**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

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### **FORM 10-Q**

| **x**      | **QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)  OF THE SECURITIES AND EXCHANGE ACT OF 1934**  |
|------------|---------------------------------------------------------------------------------------------------|
| ** ** | ** **                                                                                        |
| ** ** | **For the  Quarterly Period Ended June 30, 2007**                                                 |
| ** ** | ** **                                                                                        |
| ** ** | **OR**                                                                                            |
| ** ** | ** **                                                                                        |
| **o**      | **TRANSITION REPORT PURSUANT TO SECTION 13 OR  15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934** |
| ** ** | ** **                                                                                        |
| ** ** | **For the transition period from          to**  |

 

**Commission File No. 0-27246**

**ZORAN CORPORATION**

(Exact name of registrant as specified in its charter)

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

 

**1390Kifer Road**

**Sunnyvale,California 94086**

(Address of principal executive offices, including zip code)

**(408)523-6500**

(Registrant’s telephone number, including area code)

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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

Indicateby check mark whether registrant is a large accelerated filer, an acceleratedfiler or a non-accelerated filer.  Seedefinition of “accelerated and large accelerated filer” in Rule 12b-2 ofthe Exchange Act.  (Check one):

Largeaccelerated filer  x   Accelerated filer   o   Non accelerated-filer  o

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

As of August 7, 2007, there were outstanding 49,828,457shares of the registrant’s Common Stock, par value $0.001 per share.

 

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**ZORANCORPORATION AND SUBSIDIARIES**

**FORM10-Q**

**INDEX**

**For the Quarter Ended June 30, 2007**
|                                    | ** **                                                                                  | ** **                                                                                                         | **Page** |
|------------------------------------|---------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------------|----------|
| **PART I. FINANCIAL  INFORMATION** | ** **                                                                                  |
|                               |                                                                                        |                                                                                                               |     |
|                               |                                                                                        |                                                                                                               |     |
| **Item 1.**                        | Financial  Statements (Unaudited):                                                          |                                                                                                               |
|                               |                                                                                        |                                                                                                               |     |
|                               |                                                                                        | Condensed  Consolidated Balance Sheets as of June 30, 2007 and December 31, 2006                                   | 3        |
|                               |                                                                                        |                                                                                                               |     |
|                               |                                                                                        | Condensed  Consolidated Statements of Operations for the Three Months and Six Months  Ended June 30, 2007 and 2006 | 4        |
|                               |                                                                                        |                                                                                                               |     |
|                               |                                                                                        | Condensed  Consolidated Statements of Cash Flows for the Three Months and Six Months  Ended June 30, 2007 and 2006 | 5        |
|                               |                                                                                        |                                                                                                               |     |
|                               |                                                                                        | Notes to  Condensed Consolidated Financial Statements                                                              | 6        |
|                               |                                                                                        |                                                                                                               |     |
| **Item 2.**                        | Management’s  Discussion and Analysis of Financial Condition and Results of Operations | 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                                        | 34                                                                                                                 |
| ** **                         |                                                                                        |                                                                                                               |     |
| **Item  6.**                       | Exhibits                                                                                    | 35                                                                                                                 |
| ** **                         |                                                                                        |                                                                                                               |     |
| Signatures                         |                                                                                        |                                                                                                               | 36       |
|                                    |                                                                                             |                                                                                                                    |          |  |  |

 

2

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**PART I. FINANCIAL INFORMATION**

