMarch 31, |        |   | Change |  
|                                                           |  | 2010                        |        |   | 2009   |   |         | $ |  |   | %      |  
|Revenues:                                                  |  |                             |        |   |        |   |         |   |  |   |        |   |  |        |   
|Hardware product revenues                                  |  | $                           | 79,050 |   |        | $ | 55,961  |   |  | $ | 23,089 |   |  | 41.26  | % 
|Software and other revenues                                |  |                             | 11,401 |   |        |   | 12,526  |   |  |   | (1,125 | ) |  | (8.98  | )%
|                                                           |  |                             |        |   |        |   |         |   |  |   |        |   |  |        |   
|Total revenues                                             |  |                             | 90,451 |   |        |   | 68,487  |   |  |   | 21,964 |   |  | 32.07  | % 
|                                                           |  |                             |        |   |        |   |         |   |  |   |        |   |  |        |   
|                                                           |  |                             |        |  
|Cost and expenses:                                         |  |                             |        |   |        |   |         |   |  |   |        |   |  |        |   
|Cost of hardware product revenues                          |  |                             | 43,720 |   |        |   | 35,998  |   |  |   | 7,722  |   |  | 21.45  | % 
|Research and development                                   |  |                             | 26,114 |   |        |   | 29,547  |   |  |   | (3,433 | ) |  | (11.62 | )%
|Selling, general and administrative                        |  |                             | 24,126 |   |        |   | 24,612  |   |  |   | (486   | ) |  | (1.97  | )%
|Amortization of intangible assets.                         |  |                             | 109    |   |        |   | 109     |   |  |   |       |   |  |       |   
|                                                           |  |                             |        |   |        |   |         |   |  |   |        |   |  |        |   
|Total costs and expenses                                   |  |                             | 94,069 |   |        |   | 90,266  |   |  |   | 3,803  |   |  | 4.21   | % 
|                                                           |  |                             |        |   |        |   |         |   |  |   |        |   |  |        |   
|Operating loss                                             |  |                             | (3,618 | ) |        |   | (21,779 | ) |  |   | 18,161 |   |  | *      |   
|                                                           |  |                             |        |   |        |   |         |   |  |   |        |   |  |        |   
|                                                           |  |                             |        |  
|Interest and other income, net                             |  |                             | 2,349  |   |        |   | 3,452   |   |  |   | (1,103 | ) |  | (31.95 | )%
|Provision for income taxes                                 |  |                             | 2,700  |   |        |   | 2,740   |   |  |   | (40    | ) |  | *      |   
|                                                           |  |                             |        |   |        |   |         |   |  |   |        |   |  |        |   
|Net loss                                                   |  | $                           | (3,969 | ) |        | $ | (21,067 | ) |  | $ | 17,098 |   |  | *      |   
|                                                           |  |                             |        |   |        |   |         |   |  |   |        |   |  |        |   
|Supplemental Operating Data:                               |  |                             |        |   |        |   |         |   |  |   |        |   |  |        |   
|                                                           |  |                             |        |  
|Cost of hardware product as % of hardware
product revenues |  |                             | 55.3   | % |        |   | 64.3    | % |  |   |        |   |  |        |   



|* | not meaningful
|- | --------------

Revenues

Hardware product revenues for the three months ended March 31, 2010 were $79.1 million, compared to $56.0 million for the same
period of 2009. Hardware product revenues increased $21.6 million or 40.4% in the Consumer segment and $1.5 million or 59.3% in the Imaging segment. Total units shipped for products in the Consumer segment increased by 71.9%, partially offset by a
decrease in average selling price by 18.3% compared to the prior year. Within the Consumer segment, hardware product revenues for Mobile products increased by $19.8 million or 91.0% and hardware product revenue for DVD products increased by $1.9
million or 23.9%. Total units shipped for Mobile products increased by 120.3%, partially offset by a decrease in average selling price by 13.3% compared to the prior year. Total units shipped for DVD products increased by 34.3% and average selling
price decreased by 7.7% compared to the prior year. The increase in Imaging hardware product revenues was primarily due to a 62.0% increase in unit shipments attributable to an overall increase in demand as a result of the economic recovery. As the
economy continues to improve, we believe that our revenue will grow in 2010 although there is uncertainty regarding the level of recovery that will occur in the near future.



21



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Software and other revenues were $11.4 million for the three months ended March 31, 2010, compared to
$12.5 million for the same period of 2009. Software and other revenues decreased by $0.8 million in the Imaging segment and $0.3 million in the Consumer segment. The decrease was primarily due to timing of new agreements signed.

