UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

(Mark One)

þ		QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

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

Commission file number: 000-49842

 

CEVA, Inc.

Delaware (State or Other Jurisdiction of Incorporation or Organization)		77-0556376 (I.R.S. Employer Identification No.)
2033 Gateway Place, Suite 150, San Jose, California (Address of Principal Executive Offices)		95110-1002 (Zip Code)

Indicate by check mark whether the registrant: (1) has filed all reports to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

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

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

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

Indicate the number of shares outstanding of each of the issuer’s classes of common stock as of the latest practicable date: 21,243,241 shares of common stock, $0.001 par value, as of August 3, 2010.

 

 

TABLE OF CONTENTS

				Page
PART I.		FINANCIAL INFORMATION
Item 1.		Interim Condensed Consolidated Balance Sheets at June 30, 2010 and December 31, 2009			3
		Interim Condensed Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2010 and 2009			4
		Interim Condensed Statements of Changes in Stockholders’ Equity (unaudited) for the six months ended June 30, 2010 and 2009			5
		Interim Condensed Consolidated Statements of Cash Flows (unaudited) for the six months ended June 30, 2010 and 2009			6
		Notes to the Interim Condensed Consolidated Financial Statements			7
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			15
Item 3.		Quantitative and Qualitative Disclosures about Market Risk			21
Item 4.		Controls and Procedures			22
PART II.		OTHER INFORMATION
Item 1.		Legal Proceedings			23
Item 1A.		Risk Factors			23
Item 2		Unregistered Sales Of Equity Securities And Use Of Proceeds			31
Item 6.		Exhibits			31
SIGNATURES					32
Exhibit 31.1
Exhibit 31.2
Exhibit 32

FORWARD-LOOKING STATEMENTS

FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This Quarterly Report contains forward-looking statements that involve risks and uncertainties, as well as assumptions that if they materialize or prove incorrect, could cause the results of CEVA to differ materially from those expressed or implied by such forward-looking statements and assumptions. All statements other than statements of historical fact are statements that could be deemed forward-looking statements. Forward-looking statements are generally written in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements include the following:

	•		Our belief that there is an industry shift towards licensing DSP technology from third party IP providers as opposed to developing it in-house;
	•		Our belief that the penetration of handsets in emerging markets such as China, India and Latin America could generate future growth potential for CEVA;
	•		Our belief that the full scale migration to our DSP cores and technologies in the handsets market has not been fully realized and continues to progress;
	•		Our optimism about adoption of our technologies for new categories of products, such as data cards, USB dongles, smart metering, tablets, netbooks and eReaders;
	•		Our belief that Texas Instruments’ and Freescale’s announcement of their intent to exit the baseband market, after historically having been large players in this market, is a strong positive driver for our future market share expansion;
	•		Our belief that both the handsets and mobile broadband markets continue to present significant growth opportunities for us;
	•		Subject to a return to normal seasonal growth, our optimism about 2010 resulting from key customers with production capability for high volume products, including portable consumer products, set-top boxes, ultra-low-cost phones and smartphones;
	•		Our belief that we are well-positioned to capitalize on the growth in the ultra-low-cost phone, smarphones and mobile broadband markets;
	•		Our belief that our operating expenses will increase in 2010 as compared to 2009;
	•		Our belief that our new DSP core, CEVA-XC, is well positioned to expand our licensee base in existing wireless handsets and new wireless infrastructure markets;
	•		We are experiencing strong interest and pipe line build-up for our DSP cores due to general business improvements in our primary markets, particularly the cellular baseband market, and the availability of CEVA-XC DSP core designs for 4G software;
	•		Our anticipation that our current cash on hand, short-term deposits and marketable securities, along with cash from operations, will provide sufficient capital to fund our operations for at least the next 12 months; and
	•		Our belief that changes in interest rates within our investment portfolio will not have a material affect on our financial position on an annual or quarterly basis.

Forward-looking statements are not guarantees of future performance and involve risks and uncertainties. The forward-looking statements contained in this report are based on information that is currently available to us and expectations and assumptions that we deem reasonable at the time the statements were made. We do not undertake any obligation to update any forward-looking statements in this report or in any of our other communications, except as required by law. All such forward-looking statements should be read as of the time the statements were made and with the recognition that these forward-looking statements may not be complete or accurate at a later date.

Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, those risks set forth in Part II — Item 1A — “Risk Factors” of this Form 10-Q.

This report contains market data prepared by third parties, including Ericsson, Gartner, Inc., ABI Research and iSupply. Actual market results may differ from the projections of such organizations.

PART I. FINANCIAL INFORMATION

Item 1.		FINANCIAL STATEMENTS

INTERIM CONDENSED CONSOLIDATED BALANCE SHEETS
U.S. dollars in thousands, except share and per share data

		June 30,				December 31,
		2010				2009
		Unaudited				Audited
ASSETS
Current assets:
Cash and cash equivalents		$	22,228			$	12,104
Short term bank deposits			12,079				40,056
Marketable securities (see Note 3)			59,214				48,438
Trade receivables (net of allowance for doubtful accounts of $700 at both June 30, 2010 and December 31, 2009)			5,546				5,995
Deferred tax assets			1,059				1,096
Prepaid expenses and other accounts receivable			3,938				5,345
Total current assets			104,064				113,034
Long term bank deposit			15,066				—
Severance pay fund			4,536				4,455
Deferred tax assets			564				309
Property and equipment, net			1,346				1,148
Goodwill			36,498				36,498
Total long-term assets			58,010				42,410
Total assets		$	162,074			$	155,444
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables		$	650			$	530
Deferred revenues			527				432
Accrued expenses and other payables			8,064				9,735
Deferred tax liabilities			1,062				1,168
Total current liabilities			10,303				11,865
Long term liabilities:
Accrued severance pay			4,558				4,483
Stockholders’ equity:
Common Stock:
$0.001 par value: 60,000,000 shares authorized; 21,093,079 and 20,429,736 shares issued and outstanding at June 30, 2010 and December 31, 2009, respectively			21				20
Additional paid in-capital			164,001				158,325
Treasury stock			(1,133	)			—
Accumulated other comprehensive income (loss)			(336	)			251
Accumulated deficit			(15,340	)			(19,500	)
Total stockholders’ equity			147,213				139,096
Total liabilities and stockholders’ equity		$	162,074			$	155,444

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (unaudited)
U.S. dollars in thousands, except share and per share data

		Six months ended								Three months ended
		June 30,								June 30,
		2010				2009				2010				2009
Revenues:
Licensing		$	9,315			$	8,817			$	4,593			$	4,273
Royalties			10,134				7,709				5,154				3,950
Other revenue			1,761				2,097				862				887
Total revenues			21,210				18,623				10,609				9,110
Cost of revenues			1,577				2,362				863				1,152
Gross profit			19,633				16,261				9,746				7,958
Operating expenses:
Research and development, net			9,114				8,071				4,505				3,996
Sales and marketing			3,584				3,286				1,776				1,650
General and administrative			3,116				3,030				1,570				1,558
Total operating expenses			15,814				14,387				7,851				7,204
Operating income			3,819				1,874				1,895				754
Financial income, net			1,098				950				541				474
Other income (see Note 10)			—				1,901				—				1,901
Income before taxes on income			4,917				4,725				2,436				3,129
Income tax expenses			735				1,042				313				814
Net income		$	4,182			$	3,683			$	2,123			$	2,315
Basic net income per share		$	0.20			$	0.19			$	0.10			$	0.12
Diluted net income per share		$	0.19			$	0.19			$	0.10			$	0.12
Weighted-average number of shares of Common Stock used in computation of net income per share (in thousands):
Basic			20,859				19,536				21,061				19,515
Diluted			21,991				19,884				22,069				20,014

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

INTERIM CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (unaudited)
U.S. dollars in thousands, except share data

																		Accumulated
										Additional								other								Total				Total
Six months ended		Common stock								paid-in				Treasury				comprehensive				Accumulated				Comprehensive				stockholders’
June 30, 2010		Shares				Amount				capital				stock				income (loss)				deficit				income				equity
Balance as of January 1, 2010			20,429,736			$	20			$	158,325			$	—			$	251			$	(19,500	)						$	139,096
Net income			—				—				—				—				—				4,182			$	4,182				4,182
Unrealized loss from available-for-sale securities, net			—				—				—				—				(314	)			—				(314	)			(314	)
Unrealized loss from hedging activities, net			—				—				—				—				(273	)			—				(273	)			(273	)
Total comprehensive income																										$	3,595
Equity-based compensation			—				—				1,124				—				—				—								1,124
Issuance of Common Stock upon exercise of employee stock options			675,378				1				4,027				—				—				—								4,028
Issuance of Common Stock under employee stock purchase plan			89,365				—	(*)			525				—				—				—								525
Purchase of Treasury Stock			(108,009	)			—	(*)			—				(1,207	)			—				—								(1,207	)
Issuance of Treasury Stock upon exercise of employee stock options			6,609				—	(*)			—				74				—				(22	)							52
Balance as of June 30, 2010			21,093,079			$	21			$	164,001			$	(1,133	)		$	(336	)		$	(15,340	)						$	147,213

