** **

**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

----

 

### **FORM 10-Q**

 

 

**x****                 ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**

 

**For theQuarterly Period Ended September 30, 2007**

 

**OR**

 

**o****                    ****TRANSITION REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**

 

**For the transition period from                             to                             **

 

**CommissionFile No. 0-27246**

 

**ZORAN CORPORATION**

(Exactname of registrant as specified in its charter)

** **

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

 

**1390 Kifer Road**

**Sunnyvale, California 94086**

(Address of principalexecutive offices, including zip code)

 

**(408) 523-6500**

(Registrant’s telephonenumber, 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 of 1934during 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

 

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

 

As of November 7, 2007, there were outstanding 51,343,230 shares of the registrant’s Common Stock,par value $0.001 per share.

 

 

 

 

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**ZORAN CORPORATION ANDSUBSIDIARIES**

**FORM 10-Q**

**INDEX**

 

**For theQuarter Ended September 30, 2007**

** **
| ** **                         | ** **                                                                                                                           | **Page** |
|------------------------------------|--------------------------------------------------------------------------------------------------------------------------------------|----------|
| **PART I.  FINANCIAL INFORMATION** |
|                               |                                                                                                                                 |     |
| **Item  1.**                       | Financial  Statements                                                                                                                |     |
|                               |                                                                                                                                 |     |
|                               | Condensed  Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006  (unaudited)                                   | 3        |
|                               |                                                                                                                                 |     |
|                               | Condensed  Consolidated Statements of Operations for the Three Months and Nine Months  Ended September 30, 2007 and 2006 (unaudited) | 4        |
|                               |                                                                                                                                 |     |
|                               | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended September 30,  2007 and 2006 (unaudited)                  | 5        |
|                               |                                                                                                                                 |     |
|                               | Notes to  Condensed Consolidated Financial Statements (unaudited)                                                                    | 6        |
|                               |                                                                                                                                 |     |
| **Item 2.**                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                                          | 16       |
|                               |                                                                                                                                 |     |
| **Item 3.**                        | Quantitative  and Qualitative Disclosures About Market Risk                                                                          | 21       |
|                               |                                                                                                                                 |     |
| **Item 4.**                        | Controls and  Procedures                                                                                                             | 22       |
|                               |                                                                                                                                 |     |
|                               |                                                                                                                                 |     |
|                               |                                                                                                                                 |     |
| **PART  II. OTHER INFORMATION**    |
|                               |                                                                                                                                 |     |
| **Item 1.**                        | Legal Proceedings                                                                                                                    | 23       |
|                               |                                                                                                                                 |     |
| **Item 1A.**                       | Risk  Factors                                                                                                                        | 23       |
|                               |                                                                                                                                 |     |
| **Item 4.**                        | Submission of  Matters to a Vote of Security Holders                                                                                 | 35       |
|                               |                                                                                                                                 |     |
| **Item  6.**                       | Exhibits                                                                                                                             | 35       |
|                               |                                                                                                                                 |     |
| Signatures                         |                                                                                                                                 | 36       |

 

 

2

----

 

 

**PART I. FINANCIAL INFORMATION**

 

**Item 1. Financial Statements:**

 

** **

**ZORANCORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                                       | ** ** | **September 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
| ASSETS                                                                                                                                                                                                                                                           |       |                    |       |                   |       |
| Current assets:                                                                                                                                                                                                                                                  |       |                    |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                                                                                                       |       | $                       | 102,520    |                   | $          | 100,034 |   |
| Short-term  investments                                                                                                                                                                                                                                          |       | 254,069                 |       | 196,195                |       |
| Accounts  receivable, net                                                                                                                                                                                                                                        |       | 60,470                  |       | 42,640                 |       |
| Inventories                                                                                                                                                                                                                                                      |       | 33,601                  |       | 45,044                 |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                                       |       | 12,864                  |       | 10,726                 |       |
| Total current  assets                                                                                                                                                                                                                                            |       | 463,524                 |       | 394,639                |       |
| Property and  equipment, net                                                                                                                                                                                                                                     |       | 17,214                  |       | 15,673                 |       |
| Other assets and  investments                                                                                                                                                                                                                                    |       | 28,508                  |       | 22,890                 |       |
| Goodwill                                                                                                                                                                                                                                                         |       | 172,791                 |       | 174,259                |       |
| Intangible  assets, net                                                                                                                                                                                                                                          |       | 35,183                  |       | 69,169                 |       |
|                                                                                                                                                                                                                                                             |       | $                       | 717,220    |                   | $          | 676,630 |   |
|                                                                                                                                                                                                                                                             |       |                    |       |                   |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                       |       |                    |       |                   |       |
| Current  liabilities:                                                                                                                                                                                                                                            |       |                    |       |                   |       |
| Accounts payable                                                                                                                                                                                                                                                 |       | $                       | 40,052     |                   | $          | 33,767 |   |
| Accrued expenses  and other liabilities                                                                                                                                                                                                                          |       | 50,859                  |       | 46,082                 |       |
| Total current  liabilities                                                                                                                                                                                                                                       |       | 90,911                  |       | 79,849                 |       |
| Other long-term  liabilities                                                                                                                                                                                                                                     |       | 20,510                  |       | 12,784                 |       |
| Commitments and  Contingencies (Note 11)                                                                                                                                                                                                                         |       |                    |       |                   |       |
| Stockholders’  equity:                                                                                                                                                                                                                                      |       |                    |       |                   |       |
| Common stock,  $0.001 par value; 105,000,000 shares authorized at September 30, 2007 and  December 31, 2006; 49,979,488 shares issued and outstanding as of  September 30, 2007; and 49,433,780 shares issued and outstanding as of  December 31, 2006 |       | 50                      |       | 49                     |       |
| Additional paid-in  capital                                                                                                                                                                                                                                      |       | 823,661                 |       | 807,220                |       |
| Accumulated  other comprehensive income                                                                                                                                                                                                                          |       | 1,689                   |       | 4,238                  |       |
| Accumulated  deficit                                                                                                                                                                                                                                             |       | (219,601                | )          | (227,510               | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                                 |       | 605,799                 |       | 583,997                |       |
|                                                                                                                                                                                                                                                             |       | $                       | 717,220    |                   | $          | 676,630 |   |
|                                                                                                                                                                                                                                                                  |            |                         |            |                        |            |  |  |  |  |

 

 

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

 

 

 

3

----

 

 

**ZORAN CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 

| ** **                                           | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |
|------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|
| ** **                                           | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |
| ** **                                           | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007** | ** ** | **2006** | ** ** |
| Revenues:                                            |       |                   |       |                  |       |   |   |   |   |
| Hardware product  revenues                           |       | $                      | 129,820    |                  | $          | 115,602 |   | $ | 331,510 |   | $ | 323,007 |   |
| Software and  other revenues                         |       | 16,606                 |       | 13,777                |       | 46,478 |   | 40,755 |   |
| License revenues  related to litigation settlement   |       | —                 |       | —                |       | — |   | 35,792 |   |
| Total revenues                                       |       | 146,426                |       | 129,379               |       | 377,988 |   | 399,554 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Costs and  expenses:                                 |       |                   |       |                  |       |   |   |   |   |
| Cost of hardware  product revenues                   |       | 69,876                 |       | 66,810                |       | 174,252 |   | 180,815 |   |
| Research and  development                            |       | 28,063                 |       | 25,255                |       | 83,027 |   | 74,729 |   |
| Selling, general  and administrative                 |       | 28,043                 |       | 25,907                |       | 85,050 |   | 80,917 |   |
| Amortization of  intangible assets                   |       | 9,648                  |       | 12,423                |       | 33,986 |   | 37,893 |   |
| Total costs and  expenses                            |       | 135,630                |       | 130,395               |       | 376,315 |   | 374,354 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Operating income  (loss)                             |       | 10,796                 |       | (1,016                | )          | 1,673 |   | 25,200 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Interest income                                      |       | 4,287                  |       | 3,079                 |       | 11,735 |   | 7,539 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Other income  (loss), net                            |       | (241                   | )          | (281                  | )          | 398 |   | 496 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Income before  income taxes                          |       | 14,842                 |       | 1,782                 |       | 13,806 |   | 33,235 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Provision  (benefit) for income taxes                |       | 1,700                  |       | (70                   | )          | 6,350 |   | 5,921 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Net income                                           |       | $                      | 13,142     |                  | $          | 1,852 |   | $ | 7,456 |   | $ | 27,314 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Basic net income  per share                          |       | $                      | 0.26       |                  | $          | 0.04 |   | $ | 0.15 |   | $ | 0.57 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Diluted net  income per share                        |       | $                      | 0.26       |                  | $          | 0.04 |   | $ | 0.15 |   | $ | 0.54 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Shares used to  compute basic net income per share   |       | 49,863                 |       | 49,333                |       | 49,633 |   | 48,013 |   |
|                                                 |       |                   |       |                  |       |   |   |   |   |
| Shares used to  compute diluted net income per share |       | 51,284                 |       | 50,712                |       | 50,861 |   | 50,286 |   |
|                                                      |            |                        |            |                       |            |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

 

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

 

 

 

4

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**ZORANCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                               | ** ** | **Nine Months Ended** | ** ** |
|--------------------------------------------------------------------------|------------|-----------------------|------------|
| ** **                                                               | ** ** | **September 30,**     | ** ** |
| ** **                                                               | ** ** | **2007**              | ** ** | **2006** | ** ** |
| Cash flows from  operating activities:                                   |       |                  |       |   |   |
| Net income                                                               |       | $                     | 7,456      |   | $ | 27,314 |   |
| Adjustments to  reconcile net income to net cash provided by operations: |       |                  |       |   |   |
| Depreciation                                                             |       | 5,932                 |       | 7,093 |   |
| Amortization                                                             |       | 33,986                |       | 37,931 |   |
| Stock-based  compensation expense                                        |       | 10,599                |       | 13,728 |   |
| Gain on sale of  investments, net                                        |       | (796                  | )          | (1,044 | ) |
| Changes in  current assets and liabilities:                              |       |                  |       |   |   |
| Accounts  receivable, net                                                |       | (17,830               | )          | 7,205 |   |
| Inventories                                                              |       | 11,443                |       | (12,631 | ) |
| Prepaid expenses  and other current assets and other assets              |       | (7,756                | )          | 1,216 |   |
| Accounts payable                                                         |       | 6,285                 |       | (775 | ) |
| Accrued expenses  and other liabilities and other long term liabilities  |       | 14,304                |       | 1,787 |   |
| Net cash  provided by operating activities                               |       | 63,623                |       | 81,824 |   |
|                                                                     |       |                  |       |   |   |
| Cash flows from  investing activities:                                   |       |                  |       |   |   |
| Purchases of  property and equipment                                     |       | (7,473                | )          | (5,429 | ) |
| Purchases of  investments                                                |       | (317,700              | )          | (308,871 | ) |
| Proceeds from  sales and maturities of investments                       |       | 258,073               |       | 188,092 |   |
| Net cash used in  investing activities                                   |       | (67,100               | )          | (126,208 | ) |
|                                                                     |       |                  |       |   |   |
| Cash flows from  financing activities:                                   |       |                  |       |   |   |
| Proceeds from  issuance of common stock                                  |       | 5,963                 |       | 52,079 |   |
| Net cash  provided by financing activities                               |       | 5,963                 |       | 52,079 |   |
|                                                                     |       |                  |       |   |   |
| Net increase in  cash and cash equivalents                               |       | 2,486                 |       | 7,695 |   |
|                                                                     |       |                  |       |   |   |
| Cash and cash  equivalents at beginning of period                        |       | 100,034               |       | 78,856 |   |
|                                                                     |       |                  |       |   |   |
| Cash and cash  equivalents at end of period                              |       | $                     | 102,520    |   | $ | 86,551 |   |

 

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

 

 

 

5

----

 

 

**ZORAN CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.****             ****Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementsof Zoran Corporation and its subsidiaries (“Zoran” or the “Company”) have beenprepared in conformity with accounting principles generally accepted in theUnited States of America.  However,certain information or footnote disclosures normally included in financialstatements prepared in accordance with accounting principles generally acceptedin the United States of America have been condensed or omitted pursuant to therules and regulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, the condensedconsolidated financial statements reflect all adjustments, consisting only ofnormal recurring adjustments, considered necessary for a fair statement of theconsolidated financial position, operating results and cash flows for theperiods presented.  The results ofoperations for the interim periods presented are not necessarily indicative ofthe results that may be expected for the full fiscal year or in any futureperiod.  This Quarterly Report on Form10-Q should be read in conjunction with the audited consolidated financialstatements and notes thereto for the year ended December 31, 2006,included in the Company’s 2006 Annual Report on Form 10-K filed with the SEC.