Cost of Hardware Product Revenues

Cost of hardware product as a percentage of hardware revenues decreased to 55.3% for the quarter ended March 31, 2010 from 64.3% for the same period
of 2009. This decrease was primarily due to a change in product mix, with a higher percentage of revenues from sales of higher margin Mobile products.

Research and Development

Research and development expenses were $26.1 million for the three months ended March 31, 2010, compared to $29.5 million for the same period of
2009. The decrease in costs by $3.4 million or 11.6% was primarily due to fluctuations based on the timing of tape-outs which include mask sets and engineering wafers and reduction in payroll costs in certain areas due to cost control measures in
place.

Selling, General and Administrative

Selling, general and administrative expenses were $24.1 million for the three months ended March 31, 2010, compared to $24.6 million for the same
period of 2009, resulting in a minor decrease in costs of $0.5 million or 2.0%.

Amortization of Intangible Assets

Amortization expense for the three months ended March 31, 2010 remained consistent with the same period of 2009. At
March 31, 2010, we had approximately $0.5 million in net intangible assets acquired through the Let It Wave acquisition, which we will continue to amortize on a straight line basis through 2011.

Interest and Other Income

Interest and other income was $2.3 million for the three months ended March 31, 2010, compared to $3.5 million for the same period of 2009. The
decrease was primarily due to weakening in the value of the U.S. dollar in comparison to currencies in countries in which we operate and lower average interest earned on our cash and short term investment balances due to a decline in interest rates.

Provision for Income Taxes

We recorded a tax provision of $2.7 million for each of the three months ended March 31, 2010 and 2009. The 2010 and 2009 provisions are primarily
for the accrual of taxes we expect to owe in our profitable jurisdictions.

The income tax provision for these periods was affected by the
geographic distribution of our worldwide earnings and losses, the impact of recording or removing the valuation allowance relating to deferred tax assets, non-deductible expenses such as ASC 718 Compensation-Stock Compensation, as well as the
accrual of liabilities associated with unrecognized tax benefits. 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.



22



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Liquidity and Capital Resources

At March 31, 2010, we had $95.7 million of cash and cash equivalents, and $304.3 million of short term investments. At March 31, 2010, we had
$411.8 million of working capital.

Our operating activities generated cash of $1.4 million during the three months ended March 31, 2010.
While we recorded a net loss of $4.0 million, this loss included non-cash items such as amortization of intangible assets of $0.1 million, depreciation of $1.6 million, stock-based compensation expense of $2.2 million and deferred income taxes of
$3.0 million resulting in our net loss adjusted for non-cash items to be a total net income of $3.0 million. Cash flow from changes in assets and liabilities was primarily due to increases in accounts receivable by $5.0 million due to the
timing of shipments, inventory by $2.4 million to meet an increase in demand for the future quarter and prepaid expenses, other current assets and other assets by $0.3 million due to the timing of payments made. These changes were partially offset
by an increase in accounts payable, accrued expenses and other liabilities totaling $6.6 million due to timing of payments.

Cash provided by
investing activities was $4.7 million during the three months ended March 31, 2010. Proceeds from sales and maturities of investments of $53.2 million were offset by purchases of $47.8 million and $0.7 million used for purchases of property and
equipment.

Cash provided by financing activities during the three months ended March 31, 2010 was $0.3 million and consisted of proceeds
from issuances of common stock through exercises of employee stock options.

At March 31, 2009, we had $85.7 million of cash and cash
equivalents, $258.8 million of short term investments and $37.4 million of long term investments. At March 31, 2009, we had $365.8 million of working capital.

Cash used in operating activities was $13.7 million during the three months ended March 31, 2009. While we recorded a net loss of $21.1 million,
this loss included non-cash items such as depreciation of $2.0 million, amortization of $0.1 million, stock-based compensation expense of $2.9 million and deferred income taxes of $0.5 million. Cash from changes in assets and liabilities was
primarily due to increase in accounts payable, accrued expenses and other liabilities totaling $10.4 million due to timing of purchases and payments, decrease in inventories by $3.5 million due to shipments in the current quarter and decreases in
prepaid expenses, other current assets and other assets by $1.1 million due to timing of payments. These changes were partially offset by an increase in accounts receivable by $13.1 million due to timing of shipments and collections.

Cash used by investing activities was $11.3 million during the three months ended March 31, 2009, principally reflecting the purchases of
investments, net of proceeds from sales and maturities of investments.

