**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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### **FORM 10-Q**

| **x**                                              | **QUARTERLY REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**  |
|----------------------------------------------------|---------------------------------------------------------------------------------------------------|
| ** **                                         | ** **                                                                                        |
| **For the  Quarterly Period Ended March 31, 2007** |
| ** **                                         |
| **OR**                                             |
| ** **                                         |
| **o**                                              | **TRANSITION REPORT  PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934** |

 

**For the transition period from                           to                           **

**CommissionFile No. 0-27246**

**ZORANCORPORATION**

(**Exact name of registrant as specified in its charter)**

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

 

**1390 Kifer Road**

**Sunnyvale, California 94086**

(Address ofprincipal executive offices, including zip code)

**(408) 523-6500**

(Registrant’stelephone number, including area code)

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Indicate by check mark whetherthe registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.  Yes x   No o

Indicate by check mark whetherregistrant is a large accelerated filer, an accelerated filer or anon-accelerated filer.  See definition of“accelerated and large accelerated filer” in Rule 12b-2 of the ExchangeAct.  (Check one):

Large accelerated filer  x   Accelerated filer   o   Non accelerated-filer  o

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

As of May 8, 2007, therewere outstanding 49,598,486 shares of the registrant’s Common Stock, par value$0.001 per share.

 

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**ZORAN CORPORATION ANDSUBSIDIARIES**

**FORM 10-Q**

**INDEX**

**For theQuarter Ended March 31, 2007**
|                                    | ** ** |                                                                                                           | ** ** | **Page** |
|------------------------------------|------------|-----------------------------------------------------------------------------------------------------------|------------|----------|
| **PART  I. FINANCIAL INFORMATION** | ** ** | ** **                                                                                                |
|                               |       |                                                                                                      |       |     |
|                               |       |                                                                                                      |       |     |
| Item 1.                            |       | Financial  Statements (Unaudited):                                                                        |       |     |
|                               |       |                                                                                                      |       |     |
|                               |       | Condensed  Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006                         |       | 3        |
|                               |       |                                                                                                      |       |     |
|                               |       | Condensed  Consolidated Statements of Operations for the Three Months Ended March 31,  2007 and 2006      |       | 4        |
|                               |       |                                                                                                      |       |     |
|                               |       | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended  March 31, 2007 and 2006 |       | 5        |
|                               |       |                                                                                                      |       |     |
|                               |       | Notes to  Condensed Consolidated Financial Statements                                                     |       | 6        |
|                               |       |                                                                                                      |       |     |
| **Item 2.**                        |       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations               |       | 15       |
|                               |       |                                                                                                      |       |     |
| **Item 3.**                        |       | Quantitative  and Qualitative Disclosures About Market Risk                                               |       | 19       |
| ** **                         |       |                                                                                                      |       |     |
| **Item 4.**                        |       | Controls and  Procedures                                                                                  |       | 19       |
| ** **                         |       |                                                                                                      |       |     |
|                               |       |                                                                                                      |       |     |
|                               |       |                                                                                                      |       |     |
| **PART II. OTHER  INFORMATION**    | ** ** | ** **                                                                                                |
|                               |       |                                                                                                      |       |     |
| **Item 1.**                        |       | Legal Proceedings                                                                                         |       | 20       |
|                               |       |                                                                                                      |       |     |
| **Item 1A.**                       |       | Risk  Factors                                                                                             |       | 21       |
| ** **                         |       |                                                                                                      |       |     |
| **Item  6.**                       |       | Exhibits                                                                                                  |       | 33       |
| ** **                         |       |                                                                                                      |       |     |
| Signatures                         |       | 34                                                                                                        |
|                                    |            |                                                                                                           |            |          |  |

 

2

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**PART I.FINANCIAL INFORMATION**

**Item 1.Financial Statements (Unaudited):**

**ZORAN CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**
| ** **                                                                                                                                                                                                                                                    | ** ** | **March 31,  2007** | ** ** | **December 31,  2006** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                                    |       |                     |       |                        |       |
| ASSETS                                                                                                                                                                                                                                                        |       |                     |       |                        |       |
| Current assets:                                                                                                                                                                                                                                               |       |                     |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                    |       | $                        | 90,510     |                        | $          | 100,034 |   |
| Short-term  investments                                                                                                                                                                                                                                       |       | 205,432                  |       | 196,195                     |       |
| Accounts  receivable, net                                                                                                                                                                                                                                     |       | 44,624                   |       | 42,640                      |       |
| Inventories                                                                                                                                                                                                                                                   |       | 44,630                   |       | 45,044                      |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                    |       | 9,639                    |       | 10,726                      |       |
| Total current  assets                                                                                                                                                                                                                                         |       | 394,835                  |       | 394,639                     |       |
| Property and  equipment, net                                                                                                                                                                                                                                  |       | 15,179                   |       | 15,673                      |       |
| Other assets and  investments                                                                                                                                                                                                                                 |       | 22,890                   |       | 22,890                      |       |
| Goodwill                                                                                                                                                                                                                                                      |       | 173,079                  |       | 174,259                     |       |
| Intangible  assets, net                                                                                                                                                                                                                                       |       | 57,000                   |       | 69,169                      |       |
|                                                                                                                                                                                                                                                          |       | $                        | 662,983    |                        | $          | 676,630 |   |
|                                                                                                                                                                                                                                                          |       |                     |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                    |       |                     |       |                        |       |
| Current liabilities:                                                                                                                                                                                                                                          |       |                     |       |                        |       |
| Accounts payable                                                                                                                                                                                                                                              |       | $                        | 27,369     |                        | $          | 33,767 |   |
| Accrued expenses  and other liabilities                                                                                                                                                                                                                       |       | 36,138                   |       | 46,082                      |       |
| Total current  liabilities                                                                                                                                                                                                                                    |       | 63,507                   |       | 79,849                      |       |
| Other long-term  liabilities                                                                                                                                                                                                                                  |       | 19,840                   |       | 12,784                      |       |
| Commitments and  Contingencies (Note 11)                                                                                                                                                                                                                      |       |                     |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                                                                                    |       |                     |       |                        |       |
| Common stock,  $0.001 par value; 105,000,000 shares authorized at March 31, 2007 and  December 31, 2006; 49,448,791 shares issued and outstanding as of March  31, 2007; and 49,433,780 shares issued and outstanding as of  December 31, 2006 |       | 49                       |       | 49                          |       |
| Additional paid-in  capital                                                                                                                                                                                                                                   |       | 809,732                  |       | 807,220                     |       |
| Accumulated other  comprehensive income                                                                                                                                                                                                                       |       | 2,796                    |       | 4,238                       |       |
| Accumulated deficit                                                                                                                                                                                                                                           |       | (232,941                 | )          | (227,510                    | )          |
| Total stockholders’  equity                                                                                                                                                                                                                              |       | 579,636                  |       | 583,997                     |       |
|                                                                                                                                                                                                                                                          |       | $                        | 662,983    |                        | $          | 676,630 |   |

 

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

3

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**ZORAN CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(in thousands, except per sharedata)**

**(unaudited)**
| ** **                                                  | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                  | ** ** | **March 31,**               | ** ** |
| ** **                                                  | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                        | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Revenues:                                                   |       |                             |       |   |   |
| Hardware product revenues                                   |       | $                                | 87,182     |   | $ | 99,169 |   |
| Software and other revenues                                 |       | 14,477                           |       | 12,909 |   |
| License revenues related to litigation settlement           |       | —                           |       | 30,168 |   |
| Total revenues                                              |       | 101,659                          |       | 142,246 |   |
|                                                        |       |                             |       |   |   |
| Costs and  expenses:                                        |       |                             |       |   |   |
| Cost of hardware product revenues                           |       | 44,198                           |       | 53,650 |   |
| Research and development                                    |       | 24,988                           |       | 24,248 |   |
| Selling, general and administrative                         |       | 28,593                           |       | 24,901 |   |
| Amortization of intangible assets                           |       | 12,169                           |       | 12,735 |   |
| Total costs and expenses                                    |       | 109,948                          |       | 115,534 |   |
|                                                        |       |                             |       |   |   |
| Operating income  (loss)                                    |       | (8,289                           | )          | 26,712 |   |
|                                                        |       |                             |       |   |   |
| Interest income                                             |       | 3,603                            |       | 1,593 |   |
|                                                        |       |                             |       |   |   |
| Other income,  net                                          |       | 602                              |       | 1,193 |   |
|                                                        |       |                             |       |   |   |
| Income (loss)  before income taxes                          |       | (4,084                           | )          | 29,498 |   |
|                                                        |       |                             |       |   |   |
| Provision for  income taxes                                 |       | 1,800                            |       | 8,815 |   |
|                                                        |       |                             |       |   |   |
| Net income  (loss)                                          |       | $                                | (5,884     | ) | $ | 20,683 |   |
|                                                        |       |                             |       |   |   |
| Basic net income  (loss) per share                          |       | $                                | (0.12      | ) | $ | 0.45 |   |
|                                                        |       |                             |       |   |   |
| Diluted net  income (loss) per share                        |       | $                                | (0.12      | ) | $ | 0.43 |   |
|                                                        |       |                             |       |   |   |
| Shares used to  compute basic net income (loss) per share   |       | 49,442                           |       | 46,207 |   |
|                                                        |       |                             |       |   |   |
| Shares used to compute  diluted net income (loss) per share |       | 49,442                           |       | 48,487 |   |

 

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

4

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**ZORAN CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**
| ** **                                                                        | ** ** | **Three Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                                                        | ** ** | **March 31,**               | ** ** |
| ** **                                                                        | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                                              | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Cash flows from  operating activities:                                            | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income (loss)                                                                 |       | $                                | (5,884     | ) | $ | 20,683 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operations:   |       |                             |       |   |   |
| Depreciation                                                                      |       | 2,080                            |       | 2,361 |   |
| Amortization                                                                      |       | 12,169                           |       | 12,772 |   |
| Stock-based compensation expense                                                  |       | 2,512                            |       | 4,813 |   |
| Gain on sale of investments, net                                                  |       | (809                             | )          | (1,044 | ) |
| Changes in assets and liabilities:                                                |       |                             |       |   |   |
| Accounts receivable                                                               |       | (1,984                           | )          | 7,743 |   |
| Inventories                                                                       |       | 414                              |       | (6,047 | ) |
| Prepaid expenses and other current assets and other  assets                       |       | 1,087                            |       | 176 |   |
| Accounts payable                                                                  |       | (6,398                           | )          | 5,738 |   |
| Accrued expenses and other liabilities, goodwill and  other long term liabilities |       | (1,255                           | )          | 4,245 |   |
| Net cash provided by operating activities                                         |       | 1,932                            |       | 51,440 |   |
|                                                                              |       |                             |       |   |   |
| Cash flows from  investing activities:                                            |       |                             |       |   |   |
| Purchases of property and equipment                                               |       | (1,586                           | )          | (1,209 | ) |
| Purchases of investments                                                          |       | (85,358                          | )          | (90,037 | ) |
| Proceeds from sales and maturities of investments                                 |       | 75,488                           |       | 57,474 |   |
| Net cash used in investing activities                                             |       | (11,456                          | )          | (33,772 | ) |
|                                                                              |       |                             |       |   |   |
| Cash flows from  financing activities:                                            |       |                             |       |   |   |
| Proceeds from issuance of common stock                                            |       | —                           |       | 17,228 |   |
| Net cash provided by financing activities                                         |       | —                           |       | 17,228 |   |
|                                                                              |       |                             |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                             |       | (9,524                           | )          | 34,896 |   |
|                                                                              |       |                             |       |   |   |
| Cash and cash  equivalents at beginning of period                                 |       | 100,034                          |       | 78,856 |   |
|                                                                              |       |                             |       |   |   |
| Cash and cash  equivalents at end of period                                       |       | $                                | 90,510     |   | $ | 113,752 |   |

 

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

5

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**ZORAN CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

**1.     Basis of Presentation**

The accompanyingunaudited condensed consolidated financial statements of Zoran Corporation andits subsidiaries (“Zoran” or the “Company”) have been prepared in conformitywith accounting principles generally accepted in the United States ofAmerica.  However, certain information orfootnote disclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission (“SEC”). In the opinion of management, the condensed consolidated financialstatements reflect all adjustments considered necessary, consisting only ofnormal recurring adjustments, for a fair statement of the consolidatedfinancial position, operating results and cash flows for the periodspresented.  The results of operations forthe interim periods presented are not necessarily indicative of the resultsthat may be expected for the full fiscal year or in any future period.  This Quarterly Report on Form 10-Q should beread in conjunction with the audited consolidated financial statements andnotes thereto for the year ended December 31, 2006, included in theCompany’s 2006 Annual Report on Form 10-K filed with the SEC.

