Tableof Contents

 

 

 

**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

 

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### **FORM 10-Q**

### ** **

**x****                 ****QUARTERLYREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGEACT OF 1934**

 

**For theQuarterly Period Ended September 30, 2008**

 

**OR**

 

**o****                    ****TRANSITIONREPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGEACT OF 1934**

 

**For thetransition period from                        to                        **

 

**CommissionFile No. 0-27246**

 

**ZORAN CORPORATION**

(Exact name ofregistrant as specified in its charter)

** **

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

 

**1390Kifer Road**

**Sunnyvale,California 94086**

(Address ofprincipal executive offices, including zip code)

 

**(408)523-6500**

(Registrant’stelephone number, including area code)

 

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Indicate by check markwhether the registrant (1) has filed all reports required to be filed by Section 13or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required tofile such reports), and (2) has been subject to such filing requirementsfor the past 90 days.  Yes x   No o

 

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

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

 

Indicate by check markwhether the registrant is a shell company (as defined in Rule 12b-2 of theExchange Act) Yes oNo x

 

As of November 5,2008, there were outstanding 51,167,158 shares of the registrant’s CommonStock, par value $0.001 per share.

 

 

 

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**ZORAN CORPORATION AND SUBSIDIARIES**

**FORM 10-Q**

**INDEX**

 

**For theQuarter Ended September 30, 2008**

** **
| ** **   | ** **                                                                                                                    | **Page**   |
|--------------|-------------------------------------------------------------------------------------------------------------------------------|------------|
| ** **   | ** **                                                                                                                    | ** ** |
| ** **   | **PART I. FINANCIAL INFORMATION**                                                                                        | ** ** |
|         |                                                                                                                          |       |
| **Item 1.**  | Financial Statements (Unaudited):                                                                                             |       |
|         |                                                                                                                          |       |
|         | Condensed  Consolidated Balance Sheets as of September 30, 2008 and  December 31, 2007                              | 3          |
|         |                                                                                                                          |       |
|         | Condensed Consolidated  Statements of Operations for the Three Months and Nine Months Ended  September 30, 2008 and 2007 | 4          |
|         |                                                                                                                          |       |
|         | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended  September 30, 2008 and 2007                  | 5          |
|         |                                                                                                                          |       |
|         | Notes  to Condensed Consolidated Financial Statements                                                                         | 6          |
|         |                                                                                                                          |       |
| **Item 2.**  | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                   | 19         |
|         |                                                                                                                          |       |
| **Item 3.**  | Quantitative  and Qualitative Disclosures About Market Risk                                                                   | 26         |
|         |                                                                                                                          |       |
| **Item 4.**  | Controls and Procedures                                                                                                       | 27         |
|         |                                                                                                                          |       |
| ** **   | **PART II.  OTHER INFORMATION**                                                                                          | ** ** |
|         |                                                                                                                          |       |
| **Item 1.**  | Legal Proceedings                                                                                                             | 28         |
|         |                                                                                                                          |       |
| **Item 1A.** | Risk Factors                                                                                                                  | 28         |
|         |                                                                                                                          |       |
| **Item 2.**  | Unregistered  Sales of Equity Securities and Use of Proceeds                                                                  | 41         |
|         |                                                                                                                          |       |
| **Item 6.**  | Exhibits                                                                                                                      | 41         |
|         |                                                                                                                          |       |
| Signatures   |                                                                                                                          | 42         |

 

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**PART I. FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**ZORAN CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

 

**(in thousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                                                 | ** ** | **September 30,   2008** | ** ** | **December 31,   2007** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------|------------|-----------------------------------|------------|
| ASSETS                                                                                                                                                                                                                                                                     |       |                               |       |                              |       |
| Current assets:                                                                                                                                                                                                                                                            |       |                               |       |                              |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                                 |       | $                                  | 98,132     |                              | $          | 97,377 |   |
| Short-term  investments                                                                                                                                                                                                                                                    |       | 206,002                            |       | 222,432                           |       |
| Accounts  receivable, net                                                                                                                                                                                                                                                  |       | 54,245                             |       | 58,220                            |       |
| Inventories                                                                                                                                                                                                                                                                |       | 49,320                             |       | 48,992                            |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                                 |       | 30,949                             |       | 25,189                            |       |
| Total current  assets                                                                                                                                                                                                                                                      |       | 438,648                            |       | 452,210                           |       |
| Property and  equipment, net                                                                                                                                                                                                                                               |       | 17,006                             |       | 17,636                            |       |
| Deferred income  taxes                                                                                                                                                                                                                                                     |       | 45,439                             |       | 43,218                            |       |
| Other assets and  long-term investments                                                                                                                                                                                                                                    |       | 83,490                             |       | 112,632                           |       |
| Goodwill                                                                                                                                                                                                                                                                   |       | 4,197                              |       | 168,691                           |       |
| Intangible  assets, net                                                                                                                                                                                                                                                    |       | 1,178                              |       | 25,945                            |       |
| Total assets                                                                                                                                                                                                                                                               |       | $                                  | 589,958    |                              | $          | 820,332 |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                 |       |                               |       |                              |       |
| Current  liabilities:                                                                                                                                                                                                                                                      |       |                               |       |                              |       |
| Accounts payable                                                                                                                                                                                                                                                           |       | $                                  | 33,894     |                              | $          | 67,836 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                                                                            |       | 41,977                             |       | 43,968                            |       |
| Total current  liabilities                                                                                                                                                                                                                                                 |       | 75,871                             |       | 111,804                           |       |
| Other long-term  liabilities                                                                                                                                                                                                                                               |       | 25,030                             |       | 20,756                            |       |
| Contingencies  (Note 12)                                                                                                                                                                                                                                                   |       |                               |       |                              |       |
| Stockholders’  equity:                                                                                                                                                                                                                                                |       |                               |       |                              |       |
| Common stock,  $0.001 par value; 105,000,000 shares authorized at September 30, 2008  and December 31, 2007; 50,715,036 shares issued and outstanding as of  September 30, 2008; and 51,407,860 shares issued and outstanding as of  December 31, 2007 |       | 51                                 |       | 51                                |       |
| Additional  paid-in capital                                                                                                                                                                                                                                                |       | 851,447                            |       | 847,597                           |       |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                                                             |       | (6,052                             | )          | 995                               |       |
| Accumulated  deficit                                                                                                                                                                                                                                                       |       | (356,389                           | )          | (160,871                          | )          |
| Total stockholders’  equity                                                                                                                                                                                                                                           |       | 489,057                            |       | 687,772                           |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                           |       | $                                  | 589,958    |                              | $          | 820,332 |   |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financialstatements.

 

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**ZORAN CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(in thousands, except per share data)**

**(unaudited)**

 
| ** **                                                  | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                                                  | ** ** | **2008**                                              | ** ** | **2007**                                             | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                  | ** ** | ** **                                            | ** ** | ** **                                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                   |       |                                                  |       |                                                 |       |   |   |   |   |
| Hardware product  revenues                                  |       | $                                                     | 112,112    |                                                 | $          | 129,820 |   | $ | 320,015 |   | $ | 331,510 |   |
| Software and  other revenues                                |       | 14,022                                                |       | 16,606                                               |       | 43,835 |   | 46,478 |   |
| Total revenues                                              |       | 126,134                                               |       | 146,426                                              |       | 363,850 |   | 377,988 |   |
|                                                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Costs and  expenses:                                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Cost of hardware  product revenues                          |       | 66,446                                                |       | 69,876                                               |       | 192,595 |   | 174,252 |   |
| Research and  development                                   |       | 28,922                                                |       | 28,063                                               |       | 87,606 |   | 83,027 |   |
| Selling, general  and administrative                        |       | 23,653                                                |       | 28,043                                               |       | 73,552 |   | 85,050 |   |
| Amortization of  intangible assets                          |       | 4,494                                                 |       | 9,648                                                |       | 22,987 |   | 33,986 |   |
| Impairment of  goodwill and intangible assets               |       | 167,579                                               |       | —                                               |       | 167,579 |   | — |   |
| In-process  research and development                        |       | —                                                |       | —                                               |       | 22,383 |   | — |   |
| Total costs and  expenses                                   |       | 291,094                                               |       | 135,630                                              |       | 566,702 |   | 376,315 |   |
|                                                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Operating income  (loss)                                    |       | (164,960                                              | )          | 10,796                                               |       | (202,852 | ) | 1,673 |   |
|                                                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Interest income                                             |       | 3,032                                                 |       | 4,287                                                |       | 10,808 |   | 11,735 |   |
|                                                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Other income  (expense), net                                |       | (12                                                   | )          | (241                                                 | )          | (1,144 | ) | 398 |   |
|                                                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Income (loss)  before income taxes                          |       | (161,940                                              | )          | 14,842                                               |       | (193,188 | ) | 13,806 |   |
|                                                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Provision  (benefit) for income taxes                       |       | (7,720                                                | )          | 1,700                                                |       | 2,330 |   | 6,350 |   |
|                                                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Net income  (loss)                                          |       | $                                                     | (154,220   | )                                                    | $          | 13,142 |   | $ | (195,518 | ) | $ | 7,456 |   |
|                                                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Basic net income  (loss) per share                          |       | $                                                     | (3.01      | )                                                    | $          | 0.26 |   | $ | (3.80 | ) | $ | 0.15 |   |
|                                                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Diluted net  income (loss) per share                        |       | $                                                     | (3.01      | )                                                    | $          | 0.26 |   | $ | (3.80 | ) | $ | 0.15 |   |
|                                                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Shares used to  compute basic net income (loss) per share   |       | 51,231                                                |       | 49,863                                               |       | 51,464 |   | 49,633 |   |
|                                                        |       |                                                  |       |                                                 |       |   |   |   |   |
| Shares used to  compute diluted net income (loss) per share |       | 51,231                                                |       | 51,284                                               |       | 51,464 |   | 50,861 |   |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financialstatements.

 

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**ZORANCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                      | ** ** | **Nine Months Ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2008**                                            | ** ** | **2007** | ** ** |
| ** **                                                                      | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                          | ** ** | ** **                                          | ** ** | ** ** | ** ** |
| Net income  (loss)                                                              |       | $                                                   | (195,518   | ) | $ | 7,456 |   |
| Adjustments to  reconcile net income (loss) to net cash provided by operations: |       |                                                |       |   |   |
| Depreciation                                                                    |       | 6,040                                               |       | 5,932 |   |
| Amortization of  intangible assets                                              |       | 22,987                                              |       | 33,986 |   |
| Stock-based  compensation expense                                               |       | 9,989                                               |       | 10,599 |   |
| Impairment of  goodwill and intangible assets                                   |       | 167,579                                             |       | — |   |
| In-process  research and development                                            |       | 22,383                                              |       | — |   |
| Deferred income  taxes                                                          |       | 1,244                                               |       | — |   |
| Gain on sale of  short-term investments                                         |       | (115                                                | )          | (796 | ) |
| Changes in  assets and liabilities, net of acquisition:                         |       |                                                |       |   |   |
| Accounts  receivable                                                            |       | 3,975                                               |       | (17,830 | ) |
| Inventories                                                                     |       | (328                                                | )          | 11,443 |   |
| Prepaid expenses  and other current assets and other assets                     |       | 2,710                                               |       | (7,756 | ) |
| Accounts payable                                                                |       | (34,185                                             | )          | 6,285 |   |
| Accrued expenses  and other current liabilities and long-term liabilities       |       | (6,303                                              | )          | 14,304 |   |
| Net cash  provided by operating activities                                      |       | 458                                                 |       | 63,623 |   |
|                                                                            |       |                                                |       |   |   |
| Cash flows from  investing activities:                                          |       |                                                |       |   |   |
| Purchases of  property and equipment                                            |       | (4,909                                              | )          | (7,473 | ) |
| Purchases of  investments                                                       |       | (129,032                                            | )          | (317,700 | ) |
| Sales and  maturities of investments                                            |       | 162,803                                             |       | 258,073 |   |
| Acquisition of  Let It Wave, net of cash acquired of $1,261                     |       | (22,767                                             | )          | — |   |
| Net cash  provided by (used in) investing activities                            |       | 6,095                                               |       | (67,100 | ) |
|                                                                            |       |                                                |       |   |   |
| Cash flows from  financing activities:                                          |       |                                                |       |   |   |
| Proceeds from  issuance of common stock                                         |       | 4,214                                               |       | 5,963 |   |
| Repurchase of  common stock                                                     |       | (10,012                                             | )          | — |   |
| Net cash  provided by (used in) financing activities                            |       | (5,798                                              | )          | 5,963 |   |
|                                                                            |       |                                                |       |   |   |
| Net increase in  cash and cash equivalents                                      |       | 755                                                 |       | 2,486 |   |
|                                                                            |       |                                                |       |   |   |
| Cash and cash  equivalents at beginning of period                               |       | 97,377                                              |       | 100,034 |   |
|                                                                            |       |                                                |       |   |   |
| Cash and cash  equivalents at end of period                                     |       | $                                                   | 98,132     |   | $ | 102,520 |   |

 

The accompanyingnotes are an integral part of these unaudited condensed consolidated financialstatements.

 

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**ZORANCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(unaudited)**

 

**1.****              Basisof Presentation**

 

The accompanyingunaudited condensed consolidated financial statements of Zoran Corporation andits subsidiaries (“Zoran” or “Company”) have been prepared in conformity withaccounting principles generally accepted in the United States of America.  However, certain information or footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to the rules and regulations ofthe Securities and Exchange Commission (“SEC”). In the opinion of management, the condensed consolidated financialstatements reflect all necessary adjustments, consisting only of normalrecurring adjustments, for a fair statement of the consolidated financialposition, operating results and cash flows for the periods presented.  The results of operations for the interimperiods presented are not necessarily indicative of the results that may beexpected for the full fiscal year or in any future period.  This Quarterly Report on Form 10-Qshould be read in conjunction with the audited consolidated financialstatements and notes thereto for the year ended December 31, 2007,included in the Company’s 2007 Annual Report on Form 10-K filed with theSEC.

 

***Revenues***

 

On January 25, 2006,the Company entered into an agreement with MediaTek to settle patent litigationbetween the companies. In consideration for licenses granted by Zoran, MediaTekagreed to pay Zoran $55.0 million, of which $44.0 million was paid inFebruary 2006 and $11.0 million was paid in April 2006.  These two payments, net of amountsattributable to a holder of rights under patents involved in the litigation,and amounts payable as legal fees, were recognized as license revenues relatedto litigation settlement. MediaTek was required to pay quarterly royaltiestotaling $30.0 million over a 30-month period that commenced on the dateof the agreement based on future sales of covered MediaTek products.  These royalty payments, net of amountspayable by Zoran to a holder of rights under patents involved in thelitigation, and amounts payable as legal fees, are recognized as software andother revenues as they are received.

 

**2.****              Stock-basedCompensation**

 

***Stock Option Plans***

 

As of September 30,2008, the Company had outstanding options for the purchase of 8,816,109 sharesof common stock held by employees and directors under the Company’s 2005 EquityIncentive Plan (the “2005 Plan”), 2005 Outside Directors Equity Plan, 2000Nonstatutory Stock Option Plan, 1995 Outside Directors Stock Option Plan, 1993Stock Option Plan and other various plans the Company assumed as a result ofacquisitions.  As of September 30,2008, an aggregate of 3,697,701 shares remained available for future grants andawards.  Options and stock appreciationrights granted under the 2005 Plan must have exercise prices per share not lessthan the fair market value of Zoran common stock on the date of grant and maynot be repriced without stockholder approval. Such awards will vest and become exercisable upon conditions establishedby the Compensation Committee and may not have a term exceeding 10 years.

 

Thefollowing table summarizes stock-based compensation expense related to employeestock options, employee stock purchases and restricted stock unit grants forthe three and nine month periods ended September 30, 2008 and 2007 asrecorded in accordance with SFAS 123(R) (revised 2004), *Share-Based Payment* (“SFAS 123(R)”)(in thousands):

 
| ** **                           | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------|------------|-----------------------------------------------------------|------------|
| ** **                           | ** ** | **2008**                                                   | ** ** | **2007**                                                  | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                 |       |                                                       |       |                                                      |       |   |   |   |   |
| Cost of hardware  product revenues   |       | $                                                          | 113        |                                                      | $          | 133 |   | $ | 313 |   | $ | 309 |   |
| Research and  development            |       | 1,163                                                      |       | 1,318                                                     |       | 3,627 |   | 3,481 |   |
| Selling, general  and administrative |       | 2,129                                                      |       | 2,116                                                     |       | 6,049 |   | 6,809 |   |
| Total costs and  expenses            |       | $                                                          | 3,405      |                                                      | $          | 3,567 |   | $ | 9,989 |   | $ | 10,599 |   |

 

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Theincome tax benefit for share-based compensation expense was $335,000 and$1,164,000 for the three and nine month periods ended September 30,2008.  The Company recognized notax benefit during the three and nine month periods ended September 30,2007 due to the Company’s full valuation on its deferred tax assets, which wasreleased in December 2007.