Cash provided by financing activities during the three months ended
March 31, 2009 was $35,000 and consisted of proceeds received from issuances of common stock through exercises of employee stock options

At March 31, 2010 and 2009, we do 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 flows from operations, will satisfy our anticipated working capital and capital expenditure requirements at least through the next 12 months. 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;
| | - |  | ---------------------



| |  |  | acquisitions of businesses, products or technologies;
| | - |  | -----------------------------------------------------



23



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| |  |  | technological advances;
| | - |  | -----------------------



| |  |  | the response of competitors to our products; and
| | - |  | ------------------------------------------------



| |  |  | our relationships with suppliers and customers.
| | - |  | -----------------------------------------------

In addition, we may require an increase in the level of working capital to accommodate planned growth, hiring and infrastructure needs.

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 any 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.

At March 31, 2010 we held ARS with a par value of $34.5 million and a fair value of $33.4
million. During the three months ended March 31, 2010, we sold $0.4 million of our ARS at par value. Our ARS are high grade long-term debt instruments backed by student loans which are guaranteed by the United States government. All
of our ARS have credit ratings of AAA or AA, and none are mortgage-backed debt obligations. We also hold Series C-2 Auction Rate Securities Rights (ARS Rights) that entitle us to sell our eligible ARS to UBS affiliates during the
period from June 30, 2010 to July 2, 2012 for a price equal to par value. In exchange for the issuance of the ARS Rights, the UBS affiliates have the discretionary right to sell our eligible ARS on our behalf, without prior notification,
at any time during a two-year period beginning June 30, 2010. The total fair value of the ARS, combined with the fair value of the ARS Rights, approximates the par value of the ARS. We intend to exercise our ARS right on June 30, 2010 and
as a result, have classified these ARS as short-term investments. See Note 5 to the Condensed Consolidated Financial Statements.

Our
investment policy focuses on three objectives: to preserve capital, to meet liquidity requirements and to maximize total return. Our investment policy establishes minimum ratings for each classification of investment and investment concentration is
limited in order to minimize risk, and the policy also limits the final maturity on any investment and the overall duration of the portfolio. Given the overall market conditions, we regularly review our investment portfolio to ensure adherence to
our investment policy and to monitor individual investments for risk analysis and proper valuation.

We hold our marketable securities as
trading and available-for-sale and mark them to market. We expect to realize the full value of our marketable securities upon maturity or sale, as we have the intent and believe we have the ability to hold the securities until the full value is
realized. However, we cannot provide any assurance that our invested cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial markets, which may require us to record an impairment charge that could
adversely impact our financial results.

Contractual Obligations

The following is a summary of fixed payments related to certain contractual obligations as of March 31, 2010 (in thousands):



|                                 |  |       |         |                 |   |          |  |          |        |                 |   |        |  |   |       
|-------------------------------- |  | ----- | ------- | --------------- | - | -------- |  | -------- | ------ | --------------- | - | ------ |  | - | ------
|Contractual Obligations          |  | Total |         | Less than1 year |   | 1-3years |  | 3-5years |        | Morethan
5years
|Operating leases commitments (1) |  | $     | 37,263  |                 | $ | 6,183    |  | $        | 10,822 |                 | $ | 10,459 |  | $ | 9,799 
|Purchase commitments (2)         |  |       | 39,273  |                 |   | 39,273   |  |          |       |                 |   |       |  |   |      
|Other long-term liabilities      |  |       | 32,777  |                 |   |         |  |          | 13,647 |                 |   | 590    |  |   | 18,540
|                                 |  |       |         |                 |   |          |  |          |        |                 |   |        |  |   |       
|Total                            |  | $     | 109,313 |                 | $ | 45,456   |  | $        | 24,469 |                 | $ | 11,049 |  | $ | 28,339
|                                 |  |       |         |                 |   |          |  |          |        |                 |   |        |  |   |       



|(1) | Our contracts with our suppliers generally require us to provide purchase order commitments that are generally binding and cannot be canceled.
|--- | ----------------------------------------------------------------------------------------------------------------------------------------------

|(2) | We lease many of our office facilities for various terms under long-term, noncancelable operating lease agreements. The leases expire at various dates from fiscal
year 2010 through fiscal year 2018.
|--- | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



24



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|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.

We maintain an investment portfolio of various holdings, types, and maturities. See Note 4 to the Condensed consolidated Financial Statements. We
hold our marketable securities, other than the ARS held with UBS, as available-for-sale and mark them to market. We expect to realize the full value of all our marketable securities upon maturity or sale, as we have the intent and believe that we
have the ability to hold the securities until the full value is realized. However, we cannot provide any assurance that our invested cash, cash equivalents and marketable securities will not be impacted by adverse conditions in the financial
markets, which may require us to record an impairment charge that could adversely impact our financial results.