***RecentAccounting Pronouncements***

In February 2007, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities” (“SFAS No. 159”). This statement expands the standardsunder SFAS No. 157, “Fair ValueMeasurement,” to provide entities the one-time election (Fair ValueOption or FVO) to measure financial instruments and certain other items at fairvalue. Most of the provisions of this statement apply only to entities thatelect the fair value option. The provisions of SFAS No. 159 are effectivefor the Company for fiscal years beginning January 1, 2008. The Company isevaluating the impact of the provisions of this statement on its consolidatedfinancial position, results of operations and cash flows.

In September 2006, the FASB issuedSFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), whichdefines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles, and expandsdisclosures about fair value measurements. The provisions of SFAS No. 157are effective for the Company for fiscal years beginning afterDecember 31, 2007. The Company is evaluating the impact of the provisionsof this statement on its consolidated financial position, results of operationsand cash flows.

In February 2006, the FASB issued SFASNo. 155, “Accounting for Certain Hybrid Financial Instruments,” anamendment of SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” and SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities.” ThisStatement permits fair value remeasurement for any hybrid financial instrumentthat contains an embedded derivative that otherwise would require bifurcation.This Statement is effective for the Company for all financial instrumentsacquired or issued after July 1, 2007. The adoption of SFAS No. 155is not expected to have a material effect on the Company’s consolidatedfinancial position, results of operations or cash flows.

**2.****                                      Stock-BasedCompensation**

The following table summarizes stock-basedcompensation expense related to employee stock options, employee stockpurchases and restricted stock unit grants for the three months endedMarch 31, 2007 and 2006 as recorded in accordance with SFAS No. 123(R) (inthousands):
| ** **                           | ** ** | **Three Months Ended  March 31, 2007** | ** ** | **Three Months Ended  March 31, 2006** | ** ** |
|--------------------------------------|------------|------------------------------------------------------------|------------|------------------------------------------------------------|------------|
|                                 |       |                                                       |       |                                                       |       |
| Cost of hardware  product revenues   |       | $                                                          | 60         |                                                       | $          | 153 |   |
| Research and  development            |       | 695                                                        |       | 1,610                                                      |       |
| Selling, general and  administrative |       | 1,757                                                      |       | 3,050                                                      |       |
| Total costs and  expenses            |       | $                                                          | 2,512      |                                                       | $          | 4,813 |   |

 

6

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The expense for the quarter ended March 31, 2007includes a one-time charge of $0.2 million attributable to the extension ofexercise periods for the modification of vested options under SFAS No. 123(R)for employees terminated during the three months ended March 31, 2007.

Stock Option Activity

The following is asummary of stock option activities:
|                                 | ** ** | **Shares Underlying  Outstanding Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|---------------------------------|------------|------------------------------------------------------|------------|------------------------------------------------|------------|
| Outstanding at January  1, 2007 |       | 8,096,344                                            |       | $                                              | 16.58      |   |
| Granted                         |       | —                                               |       | —                                         |       |
| Exercised                       |       | —                                               |       | —                                         |       |
| Canceled                        |       | (71,978                                              | )          | $                                              | 15.68      |   |
| Outstanding at March  31, 2007  |       | 8,024,366                                            |       | $                                              | 16.59      |   |

 

Significant option groupsoutstanding as of March 31, 2007 and the related weighted average exerciseprice and contractual life information, are as follows:
| ** **               | ** ** | **Options Outstanding**                                  | ** ** | **Options Exercisable**                                 | ** ** |
|--------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **Exercise Prices** | ** ** | **Shares  Underlying  Options at  March 31,  2007** | ** ** | **Weighted  Average  Remaining  Contractual  Life  (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  intrinsic  value (‘000)** | ** ** | **Shares  Underlying  Options at  March 31,  2007** | ** ** | **Weighted  Average  Remaining  Contractual  Life  (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  intrinsic  value (‘000)** | ** ** |
|                     |       |                                                          |       |                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| $0.00 to $9.99           |       | 574,561                                                       |       | 4.86                                                         |       | $ | 6.28 |   | $ | 6,169 |   | 551,684 |   | 4.72 |   | $ | 6.17 |   | $ | 5,987 |   |
| $10.00 to $11.99         |       | 1,331,559                                                     |       | 7.15                                                         |       | $ | 10.56 |   | 8,604 |   | 1,331,559 |   | 7.15 |   | $ | 10.56 |   | 8,604 |   |
| $12.00 to $14.99         |       | 1,617,458                                                     |       | 6.63                                                         |       | $ | 13.30 |   | 6,021 |   | 1,399,399 |   | 6.36 |   | $ | 13.24 |   | 5,294 |   |
| $15.00 to $19.99         |       | 2,314,688                                                     |       | 6.84                                                         |       | $ | 17.10 |   | 540 |   | 2,022,308 |   | 6.70 |   | $ | 17.10 |   | 448 |   |
| $20.00 to $25.99         |       | 1,793,649                                                     |       | 6.41                                                         |       | $ | 24.05 |   | — |   | 1,570,977 |   | 6.03 |   | $ | 24.20 |   | — |   |
| $26.00 to $46.53         |       | 392,451                                                       |       | 3.51                                                         |       | $ | 28.59 |   | — |   | 385,631 |   | 3.41 |   | $ | 28.61 |   | — |   |
| Total                    |       | 8,024,366                                                     |       | 6.45                                                         |       | $ | 16.59 |   | $ | 21,334 |   | 7,261,558 |   | 6.25 |   | $ | 16.47 |   | $ | 20,333 |   |

 

The weighted average grant date fair value ofoptions, as determined under SFAS No. 123(R), granted during the three monthsended March 31, 2006 was $11.09 per share.  There were no grants in thethree months ended March 31, 2007.

The aggregate intrinsicvalue in the table above represents the total pretax intrinsic value, based onthe Company’s closing stock price of $17.02 as of March 31, 2007, which wouldhave been received by the option holders had all option holders exercised theiroptions as of that date.  The totalnumber of shares of common stock underlying in-the-money options exercisable asof March 31, 2007 was 3.8 million.

As of March 31, 2007, thetotal unrecognized compensation cost related to stock options not yetrecognized was $7.1 million after estimated forfeitures which are expected tobe recognized over an estimated amortization period of up to four years.

The Company settles employee stock optionexercises with newly issued common shares.

7

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

The following table presents the calculation ofcomprehensive income (loss) as required by SFAS No. 130 “ReportingComprehensive Income.”  The components ofcomprehensive income (loss), net of tax, are as follows (in thousands):
|                                                       | ** ** | **Three Months Ended** | ** ** |
|-------------------------------------------------------|------------|----------------------------------|------------|
| ** **                                            | ** ** | **March 31,**               | ** ** |
| ** **                                            | ** ** | **2007**                         | ** ** | **2006** | ** ** |
|                                                  | ** ** | ** **                       | ** ** | ** ** | ** ** |
| Net income (loss)                                     |       | $                                | (5,884     | ) | $ | 20,683 |   |
| Change in  unrealized gain (loss) on investments, net |       | (1,442                           | )          | (878 | ) |
| Total comprehensive  income (loss)                    |       | $                                | (7,326     | ) | $ | 19,805 |   |

 

The components ofaccumulated other comprehensive income (loss) are unrealized gain (loss) onmarketable securities.

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

The Company’s portfolio ofmarketable securities at March 31, 2007 was as follows (in thousands):
| ** **                         | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|------------------------------------|------------|----------|------------|-----------------------|------------|------------------------|------------|----------------------------|------------|
| Corporate debt                     |       | $        | 93,663     |                  | $          | 30                     |       | $                          | (98        | ) | $ | 93,595 |   |
| U.S. government  securities        |       | 58,402   |       | 41                    |       | (66                    | )          | 58,377                     |       |
| Auction rate  securities           |       | 40,575   |       | —                |       | —                 |       | 40,575                     |       |
| Foreign bonds                      |       | 7,269    |       | —                |       | (6                     | )          | 7,263                      |       |
| Municipal bonds                    |       | 1,500    |       | —                |       | (1                     | )          | 1,499                      |       |
| Total fixed  income securities     |       | 201,409  |       | 71                    |       | (171                   | )          | 201,309                    |       |
| Publicly traded  equity securities |       | 1,227    |       | 2,896                 |       | —                 |       | 4,123                      |       |
| Total                              |       | $        | 202,636    |                  | $          | 2,967                  |       | $                          | (171       | ) | $ | 205,432 |   |

 

The Company’s portfolio ofmarketable securities at December 31, 2006 was as follows (in thousands):
| ** **                         | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|------------------------------------|------------|----------|------------|-----------------------|------------|------------------------|------------|----------------------------|------------|
| Corporate debt                     |       | $        | 97,175     |                  | $          | 10                     |       | $                          | (245       | ) | $ | 96,940 |   |
| U.S. government  securities        |       | 42,822   |       | 7                     |       | (141                   | )          | 42,688                     |       |
| Auction rate  securities           |       | 37,550   |       | —                |       | —                 |       | 37,550                     |       |
| Foreign bonds                      |       | 11,427   |       | 1                     |       | (12                    | )          | 11,416                     |       |
| Municipal bonds                    |       | 1,500    |       | —                |       | (1                     | )          | 1,499                      |       |
| Total fixed  income securities     |       | 190,474  |       | 18                    |       | (399                   | )          | 190,093                    |       |
| Publicly traded  equity securities |       | 1,483    |       | 4,619                 |       | —                 |       | 6,102                      |       |
| Total                              |       | $        | 191,957    |                  | $          | 4,637                  |       | $                          | (399       | ) | $ | 196,195 |   |

 

8

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The following tablesummarizes the maturities of the Company’s fixed income securities at March 31,2007 (in thousands):
|                                | ** ** | **Cost** | ** ** | **Estimated  Fair  Value** | ** ** |
|--------------------------------|------------|----------|------------|----------------------------|------------|
| Less than 1 year               |       | $        | 83,369     |                       | $          | 83,290 |   |
| Due in 1 to 2  years           |       | 46,422   |       | 46,387                     |       |
| Due in 2 to 5  years           |       | 31,043   |       | 31,057                     |       |
| Greater than  5 years*    |       | 40,575   |       | 40,575                     |       |
| Total fixed  income securities |       | $        | 201,409    |                       | $          | 201,309 |   |

 

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*Comprised of auction rate securities with reset dates of90 days or less but final expiration dates beyond 5 years.

**5.     Inventories**

Inventories are stated atthe lower of cost (first in, first out) or market and consisted of thefollowing (in thousands):
|                                      | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                           | ** ** | **2007**           | ** ** | **2006**              | ** ** |
|                                 |       |               |       |                  |       |
| Purchased parts  and work in process |       | $                  | 17,468     |                  | $          | 18,748 |   |
| Finished goods                       |       | 27,162             |       | 26,296                |       |
|                                 |       | $                  | 44,630     |                  | $          | 45,044 |   |

 

**6.****              Goodwill and OtherIntangible Assets**

The Companymonitors the recoverability of goodwill recorded in connection withacquisitions, by reporting unit, annually, or sooner if events or changes incircumstances indicate that the carrying amount may not be recoverable.  The Company performed the annual analysis asof September 30, 2006 and concluded that goodwill was not impaired, as the fairvalue of each reporting unit exceeded its carrying value, including goodwill.

