** **

**SECURITIESAND 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, 2008** |
|                                                    |                                                                                                                                                                                                                                                                                                                     |
| **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 ofregistrant as specified in its charter)

** **

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

 

**1390Kifer Road**

**Sunnyvale,California 94086**

(Address ofprincipal executive offices, including zip code)

** **

**(408)523-6500**

(Registrant’stelephone number, including area code)

 

----

 

Indicateby check mark whether the registrant (1) has filed all reports required tobe filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject tosuch filing requirements for the past 90 days.  Yes x  No o

 

Indicate by check mark whether registrant is a largeaccelerated filer, an accelerated filer or a non-accelerated filer.  See definition of “accelerated and largeaccelerated filer” in Rule 12b-2 of the Exchange Act.  (Check one):

 

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

 

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

 

As of May 7, 2008,there were outstanding 51,795,356 shares of the registrant’s Common Stock, parvalue $0.001 per share.

 

** **

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**ZORANCORPORATION AND SUBSIDIARIES**

**FORM 10-Q**

**INDEX**

 

**For theQuarter Ended March 31, 2008**

** **
| ** **                              | ** **                                                                                                | **Page** |
|-----------------------------------------|-----------------------------------------------------------------------------------------------------------|----------|
| **PART I.  FINANCIAL INFORMATION** | ** **                                                                                                |
|                                    |                                                                                                      |     |
| Item 1.                                 | Financial Statements  (Unaudited):                                                                        |     |
|                                    |                                                                                                      |     |
|                                    | Condensed  Consolidated Balance Sheets as of March 31, 2008 and December 31,  2007              | 3        |
|                                    |                                                                                                      |     |
|                                    | Condensed  Consolidated Statements of Operations for the Three Months Ended  March 31, 2008 and 2007 | 4        |
|                                    |                                                                                                      |     |
|                                    | Condensed  Consolidated Statements of Cash Flows for the Three Months Ended  March 31, 2008 and 2007 | 5        |
|                                    |                                                                                                      |     |
|                                    | Notes to Condensed Consolidated Financial Statements                                                      | 6        |
|                                    |                                                                                                      |     |
| **Item 2.**                             | Management’s  Discussion and Analysis of Financial Condition and Results of Operations               | 17       |
|                                    |                                                                                                      |     |
| **Item 3.**                             | Quantitative  and Qualitative Disclosures About Market Risk                                               | 22       |
|                                    |                                                                                                      |     |
| **Item 4.**                             | Controls and  Procedures                                                                                  | 23       |
|                                    |                                                                                                      |     |
| **PART II.  OTHER INFORMATION**    | ** **                                                                                                |
|                                    |                                                                                                      |     |
| **Item 1.**                             | Legal Proceedings                                                                                         | 24       |
|                                    |                                                                                                      |     |
| **Item 1A.**                            | Risk Factors                                                                                              | 25       |
|                                    |                                                                                                      |     |
| **Item 6.**                             | Exhibits                                                                                                  | 37       |
|                                    |                                                                                                      |     |
| Signatures                              |                                                                                                      | 38       |
|                                         |                                                                                                           |          |  |  |

 

2

----

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1.  Financial Statements**

 

**ZORAN CORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                                         | ** ** | **March  31,  2008** | ** ** | **December 31,  2007** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------|------------|-----------------------------|------------|
| ASSETS                                                                                                                                                                                                                                                             |       |                           |       |                        |       |
| Current assets:                                                                                                                                                                                                                                                    |       |                           |       |                        |       |
| Cash and cash equivalents                                                                                                                                                                                                                                          |       | $                              | 92,092     |                        | $          | 97,377 |   |
| Short-term  investments                                                                                                                                                                                                                                            |       | 222,404                        |       | 222,432                     |       |
| Accounts  receivable, net                                                                                                                                                                                                                                          |       | 55,054                         |       | 58,220                      |       |
| Inventories                                                                                                                                                                                                                                                        |       | 64,602                         |       | 48,992                      |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                         |       | 27,930                         |       | 25,189                      |       |
| Total current  assets                                                                                                                                                                                                                                              |       | 462,082                        |       | 452,210                     |       |
| Property and  equipment, net                                                                                                                                                                                                                                       |       | 17,555                         |       | 17,636                      |       |
| Deferred income  taxes                                                                                                                                                                                                                                             |       | 43,568                         |       | 43,218                      |       |
| Other assets and  long-term investments                                                                                                                                                                                                                            |       | 90,753                         |       | 112,632                     |       |
| Goodwill                                                                                                                                                                                                                                                           |       | 168,691                        |       | 168,691                     |       |
| Intangible  assets, net                                                                                                                                                                                                                                            |       | 16,708                         |       | 25,945                      |       |
| Total assets                                                                                                                                                                                                                                                       |       | $                              | 799,357    |                        | $          | 820,332 |   |
| LIABILITIES AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                          |       |                           |       |                        |       |
| Current  liabilities:                                                                                                                                                                                                                                              |       |                           |       |                        |       |
| Accounts payable                                                                                                                                                                                                                                                   |       | $                              | 52,525     |                        | $          | 67,836 |   |
| Accrued expenses  and other current liabilities                                                                                                                                                                                                                    |       | 38,930                         |       | 43,968                      |       |
| Total current  liabilities                                                                                                                                                                                                                                         |       | 91,455                         |       | 111,804                     |       |
| Other long-term  liabilities                                                                                                                                                                                                                                       |       | 22,029                         |       | 20,756                      |       |
| Contingencies  (Note 11)                                                                                                                                                                                                                                           |       |                           |       |                        |       |
| Stockholders’  equity:                                                                                                                                                                                                                                        |       |                           |       |                        |       |
| Common stock,  $0.001 par value; 105,000,000 shares authorized at March 31, 2008 and  December 31, 2007; 51,472,449 shares issued and outstanding as of  March 31, 2008; and 51,407,860 shares issued and outstanding as of  December 31, 2007 |       | 51                             |       | 51                          |       |
| Additional  paid-in capital                                                                                                                                                                                                                                        |       | 850,677                        |       | 847,597                     |       |
| Accumulated  other comprehensive income                                                                                                                                                                                                                            |       | 694                            |       | 995                         |       |
| Accumulated  deficit                                                                                                                                                                                                                                               |       | (165,549                       | )          | (160,871                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                   |       | 685,873                        |       | 687,772                     |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                                                   |       | $                              | 799,357    |                        | $          | 820,332 |   |

 

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

 

3

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**ZORANCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except per share data)**

**(unaudited)**

 
| ** **                                        | ** ** | **Three Months Ended** | ** ** |
|---------------------------------------------------|------------|------------------------|------------|
| ** **                                        | ** ** | **March 31,**     | ** ** |
| ** **                                        | ** ** | **2008**               | ** ** | **2007** | ** ** |
|                                              |       |                   |       |   |   |
| Revenues:                                         |       |                   |       |   |   |
| Hardware product  revenues                        |       | $                      | 94,297     |   | $ | 87,182 |   |
| Software and  other revenues                      |       | 14,734                 |       | 14,477 |   |
| Total revenues                                    |       | 109,031                |       | 101,659 |   |
|                                              |       |                   |       |   |   |
| Costs and expenses:                               |       |                   |       |   |   |
| Cost of hardware  product revenues                |       | 57,789                 |       | 44,198 |   |
| Research and  development                         |       | 27,887                 |       | 24,988 |   |
| Selling, general  and administrative              |       | 25,639                 |       | 28,593 |   |
| Amortization of  intangible assets                |       | 9,237                  |       | 12,169 |   |
| Total costs and  expenses                         |       | 120,552                |       | 109,948 |   |
|                                              |       |                   |       |   |   |
| Operating loss                                    |       | (11,521                | )          | (8,289 | ) |
|                                              |       |                   |       |   |   |
| Interest income                                   |       | 4,511                  |       | 3,603 |   |
|                                              |       |                   |       |   |   |
| Other income (expense), net                       |       | (698                   | )          | 602 |   |
|                                              |       |                   |       |   |   |
| Loss before income taxes                          |       | (7,708                 | )          | (4,084 | ) |
|                                              |       |                   |       |   |   |
| Provision (benefit) for income taxes              |       | (3,030                 | )          | 1,800 |   |
|                                              |       |                   |       |   |   |
| Net loss                                          |       | $                      | (4,678     | ) | $ | (5,884 | ) |
|                                              |       |                   |       |   |   |
| Basic net loss per share                          |       | $                      | (0.09      | ) | $ | (0.12 | ) |
|                                              |       |                   |       |   |   |
| Diluted net loss per share                        |       | $                      | (0.09      | ) | $ | (0.12 | ) |
|                                              |       |                   |       |   |   |
| Shares used to compute basic net loss per share   |       | 51,445                 |       | 49,442 |   |
|                                              |       |                   |       |   |   |
| Shares used to compute diluted net loss per share |       | 51,445                 |       | 49,442 |   |

 

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements.

 

4

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**ZORANCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                       | ** ** | **Three Months Ended** | ** ** |
|----------------------------------------------------------------------------------|------------|------------------------|------------|
| ** **                                                                       | ** ** | **March 31,**     | ** ** |
| ** **                                                                       | ** ** | **2008**               | ** ** | **2007** | ** ** |
|                                                                             |       |                   |       |   |   |
| Cash flows from operating activities:                                            |       |                   |       |   |   |
| Net loss                                                                         |       | $                      | (4,678     | ) | $ | (5,884 | ) |
| Adjustments to  reconcile net loss to net cash provided by (used in) operations: |       |                   |       |   |   |
| Depreciation                                                                     |       | 2,049                  |       | 2,080 |   |
| Amortization                                                                     |       | 9,237                  |       | 12,169 |   |
| Stock-based  compensation expense                                                |       | 2,943                  |       | 2,512 |   |
| Deferred income  taxes                                                           |       | (3,535                 | )          | — |   |
| Gain on sale of  short-term investments                                          |       | (95                    | )          | (809 | ) |
| Changes in  assets and liabilities:                                              |       |                   |       |   |   |
| Accounts  receivable                                                             |       | 3,166                  |       | (1,984 | ) |
| Inventories                                                                      |       | (15,610                | )          | 414 |   |
| Prepaid expenses  and other current assets and other assets                      |       | (252                   | )          | 1,087 |   |
| Accounts payable                                                                 |       | (15,311                | )          | (6,398 | ) |
| Accrued expenses  and other current liabilities                                  |       | (3,765                 | )          | (1,255 | ) |
| Net cash  provided by (used in) operating activities                             |       | (25,851                | )          | 1,932 |   |
|                                                                             |       |                   |       |   |   |
| Cash flows from investing activities:                                            |       |                   |       |   |   |
| Purchases of  property and equipment                                             |       | (1,968                 | )          | (1,586 | ) |
| Purchases of  investments                                                        |       | (70,216                | )          | (85,358 | ) |
| Sales and  maturities of investments                                             |       | 92,613                 |       | 75,488 |   |
| Net cash  provided by (used in) investing activities                             |       | 20,429                 |       | (11,456 | ) |
|                                                                             |       |                   |       |   |   |
| Cash flows from financing activities:                                            |       |                   |       |   |   |
| Proceeds from  issuance of common stock                                          |       | 137                    |       | — |   |
| Net cash  provided by financing activities                                       |       | 137                    |       | — |   |
|                                                                             |       |                   |       |   |   |
| Net decrease in cash and cash equivalents                                        |       | (5,285                 | )          | (9,524 | ) |
|                                                                             |       |                   |       |   |   |
| Cash and cash equivalents at beginning of period                                 |       | 97,377                 |       | 100,034 |   |
|                                                                             |       |                   |       |   |   |
| Cash and cash equivalents at end of period                                       |       | $                      | 92,092     |   | $ | 90,510 |   |

 

Theaccompanying notes are an integral part of these unaudited condensedconsolidated financial statements.