We consider various factors
in determining whether we should recognize an impairment charge for our fixed income securities and publicly traded equity securities, including the length of time and extent to which the fair value has been less than our cost basis, the financial
condition and near-term prospects of the investee, and our intent and ability to hold the investment for a period of time sufficient to allow for any anticipated recovery in market value.

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.

All of our cash equivalents and marketable securities other than our ARS with UBS are treated as available-for-sale.
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 generally 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.

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. Actual future gains and losses associated with our investments may differ from the sensitivity
analyses performed as of March 31, 2010 due to the inherent limitations associated with predicting the changes in the timing and level of interest rates and our actual exposures and positions.

Exchange Rate Risk

We consider our
direct exposure to foreign exchange rate fluctuations. We recorded an exchange loss of $0.2 million and a gain of $1.0 million for the three months ended March 31, 2010 and 2009, respectively. These fluctuations were primarily due to foreign
currency remeasurement as a result of changes in the value of the US dollar in comparison to currencies in countries in which we operate.

Currently, sales and supply 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 as a condition to their continuing to do 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. However, a hypothetical 10% favorable or
unfavorable change in foreign currency exchange rates would not have a material impact on our financial position or results of operations.



25



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|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 March 31, 2010 that have materially affected or are reasonably likely to materially affect our internal
control over financial reporting.



26



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PART II. OTHER INFORMATION



|Item 1. | Legal Proceedings
|------- | -----------------

The information
required by this Item is incorporated by reference to the discussion in Part I, Item 1, Note 12.



|Item 1A. | Risk Factors
|-------- | ------------

Our future business,
operating results and financial condition are subject to various risks and uncertainties, including those described below. The following risk factors update and supersede in their entirety the risk factors set forth in our annual report on Form 10-K
for the fiscal year ended December 31, 2009.

Our annual revenues and operating results fluctuate due to a variety
of factors, which may result in volatility or a decline in the price 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 the current global economic slowdown and general decline in business
conditions;
| | - |  | ---------------------------------------------------------------------------------------------------------------------------------------------------------------



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



| |  |  | the timing or cancellation of large customer orders;
| | - |  | ----------------------------------------------------



| |  |  | whether our customers choose our products over those of our competitors for existing or new products and applications;
| | - |  | ----------------------------------------------------------------------------------------------------------------------



| |  |  | changes in the mix of products sold;
| | - |  | ------------------------------------



| |  |  | our ability to identify new markets and develop products that are accepted by our customers in these markets;
| | - |  | -------------------------------------------------------------------------------------------------------------



| |  |  | the level of market acceptance of new and enhanced versions of our products and our customers products;
| | - |  | --------------------------------------------------------------------------------------------------------



| |  |  | increased competition in product lines, and competitive pricing pressures;
| | - |  | --------------------------------------------------------------------------



| |  |  | the length and variability of the sales cycle for our products;
| | - |  | ---------------------------------------------------------------



| |  |  | price changes by our competitors and suppliers;
| | - |  | -----------------------------------------------



| |  |  | the cyclical nature of the semiconductor industry;
| | - |  | --------------------------------------------------



| |  |  | the availability of development funding;
| | - |  | ----------------------------------------



| |  |  | seasonality in demand for our products since revenues in the second half of the calendar year have historically been higher than the first half; 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;
| | - |  | -------------------------------------------------------



| |  |  | the loss or gain of important customers;
| | - |  | ----------------------------------------



| |  |  | failure to anticipate changing customer product requirements;
| | - |  | -------------------------------------------------------------



| |  |  | fluctuations in manufacturing yields;
| | - |  | -------------------------------------



| |  |  | changes in or the emergence of new industry standards;
| | - |  | ------------------------------------------------------



| |  |  | product obsolescence; and
| | - |  | -------------------------



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



27



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Our operating results could also be harmed by:



| |  |  | economic conditions generally or in various geographic areas where we or our customers do business;
| | - |  | ---------------------------------------------------------------------------------------------------



| |  |  | a downturn in the markets for our customers products, particularly the consumer electronics market;
| | - |  | ----------------------------------------------------------------------------------------------------



| |  |  | general financial instability as a result of credit and equity market fluctuations and lack of credit availability for our customers and suppliers and
credit market problems;
| | - |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | other conditions affecting the timing or size of customer orders;
| | - |  | -----------------------------------------------------------------



| |  |  | our ability to effectively protect our intellectual property from infringement by others;
| | - |  | -----------------------------------------------------------------------------------------



| |  |  | changes in governmental regulations that could affect our products;
| | - |  | -------------------------------------------------------------------



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



| |  |  | liquidity constraints caused by failed auctions and lack of a liquid market for our auction rate securities;
| | - |  | ------------------------------------------------------------------------------------------------------------



| |  |  | 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;
| | - |  | -----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------



| |  |  | terrorism and international conflicts or other crises; or
| | - |  | ---------------------------------------------------------



| |  |  | further worsening or 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. If anticipated shipments in any quarter are canceled or do not occur as quickly as
expected, or if we fail to foresee a technology or market change that could render our or one of our customers products obsolete, expense and inventory levels could be disproportionately high and we may incur charges for excess inventory,
which would harm our gross margins and financial results. If anticipated license revenues in any quarter are canceled, do not occur, or are lower than anticipated, our gross margins and financial results may be harmed.