*** ***

***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,MediaTek agreed to pay Zoran $55 million, of which $44 million was paid inFebruary 2006 and $11 million was paid in April 2006.  These twopayments, net of amounts attributable to a holder of rights under patentsinvolved in the litigation, and amounts payable as legal fees, were recognizedas license revenues related to litigation settlement. Revenues for the ninemonth period ended September 30, 2006 include $35.8 million in license paymentsrelated to the litigation settlement.  MediaTek is required to payquarterly royalties totaling $30 million over a 30-month period thatcommenced on the date of the agreement based on future sales of coveredMediaTek products.  These royalty payments, net of amounts payable byZoran to a holder of rights under patents involved in the litigation, andamounts payable as legal fees, are recognized as software and other revenues asthey are received.

 

***Recent AccountingPronouncements***

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFASNo. 157”), which defined fair value, establishes a framework for measuringfair value in accordance with generally accepted accounting principles, andexpands disclosures about fair value measurements. The provisions of SFASNo. 157 are effective for the Company for fiscal years beginningJanuary 1, 2008. The Company is evaluating the impact of the provisions ofthis statement on its consolidated financial position, results of operationsand cash flows.

In February 2007,FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities” (“SFASNo. 159”). This statementexpands the standards under SFAS No. 157 to provide entities the one-timeelection to measure financial instruments and certain other items at fairvalue. Most of the provisions of this statement apply only to entities thatelect the fair value option under SFAS No. 157. The provisions of SFASNo. 159 are effective for the Company for fiscal years beginningJanuary 1, 2008. The Company is evaluating the impact of the provisions ofthis statement on its consolidated financial position, results of operationsand cash flows.

In June 2007, the FASB ratified EITF Issue No.07-3 (“EITF 07-3”), *Accounting forNonrefundable Advance Payments for Goods or Services to Be Used in FutureResearch and Development Activities.* This issue provides thatnonrefundable advance payments for goods or services that will be used orrendered for future research and development activities pursuant to anexecutory contractual arrangement should be deferred and capitalized andrecognized as an expense as the related goods are delivered or the relatedservices are performed**.**Theprovisions of EITF 07-3 are effective for the Company for fiscal yearsbeginning January 1, 2008. The Company is evaluating the impact of theprovisions of this statement on its consolidated financial position, results ofoperations and cash flows.

 

6

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**2.****             ****Stock-Based Compensation**

 

The following tablesummarizes stock-based compensation expense related to employee stock options,employee stock purchases and restricted stock shares and restricted stock unitgrants for the three and nine months ended September 30, 2007 and 2006 asrecorded in accordance with SFAS No. 123(R), “Share-Based Payment,” (“SFAS123(R)”) (in thousands):

 
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of hardware  product revenues   |       | $                                     | 133        |                                 | $          | 129 |   | $ | 309 |   | $ | 420 |   |
| Research and  development            |       | 1,318                                 |       | 1,236                                |       | 3,481 |   | 4,290 |   |
| Selling, general  and administrative |       | 2,116                                 |       | 2,405                                |       | 6,809 |   | 9,018 |   |
| Total costs and  expenses            |       | $                                     | 3,567      |                                 | $          | 3,770 |   | $ | 10,599 |   | $ | 13,728 |   |
|                                      |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

***Valuation Assumptions***

For purposes of the disclosure requirements of SFAS No. 123 and therequirements of SFAS No. 123(R), the Company estimates the fair value of stockoptions using the Black-Scholes valuation model with the following assumptions:

 
| ** **                    | ** ** | **Stock Option Plans**                | ** ** |
|-------------------------------|------------|---------------------------------------|------------|
| ** **                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
| ** **                    | ** ** | **2007**                              | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Average expected term (years) |       | 5.4                                   |       | 5.7 |   | 5.5 |   | 5.7 |   |
| Expected volatility           |       | 60                                    | %          | 68 | % | 60 | % | 71 | % |
| Risk-free interest rate       |       | 4.5                                   | %          | 4.8 | % | 4.7 | % | 4.8 | % |
| Dividend yield                |       | 0                                     | %          | 0 | % | 0 | % | 0 | % |

 
| ** **                    | ** ** | **Employee Stock Purchase Plan**        | ** ** |
|-------------------------------|------------|-----------------------------------------|------------|
| ** **                    | ** ** | **Three Months Ended****September 30,** | ** ** | **Nine Months Ended****September 30,** | ** ** |
| ** **                    | ** ** | **2007**                                | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
|                          |       |                                    |       |   |   |   |   |   |   |
| Average expected term (years) |       | 1.27                                    |       | 1.25 |   | 1.28 |   | 1.25 |   |
| Expected volatility           |       | 46                                      | %          | 58 | % | 47 | % | 58 | % |
| Risk-free interest rate       |       | 4.9                                     | %          | 3.2 | % | 4.8 | % | 2.9 | % |
| Dividend yield                |       | 0                                       | %          | 0 | % | 0 | % | 0 | % |

 

*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*:  For the three and nine months ended September 30, 2007 and 2006,the Company used historical volatility in deriving its volatility assumption.Management believes that historical volatility appropriately reflects themarket’s expectations of future 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.

 

7

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StockOption Activity

 

The following is a summary of stock option activities:

| ** **                         | ** ** | **Shares Underlying  Outstanding Options** | ** ** | **Weighted Average  Exercise Price** | ** ** |
|------------------------------------|------------|--------------------------------------------|------------|--------------------------------------|------------|
| ** **                         | ** ** | ** **                                 | ** ** | ** **                           | ** ** |
| Outstanding at  January 1, 2007    |       | 8,096,344                                  |       | $                                    | 16.58      |   |
| Granted                            |       | 1,333,590                                  |       | $                                    | 19.88      |   |
| Exercised                          |       | (448,464                                   | )          | $                                    | 13.30      |   |
| Canceled/forfeited/expired         |       | (124,199                                   | )          | $                                    | 14.72      |   |
| Outstanding at  September 30, 2007 |       | 8,857,271                                  |       | $                                    | 17.27      |   |

 

Significantoption groups outstanding as of September 30, 2007 and the related weightedaverage exercise price and contractual life information, are as follows:

 
| ** **          | ** ** | **Options Outstanding**                              | ** ** | **Options Exercisable**                                     | ** ** |
|---------------------|------------|------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **Exercise Prices** | ** ** | **Shares Underlying Options at  September 30, 2007** | ** ** | **Weighted  Average  Remaining  Contractual Life  (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate Intrinsic Value  (in thousands)** | ** ** | **Shares Underlying Options at  September 30, 2007** | ** ** | **Weighted  Average  Remaining  Contractual Life  (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate Intrinsic Value  (in thousands)** | ** ** |   |
| ** **          | ** ** | ** **                                           | ** ** | ** **                                                  | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| $0.00 to $9.99      |       | 511,029                                              |       | 4.33                                                        |       | $ | 6.56 |   | $ | 6,973 |   | 496,029 |   | 4.24 |   | $ | 6.48 |   | $ | 6,806 |   |   |
| $10.00 to $11.99    |       | 1,213,694                                            |       | 6.61                                                        |       | $ | 10.56 |   | 11,697 |   | 1,213,694 |   | 6.61 |   | $ | 10.56 |   | 11,697 |   |   |
| $12.00 to $14.99    |       | 1,481,730                                            |       | 5.60                                                        |       | $ | 13.35 |   | 10,154 |   | 1,309,759 |   | 5.30 |   | $ | 13.30 |   | 9,034 |   |   |
| $15.00 to $19.99    |       | 3,354,192                                            |       | 7.46                                                        |       | $ | 18.01 |   | 7,338 |   | 2,036,615 |   | 6.23 |   | $ | 17.07 |   | 6,371 |   |   |
| $20.00 to $25.99    |       | 1,904,175                                            |       | 6.17                                                        |       | $ | 23.83 |   | — |   | 1,698,690 |   | 5.78 |   | $ | 24.14 |   | — |   |   |
| $26.00 to $46.53    |       | 392,451                                              |       | 3.01                                                        |       | $ | 28.56 |   | — |   | 387,894 |   | 2.94 |   | $ | 28.57 |   | — |   |   |
| Total               |       | 8,857,271                                            |       | 6.38                                                        |       | $ | 17.27 |   | $ | 36,162 |   | 7,142,681 |   | 5.70 |   | $ | 16.84 |   | $ | 33,908 |   |   |
|                     |            |                                                      |            |                                                             |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The weighted average grant date fair value ofoptions, as determined under SFAS No. 123(R), granted during the three andnine months ended September 30, 2007 was $12.20 and $11.54 per share,respectively. The weighted average grant date fair value of options, asdetermined under SFAS No. 123(R), granted during the three months and ninemonths ended September 30, 2006 was $8.82 and $11.48 per share, respectively.

The aggregate intrinsic value in the table above represents the totalpretax intrinsic value, based on the Company’s closing stock price of $20.20 asof September 30, 2007, which would have been received by the option holders hadall option holders exercised their options as of that date.  The total number of shares of common stockunderlying in-the-money options exercisable as of September 30, 2007 was5,060,000 shares.

 

The total intrinsic valueof options exercised during the three and nine months ended September 30, 2007was $1,143,000 and $2,954,000 respectively. The total cash received from employees as a result of employee stockoption exercises during the three and nine months ended September 30, 2007 wasapproximately $2,300,000 and $5,963,000 respectively.  In connection with these exercises, there wasno tax benefit realized by the Company due to the Company’s full valuation onits deferred tax assets.

As of September30, 2007, the Company had $18,503,000 of unrecognized stock-based compensationcost related to stock options after estimated forfeitures, which are expectedto be recognized over an estimated amortization period of up to four years.

Pursuant to a tender offer that expired on July 2,2007, the Company amended outstanding options covering approximately 204,556shares of Zoran common stock to increase the per-share exercise price of eachsuch option to the fair market value of a share of Zoran common stock on theremeasured grant date of that option. Under the tender offer, current employeessubject to taxation in the United States had the opportunity to increase theper-share exercise price of the eligible options so that those options will notbe subject to adverse tax consequences under Internal Revenue CodeSection 409A.  In addition,participants in the tender offer whose eligible options were so amended areeligible for cash bonuses in the aggregate amount of $423,000 to compensatethem for the higher per-share exercise prices. The cash bonuses are expected to be paid on January 4, 2008 and areaccrued as of September 30, 2007.  TheCompany recorded $120,000 as expense in the three months ended September 30,2007 related to the amendment of eligible options for the incremental fairvalue representing the excess of the fair value of the replacement award andcash bonuses over the fair value of the cancelled award.

 

8

----

 

The Company settlesemployee stock option exercises with newly issued common shares.

 

***Stock OptionPlans***

As of September 30, 2007,the Company had outstanding options for the purchase of 8,857,271 shares ofcommon stock held by employees and directors under the Company’s 2005 EquityIncentive Plan (“2005 Plan”), 2005 Outside Directors Equity Plan, 2002 StockOption Plan, 1995 Outside Directors Stock Option Plan, the 1993 Stock Option Planand other various plans the Company assumed as a result of acquisitions.  As of September 30, 2007, 2,685,923 sharesremained available for future grants and awards. Options and stock appreciationrights granted under the 2005 Plan must have exercise prices per share not lessthan the fair market value of Zoran common stock on the date of grant and maynot be repriced without stockholder approval. Such awards will vest and become exercisable upon conditions establishedby the Compensation Committee and may not have a term exceeding 10 years.

***RestrictedShares and Restricted Stock Units***

Restricted shares and restricted stock units aregranted under the 2005 Plan. As of September 30, 2007, we had $191,000 of unrecognizedstock-based compensation cost related to restricted shares and restricted stockunits, which we expect to recognize over the remaining period of up to fouryears.

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, 2006  |       | 189,716                                                                        |       | $                                                                   | 19.50      |   |
| Granted                       |       | 5,000                                                                          |       | $                                                                   | 20.31      |   |
| Vested                        |       | (108,257                                                                       | )          | $                                                                   | 20.36      |   |
| Forfeited                     |       | (4,448                                                                         | )          | $                                                                   | 21.56      |   |
| Balances,  September 30, 2007 |       | 82,011                                                                         |       | $                                                                   | 18.31      |   |

 

***EmployeeStock Purchase Plan***

The Company’s 1995 Employee Stock Purchase Plan(“ESPP”) was adopted by the Company’s Board of Directors in October 1995and 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.  There were no purchases during thequarter ended September 30, 2007.  As ofSeptember 30, 2007 2,311,447 shares were reserved and available for issuanceunder the ESPP.