 

***ValuationAssumptions***

 

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

 
| ** **                    | ** ** | **Stock Option Plans**                           | ** ** |
|-------------------------------|------------|------------------------------------------------------------|------------|
| ** **                    | ** ** | **Three Months Ended   September 30,** | ** ** | **Nine Months Ended   September 30,** | ** ** |
| ** **                    | ** ** | **2008**                                                   | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
| Average expected term (years) |       | 5.6                                                        |       | 5.4 |   | 5.5 |   | 5.5 |   |
| Expected volatility           |       | 52                                                         | %          | 60 | % | 54 | % | 60 | % |
| Risk-free interest rate       |       | 3.1                                                        | %          | 4.5 | % | 3.0 | % | 4.7 | % |
| Dividend yield                |       | 0                                                          | %          | 0 | % | 0 | % | 0 | % |

 
| ** **                    | ** ** | **Employee Stock Purchase Plans**             | ** ** |
|-------------------------------|------------|--------------------------------------------------------------|------------|
| ** **                    | ** ** | **Three Months Ended ****September 30,** | ** ** | **Nine Months Ended ****September 30,** | ** ** |
| ** **                    | ** ** | **2008**                                                     | ** ** | **2007** | ** ** | **2008** | ** ** | **2007** | ** ** |
|                          |       |                                                         |       |   |   |   |   |   |   |
| Average expected term (years) |       | 1.25                                                         |       | 1.27 |   | 1.32 |   | 1.28 |   |
| Expected volatility           |       | 53                                                           | %          | 46 | % | 53 | % | 47 | % |
| Risk-free interest rate       |       | 1.8                                                          | %          | 4.9 | % | 2.8 | % | 4.8 | % |
| Dividend yield                |       | 0                                                            | %          | 0 | % | 0 | % | 0 | % |

 

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

 

*ExpectedVolatility*: The Company uses historical volatility in deriving its volatilityassumption.  Management believes thathistorical volatility appropriately reflects the market’s expectations offuture volatility.

 

*Risk-Free Interest Rate*:  Management bases its assumptions regardingthe risk-free interest rate on U.S. Treasury zero-coupon issues with anequivalent remaining term.

 

*Expected Dividend:*TheCompany has not paid and does not anticipate paying any dividends in the nearfuture.

 

StockOption Activity

 

The following is asummary of stock option activities:

 
| ** **                              | ** ** | **Shares Underlying   Outstanding Options** | ** ** | **Weighted Average   Exercise Price** | ** ** |
|-----------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------|------------|
| ** **                              | ** ** | ** **                                                 | ** ** | ** **                                           | ** ** |
| Outstanding at  January 1, 2008    |       | 7,703,071                                                  |       | $                                                    | 17.92      |   |
| Granted                                 |       | 1,504,680                                                  |       | $                                                    | 14.02      |   |
| Exercised                               |       | (113,017                                                   | )          | $                                                    | 7.50       |   |
| Canceled                                |       | (278,625                                                   | )          | $                                                    | 17.71      |   |
| Outstanding at  September 30, 2008 |       | 8,816,109                                                  |       | $                                                    | 17.40      |   |

 

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Significant option groupsoutstanding as of September 30, 2008 and the related weighted averageexercise price and contractual life information, are as follows:

 
| ** **                              | ** ** | **Options Outstanding**                                                              | ** ** | **Options Exercisable**                                                         | ** ** |
|-----------------------------------------|------------|-------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------------------------|------------|
| **Exercise Prices**                | ** ** | **Shares   Underlying   Options at   September   30, 2008** | ** ** | **Weighted   Average   Remaining   Contractual  Life   (Years)** | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Aggregate   Intrinsic   Value (‘000)** | ** ** | **Shares   Underlying   Options at   September 30,   2008** | ** ** | **Weighted   Average   Remaining   Contractual  Life   (Years)** | ** ** | **Weighted   Average   Exercise   Price** | ** ** | **Aggregate   Intrinsic   Value (‘000)** | ** ** |
|                                    |       |                                                                                      |       |                                                                                 |       |   |   |   |   |   |   |   |   |   |   |   |   |
| $  0.00  to $  9.99 |       | 322,384                                                                                   |       | 4.57                                                                                 |       | $ | 7.08 |   | $ | 420 |   | 289,134 |   | 4.05 |   | $ | 6.93 |   | $ | 420 |   |
| $10.00 to $11.99                        |       | 889,543                                                                                   |       | 5.49                                                                                 |       | $ | 10.56 |   | — |   | 889,543 |   | 5.49 |   | $ | 10.56 |   | — |   |
| $12.00 to $14.99                        |       | 2,690,323                                                                                 |       | 7.36                                                                                 |       | $ | 13.78 |   | — |   | 1,168,104 |   | 4.66 |   | $ | 13.37 |   | — |   |
| $15.00 to $19.99                        |       | 2,582,138                                                                                 |       | 6.58                                                                                 |       | $ | 18.20 |   | — |   | 1,859,598 |   | 5.83 |   | $ | 17.66 |   | — |   |
| $20.00 to $25.99                        |       | 1,952,470                                                                                 |       | 5.42                                                                                 |       | $ | 23.97 |   | — |   | 1,770,048 |   | 5.08 |   | $ | 23.97 |   | — |   |
| $26.00 to $46.53                        |       | 379,251                                                                                   |       | 1.97                                                                                 |       | $ | 28.60 |   | — |   | 377,524 |   | 1.95 |   | $ | 28.61 |   | — |   |
| Total                                   |       | 8,816,109                                                                                 |       | 6.18                                                                                 |       | $ | 17.40 |   | $ | 420 |   | 6,353,951 |   | 5.05 |   | $ | 17.80 |   | $ | 420 |   |

 

Of the 8,816,109 stockoptions outstanding as of September 30, 2008, the Company estimates that8,517,000 will fully vest over the remaining contractual term.  As of September 30, 2008, these optionshad a weighted average remaining contractual life of 6.07 years, aweighted average exercise price of $17.45 and aggregate intrinsic value of $420,000.

 

The weighted average grant date fair value ofoptions, as determined under SFAS No. 123(R), granted during the three andnine month periods ended September 30, 2008 was $4.22 and $7.23 per share,respectively.  Theweighted average grant date fair value of options, as determined under SFAS No. 123(R),granted during the three and nine month periods ended September 30, 2007was $12.20 and $11.54 per share, respectively.

 

The aggregate intrinsicvalue in the table above represents the total pretax intrinsic value, based onthe Company’s closing stock price of $8.16 as of September 30, 2008, whichwould have been received by the option holders had all option holders exercisedtheir options as of that date.  The totalnumber of shares of common stock underlying in-the-money options exercisable asof September 30, 2008 was 207,000.  Thetotal intrinsic value of options exercised during the three and nine monthperiods ended September 30, 2008 was $137,000 and $569,000 respectively.  There was no excess tax benefit realized bythe Company in 2008 and 2007 for option exercises due to the availability ofnon stock related net operating loss carry forwards which fully offset ourtaxable income.

 

As of September 30, 2008, the Company had$20,587,000 of unrecognized stock-based compensation cost related to stockoptions after estimated forfeitures, which are expected to be recognized overthe weighted average remaining term of 2.75 years.  The Company settles employee stock optionexercises with newly issued common shares.

 

***RestrictedShares and Restricted Stock Units***

 

Restrictedshares and restricted stock units are granted under the 2005 Plan.  As of September 30, 2008, wehad $199,000 of unrecognized stock-based compensation cost related torestricted shares and restricted stock units, which areexpected to be recognized over the weighted average remaining term of 2.51years.

 

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The following is a summary of restricted shares and restricted stockunits activities:

 
| ** **                         | ** ** | **Outstanding  Restricted Shares  And Stock Units** | ** ** | **Weighted-  Average Grant-  Date Fair Value** | ** ** |
|------------------------------------|------------|--------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
|                               |       |                                                               |       |                                                          |       |
| Balances,  December 31, 2007  |       | 77,345                                                             |       | $                                                             | 18.53      |   |
| Granted                            |       | 19,400                                                             |       | $                                                             | 8.29       |   |
| Released/vested                    |       | (56,650                                                            | )          | $                                                             | 19.81      |   |
| Forfeited                          |       | (612                                                               | )          | $                                                             | 21.56      |   |
| Balances,  September 30, 2008 |       | 39,483                                                             |       | $                                                             | 11.62      |   |

 

***EmployeeStock Purchase Plan***

 

TheCompany’s 1995 Employee Stock Purchase Plan (“ESPP”) was adopted by the Company’sBoard of Directors in October 1995 and approved by its stockholders in December 1995.  The ESPP enables employees to purchase sharesthrough payroll deductions at approximately 85% of the lesser of the fair valueof common stock at the beginning of a 24-month offering period or the end ofeach six-month segment within such offering period.  The ESPP is intended to qualify as an “employeestock purchase plan” under Section 423 of the U.S. Internal RevenueCode.  There were no purchases during thequarter ended September 30, 2008. As of September 30, 2008, 1,825,874 shares were reserved andavailable for issuance under the ESPP.

 

***StockRepurchase Program***

 

In March 2008, theCompany’s Board of Directors authorized a stock repurchaseprogram under which the Company may repurchase up to $100.0 million ofoutstanding Zoran common stock.  The Company repurchased 1,163,569 shares for$10.0 million under this program during the three and nine months ended September 30,2008.  As of September 30, 2008, theauthorized amount that remains available under the Company’s stock repurchaseprogram was $90.0 million.

 

The Company retires all shares repurchased under thestock repurchase program.  The purchaseprice for the repurchased shares of the Company’s stock repurchased isreflected as a reduction of common stock and additional paid-in capital.

 

**3.****  ComprehensiveIncome (Loss)**

 

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

 
| ** **                                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                   | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                                         |       |                                                 |       |                                                |       |   |   |   |   |
| Net income  (loss)                                           |       | $                                                    | (154,220   | )                                                   | $          | 13,142 |   | $ | (195,518 | ) | $ | 7,456 |   |
| Change in  unrealized gain (loss) on investments, net of tax |       | (5,147                                               | )          | (200                                                | )          | (7,047 | ) | (2,549 | ) |
| Total  comprehensive income (loss)                           |       | $                                                    | (159,367   | )                                                   | $          | 12,942 |   | $ | (202,565 | ) | $ | 4,907 |   |

 

The accumulated other comprehensive income(loss) consists of unrealized gain (loss), net of tax, on marketablesecurities.

 

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**4.****  Marketable Securities**

 

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

 
| ** **                                                                         | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|------------------------------------------------------------------------------------|------------|----------|------------|-----------------------|------------|------------------------|------------|----------------------------|------------|
| Corporate notes  and bonds                                                         |       | $        | 159,082    |                  | $          | 175                    |       | $                          | (8,288     | ) | $ | 150,969 |   |
| Auction rate  securities                                                           |       | 57,775   |       | —                |       | —                 |       | 57,775                     |       |
| U.S. government  and agency securities                                             |       | 39,399   |       | 10                    |       | (105                   | )          | 39,304                     |       |
| Foreign and  municipal bonds                                                       |       | 13,484   |       | 41                    |       | (442                   | )          | 13,083                     |       |
| Certificates of  deposit                                                           |       | 1,997    |       | 9                     |       | (3                     | )          | 2,003                      |       |
| Total fixed  income securities                                                     |       | 271,737  |       | 235                   |       | (8,838                 | )          | 263,134                    |       |
| Publicly traded  equity securities                                                 |       | 1,393    |       | —                |       | (750                   | )          | 643                        |       |
|                                                                               |       | 273,130  |       | 235                   |       | (9,588                 | )          | 263,777                    |       |
| Less: Auction  rate securities included in other assets and long- term investments |       | (57,775  | )          | —                |       | —                 |       | (57,775                    | )          |
|                                                                               |       |     |       |                  |       |                   |       |                       |       |
| Total short-term  investments                                                      |       | $        | 215,355    |                  | $          | 235                    |       | $                          | (9,588     | ) | $ | 206,002 |   |

 

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

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

 

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

 
| ** **                     | ** ** | **Cost** | ** ** | **Estimated  Fair  Value** | ** ** |
|--------------------------------|------------|----------|------------|----------------------------|------------|
| Less than 1 year               |       | $        | 89,503     |                       | $          | 86,175 |   |
| Due in 1 to 2  years           |       | 85,230   |       | 81,810                     |       |
| Due in 2 to 5  years           |       | 39,229   |       | 37,374                     |       |
| Greater than  5 years*    |       | 57,775   |       | 57,775                     |       |
| Total fixed  income securities |       | $        | 271,737    |                       | $          | 263,134 |   |

 

----

*Comprised of auctionrate securities which have reset dates of 90 days or less but final expirationdates over 5 years.  These securities areincluded in other assets and long-term investments as of September 30,2008.  In October 2008, the Company acceptedan offer (the “UBS Offer”) from UBS AG (“UBS”), one of its investmentproviders.  As a UBS client who holds Auction Rate Securities (“ARS”), theCompany will receive ARS Rights, which entitle the Company to sell ARS to UBSaffiliates during the period from June 30, 2010 to July 2, 2012 for aprice 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 eligibleARS on the Company’s behalf, without prior notification, at any time during atwo-year period 

 

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beginningJune 30, 2010.  The Company also received communications fromWachovia Securities indicating that Wachovia will soon offer to purchase, nolater than June 30, 2009, ARS held by the Company at par value. TheCompany currently holds $37.4 million of ARS with UBS and $20.4 million of ARSwith Wachovia.

 

**5.****  Fair Value**

 

Effective January 1,2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS157”).  In February 2008, the FASBissued FASB Staff Position No. FAS 157-2, “Effective Date of FASB StatementNo. 157,” which provides a one year deferral of the effective date of SFAS157 for non-financial assets and non-financial liabilities, except those thatare recognized or disclosed in the financial statements at fair value at leastannually.  Therefore, the Company hasadopted the provisions of SFAS 157 with respect to its financial assets andliabilities only.  SFAS 157 defines fairvalue, establishes a framework for measuring fair value under generally acceptedaccounting principles and enhances disclosures about fair valuemeasurements.  Fair value is definedunder SFAS 157 as the exchange price that would be received for an asset orpaid to transfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. Valuation techniques used to measure fair value under SFAS 157 mustmaximize the use of observable inputs and minimize the use of unobservableinputs.  The standard describes a fairvalue hierarchy based on three levels of inputs that may be used to measurefair value, of which the first two are considered observable and the lastunobservable:

 

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

 

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

 

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

 

The adoption of thisstatement did not have a material impact on the Company’s consolidated resultsof operations and financial condition. In October 2008 the FASB Issued FASB Staff Position No. FAS157-3, “Determining the Fair Value of a Financial Asset When the Market forthat Asset is Not Active” (“FSP 157-3”), to clarify the application of theprovisions of SFAS 157 in an inactive market and how an entity would determinefair value in an inactive market.  FSP157-3 is effective immediately and applies to the Company’s current quarterfinancial statements.  The application ofthe provision of FSP 157-3 did not impact the Company’s results of operationsor financial condition as of and for the periods ended September 30, 2008.