 

5

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**ZORANCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIALSTATEMENTS**

**(unaudited)**

 

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

 

The accompanyingunaudited condensed consolidated financial statements of Zoran Corporation andits subsidiaries (“Zoran” or 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 ofthe Securities and Exchange Commission (“SEC”). In the opinion of management, the condensed consolidated financialstatements reflect all necessary adjustments, consisting only of normalrecurring adjustments, for a fair statement of the consolidated financialposition, operating results and cash flows for the periods presented.  The results of operations for the interimperiods presented are not necessarily indicative of the results that may beexpected for the full fiscal year or in any future period.  This Quarterly Report on Form 10-Qshould be read in conjunction with the audited consolidated financialstatements and notes thereto for the year ended December 31, 2007,included in the Company’s 2007 Annual Report on Form 10-K filed with theSEC.

 

***Revenues***

 

On January 25, 2006,the Company entered into an agreement with MediaTek to settle patent litigationbetween the companies. In consideration for licenses granted by Zoran, MediaTekagreed to pay Zoran $55 million, of which $44 million was paid in February 2006and $11 million was paid in April 2006.  These two payments, net of amountsattributable to a holder of rights under patents involved in the litigation,and amounts payable as legal fees, were recognized as license revenues relatedto litigation settlement. MediaTek is required to pay quarterly royaltiestotaling $30 million over a 30-month period that commenced on the date ofthe agreement based on future sales of covered MediaTek products.  These royalty payments, net of amountspayable by Zoran to a holder of rights under patents involved in thelitigation, and amounts payable as legal fees, are recognized as software andother revenues as they are received.

 

**2.****              Stock-basedcompensation**

 

Thefollowing table summarizes stock-based compensation expense related to employeestock options, employee stock purchases and restricted stock unit grants forthe three months ended March 31, 2008 and 2007 as recorded in accordancewith SFAS 123(R) (revised 2004), *Share-BasedPayment* (“SFAS 123(R)”) (in thousands):

 
| ** **                          | ** ** | **Three Months Ended  March 31, 2008** | ** ** | **Three Months Ended  March 31, 2007** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|---------------------------------------------|------------|
|                                |       |                                        |       |                                        |       |
| Cost of hardware product revenues.  |       | $                                           | 95         |                                        | $          | 60 |   |
| Research and development            |       | 1,159                                       |       | 695                                         |       |
| Selling, general and administrative |       | 1,689                                       |       | 1,757                                       |       |
| Total costs and  expenses           |       | $                                           | 2,943      |                                        | $          | 2,512 |   |

 

Theincome tax benefit for share-based compensation expense was $451,000 for thethree months ended March 31, 2008. The Company recognized no taxbenefit in the three months ended March 31, 2007 due to the Company’s fullvaluation on its deferred tax assets, which was released in December 2007.

 

Theexpense for the quarter ended March 31, 2007 included a one-time charge of$166,000 attributable to the extension of exercise periods for the modificationof vested options under SFAS 123(R) for employees terminated during thethree months ended March 31, 2007.

 

6

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***ValuationAssumptions***

 

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

 
| ** **                    | ** ** | **Three Months Ended  March 31, 2008** | ** ** |
|-------------------------------|------------|---------------------------------------------|------------|
| ** **                    | ** ** | **Stock Option Plans**                      | ** ** | **Stock Purchase Plan** | ** ** |
| Average expected term (years) |       | 5.3                                         |       | 1.46 |   |
| Expected volatility           |       | 55                                          | %          | 52 | % |
| Risk-free interest rate       |       | 2.7                                         | %          | 4.8 | % |
| Dividend yield                |       | 0                                           | %          | 0 | % |

 

During the three months ended March 31, 2007, theCompany did not grant any options and the stock purchase plan was suspendedpending completion of the independent investigation of the Company’s historicalstock option practices.

 

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

 

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

 

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

 

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

 

*Estimated Pre-vesting Forfeitures:*Whenestimating forfeitures, the Company considers termination behavior based onactual historical information.

 

StockOption Activity

 

The following is asummary of stock option activities:

 
| ** **                          | ** ** | **Shares Underlying   Outstanding Options** | ** ** | **Weighted Average   Exercise Price** | ** ** |
|-------------------------------------|------------|---------------------------------------------|------------|---------------------------------------|------------|
| ** **                          | ** ** | ** **                                  | ** ** | ** **                            | ** ** |
| Outstanding at January 1, 2008 |       | 7,703,071                                   |       | $                                     | 17.92      |   |
| Granted                             |       | 29,050                                      |       | $                                     | 12.01      |   |
| Exercised                           |       | (17,356                                     | )          | $                                     | 7.85       |   |
| Canceled                            |       | (64,291                                     | )          | $                                     | 16.11      |   |
| Outstanding at March 31, 2008  |       | 7,650,474                                   |       | $                                     | 17.94      |   |

 

7

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Significantoption groups outstanding as of March 31, 2008 and the related weightedaverage exercise price and contractual life information, are as follows:

 
| ** **          | ** ** | **Options Outstanding**                                   | ** ** | **Options Exercisable**                                     | ** ** |
|---------------------|------------|-----------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **Exercise Prices** | ** ** | **Shares   Underlying  Options at  March 31,  2008** | ** ** | **Weighted  Average  Remaining  Contractual Life  (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  intrinsic   value (‘000)** | ** ** | **Shares   Underlying Options at  March 31,   2008** | ** ** | **Weighted  Average  Remaining  Contractual Life  (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  intrinsic   value (‘000)** | ** ** |
| ** **          | ** ** | ** **                                                | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $0.00 to $9.99      |       | 355,019                                                   |       | 3.95                                                        |       | $ | 6.65 |   | $ | 2,490 |   | 340,019 |   | 3.81 |   | $ | 6.54 |   | $ | 2,421 |   |
| $10.00 to $11.99    |       | 920,396                                                   |       | 6.12                                                        |       | $ | 10.55 |   | 2,863 |   | 920,396 |   | 6.12 |   | $ | 10.55 |   | 2,863 |   |
| $12.00 to $14.99    |       | 1,295,573                                                 |       | 5.41                                                        |       | $ | 13.35 |   | 685 |   | 1,139,052 |   | 5.08 |   | $ | 13.35 |   | 627 |   |
| $15.00 to $19.99    |       | 2,712,825                                                 |       | 7.19                                                        |       | $ | 18.20 |   | — |   | 1,534,440 |   | 5.80 |   | $ | 17.13 |   | — |   |
| $20.00 to $25.99    |       | 1,974,210                                                 |       | 5.95                                                        |       | $ | 23.95 |   | — |   | 1,651,465 |   | 5.32 |   | $ | 24.19 |   | — |   |
| $26.00 to $46.53    |       | 392,451                                                   |       | 2.51                                                        |       | $ | 28.56 |   | — |   | 388,748 |   | 2.46 |   | $ | 28.57 |   | — |   |
| Total               |       | 7,650,474                                                 |       | 6.05                                                        |       | $ | 17.94 |   | $ | 6,038 |   | 5,974,120 |   | 5.25 |   | $ | 17.49 |   | $ | 5,911 |   |

 

Of the 7,650,474 stockoptions outstanding as of March 31, 2008, the Company estimates that 7,288,000will fully vest over the remaining contractual term.  As of March 31, 2008, these options had aweighted average remaining contractual life of 5.87 years, a weighted averageexercise price of $17.94 and aggregate intrinsic value of $5,851,000.

 

The weighted average grant date fair value ofoptions, as determined under SFAS No. 123(R), granted during the threemonths ended March 31, 2008 was $6.12. There were no grants in the three 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 $13.66 as of March 31, 2008, whichwould have been received by the option holders had all option holders exercisedtheir options as of that date.  The totalnumber of shares of common stock underlying in-the-money options exercisable asof March 31, 2008 was 2,071,000.  Thetotal intrinsic value of options exercised during the three months ended March 31,2008 was $125,000.  There was no excess tax benefit realized bythe Company in 2008 and 2007 for option exercises due to the availability ofnon stock related net operating loss carry forwards which fully offset ourtaxable income.

 

As of March 31, 2008, the Company had $14,692,000of unrecognized stock-based compensation cost related to stock options afterestimated forfeitures, which are expected to be recognized over the weightedaverage remaining term of 2.17 years.

 

TheCompany settles employee stock option exercises with newly issued commonshares.

 

***Stock Option Plans***

 

As of March 31,2008, the Company had outstanding options for the purchase of 7,650,474 sharesof common stock held by employees and directors under the Company’s 2005 EquityIncentive Plan (the “2005 Plan”), 2005 Outside Directors Equity Plan, 2000Nonstatutory Stock Option Plan, 1995 Outside Directors Stock Option Plan, the1993 Stock Option Plan and other various plans the Company assumed as a resultof acquisitions.  As of March 31,2008, 2,588,356 shares remained available for future grants and awards.  Options and stock appreciation rights grantedunder the 2005 Plan must have exercise prices per share not less than the fairmarket value of Zoran common stock on the date of grant and may not be repricedwithout stockholder approval.  Suchawards will vest and become exercisable upon conditions established by theCompensation Committee and may not have a term exceeding 10 years.

 

8

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***RestrictedShares and Restricted Stock Units***

 

Restrictedshares and restricted stock units are granted under the 2005 Plan.  As of March 31, 2008, we had$118,000 of unrecognized stock-based compensation cost related to restrictedshares and restricted stock units, which areexpected to be recognized over the weighted average remaining term of 1.71years.