**3.****             ****Comprehensive Income**

 

The following table presents the calculation ofcomprehensive income as required by SFAS No. 130 “Reporting ComprehensiveIncome.”  The components of comprehensiveincome, net of tax, are as follows (in thousands):

** **
| ** **                                            | ** ** | **Three Months Ended** | ** ** | **Nine Months Ended** | ** ** |       |
|-------------------------------------------------------|------------|------------------------|------------|-----------------------|------------|------------|
| ** **                                            | ** ** | **September 30,**      | ** ** | **September 30,**     | ** ** |       |
| ** **                                            | ** ** | **2007**               | ** ** | **2006**              | ** ** | **2007**   | ** ** | **2006** | ** ** |   |
| ** **                                            | ** ** | ** **             | ** ** | ** **            | ** ** | ** ** | ** ** | ** ** | ** ** |   |
| Net income                                            |       | $                      | 13,142     |                  | $          | 1,852      |   | $ | 7,456 |   | $ | 27,314 |   |   |
| Change in  unrealized gain (loss) on investments, net |       | (200                   | )          | 1,060                 |       | (2,549     | ) | 491 |   |   |
| Total  comprehensive income                           |       | $                      | 12,942     |                  | $          | 2,912      |   | $ | 4,907 |   | $ | 27,805 |   |
|                                                       |            |                        |            |                       |            |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

The components of accumulated othercomprehensive income (loss) are unrealized gain (loss) on marketablesecurities.

 

9

----

 

**4.****             ****MarketableSecurities**

 

TheCompany’s portfolio of marketable securities at September 30, 2007 was asfollows (in thousands):

 
| ** **                         | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|------------------------------------|------------|----------|------------|-----------------------|------------|------------------------|------------|----------------------------|------------|
| Corporate debt                     |       | $        | 119,670    |                  | $          | 193                    |       | $                          | (239       | ) | $ | 119,624 |   |
| U.S. government  securities        |       | 59,603   |       | 229                   |       | (2                     | )          | 59,830                     |       |
| Auction rate  securities           |       | 54,200   |       | —                |       | —                 |       | 54,200                     |       |
| Foreign and  municipal bonds       |       | 17,680   |       | 63                    |       | (9                     | )          | 17,734                     |       |
| Total fixed  income securities     |       | 251,153  |       | 485                   |       | (250                   | )          | 251,388                    |       |
| Publicly traded  equity securities |       | 1,227    |       | 1,454                 |       | —                 |       | 2,681                      |       |
| Total                              |       | $        | 252,380    |                  | $          | 1,939                  |       | $                          | (250       | ) | $ | 254,069 |   |
|                                    |            |          |            |                       |            |                        |            |                            |            |  |  |  |  |  |  |  |

 

TheCompany’s portfolio of marketable securities at December 31, 2006 was asfollows (in thousands):

 
| ** **                         | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|------------------------------------|------------|----------|------------|-----------------------|------------|------------------------|------------|----------------------------|------------|
| Corporate debt                     |       | $        | 97,175     |                  | $          | 10                     |       | $                          | (245       | ) | $ | 96,940 |   |
| U.S. government  securities        |       | 42,822   |       | 7                     |       | (141                   | )          | 42,688                     |       |
| Auction rate  securities           |       | 37,550   |       | —                |       | —                 |       | 37,550                     |       |
| Foreign and  municipal bonds       |       | 12,927   |       | 1                     |       | (13                    | )          | 12,915                     |       |
| Total fixed  income securities     |       | 190,474  |       | 18                    |       | (399                   | )          | 190,093                    |       |
| Publicly traded  equity securities |       | 1,483    |       | 4,619                 |       | —                 |       | 6,102                      |       |
| Total                              |       | $        | 191,957    |                  | $          | 4,637                  |       | $                          | (399       | ) | $ | 196,195 |   |
|                                    |            |          |            |                       |            |                        |            |                            |            |  |  |  |  |  |  |  |  |

 

The followingtable summarizes the maturities of the Company’s fixed income securities atSeptember 30, 2007 (in thousands):

 

| ** **                     | ** ** | **Cost** | ** ** | **Estimated  Fair  Value** | ** ** |
|--------------------------------|------------|----------|------------|----------------------------|------------|
| Less than 1 year               |       | $        | 57,641     |                       | $          | 57,566 |   |
| Due in 1 to 2  years           |       | 81,175   |       | 81,274                     |       |
| Due in 2 to 5  years           |       | 58,137   |       | 58,348                     |       |
| Greater than  5 years*    |       | 54,200   |       | 54,200                     |       |
| Total fixed  income securities |       | $        | 251,153    |                       | $          | 251,388 |   |
|                                |            |          |            |                            |            |  |  |  |

----

*Comprisedof auction rate securities which have reset dates of 90 days or less but finalexpiration dates over five years.

 

**5.****          ****Inventories**

Inventoriesare stated at the lower of cost (first in, first out) or market and consistedof the following (in thousands):

 

| ** **                           | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                           | ** ** | **2007**          | ** ** | **2006**         | ** ** |
|                                 |       |              |       |             |       |
| Purchased parts  and work in process |       | $                 | 17,575     |             | $          | 18,748 |   |
| Finished goods                       |       | 16,026            |       | 26,296           |       |
|                                 |       | $                 | 33,601     |             | $          | 45,044 |   |
|                                      |            |                   |            |                  |            |  |  |  |  |

 

10

----

 

 

 

**6.****       ****Goodwill and 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 the fairvalue of each reporting unit exceeded its carrying value, including goodwill.

 

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

 

| ** **                    | ** ** | ** **        | ** ** | **September 30, 2007**      | ** ** | **December 31, 2006**         | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Life  (Years)** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Balance** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Balance** | ** ** |
| Amortized  intangible assets: |       |              |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Purchased  technology         |       | 2-3               |       | $                           | 195,505    |                          | $          | (168,306 | ) | $ | 27,199 |   | $ | 195,505 |   | $ | (142,658 | ) | $ | 52,847 |   |
| Patents                       |       | 3-5               |       | 40,265                      |       | (35,611                       | )          | 4,654 |   | 40,265 |   | (29,500 | ) | 10,765 |   |
| Customer base                 |       | 3-5               |       | 13,860                      |       | (11,428                       | )          | 2,432 |   | 13,860 |   | (9,583 | ) | 4,277 |   |
| Tradename and  others         |       | 3-5               |       | 3,350                       |       | (2,452                        | )          | 898 |   | 3,350 |   | (2,070 | ) | 1,280 |   |
| Total                         |       |              |       | $                           | 252,980    |                          | $          | (217,797 | ) | $ | 35,183 |   | $ | 252,980 |   | $ | (183,811 | ) | $ | 69,169 |   |
|                               |            |                   |            |                             |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

----

 

Estimatedfuture intangible amortization expense, based on current balances, as ofSeptember 30, 2007 is as follows (in thousands):

 

| Remaining three  months of 2007 |   | $      | 9,238  |   |
|---------------------------------|--------|--------|--------|--------|
| Year ending  December 31, 2008  |   | 23,315 |   |
| Year ending  December 31, 2009  |   | 1,820  |   |
| Year ending  December 31, 2010  |   | 810    |   |
|                            |   | $      | 35,183 |   |

 

Goodwill by reportable segment was as follows (inthousands):

 

| ** ** | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|------------|------------|-------------------|------------|------------------|------------|
| ** ** | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| ** ** | ** ** | ** **        | ** ** | ** **       | ** ** |
| Consumer   |       | $                 | 167,740    |             | $          | 169,060 |   |
| Imaging    |       | 5,051             |       | 5,199            |       |
|       |       | $                 | 172,791    |             | $          | 174,259 |   |
|            |            |                   |            |                  |            |  |  |  |  |

 

In accordance with SFASNo. 109 “Accounting for Income Taxes” (“SFAS No. 109”), we reduced goodwill byapproximately $1.5 million because we realized certain pre-acquisition tax netoperating losses.

**7.****       ****IncomeTaxes**

 

The provision for incometaxes reflects the effective tax rate applied to year to date earnings adjustedto exclude charges for amortization of intangible assets and stock-basedcompensation expense.  The effective taxrate differs from the U.S. statutory rate due to utilization of previouslyunbenefitted operating losses and State of Israel tax benefits on foreignearnings.  The provision is due primarilyto domestic income offset by previously unbenefitted purchased NOLs which whenutilized reduce goodwill and not tax expense.

 

The Company adopted theprovisions of FASB Interpretation No. 48 “Accounting for Uncertainty in Incometaxes” (“FIN No. 48”) an interpretation of SFAS No. 109 on January 1,2007.  As a result of the implementationof FIN No. 48 on January 1, 2007,  theCompany reduced its tax liability by $1,634,000 with an offsetting decrease of$454,000 to opening accumulated deficit, and a decrease in goodwill of$1,180,000.  Additionally, the Companydecreased deferred tax assets and their associated valuation allowance by$12,749,000. The adoption resulted in a reclassification of certain taxliabilities from current to non-current.

 

11

----

 

At the adoption date ofJanuary 1, 2007, the Company had $27,499,000 of unrecognized tax benefits,$6,503,000 of which was classified as other long-term liabilities, which ifrecognized in the future would benefit our effective tax rate.  The remainder would increase deferred taxassets for which the Company would require a full valuation allowance.

 

The tax years 2003through 2006 remain open to examination by the major taxing jurisdictions towhich the Company is subject.  During thesecond quarter of 2007 the Company was contacted by the ITA (Israel TaxAuthority) about an audit of the Company’s 2003, 2004 and 2005 taxreturns.  It is possible that the auditwill result in a positive or negative adjustment to our unrecognized taxbenefits within the next 12 months.  TheCompany is unable to estimate the range of the benefit or detriment at thispoint.   The Company continues to accountfor tax related interest and penalties as part of the income taxprovision.  At January 1, 2007 andSeptember 30, 2007, accrued interest and penalties were immaterial.

 

Realization of deferredtax assets is based on our ability to generate sufficient future taxableincome. The valuation allowance was determined in accordance with theprovisions of SFAS No. 109, which requires an assessment of both positiveand negative evidence when determining whether it is more likely than not thatdeferred tax assets are recoverable; such assessment is required on a jurisdictionby jurisdiction basis.  Historicaloperating results and continuing business uncertainty represent sufficientnegative evidence which it was difficult for positive evidence to overcome andaccordingly, a full valuation allowance was recorded as of September 30, 2007.The amount of the deferred tax asset valuation allowance, however, could bereduced in the near term if it becomes more likely than not that some or all ofthe Company’s deferred tax assets will be realized.

 

**8.****       ****Segment Reporting**

 

The Company’s productsare based on highly integrated application-specific integrated circuits andsystem-on-a-chip solutions.  The Companyalso licenses certain software and other intellectual property.  The Company has two reportable segments —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.

Information about reportablesegment income or loss is as follows for the three and nine monthsended September 30, 2007 and 2006 is as follows (in thousands):

 
| ** **            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **            | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **            | ** ** | ** **                            | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues:         |       |                                  |       |                                 |       |   |   |   |   |
| Consumer              |       | $                                     | 120,957    |                                 | $          | 109,681 |   | $ | 309,690 |   | $ | 342,997 |   |
| Imaging               |       | 25,469                                |       | 19,698                               |       | 68,298 |   | 56,557 |   |
|                  |       | $                                     | 146,426    |                                 | $          | 129,379 |   | $ | 377,988 |   | $ | 399,554 |   |
|                  |       |                                  |       |                                 |       |   |   |   |   |
| Operating  expenses:  |       |                                  |       |                                 |       |   |   |   |   |
| Consumer              |       | $                                     | 108,561    |                                 | $          | 102,806 |   | $ | 293,077 |   | $ | 289,781 |   |
| Imaging               |       | 17,421                                |       | 15,166                               |       | 49,252 |   | 46,680 |   |
|                  |       | $                                     | 125,982    |                                 | $          | 117,972 |   | $ | 342,329 |   | $ | 336,461 |   |
|                  |       |                                  |       |                                 |       |   |   |   |   |
| Contribution  margin: |       |                                  |       |                                 |       |   |   |   |   |
| Consumer              |       | $                                     | 12,396     |                                 | $          | 6,875 |   | $ | 16,613 |   | $ | 53,216 |   |
| Imaging               |       | 8,048                                 |       | 4,532                                |       | 19,046 |   | 9,877 |   |
|                  |       | $                                     | 20,444     |                                 | $          | 11,407 |   | $ | 35,659 |   | $ | 63,093 |   |
|                       |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

12

----

 

Areconciliation of the totals reported for the reportable segments to theapplicable line items in the consolidated financial statements for the threeand nine months ended September 30, 2007 and 2006 is as follows (in thousands):

 
| ** **                                    | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                    | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                          |       |                                  |       |                                 |       |   |   |   |   |
| Contribution  margin from reportable segments |       | $                                     | 20,444     |                                 | $          | 11,407 |   | $ | 35,659 |   | $ | 63,093 |   |
| Amortization of  intangible assets            |       | 9,648                                 |       | 12,423                               |       | 33,986 |   | 37,893 |   |
| Total operating  income (loss)                |       | $                                     | 10,796     |                                 | $          | (1,016 | ) | $ | 1,673 |   | $ | 25,200 |   |
|                                               |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Zoran maintainsoperations in Canada, China, Germany, Israel, Japan, Korea, Taiwan, the UnitedKingdom and the 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.