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 for our actual revenues, which could harm our operating results.

Our customers sales fluctuate due to product cycles and seasonality.

Because the markets that our customers serve are characterized by numerous new product introductions and rapid product enhancements and obsolescence, 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 our products are incorporated into both our customers 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 any further or continuing economic slowdown could increase the seasonal decline in sales that we typically see in the first half of the calendar year or mitigate the typical increase in sales
in the second 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 a given quarter may affect our ability to meet that quarters revenue forecast and can lead to excess inventory write-offs. 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 causing us to lose revenue or take write
offs that would reduce our profit margins, either of which would harm our results of operations and financial condition.



28



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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 account for a substantial percentage of our revenues. For the quarter ended March 31, 2010, four customers accounted for 16%,
13%, 11% and 11% of total revenues while sales to our ten largest customers accounted for 73% 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 would 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 March 31, 2010, four customers
accounted for approximately 28%, 11%, 10% and 10% of our net accounts receivable balance, respectively.

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, depending on our product line, can range from three to twelve months. Longer sales cycles require us to invest significant resources in attempting to make sales and delay the generation of revenue. We incur costs related to such sales
prior to, and even if we do not succeed in, any sale to a customer.

Long sales cycles also subject us to other risks, including
customers budgetary constraints or insolvency, internal acceptance reviews and cancellations. In addition, orders expected in one quarter could shift to another because of the timing of customers purchase decisions, which could harm our
financial results in any given period.

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. Termination or reduction in orders by one of our major customers would
harm our financial results.

The worldwide economic downturn and other adverse economic factors has reduced our sales
and revenues, increased our expenses and hurt our profitability, results of operations and financial condition.

The current worldwide
economic downturn has reduced consumer spending on products offered by our customers. Other factors, such as unemployment levels, inflation, deflation, fuel and energy costs, consumer debt levels, interest rates and tax rates, may also reduce
overall consumer spending or shift consumer spending to products other than those offered by our customers. Reduced sales by our customers harm our business by reducing demand for our products. Moreover, if our customers are not successful in
generating sufficient revenue or cannot secure financing, they may not be able to pay, or may delay payment of, accounts receivable that are owed to us. Lower net sales of our products and reduced payment capacity of our customers reduces our
current and future revenues. In addition, our expenses could increase due to, among other things, fluctuations of the value of the United States dollar, changes in interest and tax rates, decreased inventory turnover, increases in vendor prices, and
reduced vendor output. Such reduction of our revenues and increase of our expenses hurts our profitability and harms our results of operations and financial condition. In preparing our financial statements, we are required to make estimates and
assumptions that affect amounts reported in the financial statements and accompanying notes, and some of those estimates are based on our forecasts of future results. The current volatility in the worldwide economy increases the risk that our actual
results will differ materially from our forecasts, requiring adjustments in future financial statements.



29



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Trends in global credit markets could result in insolvency of our key suppliers or
customers, and customer inability to finance purchases of our products.

The credit market crisis, including uncertainties with respect
to financial institutions and the global capital markets, and other macro-economic challenges currently affecting the worldwide economy may adversely affect our customers and suppliers. As a result of these conditions, our customers may experience
cash flow problems, may not be able to obtain credit to finance their purchases and may modify, delay or cancel plans to purchase our products or lengthen payment terms. If our customers are unable to finance purchases of our products, our sales
will be harmed.

Similarly, current economic and credit conditions may cause our suppliers to increase their prices, tighten payment terms or
reduce their output, which could increase our expenses, make it harder or more expensive to obtain required supply and impair our sales. Moreover, if one of our key suppliers becomes insolvent, we may not be able to find a suitable substitute in a
timely manner and our cost of production may increase. If economic and credit conditions in the United States and other key markets deteriorate further or do not show improvement, our business and operating results may be harmed.

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  for example, we have experienced declines in average selling prices in the first quarter of 2010 compared to the same period of 2009.