 

The following is asummary of restricted shares and restricted stock units activities:

 
| ** **                       | ** ** | **Outstanding   Restricted Shares   And Stock Units** | ** ** | **Weighted-  Average Grant-   Date Fair Value** | ** ** |
|----------------------------------|------------|--------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| Balances, December 31, 2007 |       | 77,345                                                                         |       | $                                                                   | 18.53      |   |
| Granted                          |       | —                                                                         |       | $                                                                   | —     |   |
| Released/vested                  |       | (47,233                                                                        | )          | $                                                                   | 20.87      |   |
| Forfeited                        |       | (612                                                                           | )          | $                                                                   | 21.56      |   |
| Balances, March 31, 2008    |       | 29,500                                                                         |       | $                                                                   | 14.73      |   |

 

***EmployeeStock Purchase Plan***

 

TheCompany’s 1995 Employee Stock Purchase Plan (“ESPP”) was adopted by the Company’sBoard of Directors in October 1995 and approved by its stockholders in December 1995.  The ESPP enables employees to purchase sharesthrough payroll deductions at approximately 85% of the lesser of the fair valueof common stock at the beginning of a 24-month offering period or the end ofeach six-month segment within such offering period.  The ESPP is intended to qualify as an “employeestock purchase plan” under Section 423 of the U.S. Internal RevenueCode.  As of March 31, 2008,2,126,952 shares were reserved and available for issuance under the ESPP.

 

**3.****              ComprehensiveLoss**

 

The following tablepresents the calculation of comprehensive loss as required by SFAS 130 “ReportingComprehensive Income.”  The components ofcomprehensive loss, net of tax, are as follows (in thousands):

 
| ** **                                     | ** ** | **Three Months Ended** | ** ** |
|------------------------------------------------|------------|------------------------|------------|
| ** **                                     | ** ** | **March 31,**     | ** ** |
| ** **                                     | ** ** | **2008**               | ** ** | **2007** | ** ** |
| ** **                                     | ** ** | ** **             | ** ** | ** ** | ** ** |
| Net loss                                       |       | $                      | (4,678     | ) | $ | (5,884 | ) |
| Change in  unrealized gain on investments, net |       | (301                   | )          | (1,442 | ) |
| Total comprehensive loss                       |       | $                      | (4,979     | ) | $ | (7,326 | ) |

 

The components of accumulated othercomprehensive income are unrealized gain, net on marketable securities.

 

9

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

 

TheCompany’s portfolio of marketable securities as of March 31, 2008 was asfollows (in thousands):

 
| ** **                                                                        | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|-----------------------------------------------------------------------------------|------------|----------|------------|-----------------------|------------|------------------------|------------|----------------------------|------------|
| Corporate notes  and bonds                                                        |       | $        | 178,450    |                  | $          | 1,286                  |       | $                          | (825       | ) | $ | 178,911 |   |
| Auction rate  securities                                                          |       | 62,775   |       | —                |       | —                 |       | 62,775                     |       |
| U.S. government  and agency securities                                            |       | 24,096   |       | 45                    |       | (37                    | )          | 24,104                     |       |
| Foreign and  municipal bonds                                                      |       | 15,775   |       | 206                   |       | —                 |       | 15,981                     |       |
| Certificates of  deposit                                                          |       | 1,996    |       | 26                    |       | —                 |       | 2,022                      |       |
| Total fixed  income securities                                                    |       | 283,092  |       | 1,563                 |       | (862                   | )          | 283,793                    |       |
| Publicly traded  equity securities                                                |       | 1,393    |       | —                |       | (7                     | )          | 1,386                      |       |
|                                                                              |       | 284,485  |       | 1,563                 |       | (869                   | )          | 285,179                    |       |
| Less: Auction  rate securities included in other assets and long-term investments |       | (62,775  | )          | —                |       | —                 |       | (62,775                    | )          |
|                                                                              |       |     |       |                  |       |                   |       |                       |       |
| Total short-term  investments                                                     |       | $        | 221,710    |                  | $          | 1,563                  |       | $                          | (869       | ) | $ | 222,404 |   |

 

TheCompany’s portfolio of marketable securities as of December 31, 2007 wasas follows (in thousands):

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

 

The following tablesummarizes the maturities of the Company’s fixed income securities as of March 31,2008 (in thousands):

 
| ** **                    | ** ** | **Cost** | ** ** | **Estimated  Fair  Value** | ** ** |
|-------------------------------|------------|----------|------------|----------------------------|------------|
| Less than 1 year              |       | $        | 78,010     |                       | $          | 77,937 |   |
| Due in 1 to 2 years           |       | 89,283   |       | 89,823                     |       |
| Due in 2 to 5 years           |       | 53,024   |       | 53,258                     |       |
| Greater than 5 years*    |       | 62,775   |       | 62,775                     |       |
|                          |       |     |       |                       |       |
| Total fixed income securities |       | $        | 283,092    |                       | $          | 283,793 |   |

 
|   |   |   |
|--------|--------|--------|

 

*Comprisedof auction rate securities which have reset dates of 90 days or less but finalexpiration dates over 5 years.  Thesesecurities are included in other assets and long-term investments as of March 31,2008.

 

10

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

 

Effective January 1,2008, the Company adopted SFAS No. 157, “Fair Value Measurements” (“SFAS157”).  In February 2008, the FASBissued FASB Staff Position No. FAS 157-2, “Effective Date of FASBStatement No. 157”, which provides a one year deferral of the effectivedate of SFAS 157 for non-financial assets and non-financial liabilities, exceptthose that are recognized or disclosed in the financial statements at fairvalue at least annually. Therefore, the Company has adopted the provisions ofSFAS 157 with respect to its financial assets and liabilities only.  SFAS 157 defines fair value, establishes aframework for measuring fair value under generally accepted accountingprinciples and enhances disclosures about fair value measurements. Fair valueis defined under SFAS 157 as the exchange price that would be received for anasset or paid to transfer a liability (an exit price) in the principal or mostadvantageous market for the asset or liability in an orderly transactionbetween market participants on the measurement date. Valuation techniques usedto measure fair value under SFAS 157 must maximize the use of observable inputsand minimize the use of unobservable inputs. The standard describes a fairvalue hierarchy based on three levels of inputs, of which the first two areconsidered observable and the last unobservable, that may be used to measurefair value which are the following:

 

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

 

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

 

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

 

The adoption of thisstatement did not have a material impact on the Company’s consolidated resultsof operations and financial condition.

 

Effective January 1,2008, the Company adopted SFAS No. 159 “The Fair Value Option forFinancial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 allows anentity the irrevocable option to elect fair value for the initial andsubsequent measurement for specified financial assets and liabilities on acontract-by-contract basis. The Company did not elect to adopt the fair valueoption under this Statement.

 

In accordance with SFAS157, the following table represents the Company’s fair value hierarchy for itsfinancial assets (cash equivalents and investments) measured at fair value on arecurring basis as of March 31, 2008 (in thousands):

 
| ** **                            | ** ** | **Level 1** | ** ** | **Level 2** | ** ** | **Level 3** | ** ** | **Total** | ** ** |
|---------------------------------------|------------|-------------|------------|-------------|------------|-------------|------------|-----------|------------|
| Corporate notes and bonds             |       | $           | —     |        | $          | 178,911     |       | $         | —     |   | $ | 178,911 |   |
| Auction rate securities               |       | —      |       | —      |       | 62,775      |       | 62,775    |       |
| U.S. government and agency securities |       | —      |       | 24,104      |       | —      |       | 24,104    |       |
| Foreign and municipal bonds           |       | —      |       | 15,981      |       | —      |       | 15,981    |       |
| Certificates of deposit               |       | —      |       | 2,022       |       | —      |       | 2,022     |       |
| Total fixed income securities         |       | —      |       | 221,018     |       | 62,775      |       | 283,793   |       |
| Publicly traded equity securities     |       | 1,386       |       | —      |       | —      |       | 1,386     |       |
|                                  |       |        |       |        |       |        |       |      |       |
| Total                                 |       | $           | 1,386      |        | $          | 221,018     |       | $         | 62,775     |   | $ | 285,179 |   |

 

The Company’s Level 3investments as of March 31, 2008 include high-grade auction ratesecurities primarily consisting of government guaranteed student loans.  Auction rate securities are securities thatare structured with short-term interest rates which periodically reset throughauctions, typically within every 90 days. At the end of each reset period, investors can sell or continue to holdthe securities at par. During the current quarter, some of the auction ratesecurities were sold and others failed to auction successfully due to marketsupply exceeding market demand.  In theevent of a failed auction, the notes continue to bear interest at apredetermined maximum rate based on the credit rating of notes as determined byone or more nationally recognized statistical rating organizations. The fundsassociated with failed auctions will not be accessible until a successfulauction occurs, a buyer is found 

 

11

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outside of the auctionprocess, the issuers redeem the securities or the underlying securities havematured.  As a result, the Company hasclassified all auction rate securities as long-term assets in the condensedconsolidated balance sheets.

 

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

 

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

 

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

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

 

**6.****              Inventories**

 

Inventories are stated atthe lower of cost (first in, first out) or market and consisted of thefollowing (in thousands):

 
| ** **                          | ** ** | **March 31,** | ** ** | **December 31,** | ** ** |
|-------------------------------------|------------|--------------------|------------|-----------------------|------------|
| ** **                          | ** ** | **2008**           | ** ** | **2007**              | ** ** |
|                                |       |               |       |                  |       |
| Purchased parts and work in process |       | $                  | 28,609     |                  | $          | 28,498 |   |
| Finished goods                      |       | 35,993             |       | 20,494                |       |
|                                |       | $                  | 64,602     |                  | $          | 48,992 |   |

 

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

 

The Company monitors therecoverability of goodwill recorded in connection with acquisitions, byreporting unit, annually, or sooner if events or changes in circumstancesindicate that the carrying amount may not be recoverable.  The Company performed the annual analysis asof September 30, 2007 and concluded that goodwill was not impaired, as thefair value of each reporting unit exceeded its carrying value, includinggoodwill.