***Componentsof Acquired Intangible Assets****(in thousands):*
| ** **                    | ** ** | ** **        | ** ** | **March 31, 2007** | ** ** | **December 31, 2006** | ** ** |
|-------------------------------|------------|-------------------|------------|------------------------------|------------|---------------------------------|------------|
| ** **                    | ** ** | **Life  (Years)** | ** ** | **Gross  Carrying  Amount**  | ** ** | **Accumulated  Amortization**   | ** ** | **Net  Balance** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Balance** | ** ** |
| Amortized  intangible assets: |       |              |       |                         |       |                            |       |   |   |   |   |   |   |   |   |
| Purchased technology          |       | 2-3               |       | $                            | 195,505    |                            | $          | (151,704 | ) | $ | 43,801 |   | $ | 195,505 |   | $ | (142,658 | ) | $ | 52,847 |   |
| Patents                       |       | 3-5               |       | 40,265                       |       | (31,881                         | )          | 8,384 |   | 40,265 |   | (29,500 | ) | 10,765 |   |
| Customer base                 |       | 3-5               |       | 13,860                       |       | (10,198                         | )          | 3,662 |   | 13,860 |   | (9,583 | ) | 4,277 |   |
| Tradename and others          |       | 3-5               |       | 3,350                        |       | (2,197                          | )          | 1,153 |   | 3,350 |   | (2,070 | ) | 1,280 |   |
| Total                         |       |              |       | $                            | 252,980    |                            | $          | (195,980 | ) | $ | 57,000 |   | $ | 252,980 |   | $ | (183,811 | ) | $ | 69,169 |   |

 

Estimated future intangibleamortization expense, based on current balances, as of March 31, 2007 is asfollows (in thousands):
| Remaining nine months of  2007 |   | $      | 31,055 |   |
|--------------------------------|--------|--------|--------|--------|
| Year ending  December 31, 2008 |   | 23,315 |   |
| Year ending  December 31, 2009 |   | 1,820  |   |
| Year ending  December 31, 2010 |   | 810    |   |
|                           |   | $      | 57,000 |   |

 

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Goodwill by reporting units wasas follows (in thousands):
|            | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|------------|------------|--------------------|------------|-----------------------|------------|
| ** ** | ** ** | **2007**           | ** ** | **2006**              | ** ** |
| ** ** | ** ** | ** **         | ** ** | ** **            | ** ** |
| Consumer   |       | $                  | 167,999    |                  | $          | 169,060 |   |
| Imaging    |       | 5,080              |       | 5,199                 |       |
|       |       | $                  | 173,079    |                  | $          | 174,259 |   |

 

**7.****              IncomeTaxes**

Theprovision for income taxes reflects the effective tax rate applied to pretaxearnings adjusted for amortization of intangible assets and stock-basedcompensation expense for the interim periods. The effective tax rate differs from the U.S. statutory rate due toutilization of previously unbenefitted operating losses and State of Israel taxbenefits on foreign earnings.  Theprovision is due primarily to domestic income offset by previously unbenefittedpurchased NOLs which when utilized reduce goodwill and not tax expense.

TheCompany adopted the provisions of Financial Standards Accounting BoardInterpretation No. 48 Accounting for Uncertainty in Income taxes (“FIN No. 48”)an interpretation of FASB Statement No. 109 (“SFAS No. 109”) on January 1,2007.  As a result of the implementationof FIN No. 48, the Company reduced its tax liability by $1.6 million with anoffsetting increase of $0.4 million to retained earnings, and a decrease ingoodwill by $1.2 million.  Additionally,the Company decreased deferred tax assets and their associated valuation allowanceby $12.7 million. The adoption resulted in a reclassification of certain taxliabilities from current to non-current.

Atthe adoption date of January 1, 2007, the Company had $27.5 million ofunrecognized tax benefits, $6.5 million of which is classified as otherlong-term liabilities and would affect our effective tax rate.  The remainder would increase deferred taxassets for which the Company would require a full valuation allowance.

Thetax years 2003 through 2006 remain open to examination by the major taxingjurisdictions to which the Company is subject. The Company accounts for tax related interest and penalties as part ofthe income tax provision.  At January 1,2007 accrued interest and penalties were immaterial.

Realizationof deferred tax assets is based on our ability to generate sufficient futuretaxable income. The valuation allowance was determined in accordance with theprovisions of SFAS No. 109 which requires an assessment of both positiveand negative evidence when determining whether it is more likely than not thatdeferred tax assets are recoverable; such assessment is required on ajurisdiction by jurisdiction basis. Historical operating results and continuing business uncertaintyrepresent sufficient negative evidence which it was difficult for positiveevidence to overcome under SFAS No. 109 and accordingly, a full valuationallowance was recorded. The amount of the deferred tax asset valuationallowance, however, could be reduced in the near term if it becomes more likelythan not that some or all of the Company’s deferred tax assets will berealized.

**8.****              SegmentReporting**

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

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

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Information about reported segment income or loss is asfollows for the three months ended March 31, 2007 and 2006 (in thousands):
|                       | ** ** | **Three Months Ended  March 31,** | ** ** |
|-----------------------|------------|--------------------------------------------------|------------|
| ** **            | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| ** **            | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Net revenues:         |       |                                             |       |   |   |
| Consumer              |       | $                                                | 81,452     |   | $ | 123,556 |   |
| Imaging               |       | 20,207                                           |       | 18,690 |   |
|                  |       | $                                                | 101,659    |   | $ | 142,246 |   |
|                  |       |                                                  |       |  |   |
| Operating  expenses:  |       |                                             |       |   |   |
| Consumer              |       | $                                                | 82,286     |   | $ | 87,615 |   |
| Imaging               |       | 15,493                                           |       | 15,184 |   |
|                  |       | $                                                | 97,779     |   | $ | 102,799 |   |
|                  |       |                                                  |       |  |   |
| Contribution  margin: |       |                                             |       |   |   |
| Consumer              |       | $                                                | (834       | ) | $ | 35,941 |   |
| Imaging               |       | 4,714                                            |       | 3,506 |   |
|                  |       | $                                                | 3,880      |   | $ | 39,447 |   |

 

A reconciliation of the totalsreported for the operating segments to the applicable line items in theconsolidated financial statements for the three months ended March 31,2007 and 2006 is as follows (in thousands):
|                                              | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                         | ** ** | ** **                                       | ** ** | ** ** | ** ** |
| Contribution  margin from operating segments |       | $                                                | 3,880      |   | $ | 39,447 |   |
| Amortization of  intangibles                 |       | 12,169                                           |       | 12,735 |   |
| Total operating  income (loss)               |       | $                                                | (8,289     | ) | $ | 26,712 |   |

 

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

The geographic distribution of total revenues for the three months endedMarch 31, 2007 and 2006 was as follows (in thousands):
|                                                            | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                                 | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
| **Revenue  from unaffiliated customers originating from:** |       |                                             |       |   |   |
| China                                                      |       | $                                                | 30,513     |   | $ | 39,605 |   |
| Japan                                                      |       | 25,098                                           |       | 27,364 |   |
| Korea                                                      |       | 6,067                                            |       | 8,562 |   |
| Taiwan                                                     |       | 25,669                                           |       | 53,708 |   |
| United States                                              |       | 7,169                                            |       | 7,118 |   |
| North America  (excluding United States)                   |       | 82                                               |       | 12 |   |
| Other                                                      |       | 7,061                                            |       | 5,877 |   |
| **Total  revenues**                                        |       | $                                                | 101,659    |   | $ | 142,246 |   |

 

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For the three months ended March 31, 2007, onecustomer accounted for 13% of total revenues. For the same period of 2006, one customer accounted for 21% of totalrevenues attributable to the license revenue related to litigation settlement.

As of March 31, 2007,three customers accounted for approximately 12%, 10% and 10% of total netaccounts receivable, respectively, and as of December 31, 2006 four customers accounted for approximately 13%,10%, 10% and 10% of the net accounts receivable balance, respectively.

**9.****              EmployeeBenefit Plans**

Under Israeli law, theCompany is required to make severance payments to its retired or dismissedIsraeli employees and Israeli employees leaving its employment in certain othercircumstances. The Company’s severance pay liability to its Israeli employees,which is calculated based on the salary of each employee multiplied by theyears of such employee’s employment, is reflected in the Company’s balancesheet in other long-term liabilities on an accrual basis, and is partiallyfunded by the purchase of insurance policies in the name of the employees. Thesurrender value of the insurance policies is recorded in other non-currentassets. The severance pay expenses for the three months ended March 31, 2007and 2006 were $49,000 and $46,000 respectively.

**10.****       NetIncome (Loss) Per Share**

Basic net income (loss)per share is calculated by dividing net income available to common stockholdersby the weighted average number of common shares outstanding during theperiod.  Diluted net income per share is calculated by using the weightedaverage number of common shares outstanding during the period increased toinclude the number of additional shares of common stock that would have beenoutstanding if the dilutive potential shares of common stock had been issued.

The followingtable provides a reconciliation of the components of the basic and diluted netincome (loss) per share computations (in thousands, except per share data):
|                                                        | ** ** | **Three Months Ended  March 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------------------|------------|
| ** **                                             | ** ** | **2007**                                         | ** ** | **2006** | ** ** |
|                                                   |       |                                             |       |   |   |
| Net income  (loss)                                     |       | $                                                | (5,884     | ) | $ | 20,683 |   |
|                                                   |       |                                             |       |   |   |
| Weighted average  shares outstanding                   |       | 49,442                                           |       | 46,207 |   |
| Effect of  dilutive options and restricted stock units |       | —                                           |       | 2,280 |   |
| Dilutive weighted  average shares                      |       | 49,442                                           |       | 48,487 |   |
|                                                   |       |                                             |       |   |   |
| Net income  (loss) per share:                          |       |                                             |       |   |   |
| Basic                                                  |       | $                                                | (0.12      | ) | $ | 0.45 |   |
| Diluted                                                |       | $                                                | (0.12      | ) | $ | 0.43 |   |

 

**For the three months ended March 31, 2007 and 2006outstanding options and restricted stock units totaling 5.0 million and 3.4million shares, respectively, were excluded from the computation of diluted netincome (loss) per share as the inclusion of such shares would have had ananti-dilutive effect.**

**11.****       LegalProceedings**

*U.S.Attorney and SEC Investigations:* On July 3, 2006, Zoran disclosed in a pressrelease that it received a grand jury subpoena from the office of the U.S.attorney for the Northern District of California requesting documents from 1995through the present referring to, relating to or involving stock options, andalso received an informal inquiry from the SEC requesting documents related toZoran’s stock option grants.  Zoranintends to cooperate fully in all government investigations.  These

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inquiries likely willrequire the Company to expend significant management time and incur significantlegal and other expenses, and could result in civil and criminal actionsseeking, among other things, injunctions against the Company and its officersand directors and the payment of significant fines and penalties by the Companyand its officers and directors, which may adversely affect its results ofoperations and cash flow.  The Companycannot predict how long it will take to or how much more time and resources itwill have to expend to resolve these government inquiries, nor can it predictthe outcome of these inquiries. Also, there can be no assurance that otherinquiries, investigations or actions will not be started by other United Statesfederal or state regulatory agencies or by foreign governmental agencies.

*Late SEC Filings and NasdaqDelisting Proceedings* Due to the Special Committeeinvestigation and the resulting restatements, the Company did not file on timeits Quarterly Reports on Form 10-Q for the quarters ended June 30, 2006 andSeptember 30, 2006 or its Annual Report on Form 10-K for the year endedDecember 31, 2006. As a result, the Company received Nasdaq Staff Determinationletters dated August 14, 2006, November 15, 2006 and March 20, 2007 statingthat it was not in compliance with the filing requirements of Marketplace Rule4310(c)(14) and, therefore, that the Company’s stock was subject to delistingfrom the Nasdaq Global Select Market. On April 20, 2007, the Company filed itsQuarterly Reports on Form 10-Q for the quarters ended June 30, 2006 andSeptember 30, 2006, an amendment to its Quarterly Report on Form 10-Q forthe quarter ended March 31, 2006 and its Annual Report on Form 10-K for theyear ended December 31, 2006.  On April30, 2007, the Company announced in a press release that a Nasdaq ListingQualifications Panel has notified the Company that is has regained compliancewith the continued listing requirements of Nasdaq Marketplace Rule 4310(c) (14)related to the filing of periodic reports with the U.S Securities and ExchangeCommission and has demonstrated compliance with all other Nasdaq MarketplaceRules.  Accordingly, the Nasdaq ListingQualification Panel has determined that the Company’s common stock willcontinue to be listed on the Nasdaq Global Select Market.

*Shareholder Class Actions and Derivative Litigation Relating toHistorical Stock Option Practices:*****As discussed further below, certain persons and entities identifying themselves asshareholders of Zoran have filed class action complaints against the Companyand derivative actions purporting to assert claims on behalf of and in the nameof the Company against various of the Company’s current and former directorsand officers relating to its historical accounting for stock options. TheCompany intends to defend itself vigorously. However it is not possible at thistime to make a reasonable estimate of any potential loss or range of loss.

*Zucker v. Zoran Corporation, et al.*  On August 10, 2006, a securities class actioncomplaint was filed against Zoran and certain of its officers and directors inthe United States District Court, Northern District of California, allegingviolations of federal securities laws. The Court selected Middlesex Pension Fund as lead plaintiff and approvedlead plaintiff’s selection of counsel for the class.  Plaintiff filed an amended complaint onFebruary 1, 2007 and a second amended complaint on February 20, 2007.  On March 8, 2007, Defendants filed a motionto dismiss.  On March 20, 2007, leadplaintiff filed a notice voluntarily dismissing the action with prejudice as tothe lead plaintiff.