 

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

 

In accordance with SFAS157, the following table represents the Company’s fair value hierarchy for itsfinancial assets (cash equivalents and investments) measured at fair value on arecurring basis as of September 30, 2008 (in thousands):

 
| ** **                             | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|----------------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|-----------|------------|
| Corporate notes  and bonds             |       | $                | —     |             | $          | 150,969          |       | $         | —     |   | $ | 150,969 |   |
| Auction rate  securities               |       | —           |       | —           |       | 57,775           |       | 57,775    |       |
| U.S. government  and agency securities |       | —           |       | 39,304           |       | —           |       | 39,304    |       |
| Foreign and  municipal bonds           |       | —           |       | 13,083           |       | —           |       | 13,083    |       |
| Certificates of  deposit               |       | —           |       | 2,003            |       | —           |       | 2,003     |       |
| Total fixed  income securities         |       | —           |       | 205,359          |       | 57,775           |       | 263,134   |       |
| Publicly traded  equity securities     |       | 643              |       | —           |       | —           |       | 643       |       |
|                                   |       |             |       |             |       |             |       |      |       |
| Total                                  |       | $                | 643        |             | $          | 205,359          |       | $         | 57,775     |   | $ | 263,777 |   |

 

The Company’s Level 3investments as of September 30, 2008 include high-grade auction ratesecurities primarily consisting of government guaranteed student loans.  Auction rate securities are securities thatare structured with short-term interest rates which periodically reset throughauctions, typically within every 90 days. At the end of each reset period, investors can sell or continue to 

 

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hold the securities atpar. During the current year, some of the auction rate securities were sold andothers failed to auction successfully due to market supply exceeding marketdemand.  In the event of a failedauction, the notes continue to bear interest at a predetermined maximum rate basedon the credit rating of notes as determined by one or more nationallyrecognized statistical rating organizations. The funds associated with failed auctions will not be accessible until asuccessful auction occurs, a buyer is found outside of the auction process, theissuers redeem the securities or the underlying securities have matured.  As a result, the Company has classified allauction rate securities as long-term assets at cost in the condensed consolidatedbalance sheets.  In October 2008, the Company acceptedan offer (the “UBS Offer”) from UBS AG (“UBS”), one of its investmentproviders.  As a UBS client who holdsAuction Rate Securities (“ARS”), the Company will receive ARS Rights, whichentitle the Company to sell ARS to UBS affiliates during the period from June 30,2010 to July 2, 2012 for a price equal to par value.  In exchange forthe issuance of the ARS Rights, the UBS affiliates have the discretionary rightto 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.  TheCompany also received communications from Wachovia Securities indicating thatWachovia will soon offer to purchase, no later than June 30, 2009, ARSheld by the Company at par value. The Company currently holds $37.4 million ofARS with UBS and $20.4 million of ARS with Wachovia.

 

Due to the currenteconomic environment in which there is a lack of market activity for auctionrate securities, the Company has been unable to obtain quoted prices or marketprices for identical assets as of the measurement date resulting in significantunobservable inputs used in determining the fair value.  The Company estimated the fair value of theseauction rate securities using the income approach based on the following: (i) theunderlying structure and contractual provisions of each security; (ii) thepresent value of future principal and interest payments discounted at ratesconsidered to reflect current market conditions; and (iii) consideration ofthe probabilities of default, auction failure, or repurchase at par for eachperiod.  These estimated fair valuescould change significantly based on future market conditions, which couldresult in recognizing an other-than-temporary impairment loss.

 

The fair value indicatedby this approach yielded a value that approximated the par value of therespective securities.

 

The reconciliation ofbeginning and ending balances for auction rate securities measured at fairvalue on a recurring basis using significant unobservable inputs (Level 3)during the period was as follows *(inthousands):*

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

 

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**6.****              Inventories**

 

Inventoriesare stated at the lower of cost (first in, first out) or market and consistedof the following (in thousands):

 
| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2008**               | ** ** | **2007**              | ** ** |
| Purchased parts  and work in process |       | $                      | 25,831     |                  | $          | 28,498 |   |
| Finished goods                       |       | 23,489                 |       | 20,494                |       |
|                                 |       | $                      | 49,320     |                  | $          | 48,992 |   |

 

**7.****              Goodwilland Other Intangible Assets**

 

The Company conducted itsannual impairment test of goodwill as of September 30, 2008 in accordancewith Statement of Financial Accounting Standard 142 (“SFAS 142”), “Goodwilland Other Intangible Assets” and SFAS 144, “Accounting for the Impairment orDisposal of Long-Lived Assets.”  Impairment is tested at the reporting unitlevel which is one level below the reportable segments.  Potential goodwill impairment is measuredbased upon a two-step process.  In thefirst step, the Company compares the fair value of a reporting unit with itscarrying amount including goodwill.  Ifthe fair value of a reporting unit exceeds its carrying amount, goodwill of thereporting unit is considered not impaired, thus the second step of theimpairment test is unnecessary.  If thecarrying amount of a reporting unit exceeds its fair value, the second step ofthe goodwill impairment test is performed to measure the amount of animpairment loss.

 

As a result of this test,the Company determined that the carrying amounts of its Consumer segmentreporting units exceeded their fair values and recorded a goodwill impairmentcharge of approximately $164.5 million and an impairment charge for otherintangibles of $3.1 million in the current quarter.  The impairment charge was primarily due to adecrease in valuation based on a decline in the Company’s business forecasts asa result of the current economic downturn as well as a decline in the Company’sstock value over the last several months due to the current global financialcrisis.  The fair values of reportingunits were estimated using the expected present value of future cashflows.  The total of all reporting fairvalues was also compared to the Company’s market capitalization plus a controlpremium for reasonableness.

 

***Components of Acquired Intangible Assets****(in thousands):*

 
| ** **                    | ** ** | ** **        | ** ** | **September 30, 2008** | ** ** | **December 31, 2007**                | ** ** |
|-------------------------------|------------|-------------------|------------|----------------------------------|------------|------------------------------------------------|------------|
| ** **                    | ** ** | **Life  (Years)** | ** ** | **Gross  Carrying  Amount**      | ** ** | **Accumulated  Amortization  and  Impairment** | ** ** | **Net  Balance** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Balance** | ** ** |
| Amortized  intangible assets: |       |              |       |                             |       |                                           |       |   |   |   |   |   |   |   |   |
| Purchased  technology         |       | 2-3               |       | $                                | 195,505    |                                           | $          | (195,505 | ) | $ | — |   | $ | 195,505 |   | $ | (175,451 | ) | $ | 20,054 |   |
| Patents                       |       | 3-5               |       | 40,265                           |       | (40,265                                        | )          | — |   | 40,265 |   | (36,961 | ) | 3,304 |   |
| Customer base                 |       | 3-5               |       | 13,860                           |       | (13,860                                        | )          | — |   | 13,860 |   | (12,043 | ) | 1,817 |   |
| Tradename and  others         |       | 3-5               |       | 4,655                            |       | (3,477                                         | )          | 1,178 |   | 3,350 |   | (2,580 | ) | 770 |   |
| Total                         |       |              |       | $                                | 254,285    |                                           | $          | (253,107 | ) | $ | 1,178 |   | $ | 252,980 |   | $ | (227,035 | ) | $ | 25,945 |   |

 

Estimated futureintangible amortization expense, based on current balances, as of September 30,2008 is as follows (in thousands):

 
| Remaining three  months of 2008     |   | $   | 109    |   |
|-------------------------------------|--------|-----|--------|--------|
| Year ending  December 31, 2009 |   | 435 |   |
| Year ending  December 31, 2010 |   | 435 |   |
| Year ending  December 31, 2011 |   | 199 |   |
|                                |   | $   | 1,178  |   |

 

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Changes in the carrying amount of goodwill for thethree and nine month periods ended September 30, 2008 are as follows (inthousands):

 
| ** **                          | ** ** | **Amount** | ** ** |
|-------------------------------------|------------|------------|------------|
| Balance at  December 31, 2007  |       | $          | 168,691    |   |
| Impairment of  goodwill             |       | (164,494   | )          |
| Balance at  September 30, 2008 |       | $          | 4,197      |   |

 

Goodwill by reportable segment was as follows (inthousands):

 
| ** ** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------|------------|------------------------|------------|-----------------------|------------|
| ** ** | ** ** | **2008**               | ** ** | **2007**              | ** ** |
|       |       |                   |       |                  |       |
| Consumer   |       | $                      | —     |                  | $          | 164,494 |   |
| Imaging    |       | 4,197                  |       | 4,197                 |       |
|       |       |                   |       |                  |       |
|       |       | $                      | 4,197      |                  | $          | 168,691 |   |

 

# **8.**              Income Taxes

# ** **

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

 

TheCompany’s effective tax rate is highly dependent upon the geographicdistribution of our worldwide earnings or losses, the tax regulations and taxholiday benefits in certain jurisdictions, and the effectiveness of our taxplanning strategies.  The provision forincome taxes for the three and nine month periods ended September 30, 2008reflects the estimated annual tax rate applied to the year to date net earningsafter the exclusion of a material foreign jurisdiction where the Company isunable to accurately project earnings for future periods.  A separate tax calculation was done for thatjurisdiction, which was included in the total provision for income taxes.  In addition, due to a statute of limitationslapse the Company released approximately $1.0 million of its FASBInterpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”)reserve and a provision to return adjustment of $1.0 million that were fullyrecognized in the period they occurred. The Company’s Israel based subsidiary is an “Approved Enterprise” underIsraeli law, which provides a ten-year tax holiday for income attributable to aportion of the Company’s operations in Israel.  The benefits from this tax holiday expire atvarious times beginning in 2008.

 

OnJanuary 1, 2007, the Company adopted FIN 48.  Under FIN 48, the impact of an uncertainincome tax position on income tax expense must be recognized at the amount thatis more-likely-than-not of being sustained. As of December 31, 2007, the Company had $26.5 million ofunrecognized tax benefits which have not materially changed during the currentperiod.  The application of income tax law is inherently complex.  Laws and regulations in this area arevoluminous and are often ambiguous and the Company is required to make manysubjective assumptions and judgments regarding its income tax exposures.  In addition, interpretations of and guidancesurrounding income tax laws and regulations are subject to change overtime.  Any changes in our subjectiveassumptions and judgments could materially affect amounts recognized in theconsolidated balance sheets and statements of income.  The Company’s ongoing tax audit in Israelmay result in a positive or negative adjustment to the Company’s unrecognizedtax benefits within the next 12 months.

 

The“Emergency Economic Stabilization Act of 2008,” which contains the “TaxExtenders and Alternative Minimum Tax Relief Act of 2008”, was signed into lawon October 3, 2008.  Under the Act,the research credit was retroactively extended for amounts paid or incurredafter December 31, 2007 and before January 1, 2010.  The effects of the change in the tax law willbe recognized in our fourth quarter, which is the quarter in which the law wasenacted.  The Company is currently in theprocess of analyzing the impact of the new law.

 

**9.****              SegmentReporting**

 

The Company’s productsare based on highly integrated application-specific integrated circuits, orASICs, and system-on-a-chip, or SOC, solutions. The Company also licenses certain software and other intellectualproperty.  The Company has two reportablesegments – Consumer group and Imaging group.

 

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The Consumer groupprovides products for use in DVD players, recordable DVD players, standard andhigh definition digital television products, digital camera products andmultimedia mobile phone products.  TheImaging group provides products used in digital copiers, laser and inkjetprinters as well as multifunction peripherals.

 

Information aboutreported segment income or loss is as follows for the three and nine monthperiods ended September 30, 2008 and 2007 (in thousands):

 
| ** **            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **            | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                  |       |                                                 |       |                                                |       |   |   |   |   |
| Net revenues:         |       |                                                 |       |                                                |       |   |   |   |   |
| Consumer              |       | $                                                    | 109,368    |                                                | $          | 120,957 |   | $ | 306,562 |   | $ | 309,690 |   |
| Imaging               |       | 16,766                                               |       | 25,469                                              |       | 57,288 |   | 68,298 |   |
|                  |       | $                                                    | 126,134    |                                                | $          | 146,426 |   | $ | 363,850 |   | $ | 377,988 |   |
|                  |       |                                                 |       |                                                |       |   |   |   |   |
| Operating  expenses:  |       |                                                 |       |                                                |       |   |   |   |   |
| Consumer              |       | $                                                    | 106,896    |                                                | $          | 108,561 |   | $ | 312,369 |   | $ | 293,077 |   |
| Imaging               |       | 12,125                                               |       | 17,421                                              |       | 41,384 |   | 49,252 |   |
|                  |       | $                                                    | 119,021    |                                                | $          | 125,982 |   | $ | 353,753 |   | $ | 342,329 |   |
|                  |       |                                                 |       |                                                |       |   |   |   |   |
| Contribution  margin: |       |                                                 |       |                                                |       |   |   |   |   |
| Consumer              |       | $                                                    | 2,472      |                                                | $          | 12,396 |   | $ | (5,807 | ) | $ | 16,613 |   |
| Imaging               |       | 4,641                                                |       | 8,048                                               |       | 15,904 |   | 19,046 |   |
|                  |       | $                                                    | 7,113      |                                                | $          | 20,444 |   | $ | 10,097 |   | $ | 35,659 |   |

 

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

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                    | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
|                                          |       |                                                 |       |                                                |       |   |   |   |   |
| Contribution  margin from operating segments  |       | $                                                    | 7,113      |                                                | $          | 20,444 |   | $ | 10,097 |   | $ | 35,659 |   |
| Amortization of  intangible assets            |       | 4,494                                                |       | 9,648                                               |       | 22,987 |   | 33,986 |   |
| Impairment of  goodwill and intangible assets |       | 167,579                                              |       | —                                              |       | 167,579 |   | — |   |
| In-process  research and development          |       | —                                               |       | —                                              |       | 22,383 |   | — |   |
| Total operating  income (loss)                |       | $                                                    | (164,960   | )                                                   | $          | 10,796 |   | $ | (202,852 | ) | $ | 1,673 |   |

 

Zoran maintainsoperations in Canada, China, France, Germany, India, Israel, Japan, Korea,Taiwan, the United Kingdom and United States. Activities in Israel and the United States consist of corporateadministration, product development, logistics and worldwide salesmanagement.  Other foreign operationsconsist of sales, product development and technical support.

 

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The geographicdistribution of total revenues based upon customer location for the three andnine month periods ended September 30, 2008 and 2007 was as follows (inthousands):

 
| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| **Revenue  from unaffiliated customers originating from:** |       |                                                 |       |                                                |       |   |   |   |   |
| China                                                      |       | $                                                    | 57,754     |                                                | $          | 64,463 |   | $ | 152,259 |   | $ | 146,842 |   |
| Japan                                                      |       | 17,861                                               |       | 22,260                                              |       | 58,102 |   | 69,165 |   |
| Korea                                                      |       | 8,106                                                |       | 5,600                                               |       | 38,935 |   | 15,599 |   |
| Taiwan                                                     |       | 32,643                                               |       | 36,336                                              |       | 79,792 |   | 97,988 |   |
| United States                                              |       | 5,860                                                |       | 10,133                                              |       | 22,510 |   | 24,703 |   |
| Other                                                      |       | 3,910                                                |       | 7,634                                               |       | 12,252 |   | 23,691 |   |
| **Total  revenues**                                        |       | $                                                    | 126,134    |                                                | $          | 146,426 |   | $ | 363,850 |   | $ | 377,988 |   |

 

For the three months ended September 30, 2008, two customersaccounted for 16% and 11% of total revenues, respectively.  For the same period in 2007, one customeraccounted for 11% of total revenues.  Forthe nine months ended September 30, 2008, three customers accounted for13%, 10% and 10% of total revenues, respectively.  For the same period in 2007, one customeraccounted for 13% of total revenues.

 

As of September 30,2008, one customer accounted for approximately 22% of total net accountsreceivable and as of December 31, 2007 three customers accounted forapproximately 11%, 11% and 10% of the net accounts receivable balance,respectively.

 

**10.****       Acquisition**

 

**LetIt Wave**

 

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

 

This acquisition’sprimary purpose was to obtain Let It Wave’s in-process development of a video frame rate conversion and image enhancementproduct for flat panel televisions and other consumer electronics.  By acquiring Let It Wave, the Company intendsto deliver high performance image processing that enables artifact-freetrue-Motion Compensated Frame Rate Conversion (MCFRC) for flat paneltelevisions and other video consumer electronics products.  Let It Wave is at least six months fromcompleting the development of its MCFRC product and currently has no otherproducts, revenues or a customer base.  Upon completion of a finished product, the Companyexpects to market this technology for 120Hz LCD televisions within the Consumergroup.

 

The Company accounted forthis transaction as an asset acquisition in accordance with Statement ofFinancial Accounting Standard 142 (“SFAS 142”), “Goodwill and Other IntangibleAssets”**and Emerging Issues Task Force No. 98-3(“EITF 98-3”), “Determining Whether a Nonmonetary Transaction Involves Receipt of ProductiveAssets or of a Business.”  Theresults of operations of Let It Wave have been included in the condensedconsolidated financial statements from the date of acquisition.