 

12

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

 
| ** **                    | ** ** | **March 31, 2008** | ** ** | **December 31, 2007**  | ** ** |
|-------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                    | ** ** | **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    |   | $ | (182,596 | ) | $ | 12,909 |   | $ | 195,505 |   | $ | (175,451 | ) | $ | 20,054 |   |
| Patents                       |       | 3-5                     |       | 40,265                      |       | (38,311 | ) | 1,954 |   | 40,265 |   | (36,961 | ) | 3,304 |   |
| Customer base                 |       | 3-5                     |       | 13,860                      |       | (12,658 | ) | 1,202 |   | 13,860 |   | (12,043 | ) | 1,817 |   |
| Tradename and  others         |       | 3-5                     |       | 3,350                       |       | (2,707 | ) | 643 |   | 3,350 |   | (2,580 | ) | 770 |   |
| Total                         |       |                    |       | $                           | 252,980    |   | $ | (236,272 | ) | $ | 16,708 |   | $ | 252,980 |   | $ | (227,035 | ) | $ | 25,945 |   |

 

Estimatedfuture intangible amortization expense, based on current balances, as of March 31,2008 is as follows (in thousands):

 
| Remaining nine months of 2008      |   | $     | 14,078 |   |
|------------------------------------|--------|-------|--------|--------|
| Year ending December 31, 2009 |   | 1,820 |   |
| Year ending December 31, 2010 |   | 810   |   |
|                               |   | $     | 16,708 |   |

 

Goodwillby reporting units was as follows (in thousands):

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

 

# **8.**              Income Taxes

# ** **

The Company follows theliability method of accounting for income taxes, which requires recognition ofdeferred tax liabilities and assets for the expected future tax consequence oftemporary differences between the financial statement carrying amounts and thetax basis of assets and liabilities. Realization of deferred tax assets is based on the Company’s ability togenerate sufficient future taxable income. As of December 31, 2007,historical operating income and projected future profits represented sufficientpositive evidence that the Company’s deferred tax assets will more likely thannot be realized and accordingly, the valuation allowance was released.

 

Oureffective tax rate is highly dependent upon the geographic distribution of ourworldwide earnings or losses, the tax regulations and tax holiday benefits incertain jurisdictions, and the effectiveness of our tax planningstrategies.  The benefit for income taxesreported for the three months ended March 31, 2008 reflects the estimatedannual tax rate applied to the year to date net loss, adjusted for certaindiscreet items which are fully recognized in the period they occur.  The Company benefits from our Israel based subsidiary’sstatus as an “Approved Enterprise” under Israeli law, which provides a ten-yeartax holiday for income attributable to a portion of the Company’s operations inIsrael.

 

OnJanuary 1, 2007, the Company adopted FASB Interpretation No. 48,Accounting for Uncertainty in Income Taxes (“FIN 48”).  Under FIN 48, the impact of an uncertainincome tax position on income tax expense must be recognized at the amount thatis more-likely-than-not of being sustained. As of December 31, 2007, the Company had $26.5 million ofunrecognized tax benefits which have not materially changed during thequarter.  It is possible that the auditin Israel will result in a positive or negative adjustment to the Company’sunrecognized tax benefits within the next 12 months.  The application of income tax law is inherently complex.  Laws and regulations in this area arevoluminous and are often ambiguous and the Company is required to make manysubjective assumptions and judgments regarding its income tax exposures.  In addition, interpretations of and guidancesurrounding income tax laws and 

 

13

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regulations are subject to change over time.  Any changes in our subjectiveassumptions and judgments could materially affect amounts recognized in theconsolidated balance sheets and statements of income.

 

**9.****              SegmentReporting**

 

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

 

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.

 

Informationabout reported segment income or loss is as follows for the three months ended March 31,2008 and 2007 (in thousands):

 
| ** **                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|----------------------------|------------|----------------------------------------|------------|
| ** **                 | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| ** **                 | ** ** | ** **                             | ** ** | ** ** | ** ** |
| Net revenues:              |       |                                   |       |   |   |
| Consumer                   |       | $                                      | 88,372     |   | $ | 81,452 |   |
| Imaging                    |       | 20,659                                 |       | 20,207 |   |
|                       |       | $                                      | 109,031    |   | $ | 101,659 |   |
|                       |       |                                   |       |   |   |
|  Operating  expenses: |       |                                   |       |   |   |
| Consumer                   |       | $                                      | 96,547     |   | $ | 82,286 |   |
| Imaging                    |       | 14,768                                 |       | 15,493 |   |
|                       |       | $                                      | 111,315    |   | $ | 97,779 |   |
|                       |       |                                   |       |   |   |
| Contribution margin:       |       |                                   |       |   |   |
| Consumer                   |       | $                                      | (8,175     | ) | $ | (834 | ) |
| Imaging                    |       | 5,891                                  |       | 4,714 |   |
|                       |       | $                                      | (2,284     | ) | $ | 3,880 |   |

 

Areconciliation of the totals reported for the operating segments to theapplicable line items in the consolidated financial statements for the threemonths ended March 31, 2008 and 2007 is as follows (in thousands):

 
| ** **                                  | ** ** | **Three Months EndedMarch 31,** | ** ** |
|---------------------------------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **2008**                             | ** ** | **2007** | ** ** |
|                                        |       |                                 |       |   |   |
| Contribution margin from operating segments |       | $                                    | (2,284     | ) | $ | 3,880 |   |
| Amortization of intangibles                 |       | 9,237                                |       | 12,169 |   |
| Total operating loss                        |       | $                                    | (11,521    | ) | $ | (8,289 | ) |

 

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

 

14

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Thegeographic distribution of total revenues for the three months ended March 31,2008 and 2007 was as follows (in thousands):

 
| ** **                                                 | ** ** | **Three Months Ended  March 31,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------|------------|
| ** **                                                 | ** ** | **2008**                               | ** ** | **2007** | ** ** |
| **Revenue from unaffiliated customers originating  from:** |       |                                   |       |   |   |
| China                                                      |       | $                                      | 39,560     |   | $ | 30,513 |   |
| Japan                                                      |       | 21,888                                 |       | 25,098 |   |
| Korea                                                      |       | 15,013                                 |       | 6,067 |   |
| Taiwan                                                     |       | 19,978                                 |       | 25,669 |   |
| United States                                              |       | 8,100                                  |       | 7,169 |   |
| Other                                                      |       | 4,492                                  |       | 7,143 |   |
| **Total revenues**                                         |       | $                                      | 109,031    |   | $ | 101,659 |   |

 

Forthe three months ended March 31, 2008 and 2007 one customer accounted for 11%and 13% of total revenues, respectively.

 

As of March 31,2008, five customers accounted for approximately 13%, 12%, 12%, 11% and 10% oftotal net accounts receivable, respectively, and as of December 31, 2007 three customers accounted for approximately 11%,11% and 10% of the net accounts receivable balance, respectively.

 

# **10.**       Net Loss Per Share

# ** **

Basic net loss per shareis calculated by dividing net loss available to common stockholders by theweighted average number of common shares outstanding during the period.  Diluted net income per share is calculated byusing the weighted average number of common shares outstanding during theperiod increased to include the number of additional shares of common stockthat would have been outstanding if the dilutive potential shares of commonstock had been issued.

 

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

** **
| ** **                                             | ** ** | **Three Months EndedMarch 31,** | ** ** |
|--------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **2008**                             | ** ** | **2007** | ** ** |
| ** **                                             | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Net loss                                               |       | $                                    | (4,678     | ) | $ | (5,884 | ) |
|                                                   |       |                                 |       |   |   |
| Basic and diluted weighted average shares  outstanding |       | 51,445                               |       | 49,442 |   |
|                                                   |       |                                 |       |   |   |
| Net loss per share:                                    | ** ** | ** **                           | ** ** | ** ** | ** ** |
| Basic                                                  |       | $                                    | (0.09      | ) | $ | (0.12 | ) |
| Diluted                                                |       | $                                    | (0.09      | ) | $ | (0.12 | ) |

** **

**For the three months ended March 31, 2008 and 2007outstanding options and restricted stock units totaling 5.7 million and 5.0million shares, respectively, were excluded from the computation of diluted netloss per share as the inclusion of such shares would have had an anti-dilutiveeffect.**

** **

**15**

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** **

# ** **

# **11.**       Contingencies

# ** **

*MattersRelated to Historical Stock Option Practices:*  As discussedfurther below, certain persons and entities identifying themselves asshareholders of Zoran have filed derivative actions purporting to assert claimson behalf of and in the name of the Company against various of the Company’scurrent and former directors and officers relating to the Company’s historicalaccounting for stock options. It is not possible for us to quantify the extentof our potential liability, if any.

 

*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, among other things,violations of federal securities laws and breaches of fiduciary duties.

 

*Geralddel Rosario v. Aharon et al.*  On September 26,2006, a purported shareholder derivative action was filed by Gerald del Rosarioagainst Zoran as a nominal defendant and certain of its current and formerofficers and directors in the United States District Court, Northern Districtof California, alleging, among other things, violations of federal securitieslaws and breaches of fiduciary duty. On December 8, 2006, the Court issuedan order consolidating the Del Rosario action with the Pfeiffer action. TheCourt selected del Rosario as lead plaintiff and approved lead plaintiff’sselection of counsel for the consolidated derivative action. Plaintiffs filed aconsolidated amended complaint on March 14, 2007. On June 5, 2007 theCourt issued an order granting in part and denying in part defendants’ motionto dismiss.  On September 11, 2007,the parties participated in a court-ordered mediation session.  On April 7, 2008, the Court deniedpreliminary approval of the parties’ proposed settlement agreement.  The case continues to be in the discoveryphase.

 

*Baronev. Gerzberg et al.; Durco v. Gerzberg et al.*  On October 23,2006, two purported shareholder derivative actions were filed by Moshe Baroneand John Durco against Zoran as a nominal defendant and certain of its currentand former officers and directors in the California Superior Court of SantaClara County, alleging, among other things, violations of state securities lawsand breaches of fiduciary duty. On January 24, 2007 the Court consolidatedthe Barone and Durco actions, appointed Messrs. Barone and Durco asco-lead plaintiffs and approved their selection of counsel for the consolidatedderivative action. The co-lead plaintiffs filed a consolidated amendedcomplaint on March 26, 2007. On June 15, 2007 the Court issued anorder staying all proceedings until further order of the Court.

 

*U.S.Attorney Investigation:*  On July 3, 2006, Zorandisclosed in a press release that it received and was responding to a grandjury subpoena from the office of the U.S. Attorney for the Northern District ofCalifornia requesting documents relating to stock options.  Should any further such requests be made bythe U.S. Attorney, Zoran intends to continue cooperating fully.

