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

Our products include integrated circuits and related products used in DVD players, movie and home theater systems, digital cameras and video editing systems, standard and high definition digital televisions, and set-top boxes. We also provide high performance, low-power application processors, technology and products for the multimedia mobile phone market, and digital imaging semiconductor products and software that enable users to print, scan, process and transmit documents. We sell our products to original equipment manufacturers (OEMs) that incorporate them into products for consumer and commercial applications, and to resellers.

Although we experienced significant revenue growth in the DTV product line, some of our other product lines saw considerable revenue declines based on lower demand as a result of the global economic slowdown beginning in 2008. In response to the challenging economic environment we are taking steps to control costs while maintaining a strong balance sheet.

Revenues

We derive most of our revenues from the sale of our integrated circuit and system-on-a-chip products. Historically, average selling prices for our products, consistent with average selling prices for products in the semiconductor industry generally, have decreased over time. Average selling prices for our products have fluctuated substantially from period to period, reflecting changes in our mix of sales to OEM customers versus resellers and transitions from low-volume to high-volume production. In the past, we have periodically reduced the prices of some of our products in order to better penetrate the consumer market. We believe that, as our product lines continue to mature and competitive markets evolve, we are likely to experience further declines in the average selling prices of our products, although we cannot predict the timing and amount of such future changes with any certainty.

We also derive revenues from licensing our software and other intellectual property. Licensing revenues include one-time license fees and royalties based on the number of units distributed by the licensee. Quarterly licensing revenues can be significantly affected by the timing of a small number of licensing transactions, each accounting for substantial revenues. Accordingly, licensing revenues have fluctuated, and will continue to fluctuate, on a quarterly basis. Our software license agreements typically include obligations to provide maintenance and other support over a fixed term and allow for renewal of maintenance services on an annual basis. We determine the fair value of our maintenance obligations with reference to substantive renewal rates within the agreement or objective evidence of fair value as required under Statement of Position (SOP) 97-2, Software Revenue Recognition. In instances where we are unable to determine the fair value of our maintenance obligations, revenue for the entire arrangement is recognized ratably over the term of the arrangement. We recognize maintenance and support revenue ratably over the term of the arrangement. We also receive royalty revenues based on per unit shipments of products that include our software, which we recognize upon receipt of a royalty report from the customer, typically one quarter after the sales are made by our licensee.

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

Cost of Hardware Product Revenues

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

Research and Development

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

Selling, General and Administrative

Our selling, general and administrative expenses consist primarily of employee-related expenses, sales commissions, product promotion and other professional services.

Income Taxes

Our effective tax rate is highly dependent upon the geographic distribution of our worldwide earnings or losses. Our current tax expense reflects taxes expected to be owed in our profitable jurisdictions. In addition, due to economic changes in the global economy during 2008, we identified material foreign jurisdictions where it is no longer more likely than not that we will fully utilize our deferred tax assets, and continue to record a valuation allowance on the portion of their deferred tax assets which are dependent on future income to be realized.

Our Israel based subsidiary is an "Approved Enterprise" under Israeli law, which provides a ten-year tax holiday for income attributable to a portion of our operations in Israel. Our U.S. federal net operating losses expire at various times between 2009 and 2024, and the benefits from our subsidiary's Approved Enterprise status expire at various times beginning in 2011.

The calculation of our tax liabilities involves dealing with uncertainties in the application of complex tax regulations. We record liabilities for anticipated tax audit issues based on our estimate of whether, and the extent to which, additional taxes may be due. Actual tax liabilities may be different than the recorded estimates and could result in an additional charge or benefit to the tax provision in the period when the ultimate tax assessment is determined. We are currently under a tax audit in Israel for tax years 2005 through 2007 and the California Franchise Tax Board for tax years 2005 and 2006. We believe that we have adequately provided for any potential assessments associated with these audits. It is possible that the amount of our liability for unrecognized income tax benefits may change within the next 12 months. In addition, our income tax expense could be affected as other events occur, income tax audits conclude or statutes of limitations expire. We cannot estimate at this time the range of possible variations in our tax expense.

Segments

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

Critical Accounting Policies and Estimates

The discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our critical accounting policies and estimates. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Our critical accounting policies and estimates are discussed in our Annual Report on Form 10-K for the fiscal year ended December 31, 2008.