																		Accumulated
										Additional								other								Total				Total
Six months ended		Common stock								paid-in				Treasury				comprehensive				Accumulated				Comprehensive				stockholders’
June 30, 2009		Shares				Amount				capital				stock				income (loss)				deficit				income				equity
Balance as of January 1, 2009			19,532,026			$	20			$	153,712			$	(5,077	)		$	(24	)		$	(26,972	)						$	121,659
Net income			—				—				—				—				—				3,683			$	3,683				3,683
Unrealized gain from available-for-sale securities, net			—				—				—				—				419				—				419				419
Unrealized gain from hedging activities, net			—				—				—				—				2				—				2				2
Total comprehensive income																										$	4,104
Equity-based compensation			—				—				1,525				—				—				—								1,525
Purchase of Treasury Stock			(140,828	)			(1	)			—				(822	)			—				—								(823	)
Issuance of Treasury Stock upon exercise of employee stock options			50,052				1				1				370				—				(56	)							316
Issuance of Treasury Stock under employee stock purchase plan			81,509				—	(*)			—				627				—				(153	)							474
Balance as of June 30, 2009			19,522,759			$	20			$	155,238			$	(4,902	)		$	397			$	(23,498	)						$	127,255

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

INTERIM CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
U.S. dollars in thousands

		Six months ended
		June 30,
		2010				2009
Cash flows from operating activities:
Net income		$	4,182			$	3,683
Adjustments required to reconcile net income to net cash provided by operating activities:
Depreciation			258				248
Equity-based compensation			1,124				1,525
Loss (gain) on available-for-sale marketable securities			(14	)			57
Amortization of premiums on available-for-sale marketable securities			718				187
Accrued interest on short term bank deposits			(322	)			(545	)
Unrealized foreign exchange loss (gain)			(51	)			103
Gain on realization of investments			—				(1,901	)
Changes in operating assets and liabilities:
Decrease (increase) in trade receivables			449				(154	)
Decrease (increase) in prepaid expenses and other accounts receivable			1,268				(215	)
Decrease (increase) in deferred tax, net			(176	)			16
Increase (decrease) in trade payables			131				(7	)
Increase (decrease) in deferred revenues			95				(300	)
Decrease in accrued expenses and other payables			(1,706	)			(1,856	)
Increase (decrease) in accrued severance pay, net			(6	)			2
Net cash provided by operating activities			5,950				843
Cash flows from investing activities:
Purchase of property and equipment			(456	)			(164	)
Investment in bank deposits			(19,432	)			(35,527	)
Proceeds from bank deposits			32,625				30,867
Investment in available-for-sale marketable securities			(35,448	)			(19,201	)
Proceeds from maturity and sale of available-for-sale marketable securities			23,528				16,354
Proceeds from realization of investments			—				1,901
Net cash provided by (used in) investing activities			817				(5,770	)
Cash flows from financing activities:
Purchase of Treasury Stock			(1,207	)			(823	)
Proceeds from issuance of Common Stock upon exercise of employee stock options			4,028				—
Proceeds from issuance of Common Stock under employee stock purchase plan			525				—
Proceeds from issuance of Treasury Stock upon exercise of employee stock options			52				316
Proceeds from issuance of Treasury Stock under employee stock purchase plan			—				474
Net cash provided by (used in) financing activities			3,398				(33	)
Effect of exchange rate movements on cash			(41	)			(153	)
Increase (decrease) in cash and cash equivalents			10,124				(5,113	)
Cash and cash equivalents at the beginning of the period			12,104				13,328
Cash and cash equivalents at the end of the period		$	22,228			$	8,215

The accompanying notes are an integral part of the interim condensed consolidated financial statements.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(U.S. dollars in thousands, except share and per share amounts)

NOTE 1: BUSINESS

The financial information in this quarterly report includes the results of CEVA, Inc. and its subsidiaries (the “Company” or “CEVA”).

CEVA licenses a family of programmable DSP cores, DSP-based subsystems and application-specific platforms, including HD video, HD audio, Voice over IP, Bluetooth, Serial ATA (SATA) and Serial Attached SCSI (SAS).

CEVA’s technologies are licensed to leading semiconductor and original equipment manufacturer (OEM) companies in the form of intellectual property (IP). These companies design, manufacture, market and sell application-specific integrated circuits (“ASICs”) and application-specific standard products (“ASSPs”) based on CEVA’s technology to OEM companies for incorporation into a wide variety of end products. CEVA’s IP is primarily deployed in high volume markets, including wireless handsets (e.g., GSM/GPRS/EDGE/WCDMA/WiMax/LTE, CDMA and TD-SCDMA), mobile broadband (USB dongles, tablets, notebooks, netbooks, Mobile Internet Devices (MID), M2M, eReader), portable multimedia (e.g., portable video players, MobileTVs, Mobile Internet Devices, personal navigation devices and MP3/MP4 players), home entertainment (e.g., DVD/Blu-ray players, set-top boxes and digital TVs), game consoles (portable and home systems), storage (e.g., hard disk drives and solid state drives (SSD)) and telecommunication devices (e.g., residential gateways, femtocells, VoIP phones and network infrastructure).

NOTE 2: BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles for interim financial information and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all the information and footnotes required by generally accepted accounting principles for complete financial statements. In the opinion of management, all adjustments considered necessary for a fair presentation have been included. Operating results for the three and six months ended June 30, 2010 are not necessarily indicative of the results that may be expected for the year ending December 31, 2010. For further information, reference is made to the consolidated financial statements and footnotes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009.

The interim condensed consolidated financial statements incorporate the financial statements of the Company and all of its subsidiaries. All significant intercompany balances and transactions have been eliminated on consolidation.

The significant accounting policies applied in the annual consolidated financial statements of the Company as of December 31, 2009, contained in the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2010, have been applied consistently in these unaudited interim condensed consolidated financial statements.

NOTE 3: MARKETABLE SECURITIES

Marketable securities consist of certificates of deposits, corporate bonds and securities and U.S. government and agency securities. The Company determines the appropriate classification of marketable securities at the time of purchase and re-evaluates such designation at each balance sheet date. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 320-10-25 “Investments in Debt and Equity Securities Recognition,” the Company classified marketable securities as available-for-sale securities. Available-for-sale securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ equity, net of taxes. Realized gains and losses on sales of marketable securities, as determined on a specific identification basis, are included in the consolidated statements of operations. The Company has classified all marketable securities as short-term, even though the stated maturity date may be one year or more beyond the current balance sheet date, because it may sell these securities prior to maturity to meet liquidity needs or as part of risk versus reward objectives.

The Company periodically assesses whether its investments with unrealized losses are other than temporarily impaired (“OTTI”). OTTI charges exist when an entity has the intent to sell the security, it will more likely than not be required to sell the security before anticipated recovery, or it does not expect to recover the entire amortized cost basis of the security (that is, a credit loss exists). OTTI is determined based on the specific identification method and is reported in the interim condensed consolidated statements of operations. The Company did not recognize any OTTI charges on its marketable securities during the six months ended June 30, 2010 and 2009.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(U.S. dollars in thousands, except share and per share amounts)

		As at June 30, 2010 (Unaudited)
						Gross				Gross
		Amortized				unrealized				unrealized				Fair
		cost				gains				losses				value
Certificates of deposits		$	5,351			$	8			$	—			$	5,359
Corporate bonds and securities			54,054				108				(307	)			53,855
		$	59,405			$	116			$	(307	)		$	59,214

		As at December 31, 2009 (Audited)
						Gross				Gross
		Amortized				unrealized				unrealized				Fair
		cost				gains				losses				value
Certificates of deposits		$	1,842			$	6			$	(1	)		$	1,847
U.S. government and agency securities			1,934				16				—				1,950
Corporate bonds and securities			44,413				318				(90	)			44,641
		$	48,189			$	340			$	(91	)		$	48,438

The following table summarizes the Company’s investments in marketable securities by the contractual maturity date of the security:

		As at June 30, 2010 (Unaudited)
						Gross				Gross
		Amortized				unrealized				unrealized				Fair
		cost				gains				losses				value
Due in one year or less		$	23,506			$	96			$	(12	)		$	23,590
Due after one year to three years			35,899				20				(295	)			35,624
		$	59,405			$	116			$	(307	)		$	59,214

		As at December 31, 2009 (Audited)
						Gross				Gross
		Amortized				unrealized				unrealized				Fair
		cost				gains				losses				value
Due in one year or less		$	19,528			$	159			$	(2	)		$	19,685
Due after one year to three years			28,661				181				(89	)			28,753
		$	48,189			$	340			$	(91	)		$	48,438

As of June 30, 2010 and December 31, 2009, management believes the losses detailed in the tables above are not OTTI. Management expects to recover the entire cost basis of these securities, and does not intend to sell or expect to be required to sell these investment before a recovery of the cost basis.

The total fair value of marketable securities with outstanding unrealized losses as of June 30, 2010 amounted to $34,195. Of the unrealized losses outstanding as of June 30, 2010, the entire amount of $307 was outstanding for less than 12 months.