 

*ZoranCorporation v. ArcSoft, Inc.*  On February 20,2007, the Company filed a complaint against ArcSoft Inc., in theCalifornia Superior Court for the County of Alameda, seeking payment of$4,000,000 in principal under four separate convertible promissory notes,together with accrued interest thereon in the amount of approximately $528,000.The notes represent amounts loaned by the Company to ArcSoft in 2004. At thattime, the Company also entered into a business arrangement with ArcSoftinvolving the licensing and grant of certain rights to ArcSoft related to aproduct then under development and related agreements regarding the continueddevelopment and commercialization of the product. On March 28, 2007,ArcSoft filed an answer denying liability under the notes and asserting variousaffirmative defenses. ArcSoft also filed a cross-complaint alleging fraud inthe inducement of the business arrangement, fraudulent and negligent misrepresentation,breach of contract and of the implied covenant of good faith and fair dealing,and unjust enrichment and seeking monetary damages of more than $6,900,000. TheCompany filed an answer to ArcSoft’s cross-complaint denying liability andasserting various affirmative defenses. The Company also filed across-complaint alleging various breach of contract claims against ArcSoft. On August 1,2007, the Court denied the Company’s application for a writ of attachment andits petition to compel arbitration of the dispute. On November 9, 2007,the parties held a mediation, which did not result in resolution of thelitigation. The Court has ordered the parties to participate ina mandatory settlement conference on May 22, 2008.  Trial is currently scheduled to begin on July 7,2008.

 

*IndemnificationObligations.*  Subject to certain limitations, the Companyis obligated to indemnify its current and former directors, officers andemployees 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 possiblydamages and other liabilities incurred in connection with these matters. TheCompany is currently paying or reimbursing legal expenses being incurred inconnection with these matters by a number of its current and former directors,officers and employees.

 

16

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*OtherLegal Matters.*  The Company is named from time to time as aparty to lawsuits in the normal course of its business. Litigation, in general,and intellectual property and securities litigation in particular, can beexpensive and disruptive to normal business operations. Moreover, the resultsof legal proceedings are difficult to predict.

 

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

 

*This report includes a number offorward-looking statements which reflect the Company’s current views withrespect to future events and financial performance. These forward-lookingstatements are subject to certain risks and uncertainties, including thosediscussed in “Part II, Item 1A. Risk Factors” below. In this report, thewords “anticipates,” “believes,” “expects,” “intends,” “future” and similarexpressions identify forward-looking statements. Readers are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date hereof.*

 

**Overview**

 

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

 

*Revenues*

 

We derive most of ourrevenues from the sale of our integrated circuit 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.  We believethat, as our product lines continue to mature and competitive markets evolve,we are likely to experience further declines in the average selling prices ofour products, although we cannot predict the timing and amount of such futurechanges with any certainty.

 

We also derive revenuesfrom licensing our software and other intellectual property.  Licensing revenues include one-time licensefees and royalties based on the number of units distributed by 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 recognize softwarelicense revenues in accordance with the provisions of Statement of Position(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.

 

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*Cost of Hardware ProductRevenues*

* *

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

 

*Research and Development*

* *

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

 

*Selling, General andAdministrative*

* *

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

 

*Income Taxes*

* *

The change in oureffective income tax rate in 2008 reflects our increased certainty about futuretaxable income which required a release of the valuation allowance in December 2007.  Our effective tax rate benefits from ourIsrael based subsidiary’s status as an “Approved Enterprise” under Israeli law,which provides a ten-year tax holiday for income attributable to a portion ofour 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.

 

Zoranis currently under audit in Israel for tax years 2003 through 2005.  The Company believes that it hasadequately provided for any potential assessments associated with this audit.  It is possible that theamount of the liability for unrecognized income tax benefits may change withinthe next twelve months.  Our income taxexpense could be affected as events occur, income tax audits conclude or statutesof limitations expire.  An estimate ofthe range of possible changes in our tax expense cannot be made at this time.

 

**Segments**

 

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

 

**Critical Accounting Policies and Estimates**

 

The discussion and analysisof our financial condition and results of operations are based upon ourunaudited condensed consolidated financial statements, which have been preparedin accordance with accounting principles generally accepted in the UnitedStates. The preparation of these financial statements requires us to makeestimates and judgments that affect the reported amounts of assets,liabilities, revenues and expenses, and related disclosure of contingent assetsand liabilities. On an on-going basis, we evaluate our critical accountingpolicies and estimates. We base our estimates on historical experience and onvarious other assumptions that we believe to be reasonable under thecircumstances, the results of which form the basis for making judgments aboutthe carrying values of assets and liabilities that are not readily apparentfrom other sources. Actual results may differ from these estimates underdifferent assumptions or conditions. Our critical accounting policies and estimatesare discussed in our Annual Report on Form 10-K for the fiscal year ended December 31,2007 and we have added the following policy discussed below.

 

*Fair value measurements*

 

Effective January 1,2008, we adopted SFAS No. 157, “Fair Value Measurements” (“SFAS 157”).  In February 2008, the FASB issued FASBStaff Position No. FAS 157-2, “Effective Date of FASB Statement No. 157”,which provides a one year deferral of the effective date of SFAS 157 fornon-financial assets and non-financial liabilities, except those that arerecognized or disclosed in the financial statements at fair value at leastannually. Therefore, we have adopted the provisions of SFAS 157 with respect toits financial assets and liabilities only. SFAS 157 defines fair value, establishes a framework for measuring fairvalue under generally accepted 

 

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accounting principles andenhances disclosures about fair value measurements. Fair value is defined underSFAS 157 as the exchange price that would be received for an asset or paid totransfer a liability (an exit price) in the principal or most advantageousmarket for the asset or liability in an orderly transaction between marketparticipants on the measurement date. Valuation techniques used to measure fairvalue under SFAS 157 must maximize the use of observable inputs and minimizethe use of unobservable inputs. The standard describes a fair value hierarchybased on three levels of inputs, of which the first two are considered observableand the last unobservable, that may be used to measure fair value which are thefollowing:

 

·                  Level 1 - Quoted prices inactive markets for identical assets or liabilities.

 

·                  Level 2 - Inputs other than Level 1 that areobservable, either directly or indirectly, such as quoted prices for similarassets or liabilities; quoted prices in markets that are not active; or otherinputs that are observable or can be corroborated by observable market data forsubstantially the full term of the assets or liabilities.

 

·                  Level 3 - Unobservable inputs that are supported bylittle or no market activity and that are significant to the fair value of theassets or liabilities.

 

The adoption of thisstatement did not have a material impact on our consolidated results ofoperations and financial condition.

 

Our Level 3 investmentsas of March 31, 2008 include high-grade auction rate securities primarilyconsisting of government guaranteed student loans.  Auction rate securities are securities thatare structured with short-term interest rates which periodically reset throughauctions, typically within every 90 days. At the end of each reset period, investors can sell or continue to holdthe securities at par. During the current quarter, some of the auction ratesecurities were sold and others failed to auction successfully due to marketsupply exceeding market demand.  In theevent of a failed auction, the notes continue to bear interest at apredetermined maximum rate based on the credit rating of notes as determined byone or more nationally recognized statistical rating organizations. The fundsassociated with failed auctions will not be accessible until a successfulauction occurs, a buyer is found outside of the auction process, the issuersredeem the securities or the underlying securities have matured.  As a result, we have classified all auctionrate securities as long-term assets in the condensed consolidated balancesheets.

 

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

 

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

 

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**Resultsof Operations**

** **

Thefollowing table summarizes selected consolidated statement of operations dataand changes from the period to period (dollars in thousands, except forpercentages):

 
| ** **                                                  | ** ** | **Three Months Ended****March 31,** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **2008**                                           | ** ** | **2007**   | ** ** | **$** | ** ** | ** %** | ** ** |
| Revenues:                                                   |       |                                               |       |       |       |   |   |   |   |
| Hardware product  revenues                                  |       | $                                                  | 94,297     |       | $          | 87,182 |   | $ | 7,115 |   | 8.1 | % |
| Software and  other revenues                                |       | 14,734                                             |       | 14,477     |       | 257 |   | 1.8 | % |
| Total revenues                                              |       | 109,031                                            |       | 101,659    |       | 7,372 |   | 7.2 | % |
| Cost and  expenses:                                         |       |                                               |       |       |       |   |   |   |   |
| Cost of hardware  product revenues                          |       | 57,789                                             |       | 44,198     |       | 13,591 |   | 30.8 | % |
| Research and  development                                   |       | 27,887                                             |       | 24,988     |       | 2,899 |   | 11.6 | % |
| Selling, general  and administrative                        |       | 25,639                                             |       | 28,593     |       | (2,954 | ) | (10.3 | )% |
| Amortization of  intangible assets                          |       | 9,237                                              |       | 12,169     |       | (2,932 | ) | (24.1 | )% |
| Total costs and  expenses                                   |       | 120,552                                            |       | 109,948    |       | 10,604 |   | 9.6 | % |
| Operating loss                                              |       | (11,521                                            | )          | (8,289     | )          | 3,232 |   | 39.0 | % |
| Interest and  other income (expense), net                   |       | 3,813                                              |       | 4,205      |       | (392 | ) | (9.32 | )% |
| Provision  (benefit) for income taxes                       |       | (3,030                                             | )          | 1,800      |       | (4,830 | ) | * |   |
| Net loss                                                    |       | $                                                  | (4,678     | )          | $          | (5,884 | ) | $ | (1,206 | ) | (20.5 | )% |
| Supplemental  Operating Data:                               |       |                                               |       |       |       |   |   |   |   |
| Cost of hardware  product as % of hardware product revenues |       | 61.3                                               | %          | 50.7       | %          |   |   |   |   |

 
|   |   |
|--------|--------|

 

* not meaningful

 

*Revenues*

 

Total revenues were $109.0million for the three months ended March 31, 2008 compared to $101.7million for the three months ended March 31, 2007.  Consumer segment revenues increased by $6.9million while Imaging segmentrevenues increased $0.4 million.  Theincrease in Consumer segment revenues was a result of increase in revenues in the DTV products of $10.6 million which waspartially offset by decreases in revenues of DVD products by $1.8 million andMobile products by $1.9 million.

 

Hardware product revenuesfor the three months ended March 31, 2008 were $94.3 million compared to$87.2 million for the comparable period of the prior year.  Hardware product revenues increased $7.5million in the Consumer segment, partially offset by a $0.4 million decrease inthe Imaging segment.  Within the Consumersegment, hardware product revenues increased$10.9 million in the DTV products driven by increased unit shipments.  This increase was offset by decreases of $1.5million in the DVD products and $1.9 million in Mobile products attributable toreductions in unit shipments.

 

Software and otherrevenues were $14.7 million and $14.5 million for the three months ended March 31,2008 and 2007, respectively.  The marginal increase in software and otherrevenues were primarily due to the timing of new agreements.