Results of Operations

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



                                                     Three Months Ended
                                                         March 31,                     Change
                                                    2009           2008             $            %
Revenues:
Hardware product revenues                         $  55,961      $  94,297      $ (38,336 )    (40.7 )%
Software and other revenues                          12,526         14,734         (2,208 )    (15.0 )%

Total revenues                                       68,487        109,031        (40,544 )    (37.2 )%

Cost and expenses:
Cost of hardware product revenues                    35,998         57,789        (21,791 )    (37.7 )%
Research and development                             29,547         27,887          1,660        6.0 %
Selling, general and administrative                  24,612         25,639         (1,027 )     (4.0 )%
Amortization of intangible assets                       109          9,237         (9,128 )    (98.8 )%

Total costs and expenses                             90,266        120,552        (30,286 )    (25.1 )%

Operating loss                                      (21,779 )      (11,521 )      (10,258 )     89.0 %
Interest and other income (expense), net              3,452          3,813           (361 )     (9.5 )%
Provision (benefit) for income taxes                  2,740         (3,030 )        5,770          *

Net loss                                          $ (21,067 )    $  (4,678 )    $ (16,389 )    350.3 %

Supplemental Operating Data:
Cost of hardware product as % of hardware
product revenues                                       64.3 %         61.3 %

* not meaningful

Revenues

Total revenues were $68.5 million for the three months ended March 31, 2009 compared to $109.0 million for the three months ended March 31, 2008. Consumer segment revenues decreased by $34.1 million while Imaging segment revenues decreased by $6.4 million. Within the Consumer segment, revenues from DVD, Mobile and DTV products were down by $17.0 million, $14.5 million and $2.6 million, respectively. The decrease in Imaging segment revenues was due to a reduction in Imaging hardware product revenues of $5.5 million and a decrease in Imaging software and other revenues of $0.9 million. We believe that the recent worldwide economic downturn has adversely affected the markets that our customers serve, and we expect this impact may continue to reduce sales of our products until the economy begins to recover.

Hardware product revenues for the three months ended March 31, 2009 were $56.0 million compared to $94.3 million for the comparable period of the prior year. Hardware product revenues decreased $32.8 million in the Consumer segment and $5.5 million in the Imaging segment. Within the Consumer segment, hardware product revenues for DVD products decreased by $15.4 million, Mobile products decreased by $14.6 million and DTV products decreased by $2.8 million primarily as a result of lower unit shipments. The decrease in Imaging hardware product revenues was also primarily due to reduced unit shipments.

Software and other revenues were $12.5 million and $14.7 million for the three months ended March 31, 2009 and 2008, respectively. Software and other revenues decreased $1.3 million in the Consumer segment and $0.9 million in the Imaging segment. The decrease in the Consumer segment was primarily due to a $1.5 million decrease in royalty revenue from the Mediatek settlement which ended in the fourth quarter of 2008. The decrease in the Imaging segment was primarily due to decrease in royalty revenues from customers due to decreased unit shipments of products that include our software.

Cost of Hardware Product Revenues

Cost of hardware product revenues was $36.0 million for the quarter ended March 31, 2009 compared to $57.8 million for the same period of 2008. The decrease in cost of hardware product revenues was primarily due to reduced unit shipments. The increase in hardware product costs as a percentage of hardware product revenues in 2009 versus 2008 was primarily a result of product mix - products with a higher percent of cost per revenue represented a greater proportion of products sold. Cost of hardware product revenues as a percentage of product revenue was also impacted by declines in average selling prices, particularly for our Mobile and DVD products.

Research and Development

Research and development expenses were $29.5 million for the three months ended March 31, 2009, compared to $27.9 million for the same period of 2008. The increase was primarily due to a $1.1 million increase as a result of the inclusion of the operations of Let It Wave which we acquired in June 2008; an increase from fluctuations based on the timing of tape-outs which include mask sets and engineering wafers and continued investments in research and development in the consumer segment.

Selling, General and Administrative

Selling, general and administrative expenses were $24.6 million for the three months ended March 31, 2009, compared to $25.6 million for the same period of 2008. The decrease was primarily associated with reduced marketing efforts in certain areas along with cost control measures currently in place.

Amortization of Intangible Assets

During the three months ended March 31, 2009, we incurred charges of $0.1 million related to the amortization of intangible assets compared to $9.2 million of such charges for the three months ended March 31, 2008. The majority of our intangible assets became fully amortized in 2008. At March 31, 2009, we had approximately $1.0 million in net intangible assets acquired through the Let It Wave acquisition, which we will continue to amortize on a straight line basis through 2011.