 

Thegeographic distribution of total revenues for the three and nine months ended September 30, 2007 and 2006 was as follows (in thousands):

 
| ** **                                                 | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                 | ** ** | **2007**                              | ** ** | **2006**                             | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenue  from unaffiliated customers originating from:** |       |                                  |       |                                 |       |   |   |   |   |
| China                                                      |       | $                                     | 64,463     |                                 | $          | 49,728 |   | $ | 146,842 |   | $ | 136,281 |   |
| Japan                                                      |       | 22,260                                |       | 29,544                               |       | 69,165 |   | 84,539 |   |
| Korea                                                      |       | 5,600                                 |       | 7,369                                |       | 15,599 |   | 22,687 |   |
| Taiwan                                                     |       | 36,336                                |       | 21,809                               |       | 97,988 |   | 103,897 |   |
| United States                                              |       | 10,133                                |       | 10,103                               |       | 24,703 |   | 28,298 |   |
| Other                                                      |       | 7,634                                 |       | 10,826                               |       | 23,691 |   | 23,852 |   |
| **Total  revenues**                                        |       | $                                     | 146,426    |                                 | $          | 129,379 |   | $ | 377,988 |   | $ | 399,554 |   |
|                                                            |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |

 

For thethree months ended September 30, 2007 and 2006, one customer accounted for 11%and 14% of total revenues respectively.  For the nine months ended September 30, 2007 and 2006, one customeraccounted for 13% and 11% of total revenues respectively.

 

As of September 30, 2007, two customers accounted forapproximately 11% and 12% of total net accounts receivable, respectively, andas of December 31, 2006 four customersaccounted for approximately 13%, 10%, 10% and 10% of the net accountsreceivable balance, respectively.

 

**9.****       ****Employee Benefit Plans**

 

Under Israeli law, the Company is required to makeseverance payments to its retired or dismissed Israeli employees and Israeliemployees leaving its employment in certain other circumstances. The Company’sseverance pay liability to its Israeli employees, which is calculated based onthe salary of each employee multiplied by the years of such employee’semployment, is reflected in the Company’s balance sheet in other long-termliabilities on an accrual basis, and is partially funded by the purchase ofinsurance policies in the name of the employees. The surrender value of theinsurance policies is recorded in other assets and investments. The severancepay expenses (benefit) for the three and nine months ended September 30, 2007were $(173,000) and $13,000 respectively. The severance pay expenses for the three and nine months ended September30, 2006 were $367,000 and $922,000 respectively.

 

13

----

 

The severance pay detailis as follows (in thousands):

 

| ** **                                   | ** ** | **September 30,** | ** ** | **December 31,** | ** ** |
|----------------------------------------------|------------|-------------------|------------|------------------|------------|
| ** **                                   | ** ** | **2007**          | ** ** | **2006**         | ** ** |
| Accrued  severance                           |       | $                 | 12,383     |             | $          | 11,052 |   |
| Less: amount  funded                         |       | (11,606           | )          | (9,702           | )          |
| Unfunded  portion, net accrued severance pay |       | $                 | 777        |             | $          | 1,350 |   |

 

# **10.**       Net Income Per Share

Basic net income per share is calculated by dividing net incomeavailable to common stockholders by the weighted average number of commonshares outstanding during the period.  Diluted net income per share iscalculated by using the weighted average number of common shares outstandingduring the period increased to include the number of additional shares ofcommon stock that would have been outstanding if the dilutive potential sharesof common stock had been issued.

 

The following table provides a reconciliation of the components of thebasic and diluted net income per share computations (in thousands, except pershare data):

** **
| ** **                                                                 | ** ** | **Three Months EndedSeptember 30,** | ** ** | **Nine Months EndedSeptember 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------|------------|------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                            | ** ** | **2006**                           | ** ** | **2007** | ** ** | **2006** | ** ** |
| Net income                                                                 |       | $                                   | 13,142     |                               | $          | 1,852 |   | $ | 7,456 |   | $ | 27,314 |   |
|                                                                       |       |                                |       |                               |       |   |   |   |   |
| Weighted average  shares outstanding                                       |       | 49,863                              |       | 49,333                             |       | 49,633 |   | 48,013 |   |
| Effect of  dilutive options, restricted shares, and restricted stock units |       | 1,421                               |       | 1,379                              |       | 1,228 |   | 2,273 |   |
| Dilutive  weighted average shares                                          |       | 51,284                              |       | 50,712                             |       | 50,861 |   | 50,286 |   |
|                                                                       |       |                                |       |                               |       |   |   |   |   |
| Net income per  share:                                                     |       |                                |       |                               |       |   |   |   |   |
| Basic                                                                      |       | $                                   | 0.26       |                               | $          | 0.04 |   | $ | 0.15 |   | $ | 0.57 |   |
| Diluted                                                                    |       | $                                   | 0.26       |                               | $          | 0.04 |   | $ | 0.15 |   | $ | 0.54 |   |
|                                                                            |            |                                     |            |                                    |            |  |  |  |  |  |  |  |  |  |  |

** **

**Forthe three months ended September 30, 2007 and 2006 outstanding options,restricted shares and restricted stock units totaling 3,748,000 and 4,475,000respectively, were excluded from the computation of diluted net income pershare as the inclusion of such shares would have had an anti-dilutive effect.**

** **

**Forthe nine months ended September 30, 2007 and 2006 outstanding options andrestricted stock units totaling 3,764,000 and 2,571,000 shares, respectively,were excluded from the computation of diluted net income per share as theinclusion of such shares would have had an anti-dilutive effect.**

** **

# **11.**       Legal Proceedings

*Matters Related to Historical Stock OptionPractices:*****Asdiscussed further below, certainpersons and entities identifying themselves as shareholders of Zoran have filedderivative actions purporting to assert claims on behalf of and in the name ofthe Company against various of the Company’s current and former directors andofficers relating to the Company’s historical accounting for stock options. These actions are still in the early stages,and it is not possible for us to quantify the extent of our potentialliability, if any.

*Pfeiffer v. Zoran Corporation et al.* On September 7, 2006, a purported shareholder derivative action wasfiled by Milton Pfeiffer against Zoran as a nominal defendant and certain ofits officers and directors in the United States District Court, NorthernDistrict of California, alleging, inter alia, violations of federal securitieslaws and breaches of fiduciary duties.

 

14

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*Gerald del Rosario v. Aharon et al.** *On September 26, 2006, a purportedshareholder derivative action was filed by Gerald del Rosario against Zoran asa nominal defendant and certain of its current and former officers anddirectors in the United States District Court, Northern District of California,alleging, inter alia, violations of federal securities laws and breaches offiduciary duty.  On December 8, 2006, theCourt issued an order consolidating the *Del Rosario*action with the *Pfeiffer* action.  The Court selected del Rosario as leadplaintiff and approved lead plaintiff’s selection of counsel for theconsolidated derivative action. Plaintiffs filed a consolidated amended complaint on March 14, 2007. OnJune 5, 2007 the Court issued an order granting in part and denying in partdefendants’ motion to dismiss. The case is currently in the discoveryphase.  On September 11, 2007, theparties participated in a court-ordered mediation session.

*Barone v. Gerzberg et al.; Durco v. Gerzberg et al.* On October 23, 2006, two purportedshareholder derivative actions were filed by Moshe Barone and John Durcoagainst Zoran as a nominal defendant and certain of its current and formerofficers and directors in the California Superior Court of Santa Clara County,alleging, inter alia, violations of state securities laws and breaches offiduciary duty.  On January 24, 2007 theCourt consolidated the *Barone*and *Durco*actions, appointed Messrs. Barone and Durco as co-leadplaintiffs and approved their selection of counsel for the consolidatedderivative action.  The co-leadplaintiffs filed a consolidated amended complaint on March 26, 2007. On June15, 2007 the Court issued an order staying all proceedings until further order ofthe Court.

*U.S.Attorney and SEC Investigations:* On July 3,2006, Zoran disclosed in a press release that it received a grand jury subpoenafrom the office of the U.S. attorney for the Northern District of Californiarequesting documents from 1995 through the present referring to, relating to orinvolving stock options, and also received an informal inquiry from the SECrequesting documents related to Zoran’s stock option grants.  Zoran intends to continue cooperating fullywith investigations by the U.S. Attorney, SEC or any other governmentregulator relating to historical stock option practices.  The staff of the Securities and ExchangeCommission notified Zoran by letter dated November 2, 2007 that the staff'sinvestigation of Zoran’s historical stock option granting practices has beenterminated and that no enforcement action against Zoran has been recommended tothe Commission.

On February 20, 2007, the Company filed a complaint against ArcSoft Inc.in the California Superior Court for the County of Alameda, seeking payment of$4 million in principal, together with accrued interest thereon in the amountof approximately $525,000, under four separate convertible promissorynotes.  The notes represent amounts loaned by the Company to ArcSoft in2004.  At that time Zoran also entered into a transaction with ArcSoftinvolving the licensing and grant of certain rights to ArcSoft related to acertain product then under development (“Agreement”) and related agreementsregarding the continued development and commercialization of the product. On March 28, 2007, ArcSoft filed an answer denying liability under the notesand asserting various affirmative defenses.  ArcSoft also filed across-complaint alleging fraud in the inducement of the business arrangement,fraudulent and negligent misrepresentation, breach of contract and of theimplied covenant of good faith and fair dealing, and unjust enrichment andseeking monetary damages of more than $6.9 million.  On August 9,2007, the Company filed an answer to ArcSoft’s cross-complaint denyingliability and asserting various affirmative defenses.  The Company alsofiled a cross-complaint alleging ArcSoft breached the Agreement.  OnAugust 10, 2007, the Court held the initial Case ManagementConference.  The Court scheduled a further case management conferencefor November 26, 2007.  The current fact discovery cutoff isJune 9, 2008, and the current expert discovery cutoff is June 23, 2008. The first day of trial is set for July 7, 2008.

*Indemnification Obligations***.**  Subject tocertain limitations, the Company is obligated to indemnify its current andformer directors, officers and employees in connection with the investigationof the Company’s historical stock option practices and related governmentinquiries and litigation. These obligations arise under the terms of theCompany’s certificate of incorporation, its bylaws, applicable contracts, andDelaware and California law. The obligation to indemnify generally means thatthe Company is required to pay or reimburse the individuals’ reasonable legalexpenses and possibly damages and other liabilities incurred in connection withthese matters. The Company is currently paying or reimbursing legal expensesbeing incurred in connection with these matters by a number of its current andformer directors, officers and employees.

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

 

15

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**Item 2.  Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

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

 

**Overview**

 

Ourproducts consist of integrated circuits and related products used in DVDplayers, movie and digital television, digital cameras and video editingsystems. We also provide integrated circuits, software and platforms forimaging applications that enable the delivery and display of digital videocontent through a set-top box or television as well as 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 sell our products to original equipment manufacturers,or OEMs, that incorporate them into digital video and audio products forconsumer and commercial applications.

*Revenues*

 

We derive most of ourrevenues from the sale of integrated circuits and related products.  In the semiconductor industry in general, andfor our products in particular, average selling prices historically have decreasedover the life of a particular product. Average selling prices for our hardware products have fluctuatedsubstantially from period to period, primarily as a result of changes in ourcustomer mix of original equipment manufacturer, or OEM, sales versus sales toresellers and the transition from low-volume to high-volume production.  In the past, we have periodically reduced theprices of some of our products in order to better penetrate the consumermarket.  We believe that, as our productlines continue to mature and competitive markets evolve, we are likely toexperience further declines in the average selling prices of our products,although we cannot predict the timing and amount of such future changes withcertainty.

 

We also derive revenuefrom licensing our software and other intellectual property.  Licensing revenues have fluctuated, and willcontinue to fluctuate, on a quarterly basis. Licensing revenue includes one-time license fees and royalties based onthe number of units distributed by the licensee.  Licensing revenue can be significantlyaffected by the timing of a small number of licensing transactions.  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 that 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 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.

 

*Cost of Hardware Product Revenues*

* *

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.

 

16

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*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 are a partyto research and development agreements with the Chief Scientist in Israel’sMinistry of Industry and Trade and the Israel-United States BinationalIndustrial Research and Development Foundation, which fund up to 50% ofincurred project costs for approved products up to specified contractmaximums.  These agreements require us touse our best efforts to achieve specified results and require us to payroyalties at rates of 3% to 5% of resulting product sales, and up to 30% ofresulting license revenues, up to a maximum of 100% to 150% of total fundingreceived. Reported research and development expenses are net of these grants, whichfluctuate from period to period. We believe that significant investments inresearch and development are required for us to remain competitive, and weexpect to continue to devote significant resources to product development,although such expenses as a percentage of total revenues may fluctuate.