Proceeds from maturity and sales of available-for-sale marketable securities during the six months ended June 30, 2010 and 2009 were $23,528 and $16,354, respectively. Gross realized gains and losses from the sale of available-for sale securities for the three months ended June 30, 2010 were $39 and $31, respectively, as compared to $2 and $6 for the comparable periods in 2009. Gross realized gains and losses from the sale of available-for sale securities for the six months ended June 30, 2010 were $52 and $38, respectively, as compared to $9 and $66 for the comparable periods in 2009.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(U.S. dollars in thousands, except share and per share amounts)

NOTE 4: FAIR VALUE MEASUREMENT

FASB ASC No. 820, “Fair Value Measurements and Disclosures” defines fair value, establishes a framework for measuring fair value. Fair value is an exit price, representing the amount that would be received for selling an asset or paid for the transfer of a liability in an orderly transaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and for inputs used in the valuation methodologies in measuring fair value:

Level 1		Unadjusted quoted prices in active markets that are accessible on the measurement date for identical, unrestricted assets or liabilities;
Level 2		Quoted prices in markets that are not active, or inputs that are observable, either directly or indirectly, for substantially the full term of the asset or liability; and
Level 3		Prices or valuation techniques that require inputs that are both significant to the fair value measurement and unobservable (supported by little or no market activity).

The Company measures its marketable securities and foreign currency derivative contracts at fair value. Marketable securities are classified within Level 2 because they are valued using quoted market prices or alternative pricing sources and models utilizing market observable inputs. Foreign currency derivative contracts are classified within Level 2 as the valuation inputs are based on quoted prices and market observable data of similar instruments.

The table below sets forth the Company’s assets and liabilities measured at fair value by level within the fair value hierarchy. Assets and liabilities are classified in their entirety based on the lowest level of input that is significant to the fair value measurement.

Description		June 30, 2010				Level I				Level II				Level III
Assets:
Short term bank deposits		$	12,079			$	—			$	12,079			$	—
Marketable securities:
Certificates of deposits			5,359				—				5,359				—
Corporate bonds and securities			53,855				—				53,855				—
Foreign exchange contracts			221				—				221				—
Long term bank deposits			15,066				—				15,066				—
Liabilities:
Foreign exchange contracts			194				—				194				—
Description		December 31, 2009				Level I				Level II				Level III
Assets:
Short term bank deposits		$	40,056			$	—			$	40,056			$	—
Marketable securities:
Certificates of deposits			1,847				—				1,847				—
U.S. government and agency securities			1,950				—				1,950				—
Corporate bonds and securities			44,641				—				44,641				—
Foreign exchange contracts			128				—				128				—
Liabilities:
Foreign exchange contracts			27				—				27				—

In addition to the assets and liabilities described above, the Company’s financial instruments also include cash, cash equivalents, trade receivables, other accounts receivable, trade payables and accrued expenses and other payables. The fair values of these financial instruments were not materially different from their carrying values at June 30, 2010 due to the short-term maturity of such instruments.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(U.S. dollars in thousands, except share and per share amounts)

NOTE 5: GEOGRAPHIC INFORMATION AND MAJOR CUSTOMER DATA

a. Summary information about geographic areas:

The Company manages its business on the basis of one reportable segment: the licensing of intellectual property to semiconductor companies and electronic equipment manufacturers (see Note 1 for a brief description of the Company’s business). The following is a summary of revenues within geographic areas:

		Six months ended								Three months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Revenues based on customer location:
United States		$	3,714			$	3,056			$	1,879			$	2,497
Europe and Middle East (1) (2)			11,217				8,772				4,503				3,519
Asia Pacific (3) (4) (5)			6,279				6,795				4,227				3,094
		$	21,210			$	18,623			$	10,609			$	9,110
(1) Sweden		$	2,587			$	4,444			$	1,197			$	1,141
(2) Germany		$	5,158					*)				*)				*)
(3) China		$	2,897					*)		$	2,314					*)
(4) S. Korea				*)		$	2,037			$	1,141					*)
(5) Japan				*)		$	2,696					*)		$	1,409

b. Major customer data as a percentage of total revenues:

The following table sets forth the customers that represented 10% or more of the Company’s total revenues in each of the periods set forth below.

		Six months ended								Three months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Customer A			18	%			16	%			17	%			14	%
Customer B			24	%				(*)				(*)				(*)
Customer C				(*)				(*)			15	%				(*)
Customer D				(*)				(*)				(*)			18	%
Customer E				(*)			11	%				(*)				(*)

NOTE 6: NET INCOME PER SHARE OF COMMON STOCK

Basic net income per share is computed based on the weighted average number of shares of common stock outstanding during each period. Diluted net income per share is computed based on the weighted average number of shares of common stock outstanding during each period, plus dilutive potential shares of common stock considered outstanding during the period, in accordance with FASB ASC No. 260, “Earnings Per Share.”

		Six months ended								Three months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Numerator:
Numerator for basic and diluted net income per share		$	4,182			$	3,683			$	2,123			$	2,315
Denominator:
Denominator for basic net income per share			20,859				19,536				21,061				19,515
Effect of employee stock options			1,132				348				1,008				499
Denominator for diluted net income per share			21,991				19,884				22,069				20,014
Basic net income per share		$	0.20			$	0.19			$	0.10			$	0.12
Diluted net income per share		$	0.19			$	0.19			$	0.10			$	0.12

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(U.S. dollars in thousands, except share and per share amounts)

The weighted average number of shares related to the outstanding options excluded from the calculation of diluted net income per share since their effect was anti-dilutive was 51,404 and 46,486 shares for the three and six months ended June 30, 2010, respectively, and 2,078,256 and 2,733,197 shares for the corresponding periods of 2009.

NOTE 7: COMMON STOCK AND STOCK-BASED COMPENSATION PLANS

The Company grants stock options to employees and non-employee directors of the Company and its subsidiaries and provides the right to purchase common stock pursuant to the Company’s employee stock purchase plan to employees of the Company and its subsidiaries. Most of the options granted under the Company’s stock-based compensation plans have been granted at the fair market value of the Company’s common stock on the grant date. A summary of the Company’s stock option activity and related information for the three months ended June 30, 2010, is as follows:

						Weighted
		Number of				average exercise
		options				price
Outstanding as of March 31, 2010			3,527,326			$	7.83
Granted			142,500				12.49
Exercised			(238,023	)			4.91
Forfeited or expired			(11,199	)			9.13
Outstanding as of June 30, 2010			3,420,604			$	8.23
Exercisable as of June 30, 2010			2,187,777			$	7.81

During the three and six months ended June 30, 2010, the Company issued 0 and 89,365 shares of common stock under its employee stock purchase plan for an aggregate consideration of 0 and $525, respectively.

The following table shows the total equity-based compensation expense included in the condensed consolidated statement of operations:

		Six months ended								Three months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Cost of revenue		$	33			$	69			$	15			$	34
Research and development expenses			306				492				139				230
Sales and marketing expenses			208				304				96				142
General and administrative expenses			577				660				290				311
Total		$	1,124			$	1,525			$	540			$	717

The fair value for the Company’s stock options granted to employees and non-employees directors was estimated using the following assumptions:

		Three months ended
		June 30,
		2010				2009
		(unaudited)				(unaudited)
Expected dividend yield			0	%			0	%
Expected volatility			38%-62	%			49%-78	%
Risk-free interest rate			0.3%-2.6	%			0.5%-3.4	%
Expected forfeiture (employees)			10	%			10	%
Expected forfeiture (executives)			5	%			5	%
Contractual term of up to		7 Years				7 Years
Suboptimal exercise multiple (employees)			1.5				1.5
Suboptimal exercise multiple (executives)			1.3				1.3

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(U.S. dollars in thousands, except share and per share amounts)

The Company did not grant new purchase rights under the 2002 employee stock purchase plan during the three months ended June 30, 2010 and 2009.

As of June 30, 2010 and 2009, there were balances of $1,845 and $2,846, respectively, of unrecognized compensation expense related to unvested awards. The impact of equity-based compensation expense on basic net income per share was $0.03 and $0.05 for the three and six months ended June 30, 2010, respectively, and $0.04 and $0.08 for the corresponding periods of 2009. The impact of equity-based compensation expense on diluted net income per share was $0.02 and $0.05 for the three and six months ended June 30, 2010, respectively, and $0.04 and $0.08 for the corresponding periods of 2009.

