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

Overview

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, or OEM that incorporate them into products for consumer and commercial applications, and to resellers.

During the second half of 2008, our revenues were adversely affected by the deteriorating macroeconomic environment which had the effect of reducing consumer spending. As a result of those deteriorating conditions several cost containment programs were implemented including realigning our resources to increase focus on priorities, reducing investments in certain areas, generally eliminating salary increases, scaling back travel, as well as other measures. In addition, we renewed our focus on maintaining a strong balance sheet, and in particular, managing our cash and inventory balances very closely.

While the global economic downturn continues to affect consumer spending we are seeing some indications that it may be stabilizing. In our DTV product line we have seen increasing demand for low to mid-range LCD TVs where we have a strong market position. We are also seeing some quarterly sequential growth in our digital camera product line also as a result of increased demand for low to mid-range models. The DVD market appears to be improving and we are seeing some increased demand for our value-add DVD products such as HDMI players and portables.

While we have seen some recent strength in demand for certain of our products, consumer spending has not yet reached previous levels and we remain cautious regarding the outlook for the balance of 2009. As a result, we are continuing several of the cost containment measures previously mentioned.

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

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 and 2009, we identified certain foreign jurisdictions where it is no longer more likely than not that we will fully utilize our deferred tax assets, and we continue to record a valuation allowance on the portion of our deferred tax assets which are dependent on future income to be realized. The determination of when to record or remove a valuation allowance is highly subjective and is done by jurisdiction. We rely primarily on an analysis of cumulative earnings or losses and projected future earnings or losses. It is possible that we will remove or record a valuation allowance on these or other jurisdictions in the near future dependent primarily on the actual and projected results in each jurisdiction.

Our 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 for the periods presented (amounts in thousands, except for
percentages):



                                               Three Months Ended
                                                 September 30,                      Change
                                             2009             2008              $              %
Revenues:
Hardware product revenues                  $ 104,980       $  112,112       $   (7,132 )       (6.4 )%
Software and other revenues                   10,558           14,022           (3,464 )      (24.7 )%

Total revenues                               115,538          126,134          (10,596 )       (8.4 )%


Cost and expenses:
Cost of hardware product revenues             59,844           66,446           (6,602 )       (9.9 )%
Research and development                      28,207           28,922             (715 )       (2.5 )%
Selling, general and administrative           23,100           23,653             (553 )       (2.3 )%
Amortization of intangible assets                109            4,494           (4,385 )      (97.6 )%
Impairment of goodwill and intangible
assets.                                           -           167,579         (167,579 )     (100.0 )%

Total costs and expenses                     111,260          291,094         (179,834 )      (61.8 )%

Operating income (loss)                        4,278         (164,960 )        169,238            *


Interest income (expense), net                 2,223            3,032             (809 )      (26.7 )%
Other income (expense), net                     (475 )            (12 )           (463 )          *
Provision (benefit) for income taxes           1,150           (7,720 )          8,870            *

Net income (loss)                          $   4,876       $ (154,220 )     $  159,096            *


Supplemental Operating Data:

Cost of hardware product as % of
hardware product revenues                       57.0 %           59.3 %

* not meaningful

                                               Nine Months Ended
                                                 September 30,                      Change
                                             2009             2008              $              %
Revenues:
Hardware product revenues                  $ 253,120       $  320,015       $  (66,895 )      (20.9 )%
Software and other revenues                   33,627           43,835          (10,208 )      (23.3 )%

Total revenues                               286,747          363,850          (77,103 )      (21.2 )%


Cost and expenses:
Cost of hardware product revenues            150,154          192,595          (42,441 )      (22.0 )%
Research and development                      85,230           87,606           (2,376 )       (2.7 )%
Selling, general and administrative           84,564           73,552           11,012         15.0 %
Amortization of intangible assets                327           22,987          (22,660 )      (98.6 )%
Impairment of goodwill and intangible
assets                                            -           167,579         (167,579 )     (100.0 )%
In-process research and development               -            22,383          (22,383 )     (100.0 )%

Total costs and expenses                     320,275          566,702         (246,427 )      (43.5 )%

Operating loss                               (33,528 )       (202,852 )        169,324            *
Interest income (expense), net                 7,275           10,808           (3,533 )      (32.7 )%
Other income (expense), net                      108           (1,144 )          1,252            *
Provision for income taxes                     3,890            2,330            1,560         67.0 %

Net loss                                   $ (30,035 )     $ (195,518 )     $  165,483            *


Supplemental Operating Data:
Cost of hardware product as % of
hardware product revenues                       59.3 %           60.2 %