 

Allocation of thepurchase price is as follows (in thousands):

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

 

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

 

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The in-process researchand development has not yet reached technological feasibility and has noalternative future use.  Accordingly theamount allocated to in-process research and development was immediately expensedupon the acquisition date.  The value ofin-process research and development was determined using the multi-periodexcess earnings method by estimating the expected net cash flows from theprojects once commercially viable, discounting the net cash flows back to theirpresent value using a discount rate of 15%. This rate was based on the industry segment for the technology, natureof the products to be developed, relative risk of successful development,time-value of money, length of time to complete the project and overall maturityand history of the development team. Revenues for the incremental core technology are expected to commence in2009.  Revenue projections were based onestimates of market size and growth, expected trends in technology and theexpected timing of new product introductions. As of September 30, 2008, there have been no material variationsfrom the underlying assumptions that were used in the original computation ofthe value of the acquired entity.

 

# **11.**       Net Income (Loss) Per Share

# ** **

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

 

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

** **
| ** **                                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------------------------|------------|------------------------------------------------------|------------|-----------------------------------------------------|------------|
| ** **                                                                 | ** ** | **2008**                                             | ** ** | **2007**                                            | ** ** | **2008** | ** ** | **2007** | ** ** |
| ** **                                                                 | ** ** | ** **                                           | ** ** | ** **                                          | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income (loss)                                                          |       | $                                                    | (154,220   | )                                                   | $          | 13,142 |   | $ | (195,518 | ) | $ | 7,456 |   |
|                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Weighted average  shares outstanding                                       |       | 51,231                                               |       | 49,863                                              |       | 51,464 |   | 49,633 |   |
| Effect of  dilutive options, restricted shares, and restricted stock units |       | —                                               |       | 1,421                                               |       | — |   | 1,228 |   |
| Dilutive weighted  average shares                                          |       | 51,231                                               |       | 51,284                                              |       | 51,464 |   | 50,861 |   |
|                                                                       |       |                                                 |       |                                                |       |   |   |   |   |
| Net income  (loss) per share:                                              |       |                                                 |       |                                                |       |   |   |   |   |
| Basic                                                                      |       | $                                                    | (3.01      | )                                                   | $          | 0.26 |   | $ | (3.80 | ) | $ | 0.15 |   |
| Diluted                                                                    |       | $                                                    | (3.01      | )                                                   | $          | 0.26 |   | $ | (3.80 | ) | $ | 0.15 |   |

** **

**For the three month periods ended September 30, 2008and 2007, outstanding options, restricted shares and restricted stock unitstotaling 8.6 million and 3.7 million shares, respectively, were excluded fromthe computation of diluted net income (loss) per share as the inclusion of suchshares would have had an anti-dilutive effect.**

** **

**For the nine month periods ended September 30, 2008and 2007, outstanding options and restricted stock units totaling 6.8 millionand 3.8 million shares, respectively, were excluded from the computation ofdiluted net income (loss) per share as the inclusion of such shares would havehad an anti-dilutive effect.**

** **

# **12.**       Contingencies

# ** **

*MattersRelated to Historical Stock Option Practices.*  After September 30, 2008, the followingshareholder derivative actions purporting to assert claims on behalf of and inthe name of the Company against various of the Company’s current and formerdirectors and officers relating to the Company’s historical accounting forstock options were dismissed.

 

*Pfeiffer v. Zoran Corporation et al; Gerald delRosario v. Aharon et al**.*  On September 7 and September 26,2006, purported shareholder derivative actions were filed by Milton Pfeifferand Gerald Del Rosario against Zoran as a nominal defendant and

 

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certain of itsofficers and directors in the United States District Court, Northern Districtof California, alleging, among other things, violations of federal securitieslaws and breaches of fiduciary duties. * *On December 8, 2006, the Courtissued an order consolidating the two actions and selecting del Rosario as leadplaintiff. On September 15, 2008, the court entered a final judgmentapproving the parties’ settlement of the consolidated derivative action anddismissing the action with prejudice, which became effective 30 daysthereafter.  Terms of the settlementincluded payments to the Company from its insurance carrier and certain optionholders, cancelation or repricing of certain options, and a payment of legalfees to the plaintiff’s attorney.

 

*Baronev. Gerzberg et al.; Durco v. Gerzberg et al.*  On October 23, 2006, two purportedshareholder derivative actions were filed by Moshe Barone and John Durco againstZoran as a nominal defendant and certain of its current and former officers anddirectors in the California Superior Court of Santa Clara County, alleging,among other things, violations of state securities laws and breaches offiduciary duty.  On January 24, 2007the Court consolidated the Barone and Durco actions, appointed Messrs. Baroneand Durco as co-lead plaintiffs and approved their selection of counsel for theconsolidated derivative action.  Theco-lead plaintiffs filed a consolidated amended complaint on March 26,2007.  On September 15, 2007 theCourt issued an order staying all proceedings until further order of theCourt.  On October 27, 2008, thatCourt entered an order dismissing the action.

 

*Zoran Corporation v. DTS, Inc. *On October 8, 2008,the Company filed a complaint against DTS, Inc. in the U.S. District Courtfor the Northern District of California, alleging violations of Section 2of the Sherman Act and patent misuse. The complaint alleges that DTS wrongfully acquired and maintainedmonopoly power in the relevant markets in the manner in which it caused itspatented high-definition audio decompression technology to be adopted as partof the Blu-ray Disc standard.  Thecomplaint further alleges that having wrongfully acquired monopoly power in therelevant market, DTS has refused to license its technology to the Company andothers on fair, reasonable and nondiscriminatory terms as required by itsmembership in the Blu-ray Disc Association. The complaint seeks treble damages, in an amount to be determined, anorder enjoining DTS from monopolizing and attempting to monopolize the UnitedStates markets for Blu-ray Disc technology and an order declaring that DTS’srelevant patents are unenforceable by reason of misuse.  Also on October 8, 2008, the Companyfiled a notice of arbitration with the International Center for DisputeResolution under the Blu-ray Disc Association By-laws making similarallegations and seeking an order granting the Company a license to DTS’sBlu-ray technology and requiring DTS to provide the Company with necessary DTSBlu-ray materials or their equivalent and a finding that DTS materiallybreached the Blu-ray Disc Association By-Laws. On October 29, 2008, in response to the Company’s complaint, DTSfiled a motion seeking an order referring the Company’s claims to arbitrationand dismissing the complaint in its entirety or, in the alternative, stayingthe District Court action pending the outcome of the arbitration.  A hearing on the motion to dismiss isscheduled for December 19, 2008. DTS has publicly indicated that it also intends to assert counterclaimsagainst the Company.  The Company expectsthat such counterclaims will involve an unrelated dispute wherein DTS hasclaimed that the Company breached a license agreement that it entered into withDTS in 1998.  To date, DTS has not fileda response to the Company’s arbitration demand. The Company intends to vigorously pursue all rights and remedies it mayhave against DTS and defend any allegations that DTS may make by way ofcounterclaim.

 

*IndemnificationObligations.*  Subjectto certain limitations, the Company is obligated to indemnify its current andformer directors, officers and employees in connection with the investigationof the Company’s historical stock option practices and related governmentinquiries and litigation.  Theseobligations arise under the terms of the Company’s certificate ofincorporation, its bylaws, applicable contracts, and Delaware and Californialaw.  The obligation to indemnify generallymeans that the Company is required to pay or reimburse the individuals’reasonable legal expenses and possibly damages and other liabilities incurredin connection with these matters.  TheCompany is currently paying or reimbursing legal expenses being incurred inconnection with these matters by a number of its current and former directors,officers and employees.

 

*OtherLegal Matters.*  TheCompany is named from time to time as a party to lawsuits in the normal courseof its business. Litigation in general, and intellectual property andsecurities litigation in particular, can be expensive and disruptive to normalbusiness operations.  Moreover, theresults of legal proceedings are difficult to predict.

 

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**Item2.   Management’s Discussion and Analysisof Financial Condition and Results of Operations**

 

*This report includes a number of forward-looking statementswhich reflect the Company’s current views with respect to future events andfinancial performance. These forward-looking statements are subject to certainrisks 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-lookingstatements. Readers are cautioned not to place undue reliance on theseforward-looking statements, which speak only as of the date hereof.*

 

**Overview**

 

Our products consist ofintegrated circuits and related products used in digital versatile discplayers, or DVDs, movie and home theater systems, digital cameras and videoediting systems.  We also provideintegrated circuits, software and platforms for standard and high definitiondigital television applications that enable the delivery and display of digitalvideo content through a set-top box or television, demodulator IC technologyfor the global high definition television market.  We also provide digital imaging productsconsisting of semiconductor hardware and software that enable users to print,scan, process and transmit documents to computer peripherals that performprinting functions.  We also provide highperformance, low-power application processors, technology and products for themultimedia mobile telephone market.

 

*Revenues*

 

We derive most of ourrevenues from the sale of our integrated circuit and system-on-a-chipproducts.  Historically, average sellingprices in the semiconductor industry in general, and for our products inparticular, have decreased over the life of a particular product.  Average selling prices for our products havefluctuated substantially from period to period, primarily as a result ofchanges in our customer mix of original equipment manufacturer, or OEM, salesversus sales to resellers and the transition from low-volume to high-volumeproduction.  In the past, we haveperiodically reduced the prices of some of our products in order to betterpenetrate the consumer market.  Webelieve that, as our product lines continue to mature and competitive marketsevolve, we are likely to experience further declines in the average sellingprices of our products, although we cannot predict the timing and amount ofsuch future changes with any certainty.

 

We also derive revenuesfrom licensing our software and other intellectual property.  Licensing revenues include one-time licensefees and royalties based on the number of units distributed by the licensee.  Quarterly licensing revenue can besignificantly affected by the timing of a small number of licensingtransactions, each accounting for substantial revenues.  Accordingly, licensing revenues havefluctuated, and will continue to fluctuate, on a quarterly basis.  In addition, we have historically generated aportion of our total revenues from development contracts, primarily with keycustomers, although development revenue has declined substantially as apercentage of total revenues over the past several years.  These development contracts have provided uswith partial funding for the development of some of our products.  These development contracts provide forlicense and milestone payments which are recorded as development revenue.  We classify all development costs, includingcosts related to these development contracts, as research and developmentexpenses.  We retain ownership of theintellectual property developed by us under these development contracts.  While we intend to continue to enter intodevelopment contracts with certain strategic partners, we expect developmentrevenue to continue to decline as a percentage of total revenues.

 

We recognize softwarelicense revenues in accordance with the provisions of Statement of Position(SOP) 97-2, Software Revenue Recognition,as amended by SOP 98-9, Modificationof SOP 97-2, SoftwareRevenue Recognition, With Respect to Certain Transactions. Our softwarelicense agreements typically include obligations to provide maintenance andother support over a fixed term and allow for renewal of maintenance serviceson an annual basis. We determine the fair value of our maintenance obligationswith reference to substantive renewal rates within the agreement or objectiveevidence of fair value as required under SOP 97-2. We recognize maintenance andsupport revenue ratably over the term of the arrangement.  We also receive royalty revenues based on perunit shipments of products that include our software, which we recognize uponreceipt of a royalty report from the customer, typically one quarter inarrears.

 

*Cost of Hardware ProductRevenues*

* *

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

 

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*Research and Development*

* *

Our research anddevelopment expenses consist of salaries and related costs of employees engagedin ongoing research, design and development activities and costs of engineeringmaterials and supplies.  We believe thatsignificant investments in research and development are required for us toremain competitive, and we expect to continue to devote significant resourcesto product development, although such expenses as a percentage of totalrevenues may fluctuate.

 

*Selling, General andAdministrative*

* *

Our selling, general andadministrative expenses consist primarily of employee-related expenses, salescommissions, product promotion and other professional services.  We expect that selling, general andadministrative expenses will continue to increase to support our anticipatedgrowth.

 

*Income Taxes*

* *

Our effective tax rate ishighly dependent upon the geographic distribution of our worldwide earnings orlosses.  During the third quarter wedetermined that for a material foreign jurisdiction we are unable to reliablypredict the expected annual earnings, and we removed this jurisdiction from oureffective tax rate calculation.  Wecalculated tax separately for that jurisdiction and included it in the totalprovision for income taxes.

 

Our Israel basedsubsidiary is an “Approved Enterprise” under Israeli law, which provides aten-year tax holiday for income attributable to a portion of our operations inIsrael.  Our U.S. federal net operatinglosses expire at various times between 2017 and 2024, and the benefits from oursubsidiary’s Approved Enterprise status expire at various times beginning in 2008.

 

We arecurrently under a tax audit in Israel for tax years 2003 through 2005.  We believe that we have adequately provided for any potential assessmentsassociated with this audit.  It is possible that the amount of ourliability for unrecognized income tax benefits may change within the next 12months.  In addition, our income taxexpense could be affected as other events occur, income tax audits conclude orstatutes of limitations expire.  Wecannot estimate at this time the range of possible changes in our tax expense.

 

**Acquisitions**

 

*Let It Wave*

 

On June 12, 2008, wecompleted the acquisition of Let It Wave, a fabless development-stagesemiconductor company based in Paris, France. Under the terms of theacquisition agreement, we acquired Let It Wave in an all cash transactionvalued at $24.0 million including approximately $650,000 of transactioncosts.  We also agreed to make contingentpayments of up to $4.5 million in additional consideration, contingent uponcompletion of certain milestones, a portion of which is subject to continuousemployment and will be expensed as incurred. We recorded an in-process research and development expense of $22.4million in connection with the acquisition.

 

We accounted for thistransaction as an asset acquisition in accordance with Statement of FinancialAccounting Standard 142 (“SFAS 142”), “Goodwill and Other Intangible Assets”**and Emerging Issues Task Force No. 98-3 (“EITF 98-3”),“DeterminingWhether a Nonmonetary Transaction Involves Receipt of Productive Assets or of aBusiness.”

 

Following the completionof the acquisition, the results of operations of Let It Wave have been includedin our condensed consolidated financial statements.  Accordingly, our results of operations forthe three and nine month periods ended September 30, 2008 include Let ItWave’s operations from the acquisition date.

 

**Segments**

 

Our products are based onhighly integrated application-specific integrated circuits, or ASICs, andsystem-on-a-chip, or SOC, solutions.  Wealso license certain software and other intellectual property.  We operate in two operating segments —Consumer group and Imaging group.  TheConsumer group provides products for use in DVD players, recordable DVDplayers, standard and high definition digital television products, digitalcamera products and multimedia mobile phone products.  The Imaging group provides products used indigital copiers, laser and inkjet printers as well as multifunctionperipherals.

 

**Critical Accounting Policies and Estimates**

 

This discussion andanalysis of our financial condition and results of operations is based upon ourunaudited condensed consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets, liabilities,revenues and expenses, and related disclosure of contingent assets andliabilities. On an on-going basis, we evaluate our critical accounting policiesand estimates. We base our estimates on historical experience and on variousother assumptions that we believe to be reasonable under the circumstances, theresults of which form the basis for our judgments about the carrying values ofassets and liabilities that are not readily apparent from other sources. Actualresults may differ from these estimates. Our critical accounting policies andestimates are discussed in our Annual Report on Form 10-K for the fiscalyear ended December 31, 2007 with the exception of the additional policiesdiscussed below.

 

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*Fair value measurements*

 

Effective January 1,2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  In February 2008, the FASB issued FASBStaff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157,”which provides a one year deferral of the effective date of SFAS 157 fornon-financial assets and non-financial liabilities, except those that arerecognized or disclosed in the financial statements at fair value at leastannually. Therefore, we have adopted the provisions of SFAS 157 with respect toits financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fairvalue under generally accepted accounting principles and enhances disclosuresabout fair value measurements. Fair value is defined under SFAS 157 as theexchange price that would be received for an asset or paid to transfer aliability (an exit price) in the principal or most advantageous market for theasset or liability in an orderly transaction between market participants on themeasurement date. Valuation techniques used to measure fair value under SFAS157 must maximize the use of observable inputs and minimize the use ofunobservable inputs. The standard describes a fair value hierarchy based onthree levels of inputs, that may be used to measure fair value, of which thefirst two are considered observable and the last unobservable:

 

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

 

·                  Level2 - Inputs other than Level 1 that are observable, either directly or indirectly,such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; orother inputs that are observable or can be corroborated by observable marketdata for substantially the full term of the assets or liabilities.