NOTE 8: DERIVATIVES AND HEDGING ACTIVITIES

The Company implemented the requirements of FASB ASC No. 815,” Derivatives and Hedging” which requires companies to recognize all of their derivative instruments as either assets or liabilities in the statement of financial position at fair value. The accounting for changes in fair value (i.e., gains or losses) of a derivative instrument depends on whether it has been designated and qualifies as part of a hedging transaction and further, on the type of hedging transaction. For those derivative instruments that are designated and qualify as hedging instruments, a company must designate the hedging instrument, based upon the exposure being hedged, as a fair value hedge, cash flow hedge, or a hedge of a net investment in a foreign operation. Due to the Company’s global operations, it is exposed to foreign currency exchange rate fluctuations in the normal course of its business. The Company’s treasury policy allows it to offset the risks associated with the effects of certain foreign currency exposures through the purchase of foreign exchange forward or option contracts (“Hedging Contracts”). The policy, however, prohibits the Company from speculating on such Hedging Contracts for profit. To protect against the increase in value of forecasted foreign currency cash flow resulting from salaries paid in currencies other than the U.S. dollar during the year, the Company instituted a foreign currency cash flow hedging program. The Company hedges portions of the anticipated payroll of its non-U.S. employees denominated in currencies other than the U.S. dollar for a period of one to twelve months with Hedging Contracts. Accordingly, when the dollar strengthens against the foreign currencies, the decline in present value of future foreign currency expenses is offset by losses in the fair value of the Hedging Contracts. Conversely, when the dollar weakens, the increase in the present value of future foreign currency expenses is offset by gains in the fair value of the Hedging Contracts. These Hedging Contracts are designated as cash flow hedges and are all effective as hedges of these expenses.

For derivative instruments that are designated and qualify as a cash flow hedge (i.e., hedging the exposure to variability in expected future cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of other comprehensive income (loss) and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any gain or loss on a derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item is recognized in current earnings during the period of change. As of June 30, 2010 and 2009, the notional principal amount of the Hedging Contracts held by the Company was $6,790 and $5,990, respectively.

Other derivative instruments that are not designated as hedging instruments consist of forward contracts that the Company uses to hedge monetary assets denominated in currencies other than the U.S. dollar. Gains and losses on these contracts as well as related costs are included in financial income, net, along with the gains and losses of the related hedged item. As of June 30, 2010 and 2009, the notional principal amount of the foreign exchange contracts held by the Company was $8,302 and $0, respectively.

The Company recorded in cost of revenues and operating expenses a net loss of $22 and a net gain of $83 for the three and six months ended June 30, 2010, respectively, and a net loss of $123 and $362 for the comparable periods of 2009, related to its Hedging Contracts. In addition, the Company recorded in financial income, net, a gain of $216 and $221 for the three and six months ended June 30, 2010, respectively, related to derivatives not designated as hedging instruments. There were no derivatives not designated as hedging instruments for the three and six months ended June 30, 2009.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(U.S. dollars in thousands, except share and per share amounts)

The fair value of the Company’s outstanding derivative instruments is as follows:

		As at June 30,				As of December 31,
		2010				2009
		(Unaudited)				(Audited)
Derivative assets:
Derivatives designated as cash flow hedging instruments:
Foreign exchange option contracts		$	—			$	103
Foreign exchange forward contracts			—				25
			—				128
Derivatives not designated as hedging instruments:
Foreign exchange forward contracts			221				—
Total		$	221			$	128
Derivative liabilities:
Derivatives designated as cash flow hedging instruments:
Foreign exchange option contracts			4				—
Foreign exchange forward contracts			190				27
Total		$	194			$	27

The Company recorded the fair value of derivative assets in “prepaid expenses and other accounts receivable” and the fair value of derivative liabilities in “accrued expenses and other payables” in the Company’s condensed consolidated balance sheet.

The increase (decrease) in gains recognized in “accumulated other comprehensive income (loss)” on derivatives, before tax effect, is as follows:

		Six months ended								Three months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Derivatives designated as cash flow hedging instruments:
Foreign exchange option contracts		$	11			$	(274	)		$	(4	)		$	173
Foreign exchange forward contracts			(223	)			(86	)			(225	)			251
		$	(212	)		$	(360	)		$	(229	)		$	424

The gains (losses), reclassified from “accumulated other comprehensive income (loss)” into income, are as follows:

		Six months ended								Three months ended
		June 30,								June 30,
		2010				2009				2010				2009
		(unaudited)				(unaudited)				(unaudited)				(unaudited)
Derivatives designated as cash flow hedging instruments:
Foreign exchange option contracts		$	(118	)		$	284			$	—			$	157
Foreign exchange forward contracts			35				78				22				(34	)
		$	(83	)		$	362			$	22			$	123

NOTE 9: SHARE REPURCHASE PROGRAM

In May 2010, the Company announced that its board of directors approved the expansion of its share repurchase program by another two million shares of common stock, with one million shares available for repurchase in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, and one million shares available for repurchase in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. This authorization is in addition to the previously announced repurchase program of one million shares, which was fully utilized during the second quarter of 2010.

NOTES TO THE INTERIM CONDENSED CONSOLIDATED FINANCIAL STATEMENTS — CONTINUED
(U.S. dollars in thousands, except share and per share amounts)

During the second quarter of 2010, the Company repurchased 108,009 shares of common stock at an average purchase price of $11.2 per share, for an aggregate purchase price of approximately $1.2 million. The Company did not repurchase any common stock during the first quarter of 2010. As of June 30, 2010, 1,998,400 shares of common stock remain available for repurchase under its share repurchase program.

The repurchases of common stock are accounted for as treasury stock, and result in a reduction of stockholders’ equity. When treasury shares are reissued, the Company charges the excess of the repurchase cost over issuance price using the weighted average method to accumulated deficit. In the event the repurchase cost using the weighted average method is lower than the issuance price, the Company credits the difference to additional paid-in capital.

During both the second quarter and first half of 2010, the Company issued 6,609 shares of common stock, out of treasury stock, to employees who exercised their stock options. During the second quarter and first half of 2009, the Company issued 32,679 and 131,561 shares, respectively, of common stock, out of treasury stock, to employees who exercised their stock options or purchased shares from the Company’s 2002 Employee Stock Purchase Plan.

NOTE 10: OTHER INCOME

The Company recorded a capital gain of $1,901 during both the second quarter and first half of 2009 from the divestment of its equity investment in GloNav Inc. to NXP Semiconductors.

NOTE 11: RECENTLY ISSUED ACCOUNTING STANDARDS

In July 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-20, Receivables (Topic 310), Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses. The update enhances disclosures about the credit quality of financing receivables and the allowance for credit losses. The Company is currently evaluating the impact of these standards on its consolidated financial statements.

In February 2010, the FASB issued ASU No. 2010-09, Subsequent Events (“ASU No. 2010-09”). The amendment removes the requirement for an SEC filer to disclose a date through which subsequent events have been evaluated in both issued and revised financial statements. The amendment is effective upon issuance and as such the Company adopted ASU No. 2010-09 during the first quarter of 2010. The Company has evaluated subsequent events after March 31, 2010 through the date and time the condensed consolidated financial statements were issued. There were no subsequent events that required disclosure or adjustment to the financial statements.

In January 2010, the FASB issued ASU No. 2010-06, Improving Disclosures about Fair Value Measurements, which requires disclosures about inputs and valuation techniques used to measure fair value, as well as disclosures about significant transfers, beginning in the first quarter of 2010. Additionally, these amended standards require presentation of disaggregated activity within the reconciliation for fair value measurements using significant unobservable inputs (Level 3), beginning in the first quarter of 2011. The Company does not expect these new standards to significantly impact its condensed consolidated financial statements.

In October 2009, the FASB issued a new accounting standard, ASU No. 2009-13 “Multiple-Deliverable Revenue Arrangements, “ which provides guidance for arrangements with multiple deliverables. Specifically, the new standard requires an entity to allocate consideration at the inception of an arrangement to all of its deliverables based on their relative selling prices. In the absence of the vendor-specific objective evidence or third-party evidence of the selling prices, consideration must be allocated to the deliverables based on management’s best estimate of the selling prices. In addition, the new standard eliminates the use of the residual method of allocation. In October 2009, the FASB also issued a new accounting standard, ASU No. 2009-14, “Certain Revenue Arrangements That Include Software Elements,” which changes revenue recognition for tangible products containing software and hardware elements. Specifically, tangible products containing software and hardware that function together to deliver the tangible products’ essential functionality are scoped out of the existing software revenue recognition guidance and will be accounted for under the multiple-element arrangements revenue recognition guidance discussed above. Both standards will be effective for the Company in the first quarter of 2011. The Company is currently evaluating the impact of these standards on its condensed consolidated financial statements.

Item 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

You should read the following discussion together with the unaudited financial statements and related notes appearing elsewhere in this quarterly report. This discussion contains forward-looking statements that involve risks and uncertainties. Any or all of our forward-looking statements in this quarterly report may turn out to be wrong. These forward-looking statements can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. Factors which could cause actual results to differ materially include those set forth under in Part II — Item 1A — “Risk Factors,” as well as those discussed elsewhere in this quarterly report. See “Forward-Looking Statements.”

BUSINESS OVERVIEW

The financial information presented in this quarterly report includes the results of CEVA, Inc. and its subsidiaries. CEVA is the world’s leading licensor of DSP cores and platform solutions. Our technologies are widely licensed and power some of the world’s leading semiconductor and original equipment manufacturer (OEM) companies. In 2009, our licensees shipped over 334 million CEVA-powered chipsets, an increase of 9% over 2008 shipments of 307 million chipsets. In 2009, Gartner Inc. reported our share of the licensable DSP market at 46%.

Given the technological complexity of DSP-based applications, there are increased requirements to supplement the DSP core IP with additional technologies in the form of integrated application-specific hardware peripherals and software components. Therefore, we believe there is an industry shift from developing DSP technologies in-house to licensing them from third party IP providers, like us, due to the design cycle time constantly shortening and the cost of ownership and maintenance of such architectures.