* not meaningful

Hardware Product Revenues

Hardware product revenues for the three months ended September 30, 2009 were $105.0 million, compared to $112.1 million for the comparable period of the prior year. Hardware product revenues decreased $5.8 million or 5% in the Consumer segment and $1.3 million or 25% in the Imaging segment. Total units shipped for products in the Consumer segment decreased by 3% and average selling price decreased by 2% compared to the same period of the prior year. Within the Consumer segment, hardware product revenues for Mobile products decreased by $8.2 million or 17%. Total units shipped for Mobile products decreased by 9% and average selling price decreased by 9% compared to the same period of the prior year. Partially offsetting the decrease in hardware product revenues for Mobile products were increases in revenues for DVD and DTV products. Hardware product revenues for DTV products increased by $1.4 million or 3% and DVD products by $0.9 million or 5%. Total DTV product units shipped decreased by 2% principally due to decreased shipment of products for the US terrestrial digital to analog converter box segment, which was offset by an increase in average selling price of 6% compared to the same period of the prior year. Total DVD products units shipped increased by 5% and average selling price was essentially flat compared to the same period of the prior year. The decrease in Imaging hardware product revenues was primarily due to a 25% decrease in unit shipments due to the decrease in demand as a result of the economic downturn. We believe that the recent worldwide recession has adversely affected the markets that our customers serve, and we expect this impact may continue to reduce sales of our products until the worldwide economy recovers.

Hardware product revenues for the nine months ended September 30, 2009 were $253.1 million compared to $320.0 million for the comparable period of the prior year. Hardware product revenues decreased $55.7 million or 19% in the Consumer segment and $11.2 million or 56% in the Imaging segment. The decrease in revenues in the Consumer segment was primarily due to a decrease in total units shipped for products in the Consumer segment by 18% compared to the same period of the prior year. Within the Consumer segment, hardware product revenues for DVD products decreased by $19.1 million or 32%. Total DVD products units shipped decreased by 26% and average selling price decreased by 9% compared to the same period of the prior year. Hardware product revenues for Mobile products decreased by $40.2 million or 30%. Total units shipped for Mobile products decreased by 20% and average selling price decreased by

12% compared to the same period of the prior year. Partially offsetting the reduced hardware product revenues for DVD and Mobile products was an increase of $3.6 million or 3% for DTV products. Total units shipped for DTV products increased by 4%, which was offset by a decrease in average selling price of 1% compared to the same period of the prior year. The decrease in Imaging hardware product revenues was primarily due to a 65% decrease in unit shipments attributable to a decline in our Ink Jet business as well as an overall decline in demand as a result of the economic downturn.

Software and Other Revenues

Software and other revenues were $10.6 million for the three months ended September 30, 2009, compared to $14.0 million for the comparable period of the prior year. Software and other revenues decreased by $2.2 million in the Imaging segment and decreased by $1.2 million in the Consumer segment. The decrease in the Consumer segment was mainly due to the 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 a decrease in royalty revenues from customers due to decreased unit shipments of products that include our software as a result of deterioration in the macroeconomic environment.

Software and other revenues were $33.6 million for the nine months ended September 30, 2009, compared to $43.8 million for the comparable period of the prior year. Software and other revenues decreased by $6.4 million in the Imaging segment and $3.8 million in the Consumer segment compared to the same period in 2008. The decrease in the Consumer segment was primarily a result of the 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 a decrease in royalty revenues due to decreased unit shipments of products that include our software as a result of the current economic slow down.

Cost of Hardware Product Revenues

Cost of hardware product revenues was $59.8 million for the three months ended September 30, 2009, compared to $66.4 million for the same period in 2008. The decrease in cost of hardware product revenues of $6.6 million or 10% was primarily due to lower costs for our integrated circuits, primarily for our Mobile products, as well as a decrease in total units shipped.

Cost of hardware product revenues were $150.2 million for the nine months ended September 30, 2009, compared to $192.6 million for the same period in 2008. The decrease in cost of hardware product revenues of $42.4 million or 22% was primarily due to a decrease in total units shipped of 21% compared to the same period in 2008. Cost of hardware product as percentage of hardware product revenues remained fairy consistent in the nine months ended September 30, 2009 compared to the same period of prior year.

Research and Development

Research and development expenses were $28.2 million for the three months ended September 30, 2009, compared to $28.9 million for the same period in 2008. The decrease in costs by $0.7 million or 3% was primarily due to fluctuations based on the timing of tape-outs which include mask sets and engineering wafers and reduction in payroll costs in certain areas due to cost control measures currently in place.