*NCEA-IBEW Pension Fund (The Decatur Plan) v. Galil,et al.*  On June 12,2006, a purported shareholder derivative action was filed by the Decatur Planagainst Zoran as a nominal defendant and certain of its officers and directorsin the United States District Court, Northern District of California, alleging,inter alia, violations of federal and state securities laws and breaches offiduciary duty.  On December 4, 2006, theDecatur Plan filed a notice of voluntary dismissal.

*Pfeiffer v. Zoran Corporation et al.*  On September 7, 2006, a purported shareholderderivative action was filed by Milton Pfeiffer against Zoran as a nominaldefendant and certain of its officers and directors in the United StatesDistrict Court, Northern District of California, alleging, inter alia, violationsof federal securities laws and breaches of fiduciary duties.

*Gerald del Rosario v. Aharonet al.** *On September26, 2006, a purported shareholder derivative action was filed by Gerald delRosario against Zoran as a nominal defendant and certain of its current andformer officers and directors in the United States District Court, NorthernDistrict of California, alleging, inter alia, violations of federal securitieslaws and breaches of fiduciary duty.  OnDecember 8, 2006, the Court issued an order consolidating the *Del Rosario* action with the *Pfeiffer*action.  The Court selected del Rosarioas lead plaintiff and approved lead plaintiff’s selection of counsel for theconsolidated derivative action. Plaintiffs filed a consolidated amended complaint on March 14, 2007.

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*Barone v. Gerzberg et al.; Durco v. Gerzberg et al.* On October 23, 2006,two purported shareholder derivative actions were filed by Moshe Barone andJohn Durco against Zoran as a nominal defendant and certain of its current andformer officers and directors in the California Superior Court of Santa ClaraCounty, alleging, inter alia, violations of state securities laws and breachesof fiduciary duty.  On January 24, 2007the Court consolidated the *Barone*and *Durco*actions, appointed Messrs. Barone and Durco as co-leadplaintiffs and approved their selection of counsel for the consolidatedderivative action.  Co-Lead Plaintiffsfiled a consolidated amended complaint on March 26, 2007.

On February 20, 2007, the Company filed a complaintagainst ArcSoft Inc. in the California Superior Court for the County ofAlameda, seeking, payment of $4 million in principal, included in other assets,together with accrued interest then in the amount of approximately $525,000,under four separate convertible promissory notes.  On February 28, 2007,the Company filed an application with the Court seeking to attach assets ofArcSoft as security for the payment of its obligations under the notes. The notes represent amounts loaned by the Company to ArcSoft in 2004. Atthat time Zoran also entered into a transaction with ArcSoft involving thelicensing and grant of certain rights to ArcSoft related to a certain productthen under development and related agreements regarding the continueddevelopment and commercialization of the product. On March 28, 2007, ArcSoftfiled an answer denying liability under the notes and asserting variousaffirmative defenses.  ArcSoft also filed a cross complaint alleging fraudin the inducement of the business arrangement, fraudulent and negligentmisrepresentation, breach of contract and of the implied covenant of good faithand fair dealing, and unjust enrichment and seeking monetary damages of morethan $6.9 million.  The hearing on our application for an attachment iscurrently scheduled for May 14, 2007.  TheCompany has also filed a petition to compel arbitration of ArcSoft’scross-complaint, which is currently scheduled to be heard on May 18, 2007.

*Indemnification Obligations***.** Subject to certain limitations, theCompany is obligated to indemnify its current and former directors, officersand employees in connection with the investigation of the Company’s historicalstock option practices and related government inquiries and litigation. Theseobligations arise under the terms of the Company’s certificate ofincorporation, its bylaws, applicable contracts, and Delaware and Californialaw. The obligation to indemnify generally means that the Company is requiredto pay or reimburse the individuals’ reasonable legal expenses and possibly damagesand other liabilities incurred in connection with these matters. The Company iscurrently paying or reimbursing legal expenses being incurred in connectionwith these matters by a number of its current and former directors, officersand employees.

*Other Legal Matters.*The Company is named from time to time as a party to lawsuits in the normalcourse of its business. Litigation, in general, and intellectual property andsecurities litigation in particular, can be expensive and disruptive to normalbusiness operations. Moreover, the results of legal proceedings are difficultto predict.

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**Item 2.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

*This report includes a number of forward-lookingstatements which reflect the Company’s current views with respect to futureevents and financial performance. These forward-looking statements aresubject to certain risks and uncertainties, including those discussed in “PartII, Item 1A. Risk Factors” below. In this report, the words “anticipates,” “believes,”“expects,” “intends,” “future” and similar expressions identify forward-lookingstatements. Readers are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date hereof.*

**Overview**

Our productsconsist of integrated circuits and related products used in digital versatiledisc players, or DVDs, movie and home theater systems, digital cameras andvideo editing systems.  We also provideintegrated circuits, software and platforms for standard and high definitiondigital television applications that enable the delivery and display of digitalvideo content through a set-top box or television, demodulator IC technologyfor the global high definition television market. We also provide digitalimaging products consisting of semiconductor hardware and software that enableusers to print, scan, process and transmit documents to computer peripheralsthat perform printing functions. We also provide highperformance, low-power application processors, technology and products for themultimedia mobile telephone market.

*Revenues*

We derive most ofour revenues from the sale of our integrated circuit products.  Historically, average selling prices in thesemiconductor industry in general, and for our products in particular, havedecreased over the life of a particular product.  Average selling prices for our hardwareproducts have fluctuated substantially from period to period, primarily as aresult of changes in our customer mix of original equipment manufacturer, orOEM, sales versus sales to resellers and the transition from low-volume tohigh-volume production.  In the past, wehave periodically reduced the prices of some of our products in order to betterpenetrate the consumer market.  Webelieve that, as our product lines continue to mature and competitive marketsevolve, we are likely to experience further declines in the average sellingprices of our products, although we cannot predict the timing and amount ofsuch future changes with any certainty.

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

We recognizesoftware license revenues in accordance with the provisions of Statement ofPosition (SOP) 97-2, *Software RevenueRecognition,*as amended by SOP 98-9, *Modification of*SOP 97-2, *Software Revenue Recognition, With Respect to Certain Transactions.*Our software license agreements typically include obligations to providemaintenance and other support over a fixed term and allow for renewal ofmaintenance services on an annual basis. We determine the fair value of ourmaintenance obligations with reference to substantive renewal rates within theagreement or objective evidence of fair value as required under SOP 97-2.Maintenance and support revenue is recognized ratably over the term of thearrangement.  We also receive royaltyrevenues based on per unit shipments of products embedding our software whichwe recognize upon receipt of a royalty report from the customer, typically onequarter in arrears.

*Cost ofHardware Product Revenues*

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

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*Researchand Development*

Our research anddevelopment expenses consist of salaries and related costs of employees engagedin ongoing research, design and development activities and costs of engineeringmaterials and supplies.  We are a partyto research and development agreements with the Chief Scientist in Israel’sMinistry of Industry and Trade and the Israel-United States BinationalIndustrial Research and Development Foundation, which fund up to 50% ofincurred project costs for approved products up to specified contractmaximums.  These agreements require us touse our best efforts to achieve specified results and require us to payroyalties at rates of 3% to 5% of resulting product sales, and up to 30% ofresulting license revenues, up to a maximum of 100% to 150% of total fundingreceived. Reported research and development expenses are net of these grants,which fluctuate from period to period. We believe that significant investments in research and development arerequired for us to remain competitive, and we expect to continue to devotesignificant resources to product development, although such expenses as apercentage of total revenues may fluctuate.

*Selling,General and Administrative*

Our selling,general and administrative expenses consist primarily of employee-relatedexpenses, sales commissions, product promotion and other professionalservices.  We expect that selling,general and administrative expenses will continue to increase to support ouranticipated growth.

*IncomeTaxes*

Our effectiveincome tax rate has benefited from the availability of previously unbenefittednet operating losses which we have utilized to reduce taxable income forU.S.  federal income tax purposes and byour Israel based subsidiary’s status as an “Approved Enterprise” under Israelilaw, which provides a ten-year tax holiday for income attributable to a portionof our operations in Israel.  Our U.S.federal net operating losses expire at various times between 2017 and 2024, andthe benefits from our subsidiary’s Approved Enterprise status expire at varioustimes beginning in 2008.

***RecentAccounting Pronouncements***

In February 2007, the Financial AccountingStandards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”)No. 159, “The Fair Value Optionfor Financial Assets and Financial Liabilities” (“SFAS No. 159”). This statement expands the standardsunder SFAS No. 157, “Fair ValueMeasurement,” to provide entities the one-time election (Fair ValueOption or FVO) to measure financial instruments and certain other items at fairvalue. Most of the provisions of this statement apply only to entities thatelect the fair value option. The provisions of SFAS No. 159 are effectivefor fiscal years beginning January 1, 2008. We are evaluating the impactof the provisions of this statement on our consolidated financial position,results of operations and cash flows.

In September 2006, the FASB issuedSFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), whichdefines fair value, establishes a framework for measuring fair value inaccordance with generally accepted accounting principles, and expandsdisclosures about fair value measurements. The provisions of SFAS No. 157are effective for fiscal years beginning after December 31, 2007. We areevaluating the impact of the provisions of this statement on our consolidatedfinancial position, results of operations and cash flows.

In February 2006, the FASB issued SFASNo. 155, “Accounting for Certain Hybrid Financial Instruments,” anamendment of SFAS No. 133, “Accounting for Derivative Instruments andHedging Activities,” and SFAS No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities.” ThisStatement permits fair value remeasurement for any hybrid financial instrumentthat contains an embedded derivative that otherwise would require bifurcation.This Statement is effective for all financial instruments acquired or issuedafter July 1, 2007. The adoption of SFAS No. 155 is not expected tohave a material effect on our consolidated financial position, results ofoperations or cash flows.

**Segments**

Our products are based onhighly integrated application-specific integrated circuits, or ASICs, andsystem-on-a-chip, or SOC, solutions.  Wealso license certain software and other intellectual property.  We operate in two operating segments –Consumer group and Imaging group. The Consumer group provides products for usein DVD players, recordable DVD players, standard and high definition digitaltelevision products, digital camera products and multimedia mobile phoneproducts.  The Imaging group providesproducts used in digital copiers, laser and inkjet printers as well asmultifunction peripherals.

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**Results of Operations**

*Revenues*

Totalrevenues were $101.7 million for the three months ended March 31, 2007 comparedto $142.2 million for the three months ended March 31, 2006.  Revenues in 2006 were higher due to licenserevenues related to litigation settlement of $30.2 million recorded during thefirst quarter of 2006.  For the threemonths ended March 31, 2007, Consumer segment revenues decreased by $11.8million while Imaging segmentrevenues increased $1.5 million. Excluding revenues related to litigation settlement, the decrease inConsumer segment revenues was a result of decreasein revenues in the DVD and DTV products of $9.4 million and $4.1million,respectively, which was partially offset by an increase in Mobile products by$1.7 million.

Hardwareproduct revenues for the three months ended March 31, 2007 were $87.2 millioncompared to $99.2 million for the comparable period of the prior year.  Hardware product revenues decreased $13.5million in the Consumer segment and increased $1.5 million in the Imagingsegment.  Within the Consumer segment, hardware product revenues increased $1.7 millionin the Mobile products driven by increased unit shipments. This increase wasoffset by decreases of $11.2 million in the DVD products attributable toreductions in unit shipments and average selling prices and $4.0 million in theDTV products due to decrease in unit shipments of stand alone front endintegrated circuits and a decrease in average selling prices.

Softwareand other revenues were $14.5 million and $12.9 million for the three monthsended March 31, 2007 and 2006, respectively. The increase in software and otherrevenues was largely attributable to a $1.5 million increase in the Consumersegment.

*Cost of Hardware Product Revenues*

Cost of hardware productrevenues was $44.2 million for the quarter ended March 31, 2007 compared to$53.7 million for the same period of 2006. The decrease in costs was primarily a result of the corresponding decreasein hardware product revenues.  As apercentage of hardware product revenues, hardware product costs decreased from54.1% for the three months ended March 31, 2006 to 50.7% for the three monthsended March 31, 2007.  The decrease inhardware product costs as a percentage of hardware product revenues wasprimarily due to a change in product mix with an increase in the revenue sharefrom higher margin Mobile and Imaging products.

*Research and Development*

Researchand development expenses were $25.0 million for the three months ended March31, 2007, compared to $24.2 million for the same period of 2006. Research anddevelopment expenses tend to fluctuate based on the timing of majorengineering-related expenses, such as tape-outs as well as continued investmentsin research and development across all our segments.