 

·                  Level3 - Unobservable inputs that are supported by little or no market activity andthat are significant to the fair value of the assets or liabilities.

 

The adoption of thisstatement did not have a material impact on our consolidated results of operationsand financial condition.  In October 2008the FASB Issued FASB Staff Position No. FAS157-3, “Determining the FairValue of a Financial Asset When the Market for that Asset is Not Active” (“FSP157-3”), to clarify the application of the provisions of SFAS 157 in inactivemarket and how an entity would determine fair value in an inactive market.  FSP 157-3 is effective immediately andapplies to the Company’s current quarter financial statements.  The application of the provision of FSP 157-3did not affect the Company’s results of operations or financial condition as ofand for the periods ended September 30, 2008.

 

Our Level 3 investmentsas of September 30, 2008 include high-grade auction rate securitiesprimarily consisting of government guaranteed student loans.  Auction rate securities are securities thatare structured with short-term interest rates which periodically reset throughauctions, typically within every 90 days. At the end of each reset period, investors can sell or continue to holdthe securities at par. During the current quarter, some of the auction ratesecurities were sold and others failed to auction successfully due to marketsupply exceeding market demand.  In theevent of a failed auction, the notes continue to bear interest at a predeterminedmaximum rate based on the credit rating of notes as determined by one or morenationally recognized statistical rating organizations. The funds associatedwith failed auctions will not be accessible until a successful auction occurs,a buyer is found outside of the auction process, the issuers redeem thesecurities or the underlying securities have matured.  As a result, we have classified all auctionrate securities as long-term assets in the condensed consolidated balancesheets.  In October 2008, weaccepted an offer (the “UBS Offer”) from UBS AG (“UBS”), one of our investmentproviders.  As a UBS client who holdsAuction Rate Securities (“ARS”), we will receive ARS Rights, which will entitleus to sell ARS to UBS affiliates during the period from June 30, 2010 to July 2,2012 for a price equal to par value.  Inexchange for the issuance of the ARS Rights, the UBS affiliates will have thediscretionary right to sell our eligible ARS on our behalf, without priornotification, at any time during a two-year period beginning June 30,2010.  We also received communicationsfrom Wachovia Securities indicating that they will soon offer to purchase, nolater than June 30, 2009, at par value ARS held by us.  We currently hold $37.4 million of auction ratesecurities with UBS and $20.4 million of auction rate securities with Wachovia.

 

Due to the currenteconomic environment in which there is a lack of market activity for auctionrate securities, we have been unable to obtain quoted prices or market pricesfor identical assets as of the measurement date resulting in significantunobservable inputs used in determining the fair value.  We estimated the fair value of these auctionrate securities using the income approach based on the following: (i) theunderlying structure and contractual provisions of each security; (ii) thepresent value of future principal and interest payments discounted at ratesconsidered to reflect current market conditions; and (iii) considerationof the probabilities of default, auction failure, or repurchase at par for eachperiod. These estimated fair values could change significantly based on futuremarket conditions, which could result in recognizing an other-than-temporaryimpairment loss.

 

The fair value indicatedby this approach yielded a value that approximated the par value of therespective securities.

 

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*Valuation of Goodwill*

 

We conducted our annualimpairment test of goodwill as of September 30, 2008 in accordance with Statementof Financial Accounting Standard 142 (“SFAS 142”), “Goodwill and OtherIntangible Assets” and SFAS 144, “Accounting for the Impairment or Disposal ofLong-Lived Assets.”  Impairment is tested at the reporting unitlevel which is one level below the reportable segments.  Potential goodwill impairment is measuredbased upon a two-step process.  In thefirst step, we compare the fair value of a reporting unit with its carryingamount including goodwill.  If the fairvalue of a reporting unit exceeds its carrying amount, goodwill of thereporting unit is considered not impaired, thus the second step of theimpairment test is unnecessary.  If thecarrying amount of a reporting unit exceeds its fair value, the second step ofthe goodwill impairment test is performed to measure the amount of animpairment loss.

 

As a result of this test,we determined that the carrying amounts of our Consumer segment reporting unitsexceeded their fair values and recorded a goodwill impairment charge ofapproximately $164.5 million and an impairment charge for other intangibles of$3.1 million in the current quarter.  Theimpairment charge was primarily due to a decrease in valuation based on adecline in our business forecasts as a result of the current economic downturnas well as a decline in our stock value over the last several months due to thecurrent global financial crisis.  Thefair values of reporting units were estimated using the expected present valueof future cash flows.  The total of allreporting fair values was also compared to our market capitalization plus acontrol premium for reasonableness.

 

**Resultsof Operations**

 

The following tablesummarizes selected consolidated statement of operations data and changes fromthe period to period

  (dollars in thousands, except for percentages):

 
| ** **                                                  | ** ** | **Three Months Ended****September 30,** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **2008**                                     | ** ** | **2007**   | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                                  | ** ** | ** **                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                   |       |                                         |       |       |       |   |   |   |   |
| Hardware product  revenues                                  |       | $                                            | 112,112    |       | $          | 129,820 |   | $ | (17,708 | ) | (13.6 | )% |
| Software and  other revenues                                |       | 14,022                                       |       | 16,606     |       | (2,584 | ) | (15.6 | )% |
| Total revenues                                              |       | 126,134                                      |       | 146,426    |       | (20,292 | ) | (13.9 | )% |
|                                                        |       |                                         |       |       |       |   |   |   |   |
| Cost and  expenses:                                         |       |                                         |       |       |       |   |   |   |   |
| Cost of hardware  product revenues                          |       | 66,446                                       |       | 69,876     |       | (3,430 | ) | (4.9 | )% |
| Research and  development                                   |       | 28,922                                       |       | 28,063     |       | 859 |   | 3.1 | % |
| Selling, general  and administrative                        |       | 23,653                                       |       | 28,043     |       | (4,390 | ) | (15.7 | )% |
| Amortization of  intangible assets                          |       | 4,494                                        |       | 9,648      |       | (5,154 | ) | (53.4 | )% |
| Impairment of  goodwill and intangible assets               |       | 167,579                                      |       | —     |       | 167,579 |   |   | * |
| Total costs and  expenses                                   |       | 291,094                                      |       | 135,630    |       | 155,464 |   |   | * |
| Operating income  (loss)                                    |       | (164,960                                     | )          | 10,796     |       | (175,756 | ) |   | * |
|                                                        |       |                                         |       |       |       |   |   |   |   |
| Interest and  other income (expense), net                   |       | 3,020                                        |       | 4,046      |       | (1,026 | ) | (25.4 | )% |
| Provision  (benefit) for income taxes                       |       | (7,720                                       | )          | 1,700      |       | (9,420 | ) |   | * |
| Net income  (loss)                                          |       | $                                            | (154,220   | )          | $          | 13,142 |   | $ | (167,362 | ) |   | * |
|                                                        |       |                                         |       |       |       |   |   |   |   |
| Supplemental  Operating Data:                               |       |                                         |       |       |       |   |   |   |   |
|                                                        |       |                                         |       |       |       |   |   |   |   |
| Cost of hardware  product as % of hardware product revenues |       | 59.3                                         | %          | 53.8       | %          |   |   |   |   |

 

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*      notmeaningful

 

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| ** **                                                  | ** ** | **Nine Months Ended****September 30,** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **2008**                                    | ** ** | **2007**   | ** ** | **$** | ** ** | **%** | ** ** |
| ** **                                                  | ** ** | ** **                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                   |       |                                        |       |       |       |   |   |   |   |
|                                                        |       |                                        |       |       |       |   |   |   |   |
| Hardware product  revenues                                  |       | $                                           | 320,015    |       | $          | 331,510 |   | $ | (11,495 | ) | (3.5 | )% |
| Software and  other revenues                                |       | 43,835                                      |       | 46,478     |       | (2,643 | ) | (5.7 | )% |
| Total revenues                                              |       | 363,850                                     |       | 377,988    |       | (14,138 | ) | (3.7 | )% |
|                                                        |       |                                        |       |       |       |   |   |   |   |
| Cost and  expenses:                                         |       |                                        |       |       |       |   |   |   |   |
| Cost of hardware  product revenues                          |       | 192,595                                     |       | 174,252    |       | 18,343 |   | 10.5 | % |
| Research and  development                                   |       | 87,606                                      |       | 83,027     |       | 4,579 |   | 5.5 | % |
| Selling, general  and administrative                        |       | 73,552                                      |       | 85,050     |       | (11,498 | ) | (13.5 | )% |
| Amortization of  intangible assets                          |       | 22,987                                      |       | 33,986     |       | (10,999 | ) | (32.4 | )% |
| Impairment of  goodwill and intangible assets               |       | 167,579                                     |       | —     |       | 167,579 |   |   | * |
| In-process  research and development                        |       | 22,383                                      |       | —     |       | 22,383 |   |   | * |
| Total costs and  expenses                                   |       | 566,702                                     |       | 376,315    |       | 190,387 |   |   | * |
| Operating income  (loss)                                    |       | (202,852                                    | )          | 1,673      |       | (204,525 | ) |   | * |
|                                                        |       |                                        |       |       |       |   |   |   |   |
| Interest and  other income (expense), net                   |       | 9,664                                       |       | 12,133     |       | (2,469 | ) | (20.3 | )% |
| Provision  (benefit) for income taxes                       |       | 2,330                                       |       | 6,350      |       | (4,020 | ) | (63.3 | )% |
| Net income  (loss)                                          |       | $                                           | (195,518   | )          | $          | 7,456 |   | $ | (202,974 | ) |   | * |
|                                                        |       |                                        |       |       |       |   |   |   |   |
| Supplemental  Operating Data:                               |       |                                        |       |       |       |   |   |   |   |
| Cost of hardware  product as % of hardware product revenues |       | 60.2                                        | %          | 52.6       | %          |   |   |   |   |

 

----

*      notmeaningful

 

*Revenues*

 

Total revenues were$126.1 million for the three months ended September 30, 2008 compared to$146.4 million for the three months ended September 30, 2007.  Consumer segment revenues decreased by $11.6million while Imaging segment revenues decreased $8.7 million.  Within the Consumer segment, revenues for DVDand Mobile products were down by $28.9 million and $2.7 million, respectively.Partially offsetting the decrease in DVD and Mobile products’ revenue was anincrease in DTV products revenue of $20.0 million. The decrease in Imagingsegment revenues was due to a reduction in Imaging hardware product revenues of$6.4 million and a decrease in Imaging software and other revenues of $2.3million.  We believe that the recentworldwide economic downturn has adversely affected the markets that our customersserve, and we expect this impact may continue to reduce sales of our productsuntil the economy begins to recover.

 

Total revenues were$363.8 million for the nine months ended September 30, 2008 compared to$378.0 million for the nine months ended September 30, 2007.  Consumer segment revenues decreased by $3.2million while Imaging segment revenues decreased $11.0 million.  The decrease in Consumer segment revenues wasprimarily a result of decreases in revenues for DVD products of $50.8 millionand Mobile products of $2.6 million which was partially offset by an increasein revenues for DTV products of $50.2 million. The decrease in Imaging segment revenues was primarily due to areduction in Imaging hardware product revenues of $9.3 million and a decreasein software and other revenues of $1.7 million.

 

Hardware product revenuesfor the three months ended September 30, 2008 were $112.1 million comparedto $129.8 million for the comparable period of the prior year.  Hardware product revenues decreased $11.3million in the Consumer segment and $6.4 million in the Imaging segment.  Within the Consumer segment, hardware productrevenues for DVD and Mobile products decreased by $29.0 million and $2.7million respectively. DVD hardware product revenues were down due to decreasedunit shipments while Mobile hardware product revenues were primarily down dueto lower average selling prices. Partially offsetting the decreases in hardwareproduct revenues for DVD and Mobile products was an increase of $20.4 millionfor DTV products principally due to increased unit shipments. The decrease inImaging hardware product revenues was mainly due to lower unit shipments.

 

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Hardware product revenuesfor the nine months ended September 30, 2008 were $320.0 million comparedto $331.5 million for the comparable period of the prior year.  Hardware product revenues decreased $2.2million in the Consumer segment and $9.3 million in the Imaging segment.  Within the Consumer segment, hardware productrevenues for DVD and Mobile products decreased by $50.4 million and $2.6million, respectively. The decrease in hardware product revenues for DVDproducts was primarily due to lower unit shipments while the decrease in Mobileproducts was mainly due to lower average selling prices. Partially offsettingthe reduced hardware product revenues for DVD and Mobile products was anincrease of $50.8 million for DTV products due primarily to increased unitshipments.  The decrease in Imaginghardware product revenues was primarily due to reduced unit shipments.

 

Software and otherrevenues were $14.0 million and $43.8 million for the three and nine month periodsended September 30, 2008, respectively, compared to $16.6 million and$46.5 million for the three and nine month periods ended September 30,2007, respectively.  The changes insoftware and other revenues were primarily due to decrease in royalty revenuesfrom customers in the Imaging segment due to decrease in unit shipments ofproducts that include our software and the timing of new agreements.

 

*Cost of Hardware Product Revenues*

 

Theincrease in hardware product costs as a percentage of hardware product revenuesfor the three and nine month periods ended September 30, 2008, compared tothe same period in 2007, was primarily a result of product mix —products with a higher percent of cost per revenue represented a greaterproportion of products sold.  In thefirst half of 2008, we experienced initial cost challenges related to ramp involume of new products.  Since then wehave seen and we expect to continue to see improvements in the cost structureassociated with these new products. Cost of hardware product revenues as apercentage of product revenue was also impacted by declines in average sellingprices, particularly for our Mobile and DVD products.

 

*Research and Development*

 

Research and developmentexpenses increased by $0.9 million and $4.6 million for the three and ninemonth periods ended September 30, 2008, respectively, compared to the sameperiods in 2007.  Research anddevelopment expenses tend to fluctuate based on the timing of majorengineering-related expenses, such as tape-outs as well as continuedinvestments in research and development across both of our segments.

 

*Selling, General and Administrative*

 

Selling, general andadministrative expenses decreased by $4.4 million and $11.5 million for thethree and nine month periods ended September 30, 2008, respectively,compared to the same periods in 2007. These decreases were primarily attributed to decreases in legal andaccounting expenses which were high in 2007 as a result of our review ofhistorical stock option granting practices. In addition, stock-based compensation expenses were lower for the threeand nine month periods ended September 30, 2008 compared to the sameperiods in 2007.

 

*Amortization of Intangible Assets*

 

During the three and ninemonth periods ended September 30, 2008, we incurred charges of $4.5 and$23.0 million, respectively, related to the amortization of intangible assetscompared to $9.6 million and $34.0 million of such charges for the three andnine month periods ended September 30, 2007, respectively.  At September 30, 2008, we hadapproximately $1.2 million in net intangible assets acquired through the Let ItWave acquisition, which we will continue to amortize on a straight line basisthrough 2011.

 

*Impairment of Goodwill and Intangible Assets*

 

During the currentquarter, as a result of our annual impairment test, we determined that thecarrying amount of certain reporting units exceeded their fair value resultingin an impairment charge of $164.5 million related to goodwill recorded in ourConsumer business segment and $3.1 million related to intangible assets in ourConsumer business segment.

 

*In-ProcessResearch and Development*

 

During the nine monthsended September 30, 2008, the Company recorded an in-process research anddevelopment expense of $22.4 million as part of the June 2008acquisition of Let It Wave.  There wereno charges recorded for in-process research and development during 2007.

 

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*Interest and Other Income(Expense)*

 

Interest and other income(expense) was $3.0 and $9.7 million for the three and nine month periods ended September 30,2008, respectively, compared to $4.0 million and $12.1 million for the sameperiods of 2007, respectively.  Interestincome was $3.0 million and $10.8 million for the three and nine month periodsended September 30, 2008, respectively, compared to $4.3 million and $11.7million for the same period of 2007.  Thedecrease in interest income for the three and nine month periods ended September 30,2008 was primarily due to lower average interest earned on our cash and shortterm investment balances due to declines in the interest rate.  The changes in other income (expense) for thethree and nine month periods ended September 30, 2008 were primarily dueto foreign currency remeasurement losses as a result of the decline in thevalue of the U.S. dollar in comparison to currencies in countries in which weoperate and fluctuations in realized gains due to timing of sale ofinvestments.