Our operating results may be harmed by cyclical and volatile conditions in the markets we address. As a result, our business,
financial condition and results of operations could be harmed.

We operate in the semiconductor industry, which is cyclical and from
time to time has experienced significant downturns. Downturns in the industry often occur in connection with, or in anticipation of, maturing product cycles for semiconductor companies and their customers, and declines in general economic
conditions. These downturns can cause abrupt fluctuations in product demand, production over-capacity and accelerated average selling price declines. The current worldwide economic downturn and the downturn in our industry has harmed our revenue and
our results of operations. This downturn may continue and the recovery may be slow, which may continue to harm our revenues, gross margins and results of operations. The semiconductor industry also periodically experiences increased demand and
production capacity constraints, which may affect our revenues if we are unable to ship enough products to meet customer demand.

The current
worldwide economic downturn makes it extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities. This downturn has delayed and lengthened our sales cycles by causing U.S. and foreign
businesses to slow or postpone spending on our products and services. We cannot predict the timing, strength or duration of the economic slowdown or the economic recovery, worldwide, or in the semiconductor industry. The combination of our lengthy
sales cycle coupled with challenging macroeconomic conditions continue to have a compounding negative impact on our results of operations.



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Our success depends on our ability to develop and market new products in new markets.
We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.

Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards and our
customers changing demands. We sell products in markets that are characterized by rapid technological change, evolving industry standards, frequent new product introductions, short product life cycles and increasing demand for higher levels of
integration and smaller process geometries. We must constantly compete to ensure that our products are designed into our customers new products which are rapidly evolving. Our past sales and profitability have resulted, to a large extent, from
our ability to anticipate changes in technology and industry standards and to develop and introduce new and enhanced products incorporating the new standards and technologies. 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 our customers products
could become unmarketable or obsolete, and we could lose market share. We may also have 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 digital television and set-top box 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. If new markets do not develop as we anticipate, or if our products or those of our customers 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 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, obtain design wins, and achieve market acceptance, we may lose our market share and our future
revenues and earnings may suffer.

In the consumer electronics market, our performance has been dependent on our successful development and
timely introduction of integrated circuits for DVD players, digital cameras, digital televisions, multimedia accelerators for mobile phones, set-top boxes and digital imaging products. These markets are characterized by the incorporation of a
steadily increasing level of integration and features on a chip at the same or lower system cost, enabling 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 imaging 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 that 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.



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Our existing and potential competitors include many large domestic and international companies that have
substantially greater financial, manufacturing, marketing, personnel, 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. Many of our competitors are located in countries where our customers are located, such as China, Japan, Korea and Taiwan, which may give them an advantage in securing business from these customers.

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 Technology Co. Ltd. In the digital camera market, our principal competitors are in-house solutions developed and used by major Japanese
OEMs, as well as products sold by Ambarella, Fujitsu, Novatech, SunPlus Inc. and Texas Instruments, Inc. In the market for multimedia acceleration for mobile phones, our principal competitors include Broadcom Corp., CoreLogic, MtekVision Co.Ltd.,
nVidia and Telechips Inc. Our principal competitors for digital semiconductor devices in the digital television market include Broadcom Corp., M-Star, MediaTek, ST Microelectronics and Trident Microsystems, Inc. Competitors in the printer and
multifunction peripheral space include Adobe, Conexant Systems, Inc., Global Graphics, Marvell Semiconductor, Inc. and in-house captive suppliers.

The DVD player market has slowed, and continued competition will lead to further price reductions and reduced profit margins. We also face significant
competition in the DTV, set-top box, digital imaging and digital camera markets. The future growth of these markets is highly dependent on OEMs continuing to outsource chip supply and an increasing portion of their product development work
rather than doing it in-house. 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.

Our new frame rate conversion technology remains unproven and 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, for which we completed
development in June 2009. Our competitors may develop a superior performance image processing technology. If we cannot successfully market and sell our frame rate conversion technology, we will not be able to recoup our costs of acquiring Let
It Wave or our development costs for this technology and we will not obtain the intended benefits from the acquisition and our financial results and ability to compete would be harmed.

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 own or operate an assembly, fabrication or test facility. 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. Availability of foundry capacity has at times in the past been, and may in the future be, reduced due to strong demand.
Additionally, due to the recent global economic environment it is possible that our foundry subcontractors could experience financial difficulties that would impede their ability to operate effectively. If we are unable to secure sufficient capacity
at our existing foundries, or in the event of a closure at any of these foundries, our product revenue, cost of product revenue and results of operations would be negatively impacted.

We do not have long-term supply contracts with any of our suppliers, including our principal supplier, 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.