During the past three years, our business has shown profitability growth and market share expansion as a result of the widespread deployment of our DSP cores with all major handset OEMs — LG Electronics, Motorola, Nokia, Samsung, and Sony Ericsson — and many others, including a major U.S.-based smartphone manufacturer. This positive trend is evident from our royalty revenues which increased by 13% in 2009 from 2008 and increased 78% when comparing 2009 to 2007. Based on internal data and iSupply worldwide shipment data, CEVA’s worldwide market share of baseband chips for handsets that incorporate our technologies reached approximately 29% of the worldwide handsets volume based on first quarter 2010 worldwide shipments. Revenues derived from the handsets market accounted for approximately 58% and 57% of our total annual royalty revenues and total annual revenues, respectively, for 2009. We believe the full scale migration to our DSP cores and technologies in the handsets market has not been fully realized and continues to progress. Also, we are optimistic about adoption of our technologies for new categories of products, such as data cards, USB dongles, smart metering, tablets, netbooks, and eReaders. The announcements by Texas Instruments and Freescale of their intent to exit the baseband market, after historically having been large players in this market, is a strong positive driver for our future market share expansion.

We believe both the handsets and mobile broadband markets continue to present significant growth opportunities for CEVA. According to Ericsson’s management commentary, as of June 2010, there were more than five billion cellular subscriptions worldwide, which is 72% of the entire global population. iSuppli forecasts that worldwide handset shipments will grow 11% in 2010 to 1.3 billion units, with the majority of the growth coming from ultra-low-cost phone demands in developing countries and the broader adoption of advanced smartphones in mature markets. We are well-positioned to capitalize on the growth in the ultra-low-cost phone, smartphone and mobile broadband markets as key chip suppliers serving these markets use our technologies broadly. ABI Research forecasts that shipments of cellular-based devices will nearly double in 2014 from 2009, reaching 2.2 billion units. The source of this substantial growth is primarily due to new categories of devices that utilize cellular connectivity. More commonly referred to as mobile broadband connectivity, these devices comprise of various consumer and machine-to-machine equipment, including eReaders, netbooks, tablets, data cards and smart metering equipment. Every cellular-connected device requires a DSP-based modem for connectivity and many of the leading suppliers of these modems are using our DSP technologies.

Beyond products enabled by our technologies in handsets and mobile broadband markets, in 2009, we witnessed a noticeable increase in design starts of next-generation 4G WiMAX/LTE products utilizing our advanced DSP cores. Fourth generation wireless products require much greater performance and flexibility than 3G products. In addition to our CEVA-X family of DSP cores currently being designed into multiple 4G chipsets, we introduced a new DSP architecture, the CEVA-XC, in February 2009, to specifically address the unique and evolving needs of implementing LTE/4G, WiMAX and Software Defined Radio (SDR)-based wireless communication applications. We further enhanced this product offering by adding critical LTE software libraries and a robust partner program in 2010. During the second quarter of 2010, we completed three licensing agreements for CEVA-XC; this underscores our belief that this new product line is well positioned to expand our licensee base in both existing wireless handsets and new wireless infrastructure markets.

Notwithstanding the various growth opportunities we have outlined above, our business operates in a highly competitive environment. Competition has historically increased pricing pressures for our products and decreased our average selling prices. Some of our competitors have reduced their licensing and royalty fees to attract customers and expand their market share. In order to penetrate new markets and maintain our market share with our existing products, we may need to offer our products in the future at lower prices which may result in lower profits. In addition, our future growth is dependent not only on the continued success of our existing products but also the successful introduction of new products, which requires the dedication of resources into research and development which in turn may increase our operating expenses. We currently anticipate that our operating expenses will increase during 2010 in comparison to 2009, mainly due to increased investments in research and development, including the addition of new engineers, and currency exchange expenses as the U.S. dollar is currently devalued against the New Israeli Shekel (“NIS”), Euro, and British Pound, which are the primary currencies for our employee salary expenses. In addition to monitoring and controlling our operating expenses, we must maintain our current level of gross margin in order to offset any future declines in shipment quantities of products based on our technologies or any future declines in any per-unit royalty rates. Furthermore, since our products are incorporated into end products of our OEM customers, our business is very dependent on our OEM customers’ ability to achieve market acceptance of their end products in the handsets and consumer electronic markets, which are similarly very competitive.

The ever-changing nature of the market also affects our continued business growth potential. For example, the success of our video and audio products are highly dependent on the market adoption of new services and products, such as smartphones, connected devices in the form of DTV, set-top boxes, tablets, mobile Internet devices, HD video and audio within products such as Blu-ray DVDs, digital TVs, set-top boxes. In addition, our business is affected by market conditions in emerging markets, such as China, India and Latin America, where the penetration of handsets, especially ultra-low-cost phones, could generate future growth potential for our business. The maintenance of our competitive position and our future growth also are dependent on our ability to adapt to ever-changing technology, short product life cycles, evolving industry standards, changing customer needs and the trend towards cellular connectivity, and voice, audio and video convergence in the markets that we operate.

Moreover, due to the uncertainty about the sustainability of the market recovery, it is extremely difficult for our customers, our vendors and us to accurately forecast and plan future business activities. Therefore, the current economic conditions, and specifically the volatility in the semiconductor and consumer electronics industries, could seriously impact our revenue and harm our business, financial condition and operating results. As a result, our past operating results should not be relied upon as an indication of future performance.

RESULTS OF OPERATIONS

Total Revenues

Total revenues were $10.6 and $21.2 million for the second quarter and first half of 2010, respectively, representing an increase of 16% and 14%, respectively, as compared to the corresponding periods in 2009. The increase in total revenues reflected significantly higher royalty revenues, as well as higher licensing revenues from our different product lines, offset by lower revenues from the provision of technical support to customers. Five largest customers accounted for 59% and 63% of total revenues for the second quarter and first half of 2010, respectively, as compared to 54% and 52% for the comparable periods in 2009. Two customers accounted for 17% and 15% of total revenues for the second quarter of 2010, as compared to two different customers that accounted for 14% and 18% of total revenues for the second quarter of 2009. Two customers accounted for 18% and 24% of total revenues for the first half of 2010, as compared to two different customers that accounted for 16% and 11% of total revenues for the first half of 2009. Because of the nature of our license agreements and the associated large initial payments due, the identity of major customers generally varies from quarter to quarter and we do not believe that we are materially dependent on any one specific customer or any specific small number of licensees. Our total revenues derived from the handsets market represented 70% and 69% of our total revenues for the second quarter and first half of 2010, respectively, as compared to 59% and 52% for the comparable periods of 2009.

We generate our revenues from licensing our technology, which in certain circumstances is modified to customer-specific requirements. Revenues from license fees that involve customization of our technology to customer specifications are recognized in accordance with the principles set out in Financial Accounting Standards Board (“FASB”) Accounting Standards Codifications (“ASC”) No. 605-35-25 “Construction-Type and Production-Type Contracts Recognition.” We account for all of our other IP license revenues and related services in accordance with FASB ASC No. 985-605, “Software Revenue Recognition.”

We generate royalty revenue from our customers based on two models: royalties paid by our customers during the period in which they ship units of chipsets incorporating our technology, which we refer to as “per unit royalties,” and royalties which are paid in a lump sum and in advance to cover a pre-determined fixed number of future unit shipments, which we refer to as “prepaid royalties.” In either case, these royalties are non-refundable payments and are recognized when payment becomes due, provided no future obligation exists. Prepaid royalties are recognized under our licensing revenue line and accounted for 2% and 11% of total revenues for the second quarter of 2010 and 2009, respectively, and 1% and 5% of total revenues for the first half of 2010 and 2009, respectively. Only royalty revenue from customers who are paying as they ship units of chipsets incorporating our technology is recognized in our royalty revenue line. These per unit royalties are invoiced and recognized on a quarterly basis in arrears as we receive quarterly shipment reports from our licensees.

Licensing Revenues

Licensing revenues were $4.6 and $9.3 million for the second quarter and first half of 2010, respectively, an increase of 7% and 6% from the second quarter and first half of 2009. The increase in licensing revenues for the second quarter of 2010 as compared to the corresponding period of 2009 resulted mainly from higher revenues from our CEVA-X DSP core family of products. The increase in licensing revenues for the first half of 2010 as compared to the corresponding period of 2009 resulted mainly from higher revenues from our CEVA-TeakLite DSP core family of products, partially offset by lower revenues from our CEVA-X DSP core family of products and Serial Attached SCSI (SAS) products. We are experiencing strong interest and pipe line build-up for our DSP cores due to general business improvements in our primary markets, particularly the cellular baseband market, and the availability of our new advanced CEVA-XC DSP product.