 

*Provision (Benefit) for Income Taxes*

 

We recorded a tax benefitof $7.7 million and a provision of $2.3 million for the three and nine monthperiods ended September 30, 2008, respectively, compared to a taxprovision of $1.7 million and $6.4 million for the three and nine month periodsended September 30, 2007, respectively. The provision (benefit) for the three and nine month periods ended September 30,2008 reflects the estimated annual tax rate applied to the year to date pre taxloss, adjusted for certain discrete items that are fully recognized in theperiod they occur.  During the thirdquarter we determined that for a material foreign jurisdiction we are unable toreliably predict the expected annual earnings, and we removed this jurisdictionfrom our effective tax rate calculation. We calculated tax separately for that jurisdiction and included it inthe total provision for income taxes.

 

The income tax provision (benefit) for theseperiods was affected by the geographic distribution of our worldwide earningsand losses, the impact of recording a valuation allowance and the release ofthe valuation allowance at December 31, 2007, non-deductible expenses suchas SFAS 123R stock-based compensation expense, as well as the accrual ofliabilities associated with unrecognized tax benefits.  Our Israel based subsidiary is an “ApprovedEnterprise” under Israeli law, which provides a ten-year tax holiday for incomeattributable to a portion of our operations in Israel.  In addition, due to a statute of limitationslapse there was a release of approximately $1.0 million of our FASBInterpretation No. 48, Accounting for Uncertainty in Income Taxes (“FIN 48”)reserve and a provision to return adjustment of $1.0 million that were fullyrecognized in the period they occurred.

 

**Liquidity and Capital Resources**

 

At September 30,2008, we had $98.1 million of cash and cash equivalents, $206.0 million ofshort term investments and $57.8 million of long term investments.  At September 30, 2008, we had $362.8million of working capital.

 

Cash provided byoperating activities was $0.5 million during the first nine months of2008.  While we recorded a net loss of$195.6 million, this loss included non-cash items such as impairment ofgoodwill and intangible assets of $167.6 million, amortization of $23.0million, depreciation of $6.0 million, in-process research and developmentexpense of $22.4 million and stock-based compensation expense of $10.0 million.  Cash provided by operations was primarily dueto decreases in accounts receivable, prepaid expenses and other current assetsand other assets by $6.7 million due to the timing of collections and payments.These changes were partially offset by a decrease in accounts payable, accruedexpenses and other liabilities totaling $40.5 million due to timing ofpayments.

 

Cash provided byinvesting activities was $6.1 million during the nine months ended September 30,2008 principally reflecting the proceeds from sales and maturities ofinvestments, net of purchases, of $33.8 million.  This was partially offset by $22.8 millionused for the acquisition of Let It Wave and $4.9 million used for purchases ofproperty and equipment.

 

Cash used in financingactivities during the nine months ended September 30, 2008 was $5.8million primarily for repurchase of common stock of $10.0 million under ourStock Repurchase Program.  This waspartially offset by $4.2 million of proceeds received from issuances of commonstock through exercises of stock options and proceeds from the sale of stockunder our employee stock purchase plan.

 

Our operating activitiesgenerated cash of $63.6 million during the first nine months of 2007, primarilydue to net income of $7.5 million adjusted for non-cash items such asamortization of $34.0 million, depreciation of $5.9 million and stock- basedcompensation expense of $10.6 million. Cash provided by operations also increased due to a $6.3 millionincrease in accounts payable; $14.3 million increase in accrued expenses andother liabilities and other long term liabilities due to timing of payments anda $11.4 million decrease in inventory as a result of an increase inshipments.  These increases werepartially offset by an increase in accounts receivable by $17.8 million due toincrease in revenues that occurred late in the quarter and an increase inprepaid expenses and other current assets by $7.8 million.

 

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Cash used in investingactivities was $67.1 million during the nine months ended September 30,2007, principally reflecting the net purchase of investments of $59.6million.  In addition we spent $7.5million for the purchases of property and equipment.

 

Cash provided byfinancing activities during the nine months ended September 30, 2007 was$6.0 million and consisted of proceeds received from issuances of commonstock through exercises of employee stock options.

 

At September 30,2008, we did not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes.  Accordingly, we arenot exposed to the type of financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

 

We believe that ourcurrent balances of cash, cash equivalents and short-term investments, andanticipated cash flow from operations, will satisfy our anticipated workingcapital and capital expenditure requirements at least through the next 12months.  We intend to hold our auctionrate securities for the foreseeable future and have classified them as along-term asset and do not expect this to have an impact on our liquidity.  Nonetheless, our future capital requirementsmay vary materially from those now planned and will depend on many factorsincluding, but not limited to:

 

·                  the levels atwhich we maintain inventories and accounts receivable;

 

·                  the marketacceptance of our products;

 

·                  the levels ofpromotion and advertising required to launch our new products or to entermarkets and attain a competitive position in the marketplace;

 

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

 

·                  volume pricingconcessions;

 

·                  capitalimprovements to new and existing facilities;

 

·                  technologicaladvances;

 

·                  the response ofcompetitors to our products; and

 

·                  ourrelationships with our suppliers and customers.

 

In addition, we mayrequire an increase in the level of working capital to accommodate plannedgrowth, hiring and infrastructure needs.  Additional capital may also be required foradditional acquisitions of businesses, products or technologies.

 

To the extent that ourexisting resources and cash generated from operations are insufficient to fundour future activities, we may need to raise additional funds through public orprivate financings or borrowings.  Ifadditional funds are raised through the issuance of debt securities, thesesecurities could have rights, preferences and privileges senior to holders ofcommon stock, and the terms of this debt could impose restrictions on ouroperations.  The sale of additionalequity or convertible debt securities could result in additional dilution toour stockholders.  We cannot be certainthat additional financing will be available in amounts or on terms acceptableto us, if at all.  If we are unable toobtain this additional financing, we may be required to reduce the scope of ourplanned product development and sales and marketing efforts, which could harmour business, financial condition and operating results.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

We are exposed tofinancial market risks, including changes in interest rates and foreigncurrency exchange rates.

 

**InterestRate Risk**

 

We invest in a variety offinancial instruments, consisting principally of investments in commercialpaper, money market funds, auction rate securities and highly liquid debtsecurities of corporations, municipalities and the United States government andits agencies. These investments are denominated in United States dollars. We donot maintain derivative financial instruments. We place our investments ininstruments that meet high credit quality standards, as specified in ourinvestment policy guidelines.

 

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We account for ourinvestment instruments in accordance with SFAS 115, *Accounting for Certain Investments in Debt and EquitySecurities*. All of the cash equivalents and marketable securitiesare treated as “available-for-sale” under SFAS 115. Investments in bothfixed rate and floating rate interest earning instruments carry a degree ofinterest rate risk. Fixed rate securities may have their market value adverselyimpacted due to a rise in interest rates, while floating rate securities mayproduce less income than expected if interest rates fall. Due in part to thesefactors, our future investment income may fall short of expectations due to changesin interest rates or we may suffer losses in principal if we are forced to sellsecurities that decline in market value due to changes in interest rates.However, because we classify our debt securities as “available-for-sale” nogains or losses are recognized due to changes in interest rates unless suchsecurities are sold prior to maturity or declines in fair value are determinedto be other than temporary.  Thesesecurities are reported at fair value with the related unrealized gains andlosses included in accumulated other comprehensive income, a component ofstockholders’ equity, net of tax.  In October 2008,we accepted an offer (the “UBS Offer”) from UBS AG (“UBS”), one of ourinvestment providers.  As a UBS clientwho holds Auction Rate Securities (“ARS”), we will receive ARS Rights, whichwill entitle us to sell 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 ARSRights, the UBS affiliates will have the discretionary right to sell oureligible ARS on our behalf, without prior notification, at any time during atwo-year period beginning June 30, 2010. We also received communications from Wachovia Securities indicating thatthey will soon offer to purchase, no later than June 30, 2009, at parvalue ARS held by us.  We currently hold$37.4 million of auction rate securities with UBS and $20.4 million of auctionrate securities with Wachovia.

 

Due mainly to theshort-term nature of the major portion of our investment portfolio, the fairvalue of our investment portfolio or related income would not be significantlyimpacted by either a 10% increase or decrease in interest rates.

 

**ExchangeRate Risk**

 

We consider our directexposure to foreign exchange rate fluctuations to be minimal.  Currently, sales and arrangements withthird-party manufacturers provide for pricing and payment in United Statesdollars, and, therefore, are not subject to exchange rate fluctuations. Increasesin the value of the United States’ dollar relative to other currencies wouldmake our products more expensive, which could negatively impact our ability tocompete.  Conversely, decreases in thevalue of the United States’ dollar relative to other currencies could result inour suppliers raising their prices in order to continue doing business with us.

 

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

 

**Item 4.Controls and Procedures**

 

***DisclosureControls and Procedures****.*Underthe supervision and with the participation of our management, including ourChief Executive Officer and our Chief Financial Officer, we evaluated theeffectiveness of our disclosure controls and procedures, as such term isdefined under Rule 13a-15(e) promulgated under the SecuritiesExchange Act of 1934, as amended. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer****concluded that our disclosure controls and procedures were effectiveas of the end of the period covered by this quarterly report.

 

***Changes to Internal Control OverFinancial Reporting.*** There were no changes in our internal controlover financial reporting during the quarter ended September 30, 2008 thathave materially affected****or arereasonably likely to materially affect our internal control over financialreporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

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

 

**Item1A.   Risk Factors**

 

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

 

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

 

Our historical operatingresults have varied significantly from period to period due to a number offactors, including:

 

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

 

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

 

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

 

the timing or cancellation of large customerorders;

 

the length and variability of the sales cyclefor our products;

 

pricing policy changes by us and by ourcompetitors and suppliers;

 

the cyclical nature of the semiconductorindustry;

 

the availability of development funding andthe timing of development revenue;

 

changes in the mix of products sold;

 

seasonality in demand for our products;

 

increased competition in product lines, andcompetitive pricing pressures; and

 

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

 

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

 

the cost and availability of adequate foundrycapacity;

 

fluctuations in manufacturing yields;

 

changes in or the emergence of new industrystandards;

 

failure to anticipate changing customerproduct requirements;

 

the loss or gain of important customers;

 

product obsolescence; and

 

the amount of research and developmentexpenses associated with new product introductions.

 

Our operating resultscould also be harmed by:

 

economic conditions generallyor in various geographic areas where we or our customers do business;

 

financial instability as a result of problems with mortgage-relatedsecurities, liquidity of financial institutions, and credit market problems;

 

terrorism and international conflicts orother crises;

 

other conditions affecting the timing ofcustomer orders;

 

changes in governmental regulations thatcould affect our products;

 

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

 

disruption in commercial activitiesassociated with heightened security concerns affecting international travel andcommerce;

 

reduced demand for consumer electronicproducts due to an economic slowdown;

 

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

 

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

 

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

 

These factors aredifficult or impossible to forecast. We place orders with independent foundriesseveral months in advance of the scheduled delivery date, often in advance ofreceiving non-cancelable orders from our customers. This limits our ability toreact to fluctuations in demand for their products. If anticipated shipments inany quarter are canceled or do not occur as quickly as expected, or if we failto foresee a technology change that could render a product obsolete, expenseand inventory levels could be disproportionately high. If anticipated licenserevenues in any quarter are canceled or do not occur, gross margins may bereduced.

 

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

 

**Ourcustomers experience fluctuating product cycles and seasonality, which causestheir sales to fluctuate.**

 

Because the markets thatour customers serve are characterized by numerous new product introductions andrapid product enhancements, our operating results may vary significantly fromquarter to quarter. During the final production of a mature product, ourcustomers typically exhaust their existing inventories of our products.Consequently, orders for our products may decline in those circumstances, evenif the products are incorporated into both mature products and replacementproducts. A delay in a customer’s transition to commercial production of areplacement product would delay our ability to recover the lost sales from thediscontinuation of the related mature product. Our customers also experiencesignificant seasonality in the sales of their consumer products, which affectstheir orders of our products. Typically, the second half of the calendar yearrepresents a disproportionate percentage of sales for our customers due to theholiday shopping period for consumer electronics products, and therefore, adisproportionate percentage of our sales. We expect these seasonal salesfluctuations to continue for the foreseeable future and an economic slowdowncould increase the seasonal decline in sales that we typically see in the firsthalf of the calendar year.

 

Our ability to matchproduction mix with the product mix needed to fill current orders and orders tobe delivered in the given quarter may affect our ability to meet that quarter’srevenue forecast. In addition, when responding to customers’ requests forshorter shipment lead times, we manufacture products based on forecasts ofcustomers’ demands. These forecasts are based on multiple assumptions. If weinaccurately forecast customer demand, we may hold inadequate, excess orobsolete inventory that would reduce our profit margins and adversely affectour results of operations and financial condition.

 

**The worldwide economic downturnand other adverse economic factors would be likely to reduce our sales andrevenues, increase our expenses and hurt our profitability, results ofoperations and financial condition.**

 

The current worldwideeconomic downturn is likely to reduce consumer spending on products made by ourcustomers. Other factors, such as unemployment levels, inflation, deflation,fuel and energy costs, consumer debt levels, interest rates and tax rates, mayalso reduce overall consumer spending or shift consumer spending to productsother than those made by our customers. Reduced sales by our customers would be likely to hurt our business byreducing our sales for their existing products and slowing new productintroductions by our customers and by us. Lower net sales of our products wouldreduce our immediate and future revenues. In addition, our expenses could rise due to, among others, fluctuationsof the value of United States dollar, changes in interest and tax rates anddecreased inventory turnover.  Suchreduction of our revenues and increase of our expenses would hurt ourprofitability and adversely affect our results of operations and financialcondition.  In preparing our financial statements we arerequired to make estimates and assumptions that affect amounts reported in thefinancial statements and accompanying notes, and some of those estimates arebased on our forecasts of future results.  The current volatility in theworldwide economy increases the risk that our actual results will differmaterially from our forecasts, requiring adjustments in future filings.

 

**Ourproducts are characterized by average selling prices that typically declineover relatively short time periods; if we are unable to reduce our costs orintroduce new products with higher average selling prices, our financialresults will suffer.**

 

Average selling pricesfor our products typically decline over relatively short time periods, whilemany of our manufacturing costs are fixed. When our average selling pricesdecline, our revenues decline unless we are able to sell more units and ourgross margins decline unless we are able to reduce our manufacturing costs by acommensurate amount. Our operating results suffer when gross margins decline.We have experienced these problems, and we expect to continue to experiencethem in the future, although we cannot predict when they may occur or howsevere they will be.

 

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**Our operating results may beharmed by worldwide economic downturn, as well as by cyclical and volatileconditions in the markets we address. As a result, our business, financialcondition and results of operations could be materially and adversely affected.**

 

We operate in thesemiconductor industry, which is cyclical and from time to time has experiencedsignificant downturns. Downturns in the industry often occur in connectionwith, or anticipation of, maturing product cycles for semiconductor companiesand their customers, and declines in general economic conditions.  These downturns can cause abrupt fluctuationsin product demand, production over-capacity and accelerated decline of averageselling prices. The recent emergence of a number of negative economic factors,including heightened fears of a recession, could lead to such a downturn in ourindustry, which could harm our revenue and our results of operations. Anydownturn in the semiconductor industry may be severe and prolonged. Thesemiconductor industry also periodically experiences increased demand andproduction capacity constraints, which may affect our revenue if we are unableto ship products to meet customer requirements.

 

The recent worldwidedownturn, due to the crisis in credit markets, slower economic activity,concerns about inflation and deflation, increased energy costs, decreasedconsumer confidence and spending, reduced corporate profits and capitalspending, and other adverse business conditions, makes it extremely difficultfor our customers, our vendors and us to accurately forecast and plan futurebusiness activities.  This downturn couldcause U.S. and foreign businesses to slow spending on our products andservices, which would delay and lengthen sales cycles. We cannot predict thetiming, strength or duration of any economic slowdown or subsequent economicrecovery, worldwide, or in the semiconductor industry. If the economy ormarkets in which we operate continue to be subject to these adverse economicconditions, our business, financial condition and results of operations willlikely be materially and adversely affected. Additionally, the combination ofour lengthy sales cycle coupled with challenging macroeconomic conditions couldhave a synergistic negative impact on the results of our operations.