 

*Selling, General and Administrative*

* *

Our selling, general 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*

* *

Our effective income taxrate has benefited from the availability of previously unbenefitted netoperating losses which we have utilized to reduce tax expense for U.S. federalincome tax purposes, and by our Israel subsidiary’s status as an “ApprovedEnterprise” under Israeli law, which provides a ten-year tax holiday for incomeattributable to a portion of our operations in Israel.  Our U.S. federal net operating losses expireat various times between 2017 and 2024, and the benefits from our subsidiary’sApproved Enterprise status expire at various times beginning in 2008.

 

***Recent AccountingPronouncements***

 

In September 2006,the Financial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFASNo. 157”), which defines fair value, establishes a framework for measuringfair value in accordance with generally accepted accounting principles, andexpands disclosures about fair value measurements. The provisions of SFASNo. 157 are effective for fiscal years beginning January 1, 2008. We areevaluating the impact of the provisions of this statement on our consolidatedfinancial position, results of operations and cash flows.

In February 2007,the FASB issued SFAS No. 159, “TheFair Value Option for Financial Assets and Financial Liabilities”.  This statement expands the standardsunder SFAS No. 157 to provide entities the one-time election to measurefinancial instruments and certain other items at fair value. Most of theprovisions of this statement apply only to entities that elect the fair valueoption under SFAS No. 157. The provisions of SFAS No. 159 are effectivefor fiscal years beginning January 1, 2008. We are evaluating the impactof the provisions of this statement on our consolidated financial position,results of operations and cash flows.

In June 2007, the FASBratified EITF Issue No. 07-3 (“EITF 07-3”), *Accountingfor Nonrefundable Advance Payments for Goods or Services to Be Used in FutureResearch and Development Activities.* This issue provides thatnonrefundable advance payments for goods or services that will be used orrendered for future research and development activities pursuant to anexecutory contractual arrangement should be deferred and capitalized andrecognized as an expense as the related goods are delivered or the relatedservices are performed**.**Theprovisions of EITF 07-3 are effective for fiscal years beginningJanuary 1, 2008. We are evaluating the impact of the provisions of thisstatement on our consolidated financial position, results of operations andcash flows.

***Segments***

Our products are based on highly integrated application-specificintegrated circuits and system-on-a-chip solutions.  We also license software and otherintellectual property.  We operate in tworeportable segments — 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.

** **

**17**

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** **

**Results of Operations**

** **

Thefollowing table summarizes selected consolidated statement of operations dataand changes from the period to period

($in thousands, except for percentages):

 
| ** **                                                  | ** ** | **Three months ended  September 30,** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------|------------|---------------------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **2007**                              | ** ** | **2006**   | ** ** | **$** | ** ** | **%** | ** ** |
| Revenues:                                                   |       |                                  |       |       |       |   |   |   |   |
| Hardware product  revenues                                  |       | $                                     | 129,820    |       | $          | 115,602 |   | $ | 14,218 |   | 12.3 | % |
| Software and  other revenues                                |       | 16,606                                |       | 13,777     |       | 2,829 |   | 20.5 | % |
| License revenues  related to litigation settlement          |       | —                                |       | —     |       | — |   | — |   |
| Total revenues                                              |       | 146,426                               |       | 129,379    |       | 17,047 |   | 13.2 | % |
| Cost and  expenses:                                         |       |                                  |       |       |       |   |   |   |   |
| Cost of hardware  product revenues                          |       | 69,876                                |       | 66,810     |       | 3,066 |   | 4.6 | % |
| Research and  development                                   |       | 28,063                                |       | 25,255     |       | 2,808 |   | 11.1 | % |
| Selling, general  and administrative                        |       | 28,043                                |       | 25,907     |       | 2,136 |   | 8.2 | % |
| Amortization of  intangible assets                          |       | 9,648                                 |       | 12,423     |       | (2,775 | ) | (22.3 | )% |
| Total costs and  expenses                                   |       | 135,630                               |       | 130,395    |       | 5,235 |   | 4.0 | % |
| Operating income  (loss)                                    |       | 10,796                                |       | (1,016     | )          | 11,812 |   | 1162.6 | % |
| Interest and  other income (loss), net                      |       | 4,046                                 |       | 2,798      |       | 1,248 |   | 44.6 | % |
| Provision  (benefit) for income taxes                       |       | 1,700                                 |       | (70        | )          | 1,770 |   | * |   |
| Net income                                                  |       | $                                     | 13,142     |       | $          | 1,852 |   | $ | 11,290 |   | 609.6 | % |
| Supplemental  Operating Data:                               |       |                                  |       |       |       |   |   |   |   |
| Cost of hardware  product as % of hardware product revenues |       | 53.8                                  | %          | 57.8       | %          |   |   |   |   |
|                                                             |            |                                       |            |            |            |  |  |  |  |  |  |  |  |  |

----

*not meaningful

 

| ** **                                                  | ** ** | **Nine months ended  September 30,** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------|------------|--------------------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **2007**                             | ** ** | **2006**   | ** ** | **$** | ** ** | **%** | ** ** |
| Revenues:                                                   |       |                                 |       |       |       |   |   |   |   |
| Hardware product  revenues                                  |       | $                                    | 331,510    |       | $          | 323,007 |   | $ | 8,503 |   | 2.6 | % |
| Software and  other revenues                                |       | 46,478                               |       | 40,755     |       | 5,723 |   | 14.0 | % |
| License revenues  related to litigation settlement          |       | —                               |       | 35,792     |       | (35,792 | ) | (100.0 | )% |
| Total revenues                                              |       | 377,988                              |       | 399,554    |       | (21,566 | ) | (5.4 | )% |
| Cost and  expenses:                                         |       |                                 |       |       |       |   |   |   |   |
| Cost of hardware  product revenues                          |       | 174,252                              |       | 180,815    |       | (6,563 | ) | (3.6 | )% |
| Research and  development                                   |       | 83,027                               |       | 74,729     |       | 8,298 |   | 11.1 | % |
| Selling, general  and administrative                        |       | 85,050                               |       | 80,917     |       | 4,133 |   | 5.1 | % |
| Amortization of  intangible assets                          |       | 33,986                               |       | 37,893     |       | (3,907 | ) | (10.3 | )% |
| Total costs and  expenses                                   |       | 376,315                              |       | 374,354    |       | 1,961 |   | 0.5 | % |
| Operating income                                            |       | 1,673                                |       | 25,200     |       | (23,527 | ) | (93.4 | )% |
| Interest and  other income (loss), net                      |       | 12,133                               |       | 8,035      |       | 4,098 |   | 51.0 | % |
| Provision for  income taxes                                 |       | 6,350                                |       | 5,921      |       | 429 |   | 7.2 | % |
| Net income                                                  |       | $                                    | 7,456      |       | $          | 27,314 |   | $ | (19,858 | ) | (72.7% | ) |
| Supplemental  Operating Data:                               |       |                                 |       |       |       |   |   |   |   |
| Cost of hardware  product as % of hardware product revenues |       | 52.6                                 | %          | 56.0       | %          |   |   |   |   |

----

*not meaningful

 

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*Revenues*

 

The$17.0 million increase in total revenues for the three months ended September30, 2007 compared to the same period of 2006 represents an $11.3 millionincrease in Consumer segment revenues and a $5.7 million increase in Imagingsegment revenues. The increase in Consumer segment revenues reflects increases in Mobile hardware productrevenue of $10.8 million and DTV hardware product revenue of $2.3 millionpartially offset by a decrease in DVD hardware product revenues of $1.8 million. The increase in Imagingsegment revenues reflects an increase in Imaging hardware product revenues of$3.4 million and an increase in Imaging software and other revenues of $2.3million.

Total revenues for the nine months ended September30, 2006 include $35.8 million in revenues related to the litigation settlementthat did not recur. Excluding the litigation settlement revenues, revenues forthe nine months ended September 30, 2007 increased by $14.2 million compared tothe same period in 2006, and Consumer segment revenues increased by $2.5million. This increase in Consumer segment revenues was driven by an increasein revenues for Mobile products of $25.0 million offset by decreases inrevenues of $15.1 million and $7.4 million for DVD and DTV productsrespectively. For the nine months ended September 30, 2007 Imaging segmentrevenues increased by $11.7 million over the comparable period for 2006, due toan increase in hardware product revenues of $8.1 million and an increase insoftware and other revenues of $3.6 million.

Hardwareproduct revenues for the three months ended September 30, 2007 increased by$14.2 million compared to the same period of the prior year, reflectingincreases of $10.8 million in the Consumer segment and $3.4 million in theImaging segment. Unit shipments for the three months ended September 30, 2007increased over the same period of the prior year.  Within the Consumer segment, hardware product revenues increased $10.8 millionfor Mobile products and $1.8 million for DTV products, partially offset by adecrease of $1.8 million for DVD products. The decrease in revenue for DVDproducts was due to a decrease in average selling prices.

Hardwareproduct revenues for the nine months ended September 30, 2007, increased $8.5million compared to the same period of 2006 reflecting an increase in theImaging segment of $8.1 million driven by increased unit shipments. Hardwareproduct revenues for the Consumer segment increased $0.4 million for the ninemonths ended September 30, 2007 compared to the same period for 2006. Withinthe Consumer segment, hardware productrevenues increased $25.3 million for Mobile products offset by decreases of$17.3 million for DVD products and $7.6 million for DTV products. The increasein hardware product revenues for Mobile products was driven by increased unitshipments while the decrease in hardware product revenues for DVD products wasdue to a decrease in average selling prices. The decrease in hardware productrevenue for DTV products was primarily due to lower unit shipments based onreduced volume of stand alone front end integrated circuits.

Softwareand other revenues increased by $2.8 million for the three months endedSeptember 30, 2007 compared to the same period of the prior year primarily dueto a $2.3 million increase in Imaging segment revenues. The increase insoftware and other revenues of $5.7 million for the nine months ended September30, 2007 compared to the same period in 2006 was a result of a $2.1 millionincrease in Consumer segment revenues and a $3.6 million increase in Imagingsegment revenues.  These changes wereprimarily due to the timing of new agreements.

*Cost of Hardware Product Revenues*

 

The decreases in hardwareproduct costs as a percentage of hardware product revenues for the three andnine months ended September 30, 2007 compared to the same periods in 2006 wereprimarily due to a change in product mix, with a higher percentage of revenuesfrom sales of higher margin Mobile and Imaging products.

*Research and Development*

Researchand development expenses increased for the three and nine months periods endedSeptember 30, 2007, compared to the same periods in 2006, primarily due tofluctuations based on the timing of major engineering-related expenses, such astape-outs as well as continued investments in research and development acrossall our segments.

*Selling, General and Administrative*

Selling, general and administrative expenses increased by $2.1 millionfor the three month period ended September 30, 2007, compared to the sameperiod in 2006 and increased by $4.1 million for the nine months endedSeptember 30, 2007 compared to the same period in 2006.  This increase was primarilydue to continued increases in marketing and field application support expensesto support revenue growth in our Asia Pacific markets.

 

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*Amortization of Intangible Assets*

At September 30, 2007, wehad approximately $35.2 million in net intangible assets that we will continueto amortize on a straight line basis through 2010.

*Interest and Other Income*

 

The increase in interestand other income for the three and nine month periods ended September 30, 2007compared to the same periods in 2006 reflect higher average cash and short terminvestment balances.

 

*Provision for Income Taxes*

 

Thetax provision for the three and nine months ended September 30, 2007 was $1.7 millionand $6.4 million, respectively.  Theestimated tax expense for the three and nine month periods ended September 30,2007 has increased compared to the same periods in 2006 primarily due to achange in the geography of our pre-tax income. In addition, the tax provision for the three months ended Sept. 2006benefited from the release of certain domestic tax reserves and the taxprovision for the nine month period ended September 30, 2006 of $6.0 millionincluded a one time charge of $4.3 million for tax expense related to theMediaTek settlement. Our effective income tax rate has benefited from theavailability of previously unbenefitted net operating losses which we haveutilized to reduce tax expense for U.S.  federalincome tax purposes and by our Israel based subsidiary’s status as an “ApprovedEnterprise” under Israeli law, which provides a ten-year tax holiday for incomeattributable to a portion of our operations in Israel. The remaining taxexpense is related to the utilization of previously unbenefitted purchased NOL’swhich when utilized reduce goodwill and not tax expense along with statutorytaxes in our non-U.S. subsidiaries.  OurU.S. federal net operating losses expire at various times between 2017 and2024, and the benefits from our subsidiary’s Approved Enterprise status expireat various times beginning in 2008.

AtSeptember 30, 2007, we continue to carry a full valuation allowance against ournet deferred tax assets as management has determined that it is more likelythan not that our deferred tax assets may not be realized.  We continue to monitor the relative weight ofpositive and negative evidence of future profitability in relevantjurisdictions.  It is possible thatsometime in the next 12 months the positive evidence will be sufficient torelease a material amount of our valuation allowance; however there is noassurance that this will occur.