Licensing revenues accounted for 43% and 44% of our total revenues for the second quarter and first half of 2010, respectively, compared to 47% of our total revenues for both the second quarter and first half of 2009. During the second quarter of 2010, we concluded nine new license agreements. All nine agreements were for CEVA DSP cores, platforms and software. During the second quarter of 2010, we experienced strong demand from wireless industry leaders for our flagship CEVA-XC DSP product, which is part of our CEVA-X DSP core family of products, to power their LTE users equipment and facilitate network upgrades. Three of the nine licensing agreements concluded during the second quarter of 2010 were for our new CEVA-XC DSP product. Target applications for customer deployment are 3G and 4G handsets, mobile broadband, cellular base stations, VoIP TVs and Blu-ray players. Geographically, four of the nine deals concluded were in the U.S., four were in Asia and one was in Europe.

Royalty Revenues

Royalty revenues were $5.2 and $10.1 million for the second quarter and first half of 2010, respectively, an increase of 30% and 31% from the second quarter and first half of 2009. Royalty revenues accounted for 49% and 48% of our total revenues for the second quarter and first half of 2010, respectively, compared to 43% and 42% for the comparable periods of 2009. Royalty revenues for the second quarter and first half of 2010 included $0.4 million of catch-up royalties on past shipments, resulting from two existing customers in the consumer space. Royalty revenues for the second quarter and first half of 2009 included $0.9 million of royalties resulting from “catch up” royalties on past shipments from another existing customer. Excluding the “catch up” royalties, the increase in royalty revenues for the second quarter and first half of 2010 reflected our market share expansion in the handsets market, offset by a decrease in the average royalty rate per unit as a result of a change in product mix due to higher shipments of 2G/EDGE phones as compare to high end smartphones. Our per unit and prepaid royalty customers reported sales of 126 and 247 million chipsets incorporating our technology for the second quarter and first half of 2010, respectively, compared to 65 and 124 million for the comparable periods of 2009. The five largest customers paying per unit royalty accounted for 77% and 80% of our total royalty revenues for the second quarter and first half of 2010, respectively, compared to 83% and 69% for the comparable periods of 2009.

As of June 30, 2010, 25 licensees were shipping products incorporating our technologies pursuant to 34 licensing arrangements. Of the 34 licensing arrangements, 30 are under per unit royalty arrangements and 4 are under prepayment arrangements. As of June 30, 2009, 21 licensees were shipping products incorporating our technologies pursuant to 28 licensing arrangements. Of the 28 licensing arrangements, 24 were under per unit royalty arrangements and 4 were under prepayment arrangements.

Other Revenues

Other revenues were $0.9 and $1.8 million for the second quarter and first half of 2010, respectively, a decrease of 3% and 16% from the second quarter and first half of 2009, respectively. The decrease in other revenues for the second quarter and first half of 2010, as compared to the corresponding periods of 2009, reflected principally lower support-related revenues, mainly associated with our customers’ tighter expense controls and refraining from extending or renewing support-related agreements. Other revenues accounted for 8% of our total revenues for both the second quarter and first half of 2010, compared to 10% and 11% for the comparable periods of 2009. Other revenues include support and training for licensees and sale of development systems.

Geographic Revenue Analysis

		First Half								First Half								Second Quarter								Second Quarter
		2010								2009								2010								2009
		(in millions, except percentages)																(in millions, except percentages)
United States		$	3.7				17	%		$	3.0				16	%		$	1.9				18	%		$	2.5				27	%
Europe and Middle East (1) (2)		$	11.2				53	%		$	8.8				47	%		$	4.5				42	%		$	3.5				39	%
Asia Pacific (3) (4) (5)		$	6.3				30	%		$	6.8				37	%		$	4.2				40	%		$	3.1				34	%
(1) Sweden		$	2.6				12	%		$	4.4				24	%		$	1.2				11	%		$	1.1				13	%
(2) Germany		$	5.2				24	%		$		*)				*)		$		*)				*)		$		*)				*)
(3) China		$	2.9				14	%		$		*)				*)		$	2.3				22	%		$		*)				*)
(4) S. Korea		$		*)				*)		$	2.0				11	%		$	1.1				11	%		$		*)				*)
(5) Japan		$		*)				*)		$	2.7				14	%		$		*)				*)		$	1.4				15	%

Due to the nature of our license agreements and the associated potential large individual contract amounts, the geographic split of revenues both in absolute and percentage terms generally varies from quarter to quarter.

Cost of Revenues

Cost of revenues were $0.9 and $1.6 million for the second quarter and first half of 2010, respectively, compared to $1.2 and $2.4 million for the comparable periods of 2009. Cost of revenues accounted for 8% and 7% of our total revenues for the second quarter and first half of 2010, respectively, compared to 13% for both the comparable periods of 2009. The decrease for the second quarter of 2010 principally reflected lower customization work for our licensees and lower royalty payback expenses paid to the Office of Chief Scientist of Israel. The decrease for the first half of 2010 principally reflected lower customization work for our licensees, lower salary and related costs and lower royalty payback expenses paid to the Office of Chief Scientist of Israel. Royalty payback expenses amounted to 3%-3.5% of the actual sales of certain of our products, the development of which previously received grants from the Office of Chief Scientist of Israel. Included in cost of revenues for the second quarter and first half of 2010 was a non-cash equity-based compensation expense of $15,000 and $33,000, respectively, compared to $34,000 and $69,000 for the comparable periods of 2009.

Gross Margin

Gross margin for the second quarter and first half of 2010 were 92% and 93%, respectively, compared to 87% for both the comparable periods of 2009. The increase in gross margin for the second quarter and first half of 2010 principally reflected higher royalty revenues which have higher gross margins, and a decrease in cost of revenues.

Operating Expenses

Total operating expenses were $7.8 and $15.8 million for the second quarter and first half of 2010, respectively, compared to $7.2 and $14.4 million for the comparable periods of 2009. The increase in total operating expenses for the second quarter of 2010 principally reflected higher salary and related costs, partially as a result of a higher number of personnel, and lower research grants received from the Office of Chief Scientist of Israel, partially offset by lower project-related expenses and non-cash equity-based compensation expenses. The increase in total operating expenses for the first half of 2010 principally reflected higher salary and related costs, mainly as a result of a higher number of personnel and partially offset by lower non-cash equity-based compensation expenses.

We currently anticipate that our operating expenses will increase in 2010 in comparison to 2009, mainly due to increased investments in research and development, including the addition of new engineers, higher salaries and related expenses, and to some extent, higher currency exchange expenses as the U.S. dollar is currently devalued against the NIS, Euro and British Pound, which are the primary currencies for our employee salary expenses.

Research and Development Expenses, Net

Our research and development expenses were $4.5 and $9.1 million for the second quarter and first half of 2010, respectively, compared to $4.0 and $8.1 million for the comparable periods of 2009. The net increase for both the second quarter and first half of 2010 principally reflected higher salary and related costs, partially as a result of a higher number of research and development personnel hired to leverage opportunities in the LTE and HD video markets, as well as lower research grants received from the Office of Chief Scientist of Israel, partially offset by a decrease in project-related expenses and lower non-cash equity-based compensation expenses. Included in research and development expenses for the second quarter and first half of 2010 were a non-cash equity-based compensation expenses of $139,000 and $306,000, respectively, compared to $230,000 and $492,000 for the comparable periods of 2009. Research and development expenses as a percentage of our total revenues were 42% and 43% for the second quarter and first half of 2010, respectively, compared to 44% and 43% for the comparable periods of 2009.

The number of research and development personnel was 126 at June 30, 2010, compared to 120 at June 30, 2009.

Sales and Marketing Expenses

Our sales and marketing expenses were $1.8 and $3.6 million for the second quarter and first half of 2010, respectively, compared to $1.7 and $3.3 million for the comparable periods of 2009. The increase for the second quarter of 2010 principally reflected higher commission expenses. The increase for the first half of 2010 principally reflected higher salary and related expenses due to a few changes in personnel, higher commission expenses and higher travel expenses, partially offset by lower non-cash equity-based compensation expenses. Included in sales and marketing expenses for the second quarter and first half of 2010 was a non-cash equity-based compensation expense of $96,000 and $208,000, respectively, compared to $142,000 and $304,000 for the comparable periods of 2009. Sales and marketing expenses as a percentage of our total revenues were 17% for both the second quarter and first half of 2010, compared to 18% for both the second quarter and first half of 2009.

The total number of sales and marketing personnel was 22 at June 30, 2010, compared to 21 at June 30, 2009.

General and Administrative Expenses

Our general and administrative expenses were $1.6 and $3.1 million for the second quarter and first half of 2010, respectively, compared to $1.5 and $3.0 million for the comparable periods of 2009. Included in general and administrative expenses for the second quarter and first half of 2010 was a non-cash equity-based compensation expense of $290,000 and $577,000, respectively, compared to $311,000 and $660,000 for the comparable periods of 2009. General and administrative expenses as a percentage of total revenues were 15% for both the second quarter and first half of 2010, compared to 17% and 16% for the second quarter and first half of 2009, respectively.

The number of general and administrative personnel was 23 at the end of both June 30, 2010 and 2009.