*Selling, General andAdministrative*

Selling, general andadministrative expenses were $28.6 million for the three months ended March 31,2007 compared to $24.9 million for the same period of 2006.  This increase was primarily attributed to$3.8 million of legal and accounting expenses incurred in connection with ourreview of historical stock option granting practices which commenced in thethird quarter of 2006.

*Amortization of Intangible Assets*

During the three monthsended March 31, 2007, we incurred charges of $12.2 million related to theamortization of intangible assets compared to $12.7 million for the threemonths ended March 31, 2006.  At March31, 2007, we had approximately $57.0 million in net intangible assets acquiredthrough the Oak, Emblaze and Oren acquisitions which we will continue toamortize on a straight line basis through 2010.

*Interest and Other Income*

Interestand other income was $4.2 million for the three month period ended March 31,2007, compared to $2.8 million for the same period of 2006.  This increase was a result of an increase ininterest income as a result of our higher average cash and short terminvestment balances.

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*Provision for Income Taxes*

Werecorded a tax provision of $1.8 million for the three month period endedMarch 31, 2007 compared to a tax provision of $8.8 million for the threemonth period ended March 31, 2006. The tax provision for the three month periodended March 31, 2006 included a one time charge of $6.7 million related tolicense litigation settlement revenues. Our effective income tax rate has benefited from the availability ofpreviously unbenefitted net operating losses which we have utilized to reducetaxable income for U.S.  federal incometax purposes and by our Israel based subsidiary’s status as an “ApprovedEnterprise” under Israeli law, which provides a ten-year tax holiday for incomeattributable to a portion of our operations in Israel.  Our U.S. federal net operating losses expireat various times between 2017 and 2024, and the benefits from our subsidiary’sApproved Enterprise status expire at various times beginning in 2008. At March31, 2007, we continue to carry a full valuation allowance against our netdeferred tax assets as management has determined that it is more likely thannot that our deferred tax assets may not be realized.

**Liquidity and Capital Resources**

At March 31, 2007, we had $90.5 million of cash and cashequivalents and $205.4 million of short-term investments.  At March 31, 2007, we had $331.3 million ofworking capital.

Our operating activities generated cash of $1.9 millionduring the first quarter of 2007. While we recorded a net loss of $5.9 million,this loss included non-cash items such as amortization of $12.2 million,depreciation of $2.1 million and stock- based compensation expense of $2.5million.  Cash provided by operationsalso increased due to a decrease in prepaid expenses and other current assetsof $1.1 million and a net decrease in inventory by $0.4 million.  These increases were partially offset by adecrease in accounts payable, accrued expenses and other liabilities, goodwilland other long term liabilities totaling $7.7 million and an increase inaccounts receivable by $2.0 million due to the timing of collections andpayments.

Cashused in investing activities was $11.5 million during the three months endedMarch 31, 2007, principally reflecting the net purchase of investmentsof $9.9 million. In addition we spent $1.6 million for the purchases ofproperty and equipment.

Our operating activities generated cash of $51.4 millionduring the first quarter of 2006, primarily due to net income of $20.7 millionand non-cash items such as amortization of $12.8 million, depreciation of $2.4million and stock-based compensation expense of $4.8 million.  Cash provided by operations also increaseddue to a decrease of $7.7 million in accounts receivable due to the timing ofcollections and a net increase in accounts payable, accrued expenses and otherliabilities, goodwill and other long term liabilities totaling $10.1million.  These increases were partiallyoffset by a $6.0 million increase in inventories to meet the increasing demandfor our products.

Cashused in investing activities was $33.8 million during the three months endedMarch 31, 2006, principally reflecting the net purchase of investmentsof $32.6 million. In addition we spent $1.2 million for property and equipment.

Cash provided by financing activities was$17.2 million during the three months ended March 31, 2006 due to proceedsreceived from issuances of common stock through exercises of employee stockoptions.

At March 31, 2007, we did not have any relationships withunconsolidated entities or financial partnerships, such as entities oftenreferred to as structured finance or special purpose entities, established forthe purpose of facilitating off-balance sheet arrangements or othercontractually narrow or limited purposes. Accordingly, we are not exposed to the type of financing, liquidity,market or credit risk that could arise if we had engaged in such relationships.

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

·                  thelevels at which we maintain inventories and accounts receivable;

·                  themarket acceptance of our products;

·                  thelevels of promotion and advertising required to launch our new products or toenter markets and attain a competitive position in the marketplace;

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·                  ourbusiness, product, capital expenditure and research and development plans andtechnology roadmap;

·                  volumepricing concessions;

·                  capitalimprovements to new and existing facilities;

·                  technologicaladvances;

·                  theresponse of competitors to our products; and

·                  ourrelationships with our suppliers and customers.

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

Tothe extent that our existing resources and cash generated from operations areinsufficient to fund our future activities, we may need to raise additionalfunds through public or private financings or borrowings.  If additional funds are raised through theissuance of debt securities, these securities could have rights, preferencesand privileges senior to holders of common stock, and the terms of this debtcould impose restrictions on our operations. The sale of additional equity or convertible debt securities couldresult in additional dilution to our stockholders.  We cannot be certain that additionalfinancing will be available in amounts or on terms acceptable to us, if atall.  If we are unable to obtain thisadditional financing, we may be required to reduce the scope of our plannedproduct development and sales and marketing efforts, which could harm ourbusiness, financial condition and operating results.

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

We are exposed to financialmarket risks including changes in interest rates and foreign currency exchangerates.

The fair value of our investment portfolio or relatedincome would not be significantly impacted by either a 10% increase or decreasein interest rates due mainly to the short-term nature of the major portion ofour investment portfolio.

A majority of our revenue and capital spending istransacted in U.S. dollars, although a portion of the cost of our operations, relatingmainly to our personnel and facilities in Israel, is incurred in New IsraeliShekels.  As a result, we bear therisk that the rate of inflation in Israel or the decline in the value of U.S. dollars compared to the Israeli shekelwill increase our costs as expressed in U.S.dollars.We have not engaged inhedging transactions to reduce our exposure to fluctuations that may arise fromchanges in foreign exchange rates.  Basedon our overall currency rate exposure at March 31, 2007, a near-term 10% appreciationor depreciation of the New Israeli Shekel would have an immaterial affect onour financial condition.

**Item 4.Controls and Procedures**

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

**Changes to Internal ControlOver Financial Reporting**

There were no changes in our internal controlover financial reporting during the quarter ended March 31, 2007 that havematerially affected****or arereasonably likely to materially affect our internal control over financialreporting.

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**PART II.OTHER INFORMATION**

**Item 1.Legal Proceedings**

The discussion of ourlegal proceedings contained in Note 11, “Legal Proceedings” of Notes toCondensed Consolidated Financial Statements in Part I, Item 1, of this reportis incorporated herein by reference.

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**Item 1A.   Risk Factors**

Our future business, operating results and financialcondition are subject to various risks and uncertainties, including thosedescribed below.

**The discovery thatthe appropriate measurement dates for financial accounting purposes of certainstock option grants differed from the recorded grant dates of those awards hashad, and may continue to have, a material adverse effect on our historicalfinancial results and could have a material adverse effect on our financialresults going forward.**

We cannot predict the outcome of the pendinggovernment inquiries or stockholder lawsuits, and we may face additionalgovernment actions, stockholder lawsuits and other legal proceedings related toour historical stock option practices and the remedial actions we have taken.All of these events have required us, and will continue to require us, toexpend significant management time and incur significant accounting, legal, andother expenses. This could divert attention and resources from the operation ofour business and adversely affect our financial condition and results ofoperations in a manner that could potentially be material.

**The independentinvestigation of our historical stock option practices and resultingrestatements has been time consuming and expensive, and has had an adverseeffect on our financial performance.**

The independent investigation of our historical stockoption practices and resulting restatement activities have required us toexpend significant management time and incur significant accounting, legal andother expenses totaling $5.8 million in 2006 and $3.8 million in the threemonths ended March 31, 2007. We expect to incur additional costs in the futureperiods. The resulting restatements have had a material adverse effect on ourresults of operations. We have recorded additional stock-based compensationexpense of $11.7 million for stock option grants, recognized over theperiods from 1997 to 2005. There was no tax impact of these additionalstock-based compensation expenses due to the full valuation allowance on ourtax assets. In addition, we have recorded other adjustments previouslyconsidered to be immaterial totaling $1.3 million (net of tax of $0.2 million).As a result, our restated consolidated financial statements reflect a decreasein net income of $13.0 million for the period of 1997 to 2005. The effectof the restatement adjustments on our consolidated balance sheet at December 31,2005 resulted in a $2.4 million decrease in stockholders’ equity.

**Ongoing governmentinquiries relating to our historical stock option practices are time consumingand expensive and could result in injunctions, fines and penalties that mayhave a material adverse effect on our financial condition and results ofoperations.**

The inquiries by the United States Attorney’s Officefor the Northern District of California (“USAO”) and the United StatesSecurities and Exchange Commission (“SEC”) into our historical stock optionpractices are ongoing. We have cooperated with the USAO and the SEC and intendto continue to do so. The period of time necessary to resolve these inquiriesis uncertain, and we cannot predict the outcome of these inquiries or whetherwe will face additional government inquiries, investigations or other actionsrelated to our historical stock option practices. These inquiries will likelyrequire us to continue to expend significant management time and incursignificant legal and other expenses, and could result in civil and criminalactions seeking, among other things, injunctions against the Company and thepayment of significant fines and penalties by the Company, which may have amaterial adverse effect on our financial condition, results of operations andcash flow.

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**During parts of 2006 and 2007 wewere not timely in the filing of our periodic reports with the SEC, whichled Nasdaq to warn us of a possible de-listing of our common stock. Should we have similar issues in the future, our listing on Nasdaq, and theavailability of a liquid market for resale of your shares, could beat risk.**

From August 2006 toApril 2007, we we were unable to file our periodic reports with theSEC on time and faced the possibility of delisting of our stock from the NasdaqGlobal Select Market. As a result of our delay in filing periodic reports on atimely basis, we will not be eligible to use a registration statement onForm S-3 to register offers and sales of our securities untilall periodic reports have been timely filed for at least 12 months. If inthe future we have similar issues filing periodic reports and fail to complywith applicable listing requirements, then our common stock may bede-listed and the market for resales of our common stock may become lessliquid.  If this happens, the price of our stock and the ability ofour stockholders to trade in our stock could be adversely affected. Inaddition, we would be subject to restrictions regarding the registration of ourstock under federal securities laws, and we would not be able to issue stockoptions or other equity awards to our employees or allow them to exercise theiroutstanding options, which could adversely affect our business and results ofoperations.

**We have been namedas a party to stockholder derivative and class action lawsuits relating to ourhistorical stock option practices, and we may be named in additional lawsuitsin the future. This litigation could become time consuming and expensive andcould result in the payment of significant judgments and settlements, whichcould have a material adverse effect on our financial condition and results ofoperations.**

In connection with our historical stock optionpractices and resulting restatements, a number of derivative actions were filedagainst certain of our current and former directors, officers and certain otherindividuals purporting to assert claims on Zoran’s behalf. In addition, asecurities class action complaint was filed against us and certain of ourcurrent and former officers and our current directors, seeking damages relatedto our historical stock option practices. There may be additional lawsuits ofthis nature filed in the future. We cannot predict the outcome of theselawsuits, nor can we predict the amount of time and expense that will berequired to resolve these lawsuits. If these lawsuits become time consuming andexpensive, or if there are unfavorable outcomes in any of these cases, therecould be a material adverse effect on our business, financial condition andresults of operations.

Our insurance coverage will not cover our totalliabilities and expenses in these lawsuits, in part because we have asignificant deductible on certain aspects of the coverage. In addition, we areobligated to indemnify our current and former directors, officers and employeesin connection with the investigation of our historical stock option practicesand the related government inquiries and litigation. We currently holdinsurance policies for the benefit of our directors and officers, although ourinsurance coverage may not be sufficient in some or all of these matters.Furthermore, the insurers may seek to deny or limit coverage in some or all ofthese matters, in which case we may have to self-fund all or a substantialportion of our indemnification obligations.