 

**Oursuccess for the foreseeable future will depend on demand for integratedcircuits for a limited number of applications.**

 

In recent years, we havederived a substantial majority of our product revenues from the sale ofintegrated circuits for DVD and digital camera applications. We expect thatsales of our products for these applications will continue to account for asignificant portion of our revenues for the foreseeable future. Our futurefinancial performance will also depend on our ability to successfully developand market new products in the digital television, HDTV and digital imagingmarkets. If the markets for these products and applications decline or fail todevelop as expected, or we are not successful in our efforts to market and sellour products to manufacturers who incorporate integrated circuits into theseproducts, our financial results will be harmed.

 

**Ourfinancial performance is highly dependent on the timely and successfulintroduction of new and enhanced products.**

 

Our financial performancedepends in large part on our ability to successfully develop and marketnext-generation and new products in a rapidly changing technologicalenvironment. If we fail to successfully identify new product opportunities andtimely develop and introduce new products that achieve market acceptance, wemay lose our market share and our future revenues and earnings may suffer.

 

In the consumerelectronic market, our performance has been dependent on our successfuldevelopment and timely introduction of integrated circuits for DVD players,digital cameras, multimedia accelerators for mobile phones, broadband digitaltelevision and HDTV. These markets are characterized by the incorporation of asteadily increasing level of integration and numbers of features on a chip atthe same or lower system cost, enabling original equipment manufacturers, orOEMs, to continually improve the features or reduce the prices of the systemsthey sell. If we are unable to continually develop and introduce integratedcircuits with increasing levels of integration and new features at competitiveprices, our operating results will suffer.

 

In the Imaging market,our performance has been dependent on our successful development and timelyintroduction of integrated circuits for printers and multi-functionperipherals. These markets are characterized by the incorporation of a steadilyincreasing level of integration and higher speeds on a chip at the same orlower system cost, enabling OEMs to improve the performance and featuresor reduce the prices of the systems they sell. If we are unable to develop andintroduce integrated circuits with increasing levels of integration,performance and new features at competitive prices, our operating results willsuffer. The performance of our software licensing business is dependent on ourability to develop and introduce new releases of our software, whichincorporate new or enhanced printing standards, as well as performanceenhancements required by our OEM customers. If we are unable to develop andrelease versions of our software supporting required standards and offeringenhanced performance, our operating results will suffer.

 

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**Weface competition or potential competition from companies with greater resourcesthan 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 wecompete are intensely competitive and are characterized by rapid technologicalchange, declining average unit selling prices and rapid product obsolescence.We expect competition to increase in the future from existing competitors andfrom other companies that may enter our existing or future markets withsolutions which may be less costly or provide higher performance or moredesirable features than our products. Competition typically occurs at thedesign stage, when customers evaluate alternative design approaches requiringintegrated circuits. Because of short product life cycles, there are frequentdesign win competitions for next-generation systems.

 

Our existing andpotential competitors include many large domestic and international companiesthat have substantially greater financial, manufacturing, technological,market, distribution and other resources. These competitors may also havebroader product lines and longer standing relationships with customers andsuppliers than we have.

 

Some of our principalcompetitors maintain their own semiconductor foundries and may therefore benefitfrom capacity, cost and technical advantages. Our principal competitors in theintegrated audio and video devices for DVD applications include MediaTek, andSunplus. In the markets for digital cameras, our principal competitors arein-house solutions developed and used by major Japanese OEMs, as well asproducts sold by Ambarella, Fujitsu, MediaTek, Novatech, Sunplus and TexasInstruments. In the market for multimedia acceleration for Mobile phones, ourprincipal competitors include AMD, Broadcom, CoreLogic, MtekVision, NVIDIA andTelechips.  In the market for JPEG-basedproducts for desktop video editing applications, our principal competitor isSunplus. Cirrus Logic (Crystal Semiconductor), Freescale Semiconductor,Fujitsu, STMicroelectronics and Yamaha are currently shipping DolbyDigital-based audio compression products. Our principal competitors for digitalsemiconductor devices in the digital television market include Broadcom,M-Star, Mediatek and ST Microelectronics. Others who also participate in thismarket are Micronas, NXP and Trident Microsystems.  Competitors in the printer and multifunctionperipheral space include Conexant, Global Graphics, Marvell Semiconductor andin-house captive suppliers.

 

We believe that growth ofthe DVD player market will be modest in the foreseeable future, and thatcontinued strong competition will lead to further price reductions, and reducedprofit margins. We also face significant competition in the digital imaging anddigital camera markets. The future growth of both markets is highly dependenton OEMs continuing to outsource an increasing portion of their productdevelopment work. Many of our existing competitors, as well as OEM customersthat are expected to compete with us in the future, have substantially greaterfinancial, manufacturing, technical, marketing, distribution and otherresources, broader product lines and longer standing relationships withcustomers than we have. In addition, much of our future success is dependent onthe success of our OEM customers. If we or our OEM customers are unable tocompete successfully against current and future competitors, we couldexperience price reductions, order cancellations and reduced gross margins, anyone of which could harm our business.

 

**Wemust keep pace with rapid technological changes and evolving industry standardsto remain competitive.**

 

Our future success willdepend on our ability to anticipate and adapt to changes in technology andindustry standards and our customers’ changing demands. The consumerelectronics market, in particular, is characterized by rapidly changingtechnology, evolving industry standards, frequent new product introductions,short product life cycles and increasing demand for higher levels ofintegration. Our ability to adapt to these changes and to anticipate futurestandards, and the rate of adoption and acceptance of those standards, will bea significant factor in maintaining or improving our competitive position andprospects for growth. If new industry standards emerge, our products or theproducts of our customers could become unmarketable or obsolete, and we couldlose market share or be required to incur substantial unanticipated costs tocomply with these new standards.

 

Our success will alsodepend on the successful development of new markets and the application andacceptance of new technologies and products in those new markets. For example,our success will depend on the ability of our customers to develop new productsand enhance existing products in the DVD player market and products for thebroadband digital television and HDTV markets and to introduce and promotethose products successfully. These markets may not continue to develop to theextent or in the time periods that we currently anticipate due to factors outsideour control, such as delays in implementation of FCC 02-320 requiring all newtelevisions to include a digital receiver by February 2009. If new marketsdo not develop as we anticipate, or if our products do not gain widespreadacceptance in these markets, our business, financial condition and results ofoperations could be harmed. The emergence of new markets for our products isalso dependent in part upon third parties developing and marketing content in aformat compatible with commercial and consumer products that incorporate ourproducts. If this content is not available, manufacturers may not be able tosell products incorporating our products, and our sales would suffer.

 

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

 

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

 

**Werely on independent foundries and contractors for the manufacture, assembly andtesting of our integrated circuits and other hardware products, and the failureof any of these third parties to deliver products or otherwise perform asrequested could damage our relationships with our customers and harm our salesand financial results.**

 

We do not operate anymanufacturing facilities, and we rely on independent foundries to manufacturesubstantially all of our products. These independent foundries fabricateproducts for other companies and may also produce products of their own design.From time to time, there are manufacturing capacity shortages in thesemiconductor industry. We do not have long-term supply contracts with any ofour suppliers, including our principal supplier Taiwan SemiconductorManufacturing Company, or TSMC, and our principal assembly houses. Therefore,TSMC and our other suppliers are not obligated to manufacture products for usfor any specific period, in any specific quantity or at any specified price,except as may be provided in a particular purchase order.

 

Our reliance onindependent foundries involves a number of risks, including:

 

the inability to obtain adequatemanufacturing capacity;

 

the unavailability of or interruption inaccess to certain process technologies necessary for manufacture of ourproducts;

 

lack of control over delivery schedules;

 

lack of control over quality assurance;

 

lack of control over manufacturing yields andcost; and

 

potential misappropriation of ourintellectual property.

 

In addition, TSMC andsome of our other foundries are located in areas of the world that are subjectto natural disasters such as earthquakes. While the 1999 earthquake in Taiwandid not have a material impact on our independent foundries, a similar eventcentered near TSMC’s facility could severely reduce TSMC’s ability tomanufacture our integrated circuits. The loss of any of our manufacturers as asupplier, our inability to expand the supply of their products in response toincreased demand, or our inability to obtain timely and adequate deliveriesfrom our current or future suppliers due to a natural disaster or any otherreason could delay or reduce shipments of our products. Any of thesecircumstances could damage our relationships with current and prospectivecustomers and harm our sales and financial results.

 

We also rely on a limitednumber of independent contractors for the assembly and testing of our products.Our reliance on independent assembly and testing houses limits our control overdelivery schedules, quality assurance and product cost. Disruptions in theservices provided by our assembly or testing houses or other circumstances thatwould require them to seek alternative sources of assembly or testing couldlead to supply constraints or delays in the delivery of our products. Theseconstraints or delays could damage our relationships with current andprospective customers and harm our financial results.

 

**Becausefoundry capacity is limited from time to time, we may be required to enter intocostly long-term supply arrangements to secure foundry capacity.**

 

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

 

option payments or other prepayments to afoundry;

 

nonrefundable deposits with or loans to foundriesin exchange for capacity commitments;

 

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

 

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issuance of our equity securities to afoundry;

 

investment in a foundry;

 

joint ventures; or

 

other partnership relationships withfoundries.

 

We may not be able tomake any such arrangement in a timely fashion or at all, and such arrangements,if any, may not be on terms favorable to us. Moreover, if we are able to securefoundry capacity, we may be obligated to utilize all of that capacity or incurpenalties. Such penalties may be expensive and could harm our financialresults.

 

**Ifour independent foundries do not achieve satisfactory yields, our relationshipswith our customers may be harmed.**

 

The fabrication ofsilicon wafers is a complex process. Minute levels of contaminants in themanufacturing environment, defects in photo masks used to print circuits on awafer, difficulties in the fabrication process or other factors can cause asubstantial 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 themanufacturing process and may be time consuming and expensive to correct. As aresult, foundries often experience problems achieving acceptable yields, whichare represented by the number of good integrated circuits as a proportion of thenumber of total integrated circuits on any particular wafer. Poor yields fromour independent foundries would reduce our ability to deliver our products tocustomers, harm our relationships with our customers and harm our business.

 

**Weare dependent upon our international sales and operations; economic, politicalor military events in a country where we make significant sales or havesignificant operations could interfere with our success or operations there andharm our business.**

 

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

 

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

 

operating innew countries where we have limited or no experience;

 

unexpected changes in regulatoryrequirements;

 

fluctuations in exchange rates;

 

political and economic instability;

 

imposition of tariffs and other barriers andrestrictions;

 

the burdens of complying with a variety offoreign laws; and

 

health risks in a particular region.

 

A material amount of ourresearch and development personnel and facilities and a portion of our salesand marketing personnel are located in Israel. Political, economic and militaryconditions in Israel directly affect our operations. Some of our employees inIsrael are obligated to perform up to 36 days of military reserve dutyannually. The absence of these employees for significant periods during the workweek may cause us to operate inefficiently during these periods.

 

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

 

We also maintain officesin Canada, England, France, Germany, Hong Kong, India, Israel, Japan, Korea andTaiwan, and our operations are subject to the economic and politicaluncertainties affecting these countries as well.

 

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The significantconcentration of our manufacturing activities with third party foundries inTaiwan exposes us to the risk of political instability in Taiwan, including thepotential for conflict between Taiwan and China. We have several significantOEM customers in Japan, Korea and other parts of Asia. Adverse economiccircumstances in Asia could affect these customers’ willingness or ability todo business with us in the future or their success in developing and launchingdevices containing our products.

 

**Thecomplexity of our international operations may****increase our operating expenses and disrupt ourrevenues and business.**

 

We transact business andhave operations worldwide.  For example,international transactions form a substantial majority of our sales, oursemiconductor products are manufactured, assembled and tested outside of theUnited States, and in June 2008 we acquired a foreign corporation.  Our global operations involve significantcomplexity and difficulties, including:

 

monitoring andcomplying with applicable laws and regulatory requirements;

 

staffing andmanaging global operations;

 

complying withstatutory equity requirements; and

 

managing taxconsequences.

 

If we are unable tomanage the complexity of our global operations successfully, our financialperformance and operating results could suffer.

 

**Theprices of our products may become less competitive due to foreign exchangefluctuations.**

 

Foreign currencyfluctuations may affect the prices of our products. Prices for our products arecurrently denominated in U.S. dollars for sales to our customers throughout theworld. If there is a significant devaluation of the currency in a specificcountry, the prices of our products will increase relative to that country’scurrency, our products may be less competitive in that country and our revenuesmay be adversely affected. Also, we cannot be sure that our internationalcustomers will continue to be willing to place orders denominated in U.S.dollars. If they do not, our revenue and operating results will be subject toforeign exchange fluctuations.

 

**Becausewe have significant operations in Israel, our business and future operatingresults could be harmed by future terrorist activity or military conflict.**

 

We conduct a significant portionof our research and development and engineering activities at our design centerin Haifa, Israel, a 109,700 square foot facility where we employ approximately400 people. We also conduct a portion of our sales and marketing operations atour Haifa facility. We have an additional 16,100 square foot facility in KfarNetter, Israel, where we conduct research and development activities.

 

In addition, militaryconflict in the Middle East or future terrorist activities there or elsewherein the world could harm our business as a result of a disruption in commercialactivity affecting international commerce or a general economic slowdown andreduced demand for consumer electronic products.

 

**Changesin, or interpretations of, tax rules and regulations may adversely affectour effective tax rates.**

 

Unanticipated changes inour tax rates could affect our future results of operations. Our futureeffective tax rates could be unfavorably affected by changes in tax laws or theinterpretation of tax laws, by unanticipated decreases in the amount of revenueor earnings in countries with low statutory tax rates, or by changes in thevaluation of our deferred tax assets and liabilities. The ultimate outcomes ofany future tax audits are uncertain, and we can give no assurance as to whetheran adverse result from one or more of them will have a material effect on ouroperating results and financial position.

 

**Theinflation in foreign countries****or thedecline in the value of United States dollar compared to those foreign currenciesmay negatively impact our costs.**

 

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

 

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**Wederive most of our revenue from sales to a small number of large customers, andif we are not able to retain these customers, or they reschedule, reduce or cancelorders, our revenues would be reduced and our financial results would suffer.**

 

Our largest customershave accounted for a substantial percentage of our revenues. In 2007, onecustomer accounted for 13% of our total revenues, while sales to our ten largestcustomers accounted for 60% of our total revenues. In 2006, one customeraccounted for 12% of our total revenues, and sales to our ten largest customersaccounted for 58% of our total revenues. Sales to these large customers havevaried significantly from year to year and will continue to fluctuate in thefuture. These sales also may fluctuate significantly from quarter to quarter.We may not be able to retain our key customers, or these customers may cancelpurchase orders or reschedule or decrease their level of purchases from us. Anysubstantial decrease or delay in sales to one or more of our key customerscould harm our sales and financial results. In addition, any difficulty incollecting amounts due from one or more key customers could harm our financialresults. As of December 31, 2007 three customers accounted forapproximately 11%, 11% and 10% of the net accounts receivable balance,respectively.

 

**Ourproducts generally have long sales cycles and implementation periods, whichincreases our costs in obtaining orders and reduces the predictability of ouroperating results.**

 

Our products aretechnologically complex. Prospective customers generally must make asignificant commitment of resources to test and evaluate our products and tointegrate them into larger systems. As a result, our sales processes are oftensubject to delays associated with lengthy approval processes that typicallyaccompany the design and testing of new products. The sales cycles of ourproducts often last for many months. Longer sales cycles require us to investsignificant resources in attempting to make sales and delay the generation ofrevenue.

 

Long sales cycles alsosubject us to other risks, including customers’ budgetary constraints, internalacceptance reviews and cancellations. In addition, orders expected in onequarter could shift to another because of the timing of customers’ purchasedecisions.

 

The time required for ourcustomers to incorporate our products into their own can vary significantlywith the needs of our customers and generally exceeds several months, whichfurther complicates our planning processes and reduces the predictability ofour operating results.

 

**Weare not protected by long-term contracts with our customers.**

 

We generally do not enterinto long-term purchase contracts with our customers, and we cannot be certainas to future order levels from our customers. Customers generally purchase ourproducts subject to cancelable short-term purchase orders. We cannot predictwhether our current customers will continue to place orders, whether existingorders will be canceled, or whether customers who have ordered products willpay invoices for delivered products. When we do enter into a long-termcontract, the contract is generally terminable at the convenience of thecustomer. Early termination by one of our major customers would harm ourfinancial results.