 

*Cost of Hardware Product Revenues*

 

Cost of hardware productrevenues was $57.8 million for the quarter ended March 31, 2008 comparedto $44.2 million for the same period of 2007. The increase in costs was primarily a result of product mix withproducts with a higher percent of cost per revenue representing a greaterproportion of products sold.  Theseproducts with a higher cost structure are related to new products where weexperienced some initial cost challenges related to their ramp in volume. As wemove forward with these products’ volume ramp, we expect to see improvement intheir cost structure.  Cost of hardwareproduct revenues as a percentage to product revenue was also impacted by ASPdeclines particularly for our DVD products.

 

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*Research and Development*

 

Research and developmentexpenses were $27.9 million for the three months ended March 31, 2008,compared to $25.0 million for the same period of 2007.  Research and development expenses tend tofluctuate based on the timing of major engineering-related expenses, such astape-outs as well as continued investments in research and development acrossboth of our segments.

 

*Selling, General and Administrative*

 

Selling, general andadministrative expenses were $25.6 million for the three months ended March 31,2008, compared to $28.6 million for the same period of 2007.  The decrease was primarily attributed to thedecrease in legal and accounting expenses which were higher in 2007 due toexpenses incurred in connection with our review of historical stock optiongranting practices.

 

*Amortization of Intangible Assets*

 

During the three monthsended March 31, 2008, we incurred charges of $9.2 million related to theamortization of intangible assets compared to $12.2 million of such charges forthe three months ended March 31, 2007. At March 31, 2008, we had approximately $16.7 million in netintangible assets acquired through the Oak, Emblaze and Oren acquisitions whichwe will continue to amortize on a straight line basis through 2010.

 

*Interest and Other Income(Expense)*

 

Interest and other income(expense) was $3.8 million for the three month period ended March 31,2008, compared to $4.2 million for the same period of 2007.   Interest income was $4.5 million for thethree month period ended March 31, 2008 compared to $3.6 million for thesame period of 2007. This increase was a result of our higher average cash andshort term investment balances. The increase was offset by decreases due toforeign currency remeasurement losses as a result of the decline in the valueof the U.S. dollar in comparison to currencies in countries in which we operateand fluctuations in realized gain due to timing of sale of investments.

 

*Provision for Income Taxes*

 

We recorded a tax benefitof $3.0 million for the three month period ended March 31, 2008 comparedto a tax provision of $1.8 million for the three month period ended March 31,2007.  The benefit for income taxesreported for the three months ended March 31, 2008 reflects the estimatedannual tax rate applied to the year to date net loss, adjusted for certaindiscreet items which are fully recognized in the period they occur.  Theincome tax benefit or expense for these periods was affected by the geographicdistribution of our worldwide earnings or losses, the impact of recording avaluation allowance and the release of the valuation allowance at December 31,2007, non-tax-deductible expenses such as SFAS 123R stock-based compensationexpense, as well as the accrual of liabilities associated with unrecognized taxbenefits.  In addition, our tax rate benefits from ourIsrael based subsidiary’s status as an “Approved Enterprise” under Israeli law,which provides a ten-year tax holiday for income attributable to a portion ofour operations in Israel.

 

**Liquidity and Capital Resources**

 

At March 31,2008, we had $92.1 million of cash and cash equivalents, $222.4 million ofshort term investments and $62.8 million of long term investments.  At March 31, 2008, we had $370.6 millionof working capital.

 

Cashused in operating activities was $25.9 million during the first quarter of2008. While we recorded a net loss of $4.7 million, this loss included non-cashitems such as amortization of $9.2 million, depreciation of $2.0 million andstock- based compensation expense of $2.9 million.  Cash used in operations was primarily due toan increase in inventory by $15.6 million to meet the expected increase indemand for our products duringour upcoming seasonally stronger quarters and decreasein accounts payable, accrued expenses and other liabilities totaling $19.1million due to timing of payments.  Thesechanges were partially offset by a decrease in accounts receivable by $3.2million due to the timing of collections and payments.

 

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

 

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Cash provided byfinancing activities during the three months ended March 31, 2008 was $0.1million and consisted of proceeds received from issuances of common stockthrough exercises of employee stock options.

 

Ouroperating activities generated cash of $1.9 million during the first quarter of2007. While we recorded a net loss of $5.9 million, this loss included non-cashitems such as amortization of $12.2 million, depreciation of $2.1 million andstock- based compensation expense of $2.5 million.  Cash provided by operations also increaseddue to a decrease in prepaid expenses and other current assets of $1.1 millionand a net decrease in inventory by $0.4 million.  These increases were partially offset by adecrease in accounts payable, accrued expenses and other liabilities totaling$7.7 million and an increase in accounts receivable by $2.0 million due to thetiming of collections and payments.

 

Cashused in investing activities was $11.5 million during the three months ended March 31,2007, principally reflecting the net purchase of investments of $9.9 million. Inaddition we spent $1.6 million for the purchases of property and equipment.

 

At March 31,2008, we did not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes.  Accordingly, we arenot exposed to the type of financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

 

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

 

·                  the levels at which we maintaininventories and accounts receivable;

 

·                  the market acceptance of our products;

 

·                  the levels of promotion and advertisingrequired to launch our new products or to enter markets and attain acompetitive position in the marketplace;

 

·                  our business, product, capitalexpenditure and research and development plans and technology roadmap;

 

·                  volume pricing concessions;

 

·                  capital improvements to new and existingfacilities;

 

·                  technological advances;

 

·                  the response of competitors to ourproducts; and

 

·                  our relationships with our suppliers andcustomers.

 

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.

 

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

 

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

 

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

 

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**InterestRate Risk**

 

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

 

We account for ourinvestment instruments in accordance with SFAS 115, *Accounting for Certain Investments in Debt and EquitySecurities*. All of the cash equivalents and marketable securitiesare treated as “available-for-sale” under SFAS 115. Investments in bothfixed rate and floating rate interest earning instruments carry a degree ofinterest rate risk. Fixed rate securities may have their market value adverselyimpacted due to a rise in interest rates, while floating rate securities mayproduce less income than expected if interest rates fall. Due in part to thesefactors, our future investment income may fall short of expectations due tochanges in interest rates or we may suffer losses in principal if we are forcedto sell securities that decline in market value due to changes in interestrates. However, because we classify our debt securities as “available-for-sale”no gains or losses are recognized due to changes in interest rates unless suchsecurities are sold prior to maturity or declines in fair value are determinedto be other than temporary. These securities are reported at fair value withthe related unrealized gains and losses included in accumulated othercomprehensive income, a component of stockholders’ equity, net of tax.

 

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

 

**ExchangeRate Risk**

 

We consider our directexposure to foreign exchange rate fluctuations to be minimal. Currently, salesand arrangements with third-party manufacturers provide for pricing and paymentin United States dollars, and, therefore, are not subject to exchange ratefluctuations. Increases in the value of the United States’ dollar relative toother currencies would make our products more expensive, which could negativelyimpact our ability to compete. Conversely, decreases in the value of the UnitedStates’ dollar relative to other currencies could result in our suppliersraising their prices in order to continue doing business with us.

 

A portion of the cost ofour operations, relating mainly to our personnel and facilities in Israel andin Asia, are transacted in foreign currencies. To date, we have not engaged inany currency hedging activities, although we may do so in the future.Significant fluctuations in currency exchange rates could impact our businessin the future.

 

**Item 4.Controls and Procedures**

 

***DisclosureControls and Procedures****.*Under the supervision and with the participation ofour management, including our Chief Executive Officer and our Chief FinancialOfficer, we evaluated the effectiveness of our disclosure controls andprocedures, as such term is defined under Rule 13a-15(e) promulgatedunder the Securities Exchange Act of 1934, as amended. Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer****concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this quarterlyreport.

 

***Changes to Internal Control OverFinancial Reporting****.*****Therewere no changes in our internal control over financial reporting during thequarter ended March 31, 2008 that have materially affected****or are reasonably likely to materiallyaffect our internal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

**Item 1. Legal Proceedings**

 

The discussion in Part I,Item 1, Note 11, “Legal Proceedings” is incorporated herein by reference.

 

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**Item 1A.   RiskFactors**

 

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

 

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

 

The independentinvestigation of our historical stock option practices and resultingrestatement activities and derivative lawsuits has required us to expendsignificant management time and incur significant accounting, legal and otherexpenses totaling $7.9 million in 2007 and $1.5 million in the threemonths ended March 31, 2008. The resulting restatements recorded in the2006 Annual Report on Form 10-K had a material adverse effect on ourresults of operations. We recorded additional stock-based compensation expenseof $11.7 million for stock option grants, recognized over the periods from1997 to 2005. There was no tax impact of these additional stock-basedcompensation expenses due to the full valuation allowance on our tax assets atthe time of restatement. In addition, we 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 statementsincluded in the 2006 Annual Report on Form 10-K reflected a decrease innet income of $13.0 million for the period of 1997 to 2005.  As a result of the amount of managementattention and expenditure of funds on the investigation, restatement andlitigation, we may have missed important market opportunities or our competitorsmay have gained advantages, and we may not find similar opportunities oradequately cope with those competitive challenges.

 

**Ongoinggovernment inquiries relating to our historical stock option practices are timeconsuming and expensive and could result in injunctions, fines and penaltiesthat may have a material adverse effect on our financial condition and resultsof operations.**

 

The inquiry by the UnitedStates Attorney’s Office for the Northern District of California (“USAO”) intoour historical stock option practices is ongoing. We have cooperated with theUSAO and intend to continue to do so. The period of time necessary to resolvethis inquiry is uncertain, and we cannot predict the outcome of the inquiry orwhether we will face additional government inquiries, investigations or otheractions related to our historical stock option practices. This inquiry mayrequire us to continue to expend significant management time and incursignificant legal and other expenses, and could result in criminal actionsagainst the Company which may have a material adverse effect on our business,financial condition, results of operations or cash flows.

 

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

 

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

 

**Wehave been named as a party to stockholder derivative lawsuits relating to ourhistorical stock option practices, and we may be named in additional lawsuitsin the future. This litigation has become time consuming and expensive and mayresult in the payment of significant judgments and settlements, which couldhave a material adverse effect on our financial condition and results ofoperations.**

 

In connection with ourhistorical stock option practices and resulting restatements, a number ofpurported shareholder derivative actions were filed against certain of ourcurrent and former directors, officers and certain other individuals, whichpurport to assert claims on our behalf. 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. These lawsuits are time 

 

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consuming and expensive,and their outcomes may be unfavorable, which could have a material adverseeffect on our business, financial condition, results of operations or cashflows.