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



| |  |  | inability to obtain adequate manufacturing capacity;
| | - |  | ----------------------------------------------------



| |  |  | inability to cancel orders after the submission of binding purchase orders;
| | - |  | ---------------------------------------------------------------------------



| |  |  | unavailability or interruption of 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;
| | - |  | ---------------------------------------------------



| |  |  | difficulties in managing these foundries due to our limited personnel and other resources in the countries in which they are located; 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 and 2010 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 us 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 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 other things:



| |  |  | 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 be expensive and 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. Excess capacity could lead to write downs of excess inventory, which could harm our financial results. 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. Small
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 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.



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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 2009 and 2008, 93% of our total revenues were derived outside of North America. 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.

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



| |  |  | operating in countries where we have limited or no experience, and limited personnel and other resources;
| | - |  | ---------------------------------------------------------------------------------------------------------



| |  |  | unexpected changes in regulatory requirements;
| | - |  | ----------------------------------------------



| |  |  | fluctuations in exchange rates;
| | - |  | -------------------------------



| |  |  | political and economic instability;
| | - |  | -----------------------------------



| |  |  | armed conflicts or other crises;
| | - |  | --------------------------------



| |  |  | earthquakes, floods and health epidemics;
| | - |  | -----------------------------------------



| |  |  | 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 marketing personnel are located in Israel. Political,
economic and military conditions in Israel directly affect our operations. For example, increased violence or armed conflict in Israel or the Palestinian territories may disrupt travel and communications in the region, harming our operations there.
Furthermore, some of our employees in Israel are obligated to perform up to 36 days of military reserve duty annually and may be called to active duty in a time of crisis. The absence of these employees for significant periods 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 and may not be sustained. If Asia, particularly China, fails to continue its
recent growth, or even contracts, this could harm our OEM and ODM customers based in Asia and cause them to purchase fewer products from us for shipment to China, the rest of Asia and globally. In addition, Asia consumers may purchase
fewer products sold by our OEM customers containing our products, and we may experience disruptions in our operations in Asia, which could harm our business and financial results.

We also maintain offices in France, India, Japan, Korea, Sweden, Taiwan and the United Kingdom, 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.

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 account for a substantial majority of our sales
and our semiconductor products are manufactured, assembled and tested outside of the United States. Our global operations involve significant complexity and difficulties, including:



| |  |  | monitoring and complying with applicable laws and regulatory requirements;
| | - |  | --------------------------------------------------------------------------



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| |  |  | staffing and managing global operations;
| | - |  | ----------------------------------------



| |  |  | complying with statutory equity requirements; and
| | - |  | -------------------------------------------------



| |  |  | managing tax consequences.
| | - |  | --------------------------

Managing international operations is expensive and complex. If we are unable to manage the complexity of our global operations successfully and cost
effectively, our financial performance and operating results could suffer.

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, or to protect us from the claims of others. Monitoring unauthorized use of our intellectual property 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 uncertain. 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 and may obtain patents that restrict our business. 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 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 party 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, restrict or prohibit the sale of our products or invalidate our proprietary rights. These lawsuits, regardless of their
success, are time-consuming and expensive to resolve and require significant management time and attention. Our costs and potential liability are increased to the extent we have to indemnify or otherwise defend our customers. 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 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, we are restricted in or prevented from selling our products or we are required to pay substantial damages or awards, our business, financial condition and results of operations would be materially harmed.



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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 or 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.

We rely on licenses to use various technologies that are material to our products. We do not own the patents that underlie these licenses. 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.

Our business may be impacted by foreign exchange fluctuations.

Foreign currency fluctuations may affect the prices of our products. Prices for our products are currently denominated in United States 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 United States dollars. If they do not, our revenue and operating results will be
subject to foreign exchange fluctuations, which we may not be able to successfully manage.

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 value of the 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 or currency fluctuation in foreign countries.

Because we have significant operations in Israel, our business and future operating results could be harmed by 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 367 people. We also conduct a portion of our sales and marketing operations at our Haifa facility.

Any armed conflict affecting Israel could greatly disrupt our Israeli operations locally and as a result hinder our business generally by delaying
product development or interfering with global marketing efforts. For example, as a result of the heightened military operations in Gaza, some of our employees were conscripted for several weeks ending in January 2009. Additional employees may be
called to active duty in the future. Extended absences could disrupt our operations and delay product development cycles.

In addition,
military conflict in the Middle East or 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.

Changes in, or different 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, by changes in the geography
of our income or losses, or by changes in the valuation of our deferred tax assets and liabilities. 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.



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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, our manufacturers and 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 our 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 and
mobile phone 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. In addition, our digital television and digital
camera businesses 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.