Financial Income, Net (in millions)

		First Half				First Half				Second Quarter				Second Quarter
		2010				2009				2010				2009
Financial income, net		$	1.10			$	0.95			$	0.54			$	0.47
of which:
Interest income and gains and losses from marketable securities, net		$	1.03			$	1.07			$	0.50			$	0.54
Foreign exchange gain (loss)		$	0.07			$	(0.12	)		$	0.04			$	(0.07	)

Interest income and gains and losses from marketable securities, net, consists of interest earned on investments, gains and losses from marketable securities and amortization of discount and premium on marketable securities. The slightly decrease in Interest income and gains and losses from marketable securities, net, during the second quarter and first half of 2010 principally reflected higher combined cash, bank deposits and marketable securities balances held, offset by lower interest rates.

We review our monthly expected non-U.S. dollar denominated expenditures and look to hold equivalent non-U.S. dollar cash balances to mitigate currency fluctuations. This has resulted in a foreign exchange gain of $39,000 and $66,000 for the second quarter and first half of 2010, and a foreign exchange loss of $70,000 and $124,000 for the comparable periods of 2009.

Other Income (in millions)

		First half				First Half				Second Quarter				Second Quarter
		2010				2009				2010				2009
Gain on realization of investments		$	—			$	1.90			$	—			$	1.90

We recorded a capital gain of $1.9 million for both the second quarter and first half of 2009 from the divestment of our equity investment in GloNav Inc. to NXP Semiconductors.

Provision for Income Taxes

Our income tax expenses were $313,000 and $735,000 for the second quarter and first half of 2010, respectively, compared to $814,000 and $1,042,000 for the comparable periods of 2009. The decrease for the second quarter of 2010 primarily reflected a tax expense of $0.5 million related to capital gains, which we recorded during the second quarter of 2009, from the divestment in GloNav to NXP Semiconductor. The decrease for the first half of 2010 primarily reflected a tax expense of $0.5 million related to capital gains, which we recorded during the second quarter of 2009, from the divestment in GloNav to NXP Semiconductor, offset by withholding tax expenses which we were unable to obtain a refund from a certain foreign tax authority during the first half of 2010. We have significant operations in Israel and the Republic of Ireland, and a substantial portion of our taxable income is generated there. Currently, our Israeli and Irish subsidiaries are taxed at rates substantially lower than U.S. tax rates.

One of our Irish operating subsidiaries currently qualifies for a 10% tax rate on its trade, which under current legislation will remain in force until December 31, 2010. After this date, a tax rate of 12.5% will apply. Another Irish subsidiary qualifies for exemption from income taxes as its sole revenue source is license fees from qualifying patents within the meaning of Section 140 of the Irish Taxes Consolidation Act 1997.

Our Israeli operating subsidiary’s production facilities have been granted “Approved Enterprise” status under Israeli law in connection with six separate investment plans. Income from an “Approved Enterprise” is tax-exempt for a period of two or four years and is subject to a reduced corporate tax rate of 10% to 25% (based on percentage of foreign ownership) for an additional period of six or eight years. The tax benefit under the first, second, third and fourth plans have expired and are subject to corporate tax of 25% in 2010. However, the Israeli operating subsidiary received in 2008 an approval for the erosion of tax basis in respect to its second, third and fourth plans, and as a result no taxable income was attributed to the second and third plans, and reduced taxable income was attributed to the fourth plan.

On April 1, 2005, an amendment to the Israeli Investment Law came into effect (the “Amendment”) and significantly changed the provisions of the Investment Law. The Amendment included revisions to the criteria for investments qualified to receive tax benefits as an “Approved Enterprise.” The Amendment applies to new investment programs and investment programs commenced after 2004, and does not apply to investment programs approved prior to December 31, 2004, and therefore benefits included in any certificate of approval that was granted before the Amendment came into effect will remain subject to the provisions of the Investment Law as they were on the date of such approval. Our Israeli subsidiary’s seventh plan (commenced in 2007) is subject to the provisions of the Amendment. We believe that we are currently in compliance with the requirements of the Amendment. However, if we fail to meet these requirements, we would be subject to corporate tax in Israel at the regular statutory rate of 25% for 2010. We could also be required to refund tax benefits, with interest and adjustments for inflation based on the Israeli consumer price index.

Certain expenditures pursuant to Israeli law are permitted to be recognized as a tax deduction over a three year period which has resulted in the recognition of deferred tax assets in 2010.

LIQUIDITY AND CAPITAL RESOURCES

As of June 30, 2010, we had approximately $22.2 million in cash and cash equivalents, $71.3 million in short term bank deposits and marketable securities, and $15.1 million in long term bank deposits, totaling $108.6 million, compared to $100.6 million at December 31, 2009. During the first half of 2010, we invested $54.9 million of cash in bank deposits and available-for-sale marketable securities with maturities up to 35 months. In addition, during the same period, bank deposits and available-for-sale marketable securities were sold or redeemed for cash amounting to $56.2 million. Tradable certificates of deposits and corporate bonds and securities and U.S. government and agency securities instruments are classified as available-for-sale marketable securities. The purchase and sale or redemption of available-for-sale marketable securities are considered part of investing cash flow. Available-for-sale marketable securities are stated at fair value, with unrealized gains and losses reported in accumulated other comprehensive income (loss), a separate component of stockholders’ equity, net of taxes. Realized gains and losses on sales of investments, as determined on a specific identification basis, are included in the condensed consolidated statements of operations. Determining whether the decline in fair value is other-than-temporary requires management’s judgment based on the specific facts and circumstances of each investment. We assess periodically whether our investments with unrealized losses are other than temporarily impaired (“OTTI”). OTTI charges exist when an entity has the intent to sell the security, it will more likely than not be required to sell the security before anticipated recovery or it does not expect to recover the entire amortized cost basis of the security (that is, a credit loss exists). OTTI is determined based on the specific identification method and is reported in the consolidated statements of operations. We did not recognize any OTTI charges on marketable securities during the first half of 2010.

Bank deposits are classified as short-term bank deposits and long-term bank deposits. Short-term bank deposits are non-tradable deposits with maturities of more than three months but less than one year, whereas long-term bank deposits are non-tradable deposits with maturities of more than one year. Non-tradable deposits are presented at their cost, including accrued interest, and purchases and sales are considered part of cash flows from investing activities.

Net cash provided by operating activities for the first half of 2010 was $6.0 million, compared to $0.8 million of net cash provided by operating activities for the comparable period of 2009. For the first half of 2009, we expended $645,000 in connection with the restructuring of our SATA activities.

Cash flows from operating activities may vary significantly from quarter to quarter depending on the timing of our receipts and payments. Our ongoing cash outflows from operating activities principally relate to payroll-related costs and obligations under our property leases and design tool licenses. Our primary sources of cash inflows are receipts from our accounts receivable and interest earned from our cash, deposits and marketable securities. The timing of receipts of accounts receivable from customers is based upon the completion of agreed milestones or agreed dates as set out in the contracts.

Net cash provided by investing activities for the first half of 2010 was $0.8 million, compared to $5.8 million of net cash used in investing activities for the comparable period of 2009. We had a cash outflow of $35.4 million and a cash inflow of $23.5 million in respect of investments in marketable securities during the first half of 2010, as compared to cash outflow of $19.2 million and a cash inflow of $16.4 million in respect of investments in marketable securities during the first half of 2009. For the first half of 2010, we had net proceeds of $13.2 million from bank deposits, as compared to net investments of $4.7 million in bank deposits for the comparable period of 2009. During the first half of 2009, we had a cash inflow of $1.9 million from the divestment of our equity investment in GloNav to NXP Semiconductors.

Net cash provided by financing activities during the first half of 2010 was $3.4 million. No cash was used in financing activities during the first half of 2009.

In May 2010, we announced that our board of directors approved the expansion of our share repurchase program by another two million shares of common stock, with one million shares available for repurchase in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, as amended, and one million shares available for repurchase in accordance with Rule 10b-18 of the Securities Exchange Act of 1934, as amended. This authorization is in addition to the previously announced repurchase program of one million shares, which was fully utilized during the second quarter of 2010.

During the first half of 2010 and 2009, we repurchased 108,009 and 140,828 shares of common stock, respectively, pursuant to our share repurchase program, at an average purchase price of $11.2 and $5.9 per share, respectively, for an aggregate purchase price of $1.2 and $0.8 million, respectively. As of June 30, 2010, 1,998,400 shares of common stock remain available for repurchase under our share repurchase program.

During the first half of 2010 and 2009, we received $4.6 and $0.8 million, respectively, from the issuance of common stock and treasury stock upon exercises of employee stock options and purchases under our employee stock purchase plan.

We believe that our current cash on hand and marketable securities, along with cash from operations, will provide sufficient capital to fund our operations for at least the next 12 months. We cannot provide assurances, however, that the underlying assumed levels of revenues and expenses will prove to be accurate.

In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all. See “Risk Factors—We may seek to expand our business through acquisitions that could result in diversion of resources and extra expenses.” for more detailed information.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

A majority of our revenues and a portion of our expenses are transacted in U.S. dollars and our assets and liabilities together with our cash holdings are predominately denominated in U.S. dollars. However, the majority of our expenses are denominated in currencies other than the U.S. dollar, principally the Euro, the NIS and the British Pound. Increases in volatility of the exchange rates of currencies other than the U.S. dollar versus the U.S. dollar could have an adverse effect on the expenses and liabilities that we incur when remeasured into U.S. dollars. We review our monthly expected non-U.S. dollar denominated expenditures and look to hold equivalent non-U.S. dollar cash balances to mitigate currency fluctuations. This has resulted in a foreign exchange gain of $39,000 and $66,000 for the second quarter and first half of 2010, respectively, and a foreign exchange loss of $70,000 and $124,000 for the comparable periods of 2009.