 

Our insurance coveragewill not cover our total liabilities and expenses in these lawsuits, in partbecause we have a significant deductible on certain aspects of the coverage. Inaddition, we are obligated to indemnify our current and former directors, officersand employees in connection with the investigation of our historical stockoption practices and the related government inquiries and litigation. Wecurrently hold insurance policies for the benefit of our directors andofficers, although our insurance coverage may not be sufficient in some or allof these matters. Furthermore, the insurers may seek to deny or limit coveragein some or all of these matters, in which case we may have to self-fund all ora substantial portion of our indemnification obligations.

 

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

 

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

 

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

 

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

 

fluctuation in demand for our products including reduced demandresulting from an economic slowdown;

 

the timing of new product introductions or enhancements by us and ourcompetitors;

 

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

 

the timing or cancellation of large customer orders;

 

the length and variability of the sales cycle for our products;

 

pricing policy changes by us and by our competitors and suppliers;

 

the cyclical nature of the semiconductor industry;

 

the availability of development funding and the timing of developmentrevenue;

 

changes in the mix of products sold;

 

seasonality in demand for our products;

 

increased competition in product lines, and competitive pricingpressures; and

 

                        the evolving andunpredictable nature of the markets for products incorporating our integratedcircuits and embedded software.

 

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

 

the cost and availability of adequate foundry capacity;

 

fluctuations in manufacturing yields;

 

changes in or the emergence of new industry standards;

 

failure to anticipate changing customer product requirements;

 

the loss or gain of important customers;

 

product obsolescence; and

 

the amount of research and development expenses associated with newproduct introductions.

 

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                                                Ouroperating results could also be harmed by:

 

                        economicconditions generally or in various geographic areas where we or our customersdo business (including recent events in the subprime mortgage market);

 

terrorism andinternational conflicts or other crises;

 

other conditionsaffecting the 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 forconsumer electronic products due to a [potential] economic slowdown;

 

                                                tightenedimmigration controls that may adversely affect the residence status of keynon-U.S. managers and technical employees in our U.S. facilities or our abilityto hire new 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 customersexperience fluctuating product cycles and seasonality, which causes their salesto fluctuate.**

 

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 theproducts are incorporated into both mature products and replacement products. Adelay in a customer’s transition to commercial production of a replacementproduct would delay our ability to recover the lost sales from thediscontinuation of the related mature product. Our customers also experiencesignificant seasonality in the sales of their consumer products, which affectstheir orders of our products. Typically, the second half of the calendar yearrepresents a disproportionate percentage of sales for our customers due to theholiday shopping period for consumer electronics products, and therefore, adisproportionate percentage of our sales. We expect these seasonal salesfluctuations to continue for the foreseeable future and an [potential] economicslowdown could increase the seasonal decline in sales that we typically see inthe first half of the calendar year.

 

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.

 

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

 

Average selling 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.

 

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**Productsupply and demand in the semiconductor industry is subject to cyclicalvariations.**

 

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.The recent emergence of a number of negative economic factors, includingheightened fears of a recession, could lead to such a downturn. We cannotpredict whether we will achieve timely, cost-effective access to that capacitywhen needed, or when there will be a capacity shortage again in the future. Adownturn in the semiconductor industry could harm our sales and revenues ifdemand drops, or our gross margins if average selling prices decline.

 

**Oursuccess for the foreseeable future will depend on demand for integratedcircuits for a limited 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 significant portion of our revenuesfor the foreseeable future. Our future financial performance will also dependon our ability 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.

 

**Ourfinancial performance is highly dependent on the timely and successfulintroduction of new 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, digital cameras, multimedia acceleratorsfor mobile phones, broadband digital television and HDTV. These markets arecharacterized by the incorporation of a steadily increasing level ofintegration and numbers of features on a chip at the same or lower system cost,enabling original equipment manufacturers, or OEMs, to continually improve thefeatures or reduce the prices of the systems they sell. If we are unable tocontinually develop and introduce integrated circuits with increasing levels ofintegration and new features at competitive prices, our operating results willsuffer.

 

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 OEMs to improve the performance and features or reduce the pricesof the systems they sell. If we are unable to develop and introduce integratedcircuits with increasing levels of integration, performance and new features atcompetitive prices, our operating results will suffer. The performance of oursoftware licensing business is dependent on our ability to develop andintroduce new releases of our software, which incorporate new or enhancedprinting standards, as well as performance enhancements required by our OEMcustomers. If we are unable to develop and release versions of our softwaresupporting required standards and offering enhanced performance, our operatingresults 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 wincompetitions for 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.

 

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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 Technology Inc.,LSI Corporation, Magnum Semiconductor, Matsushita, MediaTek, RenesasTechnology, Samsung and Sunplus. In the markets for digital cameras, ourprincipal competitors are in-house solutions developed and used by majorJapanese OEMs, as well as products sold by Fujitsu, Mediatek, Novatech,Sunplus, Ambarella and Texas Instruments. In the market for multimediaacceleration for Mobile phones, our principal competitors include AMD,CoreLogic, MtekVision, Broadcom and Nvidia. In the market for JPEG-based products for desktop video editingapplications, our principal competitor is Sunplus. Cirrus Logic (CrystalSemiconductor), Freescale Semiconductor, Fujitsu, STMicroelectronics and Yamahaare currently shipping Dolby Digital-based audio compression products. Ourprincipal competitors for digital semiconductor devices in the digitaltelevision market include Applied Micro Devices, Broadcom, M-Star, Mediatek,Renesas Technology and ST Microelectronics. Others who also participate in thismarket are ALi Corporation, Cheertek, Fujitsu, NEC, Pixelworks and TridentMicrosystems. Competitors in the printer and multifunction peripheral spaceinclude Global Graphics, Marvell Semiconductor, Peerless Systems,Sigmatel Inc. and in-house captive suppliers.

 

We believe that growth of the DVD player market willbe modest in the foreseeable future, and that continued strong competition willlead to further price reductions, and reduced profit margins. We also facesignificant competition in the digital Imaging and digital camera markets. Thefuture growth of both markets is highly dependent on OEMs continuing tooutsource an increasing portion of their product development work. Many of ourexisting competitors, as well as OEM customers that are expected to compete withus in the future, have substantially greater financial, manufacturing,technical, marketing, distribution and other resources, broader product linesand longer standing relationships with customers than we have. In addition,much of our future success is dependent on the success of our OEM customers. Ifwe or our OEM customers are unable to compete successfully against current andfuture competitors, we could experience price reductions, order cancellationsand reduced gross margins, any one of which could harm our business.

 

**We mustkeep pace with rapid technological changes and evolving industry standards toremain competitive.**

 

Our future success will depend on our ability toanticipate and adapt to changes in technology and industry standards and our customers’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 DVD player market and products for the broadbanddigital television and HDTV markets and to introduce and promote those productssuccessfully. These markets may not continue to develop to the extent or in thetime periods that we currently anticipate due to factors outside our control,such as delays in implementation of FCC 02-320 requiring all new televisions toinclude a digital receiver by February 2009. If new markets do not developas we anticipate, or if our products do not gain widespread acceptance in thesemarkets, our business, financial condition and results of operations could beharmed. The emergence of new markets for our products is also dependent in partupon third parties developing and marketing content in a format compatible withcommercial and consumer products that incorporate our products. If this contentis not available, manufacturers may not be able to sell products incorporatingour products, and our sales would suffer.

 

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

 

We do not operate 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, and our principalassembly house. Therefore, TSMC and our other suppliers are not obligated tomanufacture products for us for any specific period, in any specific quantityor at any specified price, except as may be provided in a particular purchaseorder.

 

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

 

the inability to obtain adequate manufacturing capacity;

 

the unavailability of or interruption in access to certain processtechnologies necessary for manufacture of our products;

 

lack of control over delivery schedules;

 

lack of control over quality assurance;

 

lack of control over manufacturing yields and cost; and

 

potential misappropriation of 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 any of our manufacturers as a supplier, our inability to expand thesupply of their products in response to increased demand, or our inability toobtain timely and adequate deliveries from our current or future suppliers dueto a natural disaster or any other reason could delay or reduce shipments ofour products. Any of these circumstances could damage our relationships withcurrent and prospective customers and harm our sales and financial 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.

 

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

 

If we are not able 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 other prepayments to a foundry;

 

nonrefundable deposits with or loans to foundries in exchange forcapacity commitments;

 

contracts that commit us to purchase specified quantities of siliconwafers over extended periods;

 

issuance of our equity securities to a foundry;

 

investment in a foundry;

 

joint ventures; or

 

other partnership relationships 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 ourindependent foundries do not achieve satisfactory yields, our relationshipswith our customers 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.

 

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**We aredependent upon 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 2007, 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 avariety of risks inherent in doing business internationally, including:

 

unexpected changes in regulatory requirements;

 

fluctuations in exchange rates;

 

political and economic instability;

 

imposition of tariffs and other barriers andrestrictions;

 

the burdens of complying with a variety of foreignlaws; and

 

health risks in a particular 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 36 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 also maintain offices in Canada, England, Germany,Hong Kong, India, Israel, Japan, Korea and Taiwan, and our operations aresubject to the economic and political uncertainties affecting these countriesas 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 Asia could affect thesecustomers’ willingness or ability to do business with us in the future or theirsuccess in developing and launching devices containing our products.

 

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

 

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.

 

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

 

We conduct a significant portion of our research anddevelopment and engineering activities at our design center in Haifa, Israel, a109,700 square foot facility where we employ approximately 400 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.

 

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In addition, military conflict in the Middle East orfuture terrorist activities there or elsewhere in the world could harm ourbusiness as a result of a disruption in commercial activity affectinginternational commerce or a general economic slowdown and reduced demand forconsumer electronic products.

 

**TheIsraeli rate of inflation may negatively impact our costs if it exceeds therate of devaluation 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 fromfluctuations in the exchange rate of the United States dollar against the NewIsraeli Shekel. These measures may not adequately protect us from the impact ofinflation in Israel.

 

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

 

Our largest customers have accounted for a substantialpercentage of our revenues. In 2007, one customer accounted for 13% of ourtotal revenues, while sales to our ten largest customers accounted for 60% ofour total revenues. In 2006, one customer accounted for 12% of our totalrevenues, and sales to our ten largest customers accounted for 58% of our totalrevenues. Sales to these large customers have varied significantly from year toyear and will continue to fluctuate in the future. These sales also mayfluctuate significantly from quarter to quarter. We may not be able to retain ourkey customers, or these customers may cancel purchase orders or reschedule ordecrease their level of purchases from us. Any substantial decrease or delay insales to one or more of our key customers could harm our sales and financialresults. In addition, any difficulty in collecting amounts due from one or morekey customers could harm our financial results. As of December 31, 2007three customers accounted for approximately 11%, 11% and 10% of the netaccounts 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. Longersales cycles require us to invest significant resources in attempting to makesales 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 time required for our customers to incorporate ourproducts into their own can vary significantly with the needs of our customersand generally exceeds several months, which further complicates our planningprocesses and reduces the predictability of our operating results.