**Failure tomaintain effective internal controls may cause us to delay filing our periodicreports with the SEC, affect our Nasdaq listing, and adversely affect our stockprice.**

We are required to include a report of management oninternal control over financial reporting in our Annual Report on Form 10-Kthat contains an assessment by management of the effectiveness of our internalcontrol over financial reporting. In addition, our independent registeredpublic accounting firm must attest to and report on management’s assessment ofthe effectiveness of the internal control over financial reporting. Therestatement of financial statements in prior filings with the SEC is a strongindicator of the existence of a “material weakness” in the design or operationof internal control over financial reporting. However, we have concluded thatthe control deficiencies that resulted in the restatement of the previouslyissued consolidated financial statements did not constitute a material weaknessas of March 31, 2007 because management determined that as of March 31, 2007there were effective controls designed and in place to prevent or detect amaterial misstatement and therefore the likelihood of stock-based compensation,deferred compensation and deferred tax assets being materially misstated is notmore than remote.

The SEC may disagree with the manner in which we haveaccounted for and reported, or not reported, the financial impact of pastoption grant measurement date errors, and there is a risk that its inquirycould lead to circumstances in which we may have to further restate our priorfinancial statements, amend prior filings with the SEC, or otherwise take otheractions not currently contemplated. In addition, the SEC may issue guidance ordisclosure requirements related to the financial impact of past option grantmeasurement date errors that may require us to amend this filing or priorfilings with the SEC to provide additional disclosures pursuant to thisguidance. Any such circumstance could also lead to future delays in filing oursubsequent SEC reports and delisting of our common stock from the NASDAQ GlobalSelect Market.

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**It may bedifficult or costly to obtain director and officer liability insurance coverageas a result of our stock options issues.**

We expect that the issues arising from our historicalstock option grant practices and the related accounting will make it moredifficult to obtain director and officer insurance coverage in the future. Ifwe are able to obtain this coverage, it could be significantly more costly thanin the past, which would have an adverse effect on our financial results andcash flow. As a result of this and related factors, our directors and officerscould face increased risks of personal liability in connection with theperformance of their duties. As a result, we may have difficultly attractingand retaining qualified directors and officers, which could adversely affectour business.

**Our annualrevenues and operating results fluctuate due to a variety of factors, which mayresult in volatility or a decline in the prices of our common stock.**

Our historical operating results have variedsignificantly from period to period due to a number of factors, including:

·       fluctuation in demand forour products;

·       the timing of new productintroductions or enhancements by us and our competitors;

·       the level of marketacceptance of new and enhanced versions of our products and our customers’products;

·       the timing or cancellationof large customer orders;

·       the length and variabilityof the sales cycle for our products;

·       pricing policy changes byus and by our competitors and suppliers;

·       the cyclical nature of thesemiconductor industry;

·       the availability ofdevelopment funding and the timing of development revenue;

·       changes in the mix ofproducts sold;

·       seasonality in demand forour products;

·       increased competition inproduct lines, and competitive pricing pressures; and

·       the evolving andunpredictable nature of the markets for products incorporating our integrated circuitsand embedded software.

We expect that our operating results will continue tofluctuate in the future as a result of these factors and a variety of otherfactors, including:

·       the cost and availabilityof adequate foundry capacity;

·       fluctuations inmanufacturing yields;

·       changes in or the emergenceof new industry standards;

·       failure to anticipatechanging customer product requirements;

·       the loss or gain ofimportant customers;

·       product obsolescence; and

·       the amount of research anddevelopment expenses associated with new product introductions.

Our operating results could also be harmed by:

·       economic conditionsgenerally or in various geographic areas where we or our customers do business;

·       terrorism and internationalconflicts or other crises;

·       other conditions affectingthe timing of customer orders;

·       changes in governmentalregulations that could affect our products;

·       a downturn in the marketsfor our customers’ products, particularly the consumer electronics market;

·       disruption in commercialactivities associated with heightened security concerns affecting internationaltravel and commerce;

·       reduced demand for consumerelectronic products due to a potential economic slowdown;

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·       tightened immigrationcontrols that may adversely affect the residence status of key non-U.S.managers and technical employees in our U.S. facilities or our ability to hirenew non-U.S. employees in such facilities; or

·       potential expansion ofarmed conflict in the Middle East which could adversely affect our operationsin Israel.

These factors are difficult or impossible to forecast.We place orders with independent foundries several months in advance of thescheduled delivery date, often in advance of receiving non-cancelable ordersfrom our customers. This limits our ability to react to fluctuations in demandfor their products. If anticipated shipments in any quarter are canceled or donot occur as quickly as expected, or if we fail to foresee a technology changethat could render a product obsolete, expense and inventory levels could bedisproportionately high. If anticipated license revenues in any quarter arecanceled or do not occur, gross margins may be reduced.

A significant portion of our expenses are relativelyfixed, and the timing of increases in expenses is based in large part on ourforecast of future revenues. As a result, if revenues do not meet ourexpectations, we may be unable to quickly adjust expenses to levels appropriateto actual revenues, which could harm our operating results.

**Our customers experiencefluctuating product cycles and seasonality, which causes their sales tofluctuate.**

Because the markets that our customers serve arecharacterized by numerous new product introductions and rapid productenhancements, our operating results may vary significantly from quarter toquarter. During the final production of a mature product, our customerstypically exhaust their existing inventories of our products. Consequently,orders for our products may decline in those circumstances, even if the productsare incorporated into both mature products and replacement products. A delay ina customer’s transition to commercial production of a replacement product woulddelay our ability to recover the lost sales from the discontinuation of therelated mature product. Our customers also experience significant seasonalityin the sales of their consumer products, which affects their orders of ourproducts. Typically, the second half of the calendar year represents adisproportionate percentage of sales for our customers due to the holidayshopping period for consumer electronics products, and therefore, adisproportionate percentage of our sales. We expect these seasonal salesfluctuations to continue for the foreseeable future.

Our ability to match production mix with the productmix needed to fill current orders and orders to be delivered in the givenquarter may affect our ability to meet that quarter’s revenue forecast. Inaddition, when responding to customers’ requests for shorter shipment leadtimes, we manufacture products based on forecasts of customers’ demands. Theseforecasts are based on multiple assumptions. If we inaccurately forecastcustomer demand, we may hold inadequate, excess or obsolete inventory thatwould reduce our profit margins and adversely affect our results of operationsand financial condition.

**Our products arecharacterized by average selling prices that decline over relatively short timeperiods; if we are unable to reduce our costs or introduce new products withhigher average selling prices, our financial results will suffer.**

Average selling prices for our products decline overrelatively short time periods, while many of our manufacturing costs are fixed.When our average selling prices decline, our revenues decline unless we areable to sell more units and our gross margins decline unless we are able toreduce our manufacturing costs by a commensurate amount. Our operating resultssuffer when gross margins decline. We have experienced these problems, and weexpect to continue to experience them in the future, although we cannot predictwhen they may occur or how severe they will be.

**Product supply anddemand in the semiconductor industry is subject to cyclical variations.**

The semiconductor industry is subject to cyclicalvariations in product supply and demand. Downturns in the industry often occurin connection with, or anticipation of, maturing product cycles for bothsemiconductor companies and their customers and declines in general economicconditions. These downturns have been characterized by abrupt fluctuations inproduct demand, production over-capacity and accelerated decline of averageselling prices. In some cases, these downturns have lasted more than one year.We cannot predict whether we will achieve timely, cost-effective access to thatcapacity when needed, or when there will be a capacity shortage again in thefuture. A downturn in the semiconductor industry could harm our sales andrevenues if demand drops, or our gross margins if average selling pricesdecline.

**Our success forthe foreseeable future will depend on demand for integrated circuits for alimited number of applications.**

In recent years, we have derived a substantialmajority of our product revenues from the sale of integrated circuits for DVDand digital camera applications. We expect that sales of our products for theseapplications will continue to account for a

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significant portion of our revenues for theforeseeable future. Our future financial performance will also depend on ourability to successfully develop and market new products in the digitaltelevision, HDTV and digital imaging markets. If the markets for these productsand applications decline or fail to develop as expected, or we are notsuccessful in our efforts to market and sell our products to manufacturers whoincorporate integrated circuits into these products, our financial results willbe harmed.

**Our financialperformance is highly dependent on the timely and successful introduction ofnew and enhanced products.**

Our financial performance depends in large part on ourability to successfully develop and market next-generation and new products ina rapidly changing technological environment. If we fail to successfullyidentify new product opportunities and timely develop and introduce newproducts that achieve market acceptance, we may lose our market share and ourfuture revenues and earnings may suffer.

In the consumer electronic market, our performance hasbeen dependent on our successful development and timely introduction ofintegrated circuits for DVD players, DVD recorders, digital cameras, broadbanddigital television and HDTV. These markets are characterized by theincorporation of a steadily increasing level of integration and numbers offeatures on a chip at the same or lower system cost, enabling originalequipment manufacturers, or OEMs, to continually improve the features or reducethe prices of the systems they sell. If we are unable to continually developand introduce integrated circuits with increasing levels of integration and newfeatures at competitive prices, our operating results will suffer.

In the Imaging market, our performance has beendependent on our successful development and timely introduction of integratedcircuits for printers and multi-function peripherals. These markets arecharacterized by the incorporation of a steadily increasing level ofintegration and higher speeds on a chip at the same or lower system cost,enabling original equipment manufacturers, or OEMs, to continually improve theperformance and features or reduce the prices of the systems they sell. If weare unable to develop and introduce integrated circuits with increasing levelsof integration, performance and new features at competitive prices, ouroperating results will suffer. The performance of our software licensingbusiness is dependent on our ability to develop and introduce new releases ofour software, which incorporate new or enhanced printing standards, as well asperformance enhancements required by our OEM customers. If we are unable todevelop and release versions of our software supporting required standards andoffering enhanced performance, our operating results will suffer.

**We facecompetition or potential competition from companies with greater resources thanours, and if we are unable to compete effectively with these companies, ourmarket share may decline and our business could be harmed.**

The markets in which we compete are intenselycompetitive and are characterized by rapid technological change, decliningaverage unit selling prices and rapid product obsolescence. We expectcompetition to increase in the future from existing competitors and from othercompanies that may enter our existing or future markets with solutions whichmay be less costly or provide higher performance or more desirable featuresthan our products. Competition typically occurs at the design stage, whencustomers evaluate alternative design approaches requiring integrated circuits.Because of short product life cycles, there are frequent design win competitionsfor next-generation systems.

Our existing and potential competitors include manylarge domestic and international companies that have substantially greaterfinancial, manufacturing, technological, market, distribution and otherresources. These competitors may also have broader product lines and longerstanding relationships with customers and suppliers than we have.

Some of our principal competitors maintain their ownsemiconductor foundries and may therefore benefit from capacity, cost andtechnical advantages. Our principal competitors in the integrated audio andvideo devices for DVD applications include Cheertek, ESS, LSI Logic, MagnumSemiconductor, Matsushita, MediaTek, Renesas Technology, Samsung and Sunplus.In the markets for JPEG-based products for use in digital cameras, ourprincipal competitors are in-house solutions developed and used by majorJapanese OEMs, as well as products sold by Mediatek, Sunplus and TexasInstruments. In the market for JPEG-based products for desktop video editingapplications, our principal competitor is Sunplus. Cirrus Logic (CrystalSemiconductor), Fujitsu, Freescale Semiconductor, STMicroelectronics and Yamahaare currently shipping Dolby Digital-based audio compression products.Our principal competitors for digital semiconductor devices in the digitaltelevision market include Advanced Micro Devices, Broadcom, Renesas Technology,M-Star, Mediatek and ST Microelectronics. Others who also participate in thismarket are ALi Corporation, Cheertek, Fujitsu, Genesis Microchip, NEC,Pixelworks and Trident Microsystems. Competitors in the Printer andMultifunction peripheral space include Sigmatel Inc., Marvell Semiconductor,TAK Imaging, Peerless Systems, Global Graphics and in-house captive suppliers.

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We believe that growth ofthe DVD player market will be modest in the foreseeable future, and thatcontinued strong competition will lead to further price reductions, and reducedprofit margins. We also face significant competition in the digitalImaging and digital camera markets. The future growth of both markets is highlydependent on OEMs continuing to outsource an increasing portion of theirproduct development work. Manyof our existing competitors, as well as OEM customers that are expected tocompete with us in the future, have substantially greater financial,manufacturing, technical, marketing, distribution and other resources, broaderproduct lines and longer standing relationships with customers than we have. Inaddition, much of our future success is dependent on the success of our OEMcustomers. If we or our OEM customers are unable to compete successfullyagainst current and future competitors, we could experience price reductions,order cancellations and reduced gross margins, any one of which could harm ourbusiness.