 

**Ourproducts could contain defects, which could reduce sales of those products orresult in claims against us.**

 

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

 

**Regulationof our customers’ products may slow the process of introducing new products andcould impair our ability to compete.**

 

The FederalCommunications Commission, or FCC, has broad jurisdiction over our targetmarkets in the digital television business. Various international entities ororganizations may also regulate aspects of our business or the business of ourcustomers. Although our products are not directly subject to regulation by anyagency, the transmission pipes, as well as much of the equipment into which ourproducts are incorporated, are subject to direct government regulation. Forexample, before they can be sold in the United States, 

 

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advanced televisions andemerging interactive displays must be tested and certified by UnderwritersLaboratories and meet FCC regulations. Accordingly, the effects of regulationon our customers or the industries in which our customers operate may in turnharm our business. FCC regulatory policies affecting the ability of cableoperators or telephone companies to offer certain services and other terms onwhich these companies conduct their business may impede sales of our products.In addition, our digital television business may also be adversely affected bythe imposition of tariffs, duties and other import restrictions on oursuppliers or by the imposition of export restrictions on products that we sellinternationally. Changes in current laws or regulations or the imposition ofnew laws or regulations in the United States or elsewhere could harm ourbusiness. For example, any delays by the FCC in imposing its pendingrequirement that all new televisions have a digital receiver could have anadverse effect on our HDTV business.

 

**Ourability to compete could be jeopardized if we are unable to protect ourintellectual property rights.**

 

Our success and abilityto 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 toprotect our proprietary rights. These agreements and measures may not besufficient to protect our technology from third-party infringement, or toprotect us from the claims of others. Monitoring unauthorized use of ourproducts is difficult, and we cannot be certain that the steps we have takenwill prevent unauthorized use of our technology, particularly in foreigncountries where the laws may not protect our proprietary rights as fully as inthe United States. The laws of certain foreign countries in which our productsare or may be developed, manufactured or sold, including various countries inAsia, may not protect our products or intellectual property rights to the sameextent as do the laws of the United States and thus make the possibility ofpiracy of our technology and products more likely in these countries. Ifcompetitors are able to use our technology, our ability to compete effectivelycould be harmed.

 

The protection offered bypatents is subject to numerous uncertainties. For example, our competitors maybe able to effectively design around our patents, or the patents may bechallenged, invalidated or circumvented. Those competitors may alsoindependently develop technologies that are substantially equivalent orsuperior to our technology. Moreover, while we hold, or have applied for,patents relating to the design of our products, some of our products are basedin part on standards, for which we do not hold patents or other intellectualproperty rights.

 

We have generally limitedaccess to and distribution of the source and object code of our software andother proprietary information. With respect to our page descriptionlanguage software, System On a Chip platform firmware and drivers for thedigital office market and in limited circumstances with respect to firmware andplatforms for our DTV products, we grant licenses that give our customersaccess to and restricted use of the source code of our software. This accessincreases the likelihood of misappropriation or misuse of our technology.

 

**Claimsand litigation regarding intellectual property rights and breach of contractclaims could seriously harm our business and require us to incur significantcosts.**

 

In recent years, therehas been significant litigation in the United States involving patents andother intellectual property rights. In the past, we have been subject to claimsand litigation regarding alleged infringement of other parties’ intellectualproperty rights, and we have been parties to a number of patent-relatedlawsuits, both as plaintiff and defendant. We could become subject toadditional litigation in the future, either to protect our intellectualproperty or as a result of allegations that we infringe others’ intellectualproperty rights or have breached our contractual obligations to others. Claimsthat our products infringe proprietary rights or that we have breachedcontractual obligations would force us to defend ourselves and possibly ourcustomers or manufacturers against the alleged infringement or breach. Futurelitigation against us, if successful, could subject us to significant liabilityfor damages or invalidation of our proprietary rights. These lawsuits,regardless of their success, are time-consuming and expensive to resolve andrequire significant management time and attention. Future intellectual propertyand breach of contract litigation could force us to do one or more of thefollowing:

 

stop selling products that incorporate thechallenged intellectual property;

 

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

 

pay damages; or

 

redesign those products that use suchtechnology.

 

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Although patent disputesin the semiconductor industry have often been settled through cross-licensingarrangements, we may not be able in any or every instance to settle an allegedpatent infringement claim through a cross-licensing arrangement. We have a morelimited patent portfolio than many of our competitors. If a successful claim ismade against us or any of our customers and a license is not made available tous on commercially reasonable terms or we are required to pay substantialdamages or awards, our business, financial condition and results of operationswould be materially adversely affected.

 

**Ifnecessary licenses of third-party technology are not available to us or arevery expensive, our products could become obsolete.**

 

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

 

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

 

**Ifwe are not able to apply our net operating losses against taxable income infuture periods, our financial results will be harmed.**

 

Our future net income andcash flow will be affected by our ability to apply our net operating losscarryforwards, or NOLs, against taxable income in future periods. Our NOLs totaledapproximately $141 million for federal and $32 million for state taxreporting purposes as of December 31, 2007. The Internal Revenue Codecontains a number of provisions that limit the use of NOLs under certaincircumstances. In 2006, we reduced the NOL deferred tax asset for amounts whichwe believe will expire before they become available for utilization. Changes intax laws in the United States may further limit our ability to utilize theseNOLs. Any further limitation on our ability to utilize these respective NOLscould harm our financial condition.

 

**Anyacquisitions we make could disrupt our business and severely harm our financialcondition.**

 

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

 

issue stock that would dilute its currentstockholders’ percentage ownership;

 

incur debt;

 

use a significant amount of our cash;

 

assume liabilities;

 

incur expenses related to the futureimpairment of goodwill and the amortization of intangible assets; or

 

incur other large write-offs immediately orin the future.

 

Our operation of acquiredbusiness will also involve numerous risks, including:

 

problems combining the purchased operations,technologies or products;

 

acquisition of unproven technologies underdevelopment;

 

unanticipated costs;

 

diversion of management’s attention from ourcore business;

 

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adverse effects on existing businessrelationships with customers;

 

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

 

potential loss of key employees, particularlythose of the purchased organizations.

 

In June 2008 weacquired Let It Wave, a French company, and its frame rate conversiontechnology, which is still in development. There is no assurance that we will be able to integrate Let It Wave withour business, or complete the development of this technology and bring it tomarket.  We may not be able tosuccessfully complete the integration of the business, products or technologiesor personnel that we have acquired in the past or might acquire in the future,and any failure to do so could disrupt our business and seriously harm ourfinancial condition.

 

**Ifour goodwill or amortizable intangible assets become impaired we may berequired to record a significant charge to earnings.**

 

We review our goodwilland intangible assets for impairment, no less often than annually, when changesin circumstances indicate the carrying value may not be recoverable. A changein circumstances may be indicated, and the carrying value of our goodwill orintangible assets may be impaired (not be recoverable), where there aredeclines in our stock price and market capitalization, declines in expectedfuture cash flows, or slower growth rates in our industry. When we performedour annual impairment test in the current quarter, we determined that goodwilland intangible assets related to our reporting units in the Consumer businesssegment were impaired and therefore recorded a charge of $167.6 million in thecurrent quarter for impairment of goodwill and intangible assets.

 

If our future financialperformance or other events indicate that the value of our recorded goodwill orintangibles is impaired, we may record additional impairment charges that couldadversely affect our financial results. In addition, our impairment analysisinvolves determining the fair value of our business using a projecteddiscounted cash flow analysis that is based on significant estimates, such asour projections of future sales volume and timing, margins and operating costs,and the discount rate we use to calculate present value of future cashflow.  Changes to these estimates maycause us to recognize an impairment loss that could be material to ourfinancial results.

 

**Ifwe fail to manage our future growth, if any, our business would be harmed.**

 

We anticipate that ourfuture growth, if any, will require us to recruit and hire a substantial numberof new engineering, managerial, sales and marketing personnel. Our ability tomanage growth successfully will also require us to expand and improveadministrative, operational, management and financial systems and controls.Many of our key operations, including a material portion of our research anddevelopment operations and a significant portion of our sales andadministrative operations are located in Israel. A majority of our sales andmarketing and certain of our research and development and administrativepersonnel, including our President and Chief Executive Officer and otherofficers, are based in the United States. The geographic separation of theseoperations places additional strain on our resources and our ability to managegrowth effectively. If we are unable to manage growth effectively, our businesswill be harmed.

 

**Weare exposed to fluctuations in the market values of our portfolio investmentsand in interest rates.**

 

At the end of September 2008,we had $361.9 million in cash, cash equivalents and investments. We investour cash in a variety of financial instruments, consisting principally ofinvestments in commercial paper, money market funds, auction rate securitiesand highly liquid debt securities of corporations, municipalities and theUnited States government and its agencies. These investments are denominated inU.S. dollars.

 

The Company’s investmentsat September 30, 2008 include $57.8 million of high-grade auctionrate securities primarily consisting of government guaranteed student loans.Auction rate securities are securities that are structured with short-terminterest rates which periodically reset through auctions, typically withinevery 90 days. At the end of each reset period, investors can sell orcontinue to hold the securities at par. During February 2008, some of theauction rate securities failed to auction successfully due to market supplyexceeding market demand. In the event of a failed auction, the notes continueto bear interest at a predetermined maximum rate based on the credit rating ofnotes as determined by one or more nationally recognized statistical ratingorganizations. The funds associated with failed auctions will generally not beaccessible until a successful auction occurs, a buyer is found outside of theauction process, the issuers redeem the securities or the underlying securitieshave matured.  The securities firms wherethe auction rate securities are held have agreed to repurchase the auction ratesecurities at par within the next one to two years.  As a result, the Company has classified allauction rate securities as long-term assets at cost in the condensedconsolidated balance sheets as of September 30, 2008 and December 31,2007.

 

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Investments in both fixedrate and floating rate interest earning instruments carry a degree of interestrate risk. Fixed rate debt securities may have their market value adverselyimpacted due to a rise in interest rates, while floating rate securities mayproduce less income than expected if interest rates fall. Due in part to thesefactors, our future investment income may fall short of expectations due tochanges in interest rates or if the decline in fair value of our publiclytraded equity investments and auction rate securities is judged to beother-than-temporary. We may suffer losses in principal if we are forced tosell 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 ratesunless such securities are sold prior to maturity. Recent events in thesubprime mortgage market and with auction rate securities could negativelyimpact our return on investment for these debt securities and thereby reducethe amount of cash and cash equivalents and long-term investments on ourbalance sheet.

 

**Werely on the services of our executive officers and other key personnel, whoseknowledge of our business and industry would be extremely difficult to replace.**

 

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

 

**Provisionsin our charter documents and Delaware law could prevent or delay a change incontrol of Zoran.**

 

Our certificate ofincorporation and bylaws and Delaware law contain provisions that could make itmore difficult for a third party to acquire us, even if doing so would bebeneficial to our stockholders. These include provisions:

 

prohibiting a merger with a party that has acquired control of 15% ormore of our outstanding common stock, such as a party that has completed asuccessful tender offer, until three years after that party acquired control of15% of our outstanding common stock;

 

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

 

eliminating stockholders’ rights to call aspecial meeting of stockholders; and

 

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

 

**Ourstock price has fluctuated and may continue to fluctuate widely.**

 

The market price of ourcommon stock has fluctuated significantly since our initial public offering in1995. Between January 1, 2008 and September 30, 2008, the closingsale price of our common stock, as reported on the Nasdaq Global Select Market,ranged from a low of $7.90 to a high of $22.48. The market price of our commonstock is subject to significant fluctuations in the future in response to avariety of factors, including:

 

announcements concerning our business or thatof our competitors or customers;

 

annual and quarterly variations in ouroperating results;

 

changes in analysts’ earnings estimates;

 

announcements of technological innovations;

 

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

 

loss of key personnel;

 

proprietary rights or other litigation;

 

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general conditions in the semiconductorindustry; and

 

developments in the financial markets.

 

From time to time thestock market experiences extreme price and volume fluctuations that haveparticularly affected the market prices for semiconductor companies ortechnology companies generally and which have been unrelated to the operatingperformance of the affected companies. Broad market fluctuations of this typemay reduce the future market price of our common stock.

 

**Theindependent investigation of our historical stock option practices andresulting restatements and derivative lawsuits have been time consuming andexpensive, and may continue to have an adverse effect on our financialperformance.**

 

The independentinvestigation of our historical stock option practices and resultingrestatement activities and derivative lawsuits have required us to expendsignificant management time and incur significant accounting, legal and otherexpenses totaling $7.9 million in 2007 and $0.1 million and $1.6 millionfor the three and nine month periods ended September 30, 2008. Theresulting restatements recorded in the 2006 Annual Report on Form 10-K hada material adverse effect on our results of operations. We recorded additionalstock-based compensation expense of $11.7 million for stock option grants,recognized over the periods from 1997 to 2005. There was no tax impact of theseadditional stock-based compensation expenses due to the full valuationallowance on our tax assets at the time of restatement. In addition, werecorded other adjustments previously considered to be immaterial totaling$1.3 million (net of tax of $0.2 million). As a result, our restatedconsolidated financial statements included in the 2006 Annual Report on Form 10-Kreflected a decrease in net income of $13.0 million for the period of 1997to 2005.  As a result of the amount ofmanagement attention and expenditure of funds on the investigation, restatementand litigation, we may have missed important market opportunities or ourcompetitors may have gained advantages, and we may not find similaropportunities or adequately cope with those competitive challenges.

 

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

 

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

 

**Itmay be difficult or costly to obtain director and officer liability insurancecoverage as a result of our stock options issues.**

 

We expect that the issuesarising from our historical stock option grant practices and the relatedaccounting will make it more difficult to obtain director and officer insurancecoverage in the future. If we are able to obtain this coverage, it could besignificantly more costly than in the past, which would have an adverse effecton our financial results and cash flow. As a result of this and relatedfactors, our directors and officers could face increased risks of personalliability in connection with the performance of their duties. As a result, wemay have difficultly attracting and retaining qualified directors and officers,which could adversely affect our business.

 

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**Item 2. Unregistered Sales of Equity Securities and Use of Proceeds**

 

**Purchasesof Equity Securities by the Issuer and Affiliated Purchasers**

 

Stock repurchase activityduring the three months ended September 30, 2008 was as follows:

 
| **Period**                                       | ** ** | **Total Number of  Shares (or Units)  Purchased** | ** ** | **Average Price  Paid per Share  (or Unit)** | ** ** | **Total Number of  Shares (or Units)  Purchased as Part of  Publicly Announced  Plans or Programs** | ** ** | **Maximum Number (or  Approximate Dollar Value) of  Shares (or Units) that May  Yet Be Purchased Under the  Plans or Programs** | ** **  |
|--------------------------------------------------|------------|-----------------------------------------------------------------------|------------|------------------------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------------|------------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|-------------|
| July 1, 2008 – July 31, 2008      |       | N/A                                                                   |       | N/A                                                              |       | N/A                                                                                                                                                   |       | $                                                                                                                                                                                                          | 100,000,000 |   |
| August 1, 2008 – August 31, 2008  |       | 1,163,569                                                             |       | $                                                                | 8.60       |                                                                                                                                                  | N/A        |                                                                                                                                                                                                       | $           | 89,987,962 |   |
| September 1, 2008 – September 30, 2008 |       | N/A                                                                   |       | N/A                                                              |       | N/A                                                                                                                                                   |       | $                                                                                                                                                                                                          | 89,987,962  |   |
| Total                                            |       | 1,163,569                                                             |       | $                                                                | 8.60       |                                                                                                                                                  |       |                                                                                                                                                                                                       | $           | 89,987,962 |   |

 

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Note:

 

All sharespurchased as part of publicly announced plans during the three months ended September 30,2008 were purchased under a repurchase program we announced on March 5,2008. Under this program, we are authorized to repurchase up to$100.0 million of our common stock from time to time.  The amount and timing of specific repurchasesunder this program are subject to market conditions, applicable legalrequirements and other factors, including management’s discretion.  The average price paid per share is based onthe total price paid by the Company which includes applicable broker fees.

 

**Item 6. Exhibits**

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

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
| ** **                         | **ZORAN CORPORATION**                         |
|------------------------------------|-----------------------------------------------|
|                               |                                          |
|                               |                                          |
| Dated: November 10, 2008 | /s/ Karl Schneider                            |
|                               | Karl Schneider                                |
|                               | Senior Vice President,  Finance               |
|                               | and Chief Financial Officer                   |
|                               | (Principal Financial  and Accounting Officer) |

 

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