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 $162.0 million for federal, $39.0 million
for state and $143.0 million for foreign tax reporting purposes as of December 31, 2009. The Internal Revenue Code contains a number of provisions that limit the use of NOLs under certain circumstances. Changes in tax laws in the United States
or foreign jurisdictions may further limit our ability to utilize our NOLs. Any further limitation on our ability to utilize these respective NOLs could harm our financial condition.

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 our 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 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;
| | - |  | -----------------------------------------------------------



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| |  |  | harm to 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.
| | - |  | -----------------------------------------------------------------------------------

We may not be able to successfully complete the integration of acquired in-process products, technologies or personnel and any failure to do so could
disrupt our business, cause us to not achieve the intended benefits of the acquisition, and seriously harm our financial condition.

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 functions, including a material portion of our research and
development, product operations and a significant portion of our marketing, 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 March 31, 2010, we had $400.0 million in cash, cash equivalents and
short-term investments. We invest our cash in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds, auction rate securities (ARS) and highly liquid debt securities of corporations,
municipalities and the United States government and its agencies. These investments are denominated in U.S. dollars.

At March 31, 2010,
we held ARS with a par value of $34.5 million. Historically, our ARS were highly liquid, using a Dutch auction process that reset the applicable interest rate at predetermined intervals, typically every 35 days, to provide liquidity at par. However,
as a result of liquidity issues in the global credit and capital markets, the auctions for all of our ARS failed beginning in the first quarter of 2008, when sell orders exceeded buy orders. There can be no assurance that we will be able to dispose
of our ARS at favorable pricing, or at all.

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 debt instruments 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 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 ARS 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. We do not have employment contracts with any of our key employees. Management and other employees may voluntarily terminate their employment with us at any
time upon short or no 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.



38



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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 and for other stockholder proposals.
| | - |  | -------------------------------------------------------------------------------------------------------------------------------------------------

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, 2010 and
March 31, 2010, the sale prices of our common stock, as reported on the Nasdaq Stock Market, ranged from a low of $10.56 to a high of $12.23. The market price of our common stock may be 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;
| | - |  | ---------------------------------------------------------



| |  |  | failure to meet our guidance or analyst estimates;
| | - |  | --------------------------------------------------



| |  |  | 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.
| | - |  | --------------------------------------

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.



|Item 5. | Exhibits
|------- | --------

The information required by
this Item is incorporated by reference to the Exhibit Index which follows the signature page of this report.



39



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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: May 5, 2010 |  |  |  |  |  | /s/  KARL
SCHNEIDER                         
|                   |  |  |  |  |  | Karl Schneider                              
|                   |  |  |  |  |  | Senior Vice President, Finance              
|                   |  |  |  |  |  | and Chief Financial Officer                 
|                   |  |  |  |  |  | (Principal Financial and Accounting Officer)



40



---

EXHIBIT LIST



|              |               |                                                                                                       |      |                           |          |           |         |     |             |           |               |  
|------------- | ------------- | ----------------------------------------------------------------------------------------------------- | ---- | ------------------------- | -------- | --------- | ------- | --- | ----------- | --------- | ------------- | -
|ExhibitNumber |               |                                                                                                       |      | Incorporated by Reference |          |          
|              | Exhibit Title |                                                                                                       | Form |                           | File No. |           | Exhibit |     | Filing Date |           | FiledHerewith
|              |               |                                                                                                       |      |                           |          |          
|3.1           |               | Restated Certificate of Incorporation of the Registrant                                               |      | 10-K                      |          | 000-27246 |         | 3.1 |             | 2/26/2009 |               |  
|              |               |                                                                                                       |      |                           |          |          
|3.2           |               | Amended and Restated Bylaws of the Registrant                                                         |      | 8-K                       |          | 000-27246 |         | 3.1 |             | 4/23/2009 |               |  
|              |               |                                                                                                       |      |                           |          |          
|4.1           |               | Form of Stock Certificate                                                                             |      | 10-K                      |          | 000-27246 |         | 4.1 |             | 4/20/2007 |               |  
|              |               |                                                                                                       |      |                           |          |          
|31.1          |               | Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act |      |                           |          |           |         |     |             |           |               | X
|              |               |                                                                                                       |      |                           |          |          
|31.2          |               | Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act |      |                           |          |           |         |     |             |           |               | X
|              |               |                                                                                                       |      |                           |          |          
|32.1          |               | Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   |      |                           |          |           |         |     |             |           |               | X
|              |               |                                                                                                       |      |                           |          |          
|32.2          |               | Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002   |      |                           |          |           |         |     |             |           |               | X



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