 

**We arenot protected 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.

 

**Ourproducts could contain defects, which could reduce sales of those products orresult in claims against 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 repaircosts, divert the attention of our engineering

 

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personnel from our product development efforts andharm our relationships with customers. The occurrence of these problems couldresult in the delay or loss of market acceptance of our products and wouldlikely harm our business. Defects, integration issues or other performanceproblems in our products could result in financial or other damages tocustomers 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.

 

**Regulationof our customers’ products may slow the process of introducing new products andcould impair 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 our products are notdirectly subject to regulation by any agency, the transmission pipes, as wellas much of the equipment into which our products are incorporated, are subjectto direct government regulation. For example, before they can be sold in theUnited States, advanced televisions and emerging interactive displays must betested and certified by Underwriters Laboratories and meet FCC regulations.Accordingly, the effects of regulation on our customers or the industries inwhich our customers operate may in turn harm our business. FCC regulatorypolicies affecting the ability of cable operators or telephone companies tooffer certain services and other terms on which these companies conduct theirbusiness may impede sales of our products. In addition, our digital televisionbusiness may also be adversely affected by the imposition of tariffs, dutiesand other import restrictions on our suppliers or by the imposition of exportrestrictions on products that we sell internationally. Changes in current lawsor regulations or the imposition of new laws or regulations in the UnitedStates or elsewhere could harm our business. For example, any delays by the FCCin imposing its pending requirement that all new televisions have a digitalreceiver could have an adverse effect on our HDTV business.

 

**Ourability to compete could be jeopardized if we are unable to protect ourintellectual property 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 ourtechnology from third-party infringement, or to protect us from the claims ofothers. Monitoring unauthorized use of our products is difficult, and we cannotbe certain 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,System On a Chip platform firmware and drivers for the digital office marketand in limited circumstances with respect to firmware and platforms for ourDTV, DVDR products, we grant licenses that give our customers access to andrestricted use of the source code of our software. This access increases thelikelihood of misappropriation or misuse of our technology.

 

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

 

In recent years, there has been significant litigationin the United States involving patents and other intellectual property rights.In the past, we have been subject to claims and litigation regarding allegedinfringement of other parties’ intellectual property rights, and we have beenparties to a number of patent-related lawsuits, both as plaintiff anddefendant. We could become subject to additional litigation in the future,either to protect our intellectual property or as a result of allegations thatwe infringe others’ intellectual property rights or have breached ourcontractual obligations to others. Claims that our products infringeproprietary rights or that we have breached contractual obligations would forceus to defend ourselves and possibly our customers or manufacturers against thealleged infringement or breach. Future litigation against us, if successful,could subject us to significant liability for damages or

 

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invalidation of our proprietary rights. Theselawsuits, regardless of their success, are time-consuming and expensive toresolve and require significant management time and attention. Futureintellectual property and breach of contract litigation could force us to doone or more of the following:

 

stop selling products that incorporate the challengedintellectual property;

 

obtain from the owner of the infringed intellectualproperty right a license to sell or use the relevant technology, which licensemay not be available on reasonable terms or at all;

 

pay damages; or

 

redesign those products that use such technology.

 

Although patent disputes in the semiconductor industryhave often been settled through cross-licensing arrangements, we may not be ablein any or every instance to settle an alleged patent infringement claim througha cross-licensing arrangement. We have a more limited patent portfolio thanmany of our competitors. If a successful claim is made against us or any of ourcustomers and a license is not made available to us on commercially reasonableterms or we are required to pay substantial damages or awards, our business,financial condition and results of operations would be materially adverselyaffected.

 

**Ifnecessary licenses of third-party technology are not available to us or arevery expensive, 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 to use various technologies thatare material to our products. We do not own the patents that underlie thislicense. Our rights to use these technologies and employ the inventions claimedin the licensed patents are subject to our abiding by the terms of thelicenses. Under the license agreements we must fulfill confidentialityobligations and pay royalties. If we fail to abide by the terms of the license,we would be unable to sell and market the products under license. In addition,we do not control the prosecution of the patents subject to this license or thestrategy for determining when such patents should be enforced. As a result, weare dependent upon our licensor to determine the appropriate strategy forprosecuting and enforcing those patents.

 

**If weare not able to apply our net operating losses against taxable income in futureperiods, our financial results will be harmed.**

 

Our future net income and cash flow will be affectedby our ability to apply our net operating loss carryforwards, or NOLs, againsttaxable income in future periods. Our NOLs totaled approximately$141 million for federal and $32 million for state tax reporting purposesas of December 31, 2007. The Internal Revenue Code contains a number ofprovisions that limit the use of NOLs under certain circumstances. In 2006, wereduced 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.

 

**Changesin, or interpretations of, tax rules and regulations may adversely affectour effective 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 adequately providefor any tax contingencies, the ultimate outcomes of any future tax audits areuncertain, and we can give no assurance as to whether an adverse result fromone or more of them will have a material effect on our operating results andfinancial position.

 

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**Anyadditional acquisitions we make could disrupt our business and severely harmour financial condition.**

 

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 would dilute its current stockholders’percentage ownership;

 

incur debt;

 

use a significant amount of our cash;

 

assume liabilities;

 

incur expenses related to the future impairment ofgoodwill and the amortization of other intangible assets; or

 

incur other large write-offs immediately or in thefuture.

 

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

 

problems combining the purchased operations,technologies or products;

 

unanticipated costs;

 

diversion of management’s attention from our corebusiness;

 

adverse effects on existing business relationships withcustomers;

 

risks associated with entering markets in which wehave no or limited prior experience; and

 

potential loss of key employees, particularly those ofthe 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 ourgoodwill or amortizable intangible assets become impaired we may be required torecord a significant 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 wefail to manage 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.

 

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**We areexposed to fluctuations in the market values of our portfolio investments andin interest rates.**

 

At the end of March 2008, we had$377.3 million in cash, cash equivalents and investments. We invest ourcash in a variety of financial instruments, consisting principally ofinvestments in commercial paper, money market funds, auction rate securitiesand highly liquid debt securities of corporations, municipalities and theUnited States government and its agencies. These investments are denominated inU.S. dollars.

 

The Company’s investments at March 31, 2008include $62.8 million of high-grade auction rate securities primarilyconsisting of government guaranteed student loans. Auction rate securities aresecurities that are structured with short-term interest rates whichperiodically reset through auctions, typically within every 90 days. Atthe end of each reset period, investors can sell or continue to hold thesecurities at par. During February 2008, some of the auction ratesecurities failed to auction successfully due to market supply exceeding marketdemand. In the event of a failed auction, the notes continue to bear interestat a predetermined maximum rate based on the credit rating of notes asdetermined by one or more nationally recognized statistical ratingorganizations. The funds associated with failed auctions will not be accessibleuntil a successful auction occurs, a buyer is found outside of the auctionprocess, the issuers redeem the securities or the underlying securities havematured. As a result, the Company has classified all auction rate securities aslong-term assets in the condensed consolidated balance sheets as of March 31,2008 and December 31, 2007.

 

Investments in both fixed rate and floating rateinterest earning instruments carry a degree of interest rate risk. Fixed ratedebt securities may have their market value adversely impacted due to a rise ininterest rates, while floating rate securities may produce less income thanexpected if interest rates fall. Due in part to these factors, our futureinvestment income may fall short of expectations due to changes in interestrates or if the decline in fair value of our publicly traded equity investmentsand auction rate securities is judged to be other-than-temporary. We may sufferlosses in principal if we are forced to sell securities that decline in marketvalue due to changes in interest rates. However, because any debt securities wehold are classified as “available-for-sale,” no gains or losses are recognizeddue to changes in interest rates unless such securities are sold prior tomaturity. Recent events in the subprime mortgage market and with auction ratesecurities could negatively impact our return on investment for these debtsecurities and thereby reduce the amount of cash and cash equivalents andlong-term investments on our balance sheet.

 

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

 

Our success depends to a significant degree upon thecontinuing contributions of our senior management. Management and other employeesmay voluntarily terminate their employment with us at any time upon shortnotice. The loss of key personnel could delay product development cycles orotherwise 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 and overseas. Competition for such personnel is intense,and we may not be successful in attracting, integrating and retaining suchpersonnel. Failure to attract, integrate and retain key personnel could harmour ability to carry out our business strategy and compete with othercompanies.

 

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

 

Our certificate of incorporation and bylaws andDelaware law contain provisions that could make it more difficult for a thirdparty to acquire us, even if doing so would be beneficial to our stockholders.These include provisions:

 

prohibiting a merger with a party that has acquiredcontrol of 15% or more of our outstanding common stock, such as a party thathas completed a successful tender offer, until three years after that partyacquired control of 15% of our outstanding common stock;

 

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

 

eliminating stockholders’ rights to call a specialmeeting of stockholders; and

 

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

 

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

 

The market price of our common stock has fluctuatedsignificantly since our initial public offering in 1995. Between January 1,2007 and March 31, 2008, the closing sale price of our common stock, asreported on the Nasdaq Global Select Market, ranged from a low of $11.80 to ahigh of $26.46. The market price of our common stock is subject to significantfluctuations in the future in response to a variety of factors, including:

 

announcements concerning our business or that of ourcompetitors or customers;

 

annual and quarterly variations in our operatingresults;

 

changes in analysts’ earnings estimates;

 

announcements of technological innovations;

 

the introduction of new products or changes in productpricing policies by Zoran or its competitors;

 

loss of key personnel;

 

proprietary rights or other litigation;

 

general conditions in the semiconductor industry; and

 

developments in the financial markets.

 

From time to time the stock market experiences extremeprice and volume fluctuations that have particularly affected the market pricesfor semiconductor companies or technology companies generally and which havebeen unrelated to the operating performance of the affected companies. Broadmarket fluctuations of this type may reduce the future market price of ourcommon 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 the requirements of the Securities Exchange Act of 1934,the registrant has duly caused this report to be signed on its behalf by theundersigned thereunto duly authorized.

 

 
| ** **                    | **ZORAN CORPORATION**                        |
|-------------------------------|----------------------------------------------|
|                          |                                         |
|                          |                                         |
| Dated: May 12, 2008 | /s/ Karl Schneider                           |
|                          | Karl Schneider                               |
|                          | Senior Vice President, Finance               |
|                          | and Chief Financial Officer                  |
|                          | (Principal Financial and Accounting Officer) |

 

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