**Liquidity and Capital Resources**

 

AtSeptember 30, 2007, we had $102.5 million of cash and cash equivalents and$254.1 million of short-term investments. At September 30, 2007, we had $372.6 million of working capital.

 

Ouroperating activities generated cash of $63.6 million during the first ninemonths of 2007, primarily due to net income of $7.5 million adjusted fornon-cash items such as amortization of $34.0 million, depreciation of $5.9million and stock- based compensation expense of $10.6 million.  Cash provided by operations also increaseddue to a $6.3 million increase in accounts payable; $14.3 million increase inaccrued expenses and other liabilities and other long term liabilities due totiming of payments and a $11.4 million decrease in inventory as a result of anincrease in shipments. These increases were partially offset by an increase inaccounts receivable by $17.8 million due to increase in revenues that occurredlate in the quarter and an increase in prepaid expenses and other currentassets by $7.8 million.

 

Cash used in investing activities was $67.1million during the nine months ended September 30, 2007, principally reflectingthe net purchase ofinvestments of $59.6 million. In addition we spent $7.5 million for thepurchases of property and equipment.

 

Cash provided by financing activities during the ninemonths ended September 30, 2007 was $6.0 million and consisted of proceedsreceived from issuances of common stock through exercises of employee stockoptions.

Our operating activitiesgenerated cash of $81.8 million during the first nine months of 2006, primarilydue to net income of $27.3 million adjusted for non-cash items such asamortization of $37.9 million, depreciation of $7.1 million and stock-basedcompensation expense of $13.7 million. Cash provided by operations also increased due to a decrease of $7.2million in accounts receivable due to the timing of collections and a netincrease in accounts payable, accrued expenses and other liabilities and otherlong term liabilities totaling $1.0 million. These increases were partially offset by a $12.6 million increase ininventories to meet the increasing demand for our products.

Cash used in investing activities was $126.2 million during the ninemonths ended September 30, 2006, principally reflecting the net purchase ofinvestments of $120.8 million. In addition we spent $5.4 million for purchasesof property and equipment.

 

20

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Cashprovided by financing activities during the nine months ended September 30,2006 was $52.1 million and consisted of proceeds received from issuancesof common stock through exercises of employee stock options and proceeds fromthe sale of stock under our employee stock purchase plan.

AtSeptember 30, 2007, we did not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance 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 current balances of cash, cash equivalents andshort-term investments, and anticipated cash flow from operations, will satisfyour anticipated working capital and capital expenditure requirements at leastthrough the next 12 months.  Nonetheless,our future capital requirements may vary materially from those now planned andwill depend on many factors including, 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, capital expenditureand 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 may require an increase in the levelof working capital to accommodate planned growth, hiring and infrastructureneeds.  Additional capital may also berequired for additional acquisitions of businesses, products or technologies.

 

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

**Item 3.  Quantitative and Qualitative DisclosuresAbout Market Risk**

We are exposed to financial market risks including changes in interestrates and foreign currency exchange rates.

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

Amajority of our revenue and capital spending is transacted in U.S. dollars,although a portion of the cost of our operations, relating mainly to ourpersonnel and facilities in Israel, is incurred in New Israeli Shekels.  As a result, we bear the risk that the rate ofinflation in Israel or the decline in the value of U.S. dollars compared to the Israeli shekel will increase ourcosts as expressed in U.S. dollars.We have not engaged in hedging transactions toreduce our exposure to fluctuations that may arise from changes in foreignexchange rates.  Based on our overallcurrency rate exposure at September 30, 2007, a near-term 10% appreciation ordepreciation of the New Israeli Shekel would have an immaterial affect on ourfinancial condition.

 

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**Item 4.Controls and Procedures**

***DisclosureControls and Procedures****.*   Under the supervision and with theparticipation of our management, including our Chief Executive Officer and ourChief Financial Officer, we evaluated the effectiveness of our disclosurecontrols and procedures, as such term is defined under Rule 13a-15(e)promulgated under the Securities Exchange Act of 1934, as amended. Based uponthat evaluation, 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 Over Financial Reporting**

 

There were no changes inour internal control over financial reporting during the quarter endedSeptember 30, 2007 that have materially affected****or are reasonably likely to materially affect our internalcontrol over financial reporting.

 

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**PART II.OTHER INFORMATION**

 

**Item 1.   Legal Proceedings**

 

The information contained in Note 11, “Legal Proceedings,” of our Notesto Condensed Consolidated Financial Statements, under Item 1. FinancialStatements of this Quarterly Report on Form 10-Q, is incorporated by referenceherein.

 

**Item 1A.   RiskFactors**

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

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

The independentinvestigation of our historical stock option practices and resultingrestatement activities and derivative law suits have required us to expendsignificant management time and incur significant accounting, legal and otherexpenses totaling $5.8 million in 2006 and $6.9 million in the nine monthsended September 30, 2007. The resulting restatements have had a materialadverse effect on our results of operations. We have recorded additionalstock-based compensation expense of $11.7 million for stock option grants,recognized over the periods from 1997 to 2005. There was no tax impact of theseadditional stock-based compensation expenses due to the full valuationallowance on our tax assets. In addition, we have recorded other adjustmentspreviously considered to be immaterial totaling $1.3 million (net of tax of$0.2 million). As a result, our restated consolidated financial statementsreflect a decrease in net income of $13.0 million for the period of 1997to 2005.

**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 inquiries by theUnited States Attorney’s Office for the Northern District of California (“USAO”)and the United States Securities and Exchange Commission (“SEC”) into ourhistorical stock option practices are ongoing. We have cooperated with the USAOand the SEC and intend to continue to do so. The period of time necessary toresolve these inquiries is uncertain, and we cannot predict the outcome ofthese inquiries or whether we will face additional government inquiries,investigations or other actions related to our historical stock optionpractices. These inquiries will likely require us to continue to expendsignificant management time and incur significant legal and other expenses, andcould result in civil and criminal actions seeking, among other things,injunctions against the Company and the payment of significant fines andpenalties by the Company, which may have a material adverse effect on ourfinancial condition, results of operations and cash flow.

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

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

**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 could become time consuming and expensive andcould result in the payment of significant judgments and settlements, whichcould have a material adverse effect on our financial condition and results ofoperations.**

In connection with our historical stock optionpractices and resulting restatements, a number of purported shareholderderivative actions were filed against certain of our current and formerdirectors, officers and certain other individuals, which purport to assert

 

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claims on Zoran’sbehalf. There may be additional lawsuits of this nature filed in the future. Wecannot predict the outcome of these lawsuits, nor can we predict the amount oftime and expense that will be required to resolve these lawsuits. If theselawsuits become time consuming and expensive, or if there are unfavorableoutcomes in any of these cases, there could be a material adverse effect on ourbusiness, financial condition, results of operations or cash flows.

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,officers and employees in connection with the investigation of our historicalstock option 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.

**Failureto maintain effective internal controls may cause us to delay filing ourperiodic reports with the SEC, affect our Nasdaq listing, and adversely affectour stock price.**

We are required toinclude a report of management on internal control over financial reporting inour Annual Report on Form 10-K that contains an assessment bymanagement of the effectiveness of our internal control over financialreporting. In addition, our independent registered public accounting firm mustattest to and report on management’s assessment of the effectiveness of theinternal control over financial reporting. The restatement of financialstatements in prior filings with the SEC is a strong indicator of the existenceof a “material weakness” in the design or operation of internal control overfinancial reporting. However, management concluded that the controldeficiencies that resulted in the restatement of the previously issuedconsolidated financial statements did not constitute a material weakness as ofDecember 31, 2006. In addition, management determined that as of September 30, 2007there continued to be effective controls designed and in place to prevent ordetect a material misstatement and therefore the likelihood of materialmisstatement of the consolidated financial statements  is not more than remote.

The SEC may disagree withthe manner in which we have accounted for and reported, or not reported, thefinancial impact of past option grant measurement date errors, and there is arisk that its inquiry could lead to circumstances in which we may have tofurther restate our prior financial statements, amend prior filings with theSEC, or otherwise take other actions not currently contemplated. In addition,the SEC may issue guidance or disclosure requirements related to the financialimpact of past option grant measurement date errors that may require us toamend this filing or prior filings with the SEC to provide additionaldisclosures pursuant to this guidance. Any such circumstance could also lead tofuture delays in filing our subsequent SEC reports and delisting of our commonstock from the NASDAQ Global Select Market.

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

We expect that theissues arising 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 effect onour financial results and cash flow. As a result of this and related factors,our directors and officers could face increased risks of personal liability inconnection with the performance of their duties. As a result, we may havedifficultly attracting and retaining qualified directors and officers, whichcould 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.**

Ourhistorical operating results have varied significantly from period to perioddue to a number of factors, including:

•       fluctuation in demandfor our products;

•       the timing of newproduct introductions or enhancements by us and our competitors;

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

•       the timing orcancellation of large customer orders;

•       the length andvariability of the sales cycle for our products;

•       pricing policy changesby us and by our competitors and suppliers;

•       thecyclical nature of the semiconductor industry;

 

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

•       changes in the mix ofproducts sold;

•       seasonality in demandfor our products;

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

•    the evolving and unpredictable nature of the marketsfor products incorporating our integrated circuits 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 andavailability of adequate foundry capacity;

•       fluctuations inmanufacturing yields;

•       changes in or theemergence of new industry standards;

•       failure to anticipatechanging customer product requirements;

•       the loss or gain ofimportant customers;

•       product obsolescence;and

•       theamount of research and development expenses associated with new product introductions.

Ouroperating results could also be harmed by:

•       economicconditions generally or in various geographic areas where we or our customersdo business;

•       terrorism andinternational conflicts or other crises;

•       other conditionsaffecting the timing of customer orders;

•       changes in governmentalregulations that could affect our products;

•       a downturn in themarkets for our customers’ products, particularly the consumer electronicsmarket;

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

•       reduced demand forconsumer electronic products due to a potential economic slowdown;

•       tightened immigrationcontrols that may adversely affect the residence status of key non-U.S. managersand technical employees in our U.S. facilities or our ability to hire newnon-U.S. employees in such facilities; or

•       potentialexpansion of armed conflict in the Middle East which could adversely affect ouroperations in Israel.

These factors are difficultor impossible to forecast. We place orders with independent foundries severalmonths in advance of the scheduled delivery date, often in advance of receivingnon-cancelable orders from our customers. This limits our ability to react tofluctuations in demand for their products. If anticipated shipments in anyquarter are canceled or do not occur as quickly as expected, or if we fail toforesee a technology change that could render a product obsolete, expense andinventory levels could be disproportionately high. If anticipated licenserevenues in any quarter are canceled or do not occur, gross margins may bereduced.

A significant portion ofour expenses are relatively fixed, and the timing of increases in expenses isbased in large part on our forecast of future revenues. As a result, ifrevenues do not meet our expectations, we may be unable to quickly adjustexpenses to levels appropriate to actual revenues, which could harm ouroperating results.

**Ourcustomers experience fluctuating product cycles and seasonality, which causestheir sales to 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 to quarter.During the final production of a mature product, our customers typicallyexhaust their existing inventories of our products. Consequently, orders forour products may decline in those circumstances, even if the products areincorporated into both mature products and replacement products. A delay in acustomer’s transition to commercial production of a replacement product woulddelay our ability to recover the lost sales from the discontinuation of therelated mature product. Our customers also experience significant seasonalityin the sales of their consumer products, which

 

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affects their orders ofour products. Typically, the second half of the calendar year represents adisproportionate percentage of sales for our customers due to the holidayshopping period for consumer electronics products, and therefore, adisproportionate percentage of our sales. We expect these seasonal salesfluctuations to continue for the foreseeable future.

Our ability to matchproduction mix with the product mix needed to fill current orders and orders tobe delivered in the given quarter may affect our ability to meet that quarter’srevenue forecast. In addition, when responding to customers’ requests forshorter shipment lead times, we manufacture products based on forecasts ofcustomers’ demands. These forecasts are based on multiple assumptions. If weinaccurately forecast customer demand, we may hold inadequate, excess orobsolete inventory that would reduce our profit margins and adversely affectour results of operations and 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 pricesfor our products decline over relatively short time periods, while many of ourmanufacturing costs are fixed. When our average selling prices decline, ourrevenues decline unless we are able to sell more units, and our gross marginsdecline unless we are able to reduce our manufacturing costs by a commensurateamount. Our operating results suffer when gross margins decline. We haveexperienced these problems, and we expect to continue to experience them in thefuture, although we cannot predict when they may occur or how severe they willbe.