As a result of currency fluctuations and the remeasurement of non-U.S. dollar denominated expenditures in U.S. dollars for financial reporting purposes, we may experience fluctuations in our operating results on an annual and quarterly basis. To protect against the increase in value of forecasted foreign currency cash flows resulting from salaries paid in currencies other than the U.S. dollar during the year, we instituted during the second quarter of 2007, a foreign currency cash flow hedging program. We hedge portions of the anticipated payroll for our non-U.S. employees denominated in currencies other than the U.S. dollar for a period of one to twelve months with forward and option contracts. During the second quarter and first half of 2010, we recorded accumulated other comprehensive loss of $191,000 and $273,000, respectively, from our forward and option contracts, net of taxes, with respect to anticipated payroll expenses for our non-U.S. employees. During the second quarter and first half of 2009, we recorded accumulated other comprehensive gain of $547,000 and $2,000, respectively, from our forward and option contracts, net of taxes, with respect to anticipated payroll expenses for our non-U.S. employees. As of June 30, 2010, the amount of other comprehensive loss from our forward and option contracts, net of taxes, was $186,000, which will be recorded in the consolidated statements of operations during the following 12 months. We recognized a net loss of $22,000 and a net gain of $83,000 for the second quarter and first half of 2010, respectively, and a net loss of $123,000 and $362,000 for the comparable periods of 2009, related to forward and options contracts. We note that hedging transactions may not successfully mitigate losses caused by currency fluctuations. We expect to continue to experience the effect of exchange rate and currency fluctuations on an annual and quarterly basis.

The majority of our cash and cash equivalents are invested in high grade certificates of deposits with major U.S., European and Israeli banks. Generally, cash and cash equivalents and bank deposits may be redeemed and therefore minimal credit risk exists with respect to them. Nonetheless, deposits with these banks exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits or similar limits in foreign jurisdictions, to the extent such deposits are even insured in such foreign jurisdictions. While we monitor on a systematic basis the cash and cash equivalent balances in the operating accounts and adjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit our funds fails or is subject to other adverse conditions in the financial or credit markets. To date we have experienced no loss of principal or lack of access to our invested cash or cash equivalents; however, we can provide no assurance that access to our invested cash and cash equivalents will not be affected if the financial institutions that we hold our cash and cash equivalents fail.

We hold an investment portfolio consisting principally of corporate bonds and securities. We intend, and have the ability, to hold such investments until recovery of temporary declines in market value or maturity; accordingly, as of June 30, 2010, we believe the losses associated with our investments are temporary and no impairment loss was recognized during the first half of 2010. However, we can provide no assurance that we will recover present declines in the market value of our investments.

Interest income and gains from marketable securities, net, were $0.50 and $1.03 million for second quarter and first half of 2010, respectively, compared to $0.54 and $1.07 million for the comparable periods of 2009.

We are exposed primarily to fluctuations in the level of U.S. and EMU (European Monetary Union) interest rates. To the extent that interest rates rise, fixed interest investments may be adversely impacted, whereas a decline in interest rates may decrease the anticipated interest income for variable rate investments. We typically do not attempt to reduce or eliminate our market exposures on our investment securities because the majority of our investments are short-term. We currently do not have any derivative instruments but may put them in place in the future. Fluctuations in interest rates within our investment portfolio have not had, and we do not currently anticipate such fluctuations will have, a material effect on our financial position on an annual or quarterly basis.

Item 4. CONTROLS AND PROCEDURES

As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of June 30, 2010.

There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materially affected or is reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. LEGAL PROCEEDINGS

We are not a party to any litigation or other legal proceedings that we believe could reasonably be expected to have a material effect on our business, results of operations and financial condition.

Item 1A. RISK FACTORS

This Form 10-Q contains forward-looking statements concerning our future products, expenses, revenue, liquidity and cash needs as well as our plans and strategies. These forward-looking statements are based on current expectations and we assume no obligation to update this information. Numerous factors could cause our actual results to differ significantly from the results described in these forward-looking statements, including the following risk factors.

There are no material changes to the Risk Factors described under the title “Factors That May Affect Future Performance” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2009 other than (1) changes to the Risk Factor below entitled “Our quarterly operating results fluctuate from quarter to quarter due to a variety of factors, including our lengthy sales cycle, and may not be a meaningful indicator of future performance;” (2) changes to the Risk Factor below entitled “We rely significantly on revenue derived from a limited number of customers;” (3) changes to the Risk Factor below entitled “We generate a significant amount of our total revenues from the handsets market and our business and operating results may be materially adversely affected if we do not continue to succeed in this highly competitive market;” (4) changes to the Risk Factor below entitled “Because we have significant international operations, we may be subject to political, economic and other conditions relating to our international operations that could increase our operating expenses and disrupt our revenues and business;” (5) changes to the Risk Factor below entitled “Our operating results are affected by general economic conditions and the highly cyclical nature of the semiconductor industry;” (6) changes to the Risk Factor below entitled “Our research and development expenses may increase if the grants we currently receive from the Israeli and Irish governments are reduced or withheld;” (7) changes to the Risk Factor below entitled “We are exposed to fluctuations in currency exchange rates;” and (8) changes to the Risk Factor below entitled “The Israeli tax benefits that we currently receive and the government programs in which we participate require us to meet certain conditions and may be terminated or reduced in the future, which could increase our tax expenses.”

The markets in which we operate are highly competitive, and as a result we could experience a loss of sales, lower prices and lower revenue.

The markets for the products in which our technology is incorporated are highly competitive. Aggressive competition could result in substantial declines in the prices that we are able to charge for our intellectual property. Many of our competitors are striving to increase their share of the growing DSP market and are reducing their licensing and royalty fees to attract customers. The following factors may have a significant impact on our competitiveness:

	•		We compete directly in the DSP core space with Tensilica and Verisilicon;
	•		CPU IP providers, such as Virage Logic (through its acquisition of ARC), ARM Holdings, MIPS Technologies and Tensilica, who offer DSP and DSP extensions to their IP;
	•		Our video solution is software-based and competes with hardware implementations offered by companies such as Hantro (acquired by On2), Imagination Technologies, Chips & Media, and Virage Logic (through its acquisition of ARC);
	•		Internal engineering teams, such as Mediatek, NXP, STMicroelectronics and Zoran, may design programmable DSP core products in-house and therefore not license our technologies; and
	•		SATA and SAS IP markets are highly standardized with several vendors, such as ARM Holdings, Gennum’s Snowbush IP group, Silicon Image and Synopsys, that offer similar products, thereby leading to pricing pressures for both licensing and royalty revenue.

In addition, we may face increased competition from smaller, niche semiconductor design companies in the future. Some of our customers also may decide to satisfy their needs through in-house design. We compete on the basis of DSP performance, overall chip cost, power consumption, flexibility, reliability, communication and multimedia software availability, design cycle time, tool chain, customer support, name recognition, reputation and financial strength. Our inability to compete effectively on these bases could have a material adverse effect on our business, results of operations and financial condition.

Our quarterly operating results fluctuate from quarter to quarter due to a variety of factors, including our lengthy sales cycle, and may not be a meaningful indicator of future performance.

In some quarters our operating results could be below the expectations of securities analysts and investors, which could cause our stock price to fall. Factors that may affect our quarterly results of operations in the future include, among other things:

	•		the timing of the introduction of new or enhanced technologies by us and our competitors, as well as the market acceptance of such technologies;
	•		the timing and volume of orders and production by our customers, as well as fluctuations in royalty revenues resulting from fluctuations in unit shipments by our licensees and shifts by our customers from prepaid royalty arrangements to per unit royalty arrangements;
	•		the mix of revenues among licensing revenues, per unit and prepaid royalties and service revenues;
	•		our lengthy sales cycle and specifically in the third quarter of any fiscal year during which summer vacations slow down decision-making processes of our customers in executing contracts;
	•		the gain or loss of significant licensees, partly due to our dependence on a limited number of customers generating a significant amount of quarterly revenues;
	•		any delay in execution of any anticipated licensing arrangement during a particular quarter;
	•		delays in the commercialization of end products that incorporate our technology;
	•		currency fluctuations of the Euro and NIS versus the U.S. dollar;
	•		fluctuations in operating expenses and gross margins associated with the introduction of new or enhanced technologies and adjustments to operating expenses resulting from restructurings;
	•		our ability to scale our operations in response to changes in demand for our technologies;
	•		entry into new markets, including China, India and Latin America;
	•		changes in our pricing policies and those of our competitors;
	•		restructuring, asset and goodwill impairment and related charges, as well as other accounting changes or adjustments; and
	•		general economic conditions, including the current economic conditions, and its effect on the semiconductor industry and sales of consumer products into which our technologies are incorporated.