**We must keep pacewith rapid technological changes and evolving industry standards to remaincompetitive.**

Our future success will depend on our ability toanticipate and adapt to changes in technology and industry standards and ourcustomers’ changing demands. The consumer electronics market, in particular, ischaracterized by rapidly changing technology, evolving industry standards,frequent new product introductions, short product life cycles and increasingdemand for higher levels of integration. Our ability to adapt to these changesand to anticipate future standards, and the rate of adoption and acceptance ofthose standards, will be a significant factor in maintaining or improving ourcompetitive position and prospects for growth. If new industry standardsemerge, our products or the products of our customers could become unmarketableor obsolete, and we could lose market share or be required to incur substantialunanticipated costs to comply with these new standards.

Our success will also depend on the successfuldevelopment of new markets and the application and acceptance of newtechnologies and products in those new markets. For example, our success willdepend on the ability of our customers to develop new products and enhanceexisting products in the recordable DVD player market and products for thebroadband digital television and HDTV markets and to introduce and promotethose products successfully. These markets may not continue to develop to theextent or in the time periods that we currently anticipate due to factorsoutside our control, such as delays in implementation of FCC 02-320requiring all new televisions to include a digital receiver byFebruary 2009. If new markets do not develop as we anticipate, or if ourproducts do not gain widespread acceptance in these markets, our business,financial condition and results of operations could be harmed. The emergence ofnew markets for our products is also dependent in part upon third partiesdeveloping and marketing content in a format compatible with commercial andconsumer products that incorporate our products. If this content is notavailable, manufacturers may not be able to sell products incorporating ourproducts, and our sales would suffer.

**We rely onindependent foundries and contractors for the manufacture, assembly and testingof our integrated circuits and other hardware products, and the failure of anyof these third parties to deliver products or otherwise perform as requestedcould damage our relationships with our customers and harm our sales andfinancial results.**

We do not operate any manufacturing facilities, and werely on independent foundries to manufacture substantially all of our products.These independent foundries fabricate products for other companies and may alsoproduce products of their own design. From time to time, there aremanufacturing capacity shortages in the semiconductor industry. We do not havelong-term supply contracts with any of our suppliers, including our principalsupplier, Taiwan Semiconductor Manufacturing Company, or TSMC. Therefore, TSMCand our other suppliers are not obligated to manufacture products for us forany specific period, in any specific quantity or at any specified price, exceptas may be provided in a particular purchase order.

Our reliance on independent foundries involves anumber of risks, including:

·       the inability to obtainadequate manufacturing capacity;

·       the unavailability of orinterruption in access to certain process technologies necessary formanufacture of our products;

·       lack of control overdelivery schedules;

·       lack of control overquality assurance;

·       lack of control overmanufacturing yields and cost; and

·       potential misappropriationof our intellectual property.

In addition, TSMC and some of our other foundries arelocated in areas of the world that are subject to natural disasters such asearthquakes. While the 1999 earthquake in Taiwan did not have a material impacton our independent foundries, a similar event centered near TSMC’s facilitycould severely reduce TSMC’s ability to manufacture our integrated circuits.The loss of

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any of our manufacturers as a supplier, our inabilityto expand the supply of their products in response to increased demand, or ourinability to obtain timely and adequate deliveries from our current or futuresuppliers due to a natural disaster or any other reason could delay or reduceshipments of our products. Any of these circumstances could damage ourrelationships with current and prospective customers and harm our sales andfinancial results.

We also rely on a limited number of independentcontractors for the assembly and testing of our products. Our reliance onindependent assembly and testing houses limits our control over deliveryschedules, quality assurance and product cost. Disruptions in the servicesprovided by our assembly or testing houses or other circumstances that wouldrequire them to seek alternative sources of assembly or testing could lead tosupply constraints or delays in the delivery of our products. These constraintsor delays could damage our relationships with current and prospective customersand harm our financial results.

**Because foundrycapacity is limited from time to time, we may be required to enter into costlylong-term supply arrangements to secure foundry capacity.**

If we are not able to obtain additional foundrycapacity as required, our relationships with our customers would be harmed andour sales would likely be reduced. In order to secure additional foundrycapacity, we have considered, and may in the future need to consider, variousarrangements with suppliers, which could include, among others:

·       option payments or otherprepayments to a foundry;

·       nonrefundable deposits withor loans to foundries in exchange for capacity commitments;

·       contracts that commit us topurchase specified quantities of silicon wafers over extended periods;

·       issuance of our equitysecurities to a foundry;

·       investment in a foundry;

·       joint ventures; or

·       other partnershiprelationships with foundries.

We may not be able to make any such arrangement in atimely fashion or at all, and such arrangements, if any, may not be on termsfavorable to us. Moreover, if we are able to secure foundry capacity, we may beobligated to utilize all of that capacity or incur penalties. Such penaltiesmay be expensive and could harm our financial results.

**If our independentfoundries do not achieve satisfactory yields, our relationships with ourcustomers may be harmed.**

The fabrication of silicon wafers is a complexprocess. Minute levels of contaminants in the manufacturing environment,defects in photo masks used to print circuits on a wafer, difficulties in thefabrication process or other factors can cause a substantial portion of theintegrated circuits on a wafer to be non-functional. Many of these problems aredifficult to detect at an early stage of the manufacturing process and may betime consuming and expensive to correct. As a result, foundries oftenexperience problems achieving acceptable yields, which are represented by thenumber of good integrated circuits as a proportion of the number of totalintegrated circuits on any particular wafer. Poor yields from our independentfoundries would reduce our ability to deliver our products to customers, harmour relationships with our customers and harm our business.

**We are dependentupon our international sales and operations; economic, political or militaryevents in a country where we make significant sales or have significantoperations could interfere with our success or operations there and harm ourbusiness.**

During 2006, only 7% of our total revenues werederived from North America sales. We anticipate that international sales willcontinue to account for a substantial majority of our total revenues for theforeseeable future. In addition, substantially all of our semiconductorproducts are manufactured, assembled and tested outside of the United States byindependent foundries and subcontractors.

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

·       unexpected changes inregulatory requirements;

·       fluctuations in exchangerates;

·       political and economicinstability;

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·       imposition of tariffs andother barriers and restrictions;

·       the burdens of complyingwith a variety of foreign laws; and

·       health risks in aparticular region.

A material amount of our research and developmentpersonnel and facilities and a portion of our sales and marketing personnel arelocated in Israel. Political, economic and military conditions in Israeldirectly affect our operations. Some of our employees in Israel are obligatedto perform up to 39 days of military reserve duty annually. The absence ofthese employees for significant periods during the work week may cause us tooperate inefficiently during these periods.

Our operations in China are subject to the economicand political uncertainties affecting that country. For example, the Chineseeconomy has experienced significant growth in the past decade, but such growthhas been uneven across geographic and economic sectors. This growth maydecrease and any slowdown may have a negative effect on our business. We alsomaintain offices in Taipei, Taiwan, Hong Kong and Seoul, Korea, and ouroperations are subject to the economic and political uncertainties affectingthese countries as well.

The significant concentration of our manufacturingactivities with third party foundries in Taiwan exposes us to the risk ofpolitical instability in Taiwan, including the potential for conflict betweenTaiwan and China. We have several significant OEM customers in Japan, Korea andother parts of Asia. Adverse economic circumstances in Japan and elsewhere inAsia could affect these customers’ willingness or ability to do business withus in the future or their success in developing and launching devicescontaining our products.

**The prices of ourproducts may become less competitive due to foreign exchange fluctuations.**

Foreign currency fluctuations may affect the prices ofour products. Prices for our products are currently denominated in U.S. dollarsfor sales to our customers throughout the world. If there is a significantdevaluation of the currency in a specific country, the prices of our productswill increase relative to that country’s currency, our products may be lesscompetitive in that country and our revenues may be adversely affected. Also,we cannot be sure that our international customers will continue to be willingto place orders denominated in U.S. dollars. If they do not, our revenue andoperating results will be subject to foreign exchange fluctuations.

**Because we havesignificant operations in Israel, our business and future operating resultscould be harmed by future terrorist activity or military conflict.**

We conduct a significant portion of our research anddevelopment and engineering activities at our design center in Haifa, Israel, a109,700 square foot facility where we employ approximately 390 people. We alsoconduct a portion of our sales and marketing operations at our Haifa facility.We have an additional 16,100 square foot facility in Kfar Netter, Israel, wherewe conduct research and development activities.

Haifa was a principaltarget in the recent armed conflict in Northern Israel, and, accordingly, ourfacility and personnel in Haifa were at significant risk during that conflict.Although we suffered no damage to our facilities or injury to our personnelduring the recent conflicts, significant damage to our facilities in Israel,injury of our employees working there, or damage to the Israeli business ortransportation infrastructure as a result of future military conflict orterrorist activity could materially affect our operations in Israel and harmour business. In addition, some of our employees in Israel serve in themilitary reserve. Any prolonged absence of a substantial number of theseemployees could materially harm our business.

In addition to their impact on our operations inIsrael, military conflict in the Middle East or future terrorist activitiesthere or elsewhere in the world could harm our business as a result of adisruption in commercial activity affecting international commerce or a generaleconomic slowdown and reduced demand for consumer electronic products.

**The Israeli rateof inflation may negatively impact our costs if it exceeds the rate ofdevaluation of the new Israeli shekel against the United States dollar.**

A portion of the cost of our operations, relatingmainly to our personnel and facilities in Israel, is incurred in New IsraeliShekels. As a result, we bear the risk that the rate of inflation in Israel orthe decline in the value of United States dollar compared to the New IsraeliShekel will increase our costs as expressed in United States dollars. To date,we have not engaged in hedging transactions. In the future, we may enter intocurrency hedging transactions to decrease the risk of financial exposure from

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fluctuations in the exchange rate of the United Statesdollar against the New Israeli Shekel. These measures may not adequatelyprotect us from the impact of inflation in Israel.

**We derive most ofour revenue from sales to a small number of large customers, and if we are notable to retain these customers, or they reschedule, reduce or cancel orders,our revenues would be reduced and our financial results would suffer.**

Our largest customers have accounted for a substantialpercentage of our revenues. In 2006, one customer accounted for 12% of ourtotal revenues, while sales to our four largest customers accounted for 34% ofour total revenues. In 2005, no single customer accounted for more than 10% ofour total revenues, and sales to our four largest customers accounted for 29%of our total revenues. Sales to these large customers have varied significantlyfrom year to year and will continue to fluctuate in the future. These salesalso may fluctuate significantly from quarter to quarter. We may not be able toretain our key customers, or these customers may cancel purchase orders orreschedule or decrease their level of purchases from us. Any substantialdecrease or delay in sales to one or more of our key customers could harm oursales and financial results. In addition, any difficulty in collecting amountsdue from one or more key customers could harm our financial results. As of December 31, 2006 four customers accountedfor approximately 13%, 10%, 10% and 10% of the net accounts receivable balance,respectively.

**Our productsgenerally have long sales cycles and implementation periods, which increasesour costs in obtaining orders and reduces the predictability of our operatingresults.**

Our products are technologically complex. Prospectivecustomers generally must make a significant commitment of resources to test andevaluate our products and to integrate them into larger systems. As a result,our sales processes are often subject to delays associated with lengthyapproval processes that typically accompany the design and testing of newproducts. The sales cycles of our products often last for many months**.**Longer sales cycles require us to invest significantresources in attempting to make sales and delay the generation of revenue**.**

Long sales cycles also subject us to other risks,including customers’ budgetary constraints, internal acceptance reviews andcancellations. In addition, orders expected in one quarter could shift toanother because of the timing of customers’ purchase decisions. The timerequired for our customers to incorporate our products into their own can varysignificantly with the needs of our customers and generally exceeds severalmonths, which further complicates our planning processes and reduces thepredictability of our operating results.

**We are notprotected by long-term contracts with our customers.**

We generally do not enter into long-term purchasecontracts with our customers, and we cannot be certain as to future orderlevels from our customers. Customers generally purchase our products subject tocancelable short-term purchase orders. We cannot predict whether our currentcustomers will continue to place orders, whether existing orders will becanceled, or whether customers who have ordered products will pay invoices fordelivered products. When we do enter into a long-term contract, the contract isgenerally terminable at the convenience of the customer. Early termination byone of our major customers would harm our financial results.

**Our products couldcontain defects, which could reduce sales of those products or result in claimsagainst us.**

We develop complex and evolving products. Despitetesting by us and our customers, errors may be found in existing or newproducts. This could result in, among other things, a delay in recognition orloss of revenues, loss of market share or failure to achieve market acceptance.These defects may cause us to incur significant warranty, support and repair costs,divert the attention of our engineering personnel from our product developmentefforts and harm our relationships with customers. The occurrence of theseproblems could result in the delay or loss of market acceptance of our productsand would likely harm our business. Defects, integration issues or otherperformance problems in our products could result in financial or other damagesto customers or could damage market acceptance of such products. Our customerscould also seek damages from us for their losses. A product liability claimbrought against us, even if unsuccessful, would likely be time consuming andcostly to defend.