Interest Income

Interest income was $2.6 million for the three month period ended March 31, 2009, compared to $4.5 million for the same period of 2008. The decrease in interest income in 2009 was primarily due to lower average interest earned on our cash and short term investment balances due to declines in interest rates.

Other Income (Expense), net

Other income, net was $0.8 million for the three month period ended March 31, 2009, compared to an expense of $0.7 million for the same period of 2008. The increase in other income was primarily due to foreign currency remeasurement gains as a result of the strengthening in the value of the U.S. dollar in comparison to currencies in countries in which we operate.

Provision (Benefit) for Income Taxes

We recorded a tax provision of $2.7 million for the three month period ended March 31, 2009 compared to a tax benefit of $3.0 million for the three month period ended March 31, 2008. The provision for income taxes reported for the three months ended March 31, 2009 reflects the estimated annual tax rate applied to the year to date net income in our profitable jurisdictions, adjusted for discrete items which are fully recognized in the period they occur. In certain material foreign jurisdictions we have losses which we do not expect to benefit in 2009. In 2008 we anticipated that our year to date loss would be fully benefitted by the end of the year and accordingly we recognized a benefit on the year to date loss.

The income tax provision (benefit) for these periods was affected by the geographic distribution of our worldwide earnings and losses, the impacts of recording or removing the valuation allowance relating to deferred tax assets, non-deductible expenses such as SFAS 123R stock-based compensation expense, as well as the accrual of liabilities associated with unrecognized tax benefits. Our Israel based subsidiary is an "Approved Enterprise" under Israeli law, which provides a ten-year tax holiday for income attributable to a portion of our operations in Israel.

Liquidity and Capital Resources

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

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

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

Cash provided by financing activities during the three months ended March 31, 2008 was $35,000 and consisted of proceeds received from issuances of common stock through exercises of employee stock options.

Cash used in operating activities was $25.9 million during the three months ended March 31, 2008. While we recorded a net loss of $4.7 million, this loss included non-cash items such as amortization of $9.2 million, depreciation of $2.0 million and stock- based compensation expense of $2.9 million. Cash used in operations was primarily due to an increase in inventory by $15.6 million to meet the expected increase in demand for our products during our upcoming seasonally stronger quarters and decrease in accounts payable, accrued expenses and other liabilities totaling $19.1 million due to timing of payments. These changes were partially offset by a decrease in accounts receivable by $3.2 million due to the timing of collections and payments.

Cash provided by investing activities was $20.4 million during the three months ended March 31, 2008, principally reflecting the proceeds from sales and maturities of investments, net of purchases, of $22.4 million. This increase was partially offset by $2.0 million for the purchases of property and equipment.

Cash provided by financing activities during the three months ended March 31, 2008 was $137,000 and consisted of proceeds received from issuances of common stock through exercises of employee stock options.

At March 31, 2009, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to the type of financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

We believe that our current balances of cash, cash equivalents and short-term investments, and anticipated cash flow from operations, will satisfy our anticipated working capital and capital expenditure requirements at least through the next 12 months. Nonetheless, our future capital requirements may vary materially from those now planned and will depend on many factors including, but not limited to:

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

• the market acceptance of our products;

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

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

• acquisitions of businesses, products or technologies;

• volume pricing concessions;

• technological advances;

• the response of competitors to our products; and

• our relationships with our suppliers and customers.

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

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

At March 31, 2009, we held ARS with a par value of $57.8 million and a fair value of $55.8 million. Our ARS are high grade long-term debt instruments backed by student loans which are guaranteed by the United States government. All of our ARS have credit ratings of AAA or AA, and none are mortgage-backed debt obligations. Historically, our ARS were highly liquid, using a Dutch auction process that resets the applicable interest rate at predetermined intervals, typically every 35 days, to provide liquidity at par. However, as a result of liquidity issues in the global credit and capital markets, the auctions for most of our ARS failed beginning in the first quarter of 2008 when sell orders exceeded buy orders. The failures of these auctions do not affect the value of the collateral underlying the ARS, and we continue to earn and receive interest on our ARS at a pre-determined formula with spreads tied to particular interest rate indexes. However, due to the current financial market environment, we may be unable to sell these ARS which could restrict our liquidity.

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

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