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

The semiconductorindustry is subject to cyclical variations in product supply and demand.Downturns in the industry often occur in connection with, or anticipation of,maturing product cycles for both semiconductor companies and their customersand declines in general economic conditions. These downturns have beencharacterized by abrupt fluctuations in product demand, productionover-capacity and accelerated decline of average selling prices. In some cases,these downturns have lasted more than one year. We cannot predict whether wewill achieve timely, cost-effective access to that capacity when needed, orwhen there will be a capacity shortage again in the future. A downturn in thesemiconductor industry could harm our sales and revenues if demand drops, orour 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 havederived a substantial majority of our product revenues from the sale ofintegrated circuits for DVD and digital camera applications. We expect thatsales of our products for these applications will continue to account for asignificant portion of our revenues for the foreseeable future. Our futurefinancial performance will also depend on our ability to successfully developand market new products in the digital television, HDTV and digital imagingmarkets. If the markets for these products and applications decline or fail todevelop as expected, or we are not successful in our efforts to market and sellour products to manufacturers who incorporate integrated circuits into theseproducts, our financial results will be harmed.

**Ourfinancial performance is highly dependent on the timely and successfulintroduction of new and enhanced products.**

Our financialperformance depends in large part on our ability to successfully develop andmarket next-generation and new products in a rapidly changing technologicalenvironment. If we fail to successfully identify new product opportunities andtimely develop and introduce new products that achieve market acceptance, wemay lose our market share and our future revenues and earnings may suffer.

In the consumerelectronic market, our performance has been dependent on our successfuldevelopment and timely introduction of integrated circuits for DVD players, DVDrecorders, digital cameras, broadband digital television and HDTV. Thesemarkets are characterized by the incorporation of a steadily increasing levelof integration and numbers of features on a chip at the same or lower systemcost, enabling original equipment manufacturers, or OEMs, to continuallyimprove the features or reduce the prices of the systems they sell. If we areunable to continually develop and introduce integrated circuits with increasinglevels of integration and new features at competitive prices, our operatingresults will suffer.

In the Imaging market, our performance has beendependent on our successful development and timely introduction of integratedcircuits for printers and multi-function peripherals. These markets arecharacterized by the incorporation of a steadily increasing level ofintegration and higher speeds on a chip at the same or lower system cost,enabling OEMs to improve the performance and features or reduce the prices of thesystems 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

 

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licensing business isdependent on our ability to develop and introduce new releases of our software,which incorporate new or enhanced printing standards, as well as performanceenhancements required by our OEM customers. If we are unable to develop andrelease versions of our software supporting required standards and offeringenhanced performance, our operating results will suffer.

**Weface competition or potential competition from companies with greater resourcesthan ours, and if we are unable to compete effectively with these companies,our market share may decline and our business could be harmed.**

The markets in which wecompete are intensely competitive and are characterized by rapid technologicalchange, declining average unit selling prices and rapid product obsolescence.We expect competition to increase in the future from existing competitors andfrom other companies that may enter our existing or future markets withsolutions which may be less costly or provide higher performance or moredesirable features than our products. Competition typically occurs at thedesign stage, when customers evaluate alternative design approaches requiringintegrated circuits. Because of short product life cycles, there are frequentdesign win competitions for next-generation systems.

Our existing andpotential competitors include many large domestic and international companiesthat have substantially greater financial, manufacturing, technological,market, distribution and other resources. These competitors may also havebroader product lines and longer standing relationships with customers andsuppliers than we have.

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

We believe that growth of the DVD player market will be modest in theforeseeable future, and that continued strong competition will lead to furtherprice reductions, and reduced profit margins. Wealso face significant competition in the digital Imaging and digital cameramarkets. The future growth of both markets is highly dependent onOEMs continuing to outsource an increasing portion of their productdevelopment work. Many of our existingcompetitors, as well as OEM customers that are expected to compete with us inthe future, have substantially greater financial, manufacturing, technical,marketing, distribution and other resources, broader product lines and longerstanding relationships with customers than we have. In addition, much of ourfuture success is dependent on the success of our OEM customers. If we or ourOEM customers are unable to compete successfully against current and futurecompetitors, we could experience price reductions, order cancellations andreduced gross margins, any one of which could harm our business.

**Wemust keep pace with rapid technological changes and evolving industry standardsto remain competitive.**

Our future success willdepend on our ability to anticipate and adapt to changes in technology andindustry standards and our customers’ changing demands. The consumerelectronics market, in particular, is characterized by rapidly changingtechnology, evolving industry standards, frequent new product introductions,short product life cycles and increasing demand for higher levels ofintegration. Our ability to adapt to these changes and to anticipate futurestandards, and the rate of adoption and acceptance of those standards, will bea significant factor in maintaining or improving our competitive position andprospects for growth. If new industry standards emerge, our products or theproducts of our customers could become unmarketable or obsolete, and we couldlose market share or be required to incur substantial unanticipated costs tocomply with these new standards.

Our success will also depend on the successfuldevelopment of new markets and the application and acceptance of newtechnologies and products in those new markets. For example, our success willdepend on the ability of our customers to develop new products and enhanceexisting products in the recordable DVD player market and products for thebroadband digital television and HDTV markets and to introduce and promotethose products successfully. These markets may not continue to develop to theextent or in the time periods that we currently anticipate due to factorsoutside our control, such as delays in implementation of FCC 02-320requiring all new televisions to include a digital receiver byFebruary 2009. If new markets do not develop as we anticipate, or if ourproducts do

 

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not gain widespreadacceptance in these markets, our business, financial condition and results ofoperations could be harmed. The emergence of new markets for our products is alsodependent in part upon third parties developing and marketing content in aformat compatible with commercial and consumer products that incorporate ourproducts. If this content is not available, manufacturers may not be able tosell products incorporating our products, and our sales would suffer.

**We rely on independentfoundries and contractors for the manufacture, assembly and testing of ourintegrated circuits and other hardware products, and the failure of any ofthese third parties to deliver products or otherwise perform as requested coulddamage our relationships with our customers and harm our sales and financialresults.**

We do not operate anymanufacturing facilities, and we rely on independent foundries to manufacturesubstantially all of our products. These independent foundries fabricateproducts for other companies and may also produce products of their own design.From time to time, there are manufacturing capacity shortages in thesemiconductor industry. We do not have long-term supply contracts with any ofour suppliers, including our principal supplier, Taiwan SemiconductorManufacturing Company, or TSMC. Therefore, TSMC and our other suppliers are notobligated to manufacture products for us for any specific period, in anyspecific quantity or at any specified price, except as may be provided in aparticular purchase order.

Ourreliance on independent foundries involves a number of risks, including:

•       the inability to obtainadequate manufacturing capacity;

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

•       lack of control overdelivery schedules;

•       lack of control overquality assurance;

•       lack of control overmanufacturing yields and cost; and

•       potentialmisappropriation of our intellectual property.

In addition, TSMC andsome of our other foundries are located in areas of the world that are subjectto natural disasters such as earthquakes. While the 1999 earthquake in Taiwandid not have a material impact on our independent foundries, a similar eventcentered near TSMC’s facility could severely reduce TSMC’s ability tomanufacture our integrated circuits. The loss of any of our manufacturers as asupplier, our inability to expand the supply of their products in response toincreased demand, or our inability to obtain timely and adequate deliveriesfrom our current or future suppliers due to a natural disaster or any otherreason could delay or reduce shipments of our products. Any of thesecircumstances could damage our relationships with current and prospectivecustomers and harm our sales and financial results.

We also rely on alimited number of independent contractors for the assembly and testing of ourproducts. Our reliance on independent assembly and testing houses limits ourcontrol over delivery schedules, quality assurance and product cost.Disruptions in the services provided by our assembly or testing houses or othercircumstances that would require them to seek alternative sources of assemblyor testing could lead to supply constraints or delays in the delivery of ourproducts. These constraints or delays could damage our relationships withcurrent and prospective customers and 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.**

Ifwe are not able to obtain additional foundry capacity as required, ourrelationships with our customers would be harmed and our sales would likely bereduced. In order to secure additional foundry capacity, we have considered,and may in the future need to consider, various arrangements with suppliers,which could include, among others:

•       option payments or otherprepayments to a foundry;

•       nonrefundable depositswith or loans to foundries in exchange for capacity commitments;

•       contracts that commit usto purchase specified quantities of silicon wafers over extended periods;

•       issuance of our equitysecurities to a foundry;

•       investmentin a foundry;

 

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•       joint ventures; or

•       otherpartnership relationships with foundries.

We may not be able tomake any such arrangement in a timely fashion or at all, and such arrangements,if any, may not be on terms favorable to us. Moreover, if we are able to securefoundry capacity, we may be obligated to utilize all of that capacity or incurpenalties. Such penalties may be expensive and could harm our financialresults.

**Ifour independent foundries do not achieve satisfactory yields, our relationshipswith our customers may be harmed.**

The fabrication ofsilicon wafers is a complex process. Minute levels of contaminants in themanufacturing environment, defects in photo masks used to print circuits on awafer, difficulties in the fabrication process or other factors can cause asubstantial portion of the integrated circuits on a wafer to be non-functional.Many of these problems are difficult to detect at an early stage of themanufacturing process and may be time consuming and expensive to correct. As aresult, foundries often experience problems achieving acceptable yields, whichare represented by the number of good integrated circuits as a proportion ofthe number of total integrated circuits on any particular wafer. Poor yieldsfrom our independent foundries would reduce our ability to deliver our productsto customers, harm our relationships with our customers and harm our business.

**Weare dependent upon our international sales and operations; economic, politicalor military events in a country where we make significant sales or havesignificant operations could interfere with our success or operations there andharm our business.**

During 2006, only 7% ofour total revenues were derived from North America sales. We anticipate thatinternational sales will continue to account for a substantial majority of ourtotal revenues for the foreseeable future. In addition, substantially all ofour semiconductor products are manufactured, assembled and tested outside ofthe United States by independent foundries and subcontractors.

Weare subject to a variety of risks inherent in doing business internationally,including:

•       unexpected changes inregulatory requirements;

•       fluctuations in exchangerates;

•       political and economicinstability;

•       imposition of tariffsand other barriers and restrictions;

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

•       healthrisks in a particular region.

A material amount of ourresearch and development personnel and facilities and a portion of our salesand marketing personnel are located in Israel. Political, economic and militaryconditions in Israel directly affect our operations. Some of our employees inIsrael are obligated to perform up to 39 days of military reserve duty annually.The absence of these employees for significant periods during the work week maycause us to operate inefficiently during these periods.

Our operations in Chinaare subject to the economic and political uncertainties affecting that country.For example, the Chinese economy has experienced significant growth in the pastdecade, but such growth has been uneven across geographic and economic sectors.This growth may decrease and any slowdown may have a negative effect on ourbusiness. We also maintain offices in Taipei, Taiwan, Hong Kong and Seoul,Korea, and our operations are subject to the economic and politicaluncertainties affecting these countries as well.

The significantconcentration of our manufacturing activities with third party foundries inTaiwan exposes us to the risk of political instability in Taiwan, including thepotential for conflict between Taiwan and China. We have several significantOEM customers in Japan, Korea and other parts of Asia. Adverse economiccircumstances in Japan and elsewhere in Asia could affect these customers’willingness or ability to do business with us in the future or their success indeveloping and launching devices containing our products.

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

Foreign currency fluctuations may affect theprices of our products. Prices for our products are currently denominated inU.S. dollars for sales to our customers throughout the world. If there is asignificant devaluation of the currency in a specific country, the prices of

 

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our products willincrease 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 significantportion of our research and development and engineering activities at ourdesign center in Haifa, Israel, a 109,700 square foot facility where we employapproximately 390 people. We also conduct a portion of our sales and marketingoperations at our Haifa facility. We have an additional 16,100 square footfacility in Kfar Netter, Israel, where we conduct research and developmentactivities.

Haifawas a principal target in the recent armed conflict in Northern Israel, and,accordingly, our facility and personnel in Haifa were at significant riskduring that conflict. Although we suffered no damage to our facilities orinjury to our personnel during the recent conflicts, significant damage to ourfacilities in Israel, injury of our employees working there, or damage to theIsraeli business or transportation infrastructure as a result of futuremilitary conflict or terrorist activity could materially affect our operationsin Israel and harm our business. In addition, some of our employees in Israelserve in the military reserve. Any prolonged absence of a substantial number ofthese employees could materially harm our business.