**Regulation of ourcustomers’ products may slow the process of introducing new products and couldimpair our ability to compete.**

The Federal Communications Commission, or FCC, hasbroad jurisdiction over our target markets in the digital television business.Various international entities or organizations may also regulate aspects ofour business or the business of our customers. Although

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our products are not directly subject to regulation byany agency, the transmission pipes, as well as much of the equipment into whichour products are incorporated, are subject to direct government regulation. Forexample, before they can be sold in the United States, advanced televisions andemerging interactive displays must be tested and certified by UnderwritersLaboratories and meet FCC regulations. Accordingly, the effects of regulationon our customers or the industries in which our customers operate may in turnharm our business. FCC regulatory policies affecting the ability of cableoperators or telephone companies to offer certain services and other terms onwhich these companies conduct their business may impede sales of our products. Inaddition, our digital television business may also be adversely affected by theimposition of tariffs, duties and other import restrictions on our suppliers orby the imposition of export restrictions on products that we sellinternationally. Changes in current laws or regulations or the imposition ofnew laws or regulations in the United States or elsewhere could harm ourbusiness. For example, any delays by the FCC in imposing its pendingrequirement that all new televisions have a digital receiver could have anadverse effect on our HDTV business.

**Our ability tocompete could be jeopardized if we are unable to protect our intellectualproperty rights.**

Our success and ability to compete depend in largepart upon protection of our proprietary technology. We rely on a combination ofpatent, trade secret, copyright and trademark laws, non-disclosure and othercontractual agreements and technical measures to protect our proprietaryrights. These agreements and measures may not be sufficient to protect our technologyfrom third-party infringement, or to protect us from the claims of others.Monitoring unauthorized use of our products is difficult, and we cannot becertain that the steps we have taken will prevent unauthorized use of ourtechnology, particularly in foreign countries where the laws may not protectour proprietary rights as fully as in the United States. The laws of certainforeign countries in which our products are or may be developed, manufacturedor sold, including various countries in Asia, may not protect our products orintellectual property rights to the same extent as do the laws of the UnitedStates and thus make the possibility of piracy of our technology and productsmore likely in these countries. If competitors are able to use our technology,our ability to compete effectively could be harmed.

The protection offered by patents is subject tonumerous uncertainties. For example, our competitors may be able to effectivelydesign around our patents, or the patents may be challenged, invalidated orcircumvented. Those competitors may also independently develop technologiesthat are substantially equivalent or superior to our technology. Moreover,while we hold, or have applied for, patents relating to the design of ourproducts, some of our products are based in part on standards, for which we donot hold patents or other intellectual property rights.

We have generally limited access to and distributionof the source and object code of our software and other proprietaryinformation. With respect to our page description language software, SOCplatform firmware and drivers for the digital office market and in limitedcircumstances with respect to firmware on SCS products, firmware and platformsfor our DTV, DVDR products, we grant licenses that give our customers access toand restricted use of the source code of our****software.This access increases the likelihood of misappropriation or misuse of ourtechnology.

**Claims andlitigation regarding intellectual property rights could seriously harm our businessand require us to incur significant costs.**

In recent years, there has been significant litigationin the United States involving patents and other intellectual property rights.In the past, Zoran has been subject to claims and litigation regarding allegedinfringement of other parties’ intellectual property rights, and both Oak andZoran have been parties to a number of patent-related lawsuits, both asplaintiff and defendant. We could become subject to additional litigation inthe future, either to protect our intellectual property or as a result ofallegations that we infringe others’ intellectual property rights. Claims thatour products infringe proprietary rights would force us to defend ourselves andpossibly our customers or manufacturers against the alleged infringement.Future litigation against us, if successful, could subject us to significantliability for damages or invalidation of our proprietary rights. Theselawsuits, regardless of their success, are time-consuming and expensive to resolveand require significant management time and attention. Future intellectualproperty litigation could force us to do one or more of the following:

·       stop selling products thatincorporate the challenged intellectual property;

·       obtain from the owner ofthe infringed intellectual property right a license to sell or use the relevanttechnology, which license may not be available on reasonable terms or at all;

·       pay damages; or

·       redesign those productsthat use such technology.

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Although patent disputes in the semiconductor industryhave often been settled through cross-licensing arrangements, we may not beable in any or every instance to settle an alleged patent infringement claimthrough a cross-licensing arrangement. We have a more limited patent portfoliothan many of our competitors. If a successful claim is made against us or anyof our customers and a license is not made available to us on commerciallyreasonable terms or we are required to pay substantial damages or awards, ourbusiness, financial condition and results of operations would be materiallyadversely affected.

**If necessarylicenses of third-party technology are not available to us or are veryexpensive, our products could become obsolete.**

From time to time, we may be required to licensetechnology from third parties to develop new products or product enhancements.Third party licenses may not be available on commercially reasonable terms, ifat all. If we are unable to obtain any third-party license required to developnew products and product enhancements, we may have to obtain substitutetechnology of lower quality or performance standards or at greater cost, eitherof which could seriously harm the competitiveness of our products.

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

**If we are not ableto apply our net operating losses against taxable income in future periods, ourfinancial results will be harmed.**

Our future net income and cash flow will be affectedby our ability to apply our net operating losses, or NOLs, against taxableincome in future periods. Our NOLs totaled approximately $185 million forfederal and $36 million for state tax reporting purposes as ofDecember 31, 2006. The Internal Revenue Code contains a number ofprovisions that limit the use of NOLs under certain circumstances. During 2006we reduced the NOL deferred tax asset for amounts which we believe will expirebefore they become available for utilization. Changes in tax laws in the UnitedStates may further limit our ability to utilize these NOLs. Any furtherlimitation on our ability to utilize these respective NOLs could harm ourfinancial condition.

**Changes in, orinterpretations of, tax rules and regulations may adversely affect oureffective tax rates.**

Unanticipated changes in our tax rates could affectour future results of operations. Our future effective tax rates could beunfavorably affected by changes in tax laws or the interpretation of tax laws,by unanticipated decreases in the amount of revenue or earnings in countrieswith low statutory tax rates, or by changes in the valuation of our deferredtax assets and liabilities. While we believe our tax reserves adequatelyprovide for any tax contingencies, the ultimate outcomes of any future taxaudits are uncertain, and we can give no assurance as to whether an adverseresult from one or more of them will have a material effect on our operatingresults and financial position.

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

We have made investments in, and acquisitions of othercomplementary companies, products and technologies, and we may acquireadditional businesses, products or technologies in the future. In the event ofany future acquisitions, we could:

·       issue stock that woulddilute its current stockholders’ percentage ownership;

·       incur debt;

·       use a significant amount ofour cash;

·       assume liabilities;

·       incur expenses related tothe future impairment of goodwill and the amortization of other intangibleassets; or

·       incur other largewrite-offs immediately or in the future.

Our operation of any other acquired business will alsoinvolve numerous risks, including:

·       problems combining thepurchased operations, technologies or products;

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·       unanticipated costs;

·       diversion of management’sattention from our core business;

·       adverse effects on existingbusiness relationships with customers;

·       risks associated withentering markets in which we have no or limited prior experience; and

·       potential loss of keyemployees, particularly those of the purchased organizations.

We may not be able to successfully complete theintegration of the business, products or technologies or personnel that wemight acquire in the future, and any failure to do so could disrupt ourbusiness and seriously harm our financial condition.

**If our goodwill oramortizable intangible assets become impaired we may be required to record asignificant charge to earnings.**

Under generally accepted accounting principles, wereview our amortizable intangible assets for impairment when events or changesin circumstances indicate the carrying value may not be recoverable. Goodwillis required to be tested for impairment at least annually. Factors that may beconsidered a change in circumstances indicating that the carrying value of ourgoodwill or amortizable intangible assets may not be recoverable include adecline in stock price and market capitalization, future cash flows, and slowergrowth rates in our industry. We may be required to record a significant chargeto earnings in our financial statements during the period in which anyimpairment of our goodwill or amortizable intangible assets is determinedresulting in an impact on our results of operations.

**If we fail tomanage our future growth, if any, our business would be harmed.**

We anticipate that our future growth, if any, willrequire us to recruit and hire a substantial number of new engineering,managerial, sales and marketing personnel. Our ability to manage growthsuccessfully will also require us to expand and improve administrative,operational, management and financial systems and controls. Many of our keyoperations, including a material portion of our research and developmentoperations and a significant portion of our sales and administrative operationsare located in Israel. A majority of our sales and marketing and certain of ourresearch and development and administrative personnel, including our Presidentand Chief Executive Officer and other officers, are based in the United States.The geographic separation of these operations places additional strain on ourresources and our ability to manage growth effectively. If we are unable tomanage growth effectively, our business will be harmed.

**We rely on theservices of our executive officers and other key personnel, whose knowledge ofour business and industry would be extremely difficult to replace.**

Our success depends to a significant degree upon thecontinuing contributions of our senior management. Management and otheremployees may voluntarily terminate their employment with us at any time uponshort notice. The loss of key personnel could delay product development cyclesor otherwise harm our business. We believe that our future success will alsodepend in large part on our ability to attract, integrate and retainhighly-skilled engineering, managerial, sales and marketing personnel, locatedin the United States, Israel and China. Competition for such personnel isintense, and we may not be successful in attracting, integrating and retainingsuch personnel. Failure to attract, integrate and retain key personnel couldharm our ability to carry out our business strategy and compete with othercompanies.

**Provisions in ourcharter documents and Delaware law could prevent or delay a change in controlof Zoran.**

Our certificate of incorporation and bylaws and Delawarelaw contain provisions that could make it more difficult for a third party toacquire us, even if doing so would be beneficial to our stockholders. Theseinclude provisions:

·       prohibiting a merger with aparty that has acquired control of 15% or more of our outstanding common stock,such as a party that has completed a successful tender offer, until three yearsafter that party acquired control of 15% of our outstanding common stock;

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

·       eliminating stockholders’rights to call a special meeting of stockholders; and

·       requiring advance notice ofany stockholder nominations of candidates for election to our board ofdirectors.

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

The market price of ourcommon stock has fluctuated significantly since our initial public offering in1995.  Between January 1, 2006 andMarch 31, 2007, the closing sale price of our common stock, as reported on theNasdaq Global Select Market, ranged from a low of $13.57 to a high of$29.13.  The market price of our commonstock is subject to significant fluctuations in the future in response to avariety of factors, including:

·                        results ofregulatory investigations;

·                        announcementsconcerning our business or that of our competitors or customers;

·                        annual andquarterly variations in our operating results;

·                        changes inanalysts’ earnings estimates;

·                        announcementsof technological innovations;

·                        theintroduction of new products or changes in product pricing policies by Zoran orits competitors;

·                        loss ofkey personnel;

·                        proprietaryrights or other litigation;

·                        generalconditions in the semiconductor industry; and

·                        developmentsin the financial markets.

In addition, the stockmarket has, from time to time, experienced extreme price and volumefluctuations that have particularly affected the market prices forsemiconductor companies or technology companies generally and which have beenunrelated to the operating performance of the affected companies.  Broad market fluctuations of this type mayreduce the future market price of our common stock.

**Item 6. Exhibits**
| 31.1 | Certification of Chief Executive Officer pursuant to  Rule 13a-14(a) or 15d-14(a). |
|------|------------------------------------------------------------------------------------|
| 31.2 | Certification of Chief Financial Officer pursuant to  Rule 13a-14(a) or 15d-14(a). |
| 32.1 | Certification of Chief Executive Officer pursuant to  18 U.S.C. Section 1350.      |
| 32.2 | Certification of Chief Financial Officer pursuant to  18 U.S.C. Section 1350.      |

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                           | ** ** | **ZORAN CORPORATION**                        |   |   |
|---------------------------|------------|----------------------------------------------|--------|--------|
| ** **                | ** ** | ** **                                   |   |   |
| ** **                | ** ** | ** **                                   |   |   |
| ** **                | ** ** | ** **                                   |   |   |
| Dated: May  10, 2007 |       | /s/  Karl  Schneider                    |   |   |
|                      |       | Karl Schneider                               |   |   |
|                      |       | Senior Vice President, Finance               |   |   |
|                      |       | and Chief Financial Officer                  |   |   |
|                      |       | (Principal Financial and Accounting Officer) |   |   |

 

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