Research and development expenses were $85.2 million for the nine months ended September 30, 2009 compared to $87.6 million for the same period in 2008. The decrease in costs by $2.4 million or 3% was primarily due to fluctuations based on the timing of tape-outs which include mask sets and engineering wafers and reduction in payroll costs which was partially offset by a $1.1 million increase in costs for the nine months ended September 30, 2009 compared to the same period in 2008 as a result of the inclusion of operations of Let It Wave which we acquired in June 2008.

Selling, General and Administrative

Selling, general and administrative expenses were $23.1 million for the three months ended September 30, 2009, compared to $23.7 million for the same period in 2008, resulting in a minor decrease in costs of $0.6 million or 2%.

Selling, general and administrative expenses were $84.6 million for the nine months ended September 30, 2009 compared to $73.6 million for the same period in 2008. The increase in costs by $11.0 million or 15% was primarily due to one time costs of $11.0 million incurred during the quarter ended June 30, 2009 in connection with the settlement of intellectual property licensing disputes.

Amortization of Intangible Assets

During the three and nine month periods ended September 30, 2009, we incurred charges of $0.1 and $0.3 million, respectively, related to the amortization of intangible assets compared to $4.5 million and $23.0 million for the three and nine month periods ended September 30, 2008, respectively. The majority of our intangible assets became fully amortized in the third quarter of 2008. At September 30, 2009, we had approximately $0.7 million in net intangible assets acquired through the Let It Wave acquisition in June 2008, which we will continue to amortize on a straight line basis through 2011.

Impairment of Goodwill and intangible assets

During the three and nine months ended September 30, 2008, as a result of our annual impairment test, we determined that the carrying amount of certain reporting units exceeded their fair value resulting in an impairment charge of $164.5 million related to goodwill recorded in our Consumer business segment and $3.1 million related to intangible assets in our Consumer business segment.

In-Process Research and Development

During the nine months ended September 30, 2008, we recorded an in-process research and development expense of $22.4 million as part of the June 2008 acquisition of Let It Wave. There were no charges recorded for in-process research and development during 2009.

Interest Income

Interest income was $2.2 million and $7.3 million for the three and nine month periods ended September 30, 2009, respectively, compared to $3.0 million and $10.8 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 expense was $0.5 million for the three months ended September 30, 2009, compared to an expense of $0.01 million for the same period of 2008. Other income was $0.1 million for the nine months ended September 30, 2009, compared to an expense of $1.1 million for the same period of 2008.

The changes in other income or expense were primarily due to foreign currency remeasurement gains or losses as a result of the fluctuations in the value of the U.S. dollar in comparison to currencies in countries in which we operate.

Provision for Income Taxes

We recorded a tax provision of $1.2 and $3.9 million for the three and nine month periods ended September 30, 2009, compared to a tax benefit of $7.7 million and a tax provision of $2.3 million for the three and nine month periods ended September 30, 2008, respectively. The provision for income taxes reported for the three and nine month periods ended September 30, 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 foreign jurisdictions, we have losses which we do not expect to benefit from in 2009. At September 30, 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 losses.

The income tax provision for these periods was affected by the geographic distribution of our worldwide earnings and losses, the impacts of recording or removing a valuation allowance relating to deferred tax assets, non-deductible expenses such as 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 September 30, 2009, we had $96.9 million of cash and cash equivalents, and $301.1 million of short term investments. At September 30, 2009, we had $408.8 million of working capital.

Cash used in operating activities was $7.3 million during the first nine months of 2009. While we recorded a net loss of $30.0 million, this loss included non-cash items such as depreciation of $5.3 million, amortization of $0.3 million and stock-based compensation expense of $9.1 million. Cash from changes in assets and liabilities was primarily due to an increase in accounts payable, accrued expenses, other current liabilities, and other long term liabilities totaling $6.8 million primarily due to an increase in purchases and a decrease in prepaid expenses, as well as an increase in other current assets and other assets by $4.3 million due to timing of payments, and inventory of $6.3 million to meet an increase in demand in the current quarter. These changes were partially offset by an increase in accounts receivable of $9.0 million due to timing of product shipments in the current period.

Cash used in investing activities was $10.3 million during the nine months ended September 30, 2009, principally reflecting the purchases of investments, net of sales and maturities, of $8.1 million and purchases of property and equipment of $2.2 million.

Cash provided by financing activities during the nine months ended September 30, 2009 was $3.8 million and consisted of proceeds from issuances of common stock . . .