In addition to theirimpact on our operations in Israel, 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 ofour operations, relating mainly to our personnel and facilities in Israel, isincurred in New Israeli Shekels. As a result, we bear the risk that the rate ofinflation in Israel or the decline in the value of United States dollarcompared to the New Israeli Shekel will increase our costs as expressed inUnited States dollars. To date, we have not engaged in hedging transactions. Inthe future, we may enter into currency hedging transactions to decrease therisk of financial exposure from fluctuations in the exchange rate of the UnitedStates dollar against the New Israeli Shekel. These measures may not adequatelyprotect us from the impact of inflation 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 customershave accounted for a substantial percentage of our revenues. In 2006, onecustomer accounted for 14% of our total revenues, while sales to our fourlargest customers accounted for 36% of our total revenues. In 2005, no singlecustomer accounted for more than 10% of our total revenues, and sales to our fourlargest customers accounted for 29% of our total revenues. Sales to these largecustomers have varied significantly from year to year and will continue tofluctuate in the future. These sales also may fluctuate significantly fromquarter to quarter. We may not be able to retain our key customers, or thesecustomers may cancel purchase orders or reschedule or decrease their level ofpurchases from us. Any substantial decrease or delay in sales to one or more ofour key customers could harm our sales and financial results. In addition, anydifficulty in collecting amounts due from one or more key customers could harmour financial results. As ofDecember 31, 2006 four customers accounted for approximately 13%, 10%, 10%and 10% of the net accounts receivable balance, respectively.

**Ourproducts generally have long sales cycles and implementation periods, whichincreases our costs in obtaining orders and reduces the predictability of ouroperating results.**

Our products aretechnologically complex. Prospective customers generally must make asignificant commitment of resources to test and evaluate our products and tointegrate them into larger systems. As a result, our sales processes are oftensubject to delays associated with lengthy approval processes that typicallyaccompany the design and testing of new products. The sales cycles of ourproducts often last for many months**.**Longer salescycles require us to invest significant resources in attempting to make salesand delay the generation of revenue**.**

Long sales cycles also subject us to otherrisks, including customers’ budgetary constraints, internal acceptance reviewsand cancellations. In addition, orders expected in one quarter could shift toanother because of the timing of customers’ purchase decisions.

 

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The time required forour customers to incorporate our products into their own can vary significantlywith the needs of our customers and generally exceeds several months, whichfurther complicates our planning processes and reduces the predictability ofour operating results.

**Weare not protected by long-term contracts with our customers.**

We generally do notenter into long-term purchase contracts with our customers, and we cannot becertain as to future order levels from our customers. Customers generallypurchase our products subject to cancelable short-term purchase orders. Wecannot predict whether our current customers will continue to place orders,whether existing orders will be canceled, or whether customers who have orderedproducts will pay invoices for delivered products. When we do enter into along-term contract, the contract is generally terminable at the convenience ofthe customer. Early termination by one of our major customers would harm ourfinancial results.

**Ourproducts could contain defects, which could reduce sales of those products orresult in claims against us.**

We develop complex andevolving products. Despite testing by us and our customers, errors may be foundin existing or new products. This could result in, among other things, a delayin recognition or loss of revenues, loss of market share or failure to achievemarket acceptance. These defects may cause us to incur significant warranty,support and repair costs, divert the attention of our engineering personnelfrom our product development efforts and harm our relationships with customers.The occurrence of these problems could result in the delay or loss of marketacceptance of our products and would likely harm our business. Defects,integration issues or other performance problems in our products could resultin financial or other damages to customers or could damage market acceptance ofsuch products. Our customers could also seek damages from us for their losses.A product liability claim brought against us, even if unsuccessful, wouldlikely be time consuming and costly to defend.

**Regulationof our customers’ products may slow the process of introducing new products andcould impair our ability to compete.**

The Federal CommunicationsCommission, or FCC, has broad jurisdiction over our target markets in thedigital television business. Various international entities or organizationsmay also regulate aspects of our business or the business of our customers.Although our products are not directly subject to regulation by any agency, thetransmission pipes, as well as much of the equipment into which our productsare incorporated, are subject to direct government regulation. For example,before they can be sold in the United States, advanced televisions and emerginginteractive displays must be tested and certified by Underwriters Laboratoriesand meet FCC regulations. Accordingly, the effects of regulation on ourcustomers or the industries in which our customers operate may in turn harm ourbusiness. FCC regulatory policies affecting the ability of cable operators ortelephone companies to offer certain services and other terms on which thesecompanies conduct their business may impede sales of our products. In addition,our digital television business may also be adversely affected by theimposition of tariffs, duties and other import restrictions on our suppliers orby the imposition of export restrictions on products that we sellinternationally. Changes in current laws or regulations or the imposition ofnew laws or regulations in the United States or elsewhere could harm ourbusiness. For example, any delays by the FCC in imposing its pendingrequirement that all new televisions have a digital receiver could have anadverse effect on our HDTV business.

**Ourability to compete could be jeopardized if we are unable to protect ourintellectual property rights.**

Our success and abilityto compete depend in large part upon protection of our proprietary technology.We rely on a combination of patent, trade secret, copyright and trademark laws,non-disclosure and other contractual agreements and technical measures toprotect our proprietary rights. These agreements and measures may not besufficient to protect our technology from third-party infringement, or toprotect us from the claims of others. Monitoring unauthorized use of ourproducts is difficult, and we cannot be certain that the steps we have takenwill prevent unauthorized use of our technology, particularly in foreigncountries where the laws may not protect our proprietary rights as fully as inthe United States. The laws of certain foreign countries in which our productsare or may be developed, manufactured or sold, including various countries inAsia, may not protect our products or intellectual property rights to the sameextent as do the laws of the United States and thus make the possibility ofpiracy of our technology and products more likely in these countries. Ifcompetitors are able to use our technology, our ability to compete effectivelycould 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.

 

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We have generallylimited access to and distribution of the source and object code of oursoftware and other proprietary information. With respect to ourpage description language software, System On a Chip platform firmware anddrivers for the digital office market and in limited circumstances with respectto firmware and platforms for our DTV, DVDR products, we grant licenses thatgive our customers access to and restricted 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, therehas been significant litigation in the United States involving patents andother intellectual property rights. In the past, Zoran has been subject toclaims and litigation regarding alleged infringement of other parties’intellectual property rights, and both Oak and Zoran have been parties to anumber of patent-related lawsuits, both as plaintiff and defendant. We couldbecome subject to additional litigation in the future, either to protect ourintellectual property or as a result of allegations that we infringe others’intellectual property rights or have breached our contractual obligations toothers. Claims that our products infringe proprietary rights or that we havebreached contractual obligations would force us to defend ourselves andpossibly our customers or manufacturers against the alleged infringement orbreach. Future litigation against us, if successful, could subject us tosignificant liability for damages or invalidation of our proprietary rights.These lawsuits, regardless of their success, are time-consuming and expensiveto resolve 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 productsthat incorporate the challenged intellectual property;

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

•       pay damages; or

•       redesignthose products that use such technology.

Although patent disputesin the semiconductor industry have often been settled through cross-licensingarrangements, we may not be able in any or every instance to settle an allegedpatent infringement claim through a cross-licensing arrangement. We have a morelimited patent portfolio than many of our competitors. If a successful claim ismade against us or any of our customers and a license is not made available tous on commercially reasonable terms or we are required to pay substantialdamages or awards, our business, financial condition and results of operationswould be materially adversely affected.

**Ifnecessary licenses of third-party technology are not available to us or arevery expensive, our products could become obsolete.**

From time to time, wemay be required to license technology from third parties to develop newproducts or product enhancements. Third party licenses may not be available oncommercially reasonable terms, if at all. If we are unable to obtain anythird-party license required to develop new products and product enhancements,we may have to obtain substitute technology of lower quality or performancestandards or at greater cost, either of which could seriously harm thecompetitiveness of our products.

Werely on licenses to use various technologies that are material to our products.We do not own the patents that underlie this license. Our rights to use thesetechnologies and employ the inventions claimed in the licensed patents aresubject to our abiding by the terms of the licenses. Under the licenseagreements we must fulfill confidentiality obligations and pay royalties. If wefail to abide by the terms of the license, we would be unable to sell andmarket the products under license. In addition, we do not control theprosecution of the patents subject to this license or the strategy fordetermining when such patents should be enforced. As a result, we are dependentupon our licensor to determine the appropriate strategy for prosecuting andenforcing those patents.

**Ifwe are not able to apply our net operating losses against taxable income infuture periods, our financial results will be harmed.**

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

 

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**Changesin, or interpretations of, tax rules and regulations may adversely affectour effective tax rates.**

Unanticipated changes inour tax rates could affect our future results of operations. Our futureeffective tax rates could be unfavorably affected by changes in tax laws or theinterpretation of tax laws, by unanticipated decreases in the amount of revenueor earnings in countries with low statutory tax rates, or by changes in thevaluation of our deferred tax assets and liabilities. While we believe our taxreserves adequately provide for any tax contingencies, the ultimate outcomes ofany future tax audits are uncertain, and we can give no assurance as to whetheran adverse result from one or more of them will have a material effect on ouroperating results and financial position.

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

We have made investmentsin, and acquisitions of other complementary companies, products andtechnologies, and we may acquire additional businesses, products ortechnologies in the future. In the event of any future acquisitions, we could:

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

•       incur debt;

•       use a significant amountof our cash;

•       assume liabilities;

•       incur expenses relatedto the future impairment of goodwill and the amortization of other intangibleassets; or

•       incurother large write-offs immediately or in the future.

Ouroperation of any other acquired business will also involve numerous risks,including:

•       problems combining thepurchased operations, technologies or products;

•       unanticipated costs;

•       diversion of management’sattention from our core business;

•       adverse effects on existingbusiness relationships with customers;

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

•       potentialloss of key employees, particularly those of the purchased organizations.

We may not be able tosuccessfully complete the integration of the business, products or technologiesor personnel that we might acquire in the future, and any failure to do socould disrupt our business and seriously harm our financial condition.

**Ifour goodwill or amortizable intangible assets become impaired we may berequired to record a significant charge to earnings.**

Under generally acceptedaccounting principles, we review our amortizable intangible assets forimpairment when events or changes in circumstances indicate the carrying valuemay not be recoverable. Goodwill is required to be tested for impairment atleast annually. Factors that may be considered a change in circumstancesindicating that the carrying value of our goodwill or amortizable intangibleassets may not be recoverable include a decline in stock price and marketcapitalization, future cash flows, and slower growth rates in our industry. Wemay be required to record a significant charge to earnings in our financialstatements during the period in which any impairment of our goodwill oramortizable intangible assets is determined resulting in an impact on ourresults of operations.

**Ifwe fail to manage our future growth, if any, our business would be harmed.**

We anticipate that our future growth, if any,will require 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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**Werely on 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 asignificant degree upon the continuing contributions of our senior management.Management and other employees may voluntarily terminate their employment withus at any time upon short notice. The loss of key personnel could delay productdevelopment cycles or otherwise harm our business. We believe that our futuresuccess will also depend in large part on our ability to attract, integrate andretain highly-skilled engineering, managerial, sales and marketing personnel,located in the United States and overseas. Competition for such personnel isintense, and we may not be successful in attracting, integrating and retainingsuch personnel. Failure to attract, integrate and retain key personnel couldharm our ability to carry out our business strategy and compete with othercompanies.

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

Our certificate ofincorporation and bylaws and Delaware law contain provisions that could make itmore difficult for a third party to acquire us, even if doing so would bebeneficial to our stockholders. These include provisions:

•       prohibiting a mergerwith a party that has acquired control of 15% or more of our outstanding commonstock, such as a party that has completed a successful tender offer, untilthree years after that party acquired control of 15% of our outstanding commonstock;

•       authorizingthe issuance of up to 3,000,000 shares of “blank check” preferred stock;

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

•       requiringadvance notice of any stockholder nominations of candidates for election to ourboard of directors.

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

The market price of ourcommon stock has fluctuated significantly since our initial public offering in1995.  Between January 1, 2006 andSeptember 30, 2007, the closing sale price of our common stock, as reported onthe Nasdaq Global Select Market, ranged from a low of $13.57 to a high of$29.13.  The market price of our commonstock is subject to significant fluctuations in the future in response to avariety of factors, including:

•       announcements concerning our business orthat of our competitors or customers;

•       annual and quarterly variations in our operating results;

•       changes in analysts’ earnings estimates;

•       announcements of technologicalinnovations;

•       the introduction of new products orchanges in product pricing policies by Zoran or its competitors;

•       loss of key personnel;

•       proprietary rights or other litigation;

•       general conditions in the semiconductorindustry; and

•       developments in the financial markets.

In addition, the stock market has, from time to time,experienced extreme price and volume fluctuations that have particularlyaffected the market prices for semiconductor companies or technology companiesgenerally and which have been unrelated to the operating performance of theaffected companies.  Broad marketfluctuations of this type may reduce the future market price of our commonstock.

 

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**Item 4.   Submission of Matters to a Vote of SecurityHolders**

The information set forthin “Part II, Item 4. Submission of Matters to a Vote of Security Holders”in the Company’s Quarterly Report on Form 10-Q for the quarterly periodended June 30, 2007 is incorporated herein by reference.

**Item6.   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: November 9, 2007 |       |                  | /s/ Karl Schneider |
|                         |       |                  | Karl Schneider |
|                         |       |                  | Senior Vice President, Finance |
|                         |       |                  | and Chief Financial Officer |

 

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