**Item 1. Financial Statements:**

**ZORANCORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**

**(unaudited)**
| ** **                                                                                                                                                                                                                                             | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                                                                                                                             | ** ** | ** **              | ** ** | ** **                  | ** ** |
| ASSETS                                                                                                                                                                                                                                                 |       |                    |       |                        |       |
| Current assets:                                                                                                                                                                                                                                        |       |                    |       |                        |       |
| Cash and cash  equivalents                                                                                                                                                                                                                             |       | $                       | 98,494     |                        | $          | 100,034 |   |
| Short-term  investments                                                                                                                                                                                                                                |       | 238,195                 |       | 196,195                     |       |
| Accounts  receivable, net                                                                                                                                                                                                                              |       | 49,048                  |       | 42,640                      |       |
| Inventories                                                                                                                                                                                                                                            |       | 47,065                  |       | 45,044                      |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                             |       | 9,418                   |       | 10,726                      |       |
| Total current  assets                                                                                                                                                                                                                                  |       | 442,220                 |       | 394,639                     |       |
| Property and  equipment, net                                                                                                                                                                                                                           |       | 15,612                  |       | 15,673                      |       |
| Other assets and  investments                                                                                                                                                                                                                          |       | 25,989                  |       | 22,890                      |       |
| Goodwill                                                                                                                                                                                                                                               |       | 172,796                 |       | 174,259                     |       |
| Intangible  assets, net                                                                                                                                                                                                                                |       | 44,831                  |       | 69,169                      |       |
|                                                                                                                                                                                                                                                   |       | $                       | 701,448    |                        | $          | 676,630 |   |
|                                                                                                                                                                                                                                                   |       |                    |       |                        |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                             |       |                    |       |                        |       |
| Current liabilities:                                                                                                                                                                                                                                   |       |                    |       |                        |       |
| Accounts payable                                                                                                                                                                                                                                       |       | $                       | 48,638     |                        | $          | 33,767 |   |
| Accrued expenses  and other liabilities                                                                                                                                                                                                                |       | 45,960                  |       | 46,082                      |       |
| Total current  liabilities                                                                                                                                                                                                                             |       | 94,598                  |       | 79,849                      |       |
| Other long-term  liabilities                                                                                                                                                                                                                           |       | 19,721                  |       | 12,784                      |       |
| Commitments and  Contingencies (Note 11)                                                                                                                                                                                                               |       |                    |       |                        |       |
| Stockholders’ equity:                                                                                                                                                                                                                             |       |                    |       |                        |       |
| Common stock,  $0.001 par value; 105,000,000 shares authorized at June 30, 2007 and  December 31, 2006; 49,759,737 shares issued and outstanding as of June  30, 2007; and 49,433,780 shares issued and outstanding as of  December 31, 2006 |       | 50                      |       | 49                          |       |
| Additional paid-in  capital                                                                                                                                                                                                                            |       | 817,933                 |       | 807,220                     |       |
| Accumulated  other comprehensive income                                                                                                                                                                                                                |       | 1,889                   |       | 4,238                       |       |
| Accumulated  deficit                                                                                                                                                                                                                                   |       | (232,743                | )          | (227,510                    | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                       |       | 587,129                 |       | 583,997                     |       |
|                                                                                                                                                                                                                                                   |       | $                       | 701,448    |                        | $          | 676,630 |   |

 

The accompanying notes are anintegral part of these unaudited condensed consolidated financial statements.

3

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**ZORANCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**
| ** **                                                  | ** ** | **Three Months Ended** | ** ** | **Six Months Ended** | ** ** |
|-------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                  | ** ** | **June 30,**                | ** ** | **June 30,**              | ** ** |
| ** **                                                  | ** ** | **2007**                         | ** ** | **2006**                       | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                   |       |                             |       |                           |       |   |   |   |   |
| Hardware product  revenues                                  |       | $                                | 114,508    |                           | $          | 108,236 |   | $ | 201,690 |   | $ | 207,405 |   |
| Software and  other revenues                                |       | 15,395                           |       | 14,069                         |       | 29,872 |   | 26,978 |   |
| License revenues  related to litigation settlement          |       | —                           |       | 5,624                          |       | — |   | 35,792 |   |
| Total revenues                                              |       | 129,903                          |       | 127,929                        |       | 231,562 |   | 270,175 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Costs and  expenses:                                        |       |                             |       |                           |       |   |   |   |   |
| Cost of hardware  product revenues                          |       | 60,178                           |       | 60,355                         |       | 104,376 |   | 114,005 |   |
| Research and  development                                   |       | 29,976                           |       | 25,226                         |       | 54,964 |   | 49,474 |   |
| Selling, general  and administrative                        |       | 28,414                           |       | 30,109                         |       | 57,007 |   | 55,010 |   |
| Amortization of  intangible assets                          |       | 12,169                           |       | 12,735                         |       | 24,338 |   | 25,470 |   |
| Total costs and  expenses                                   |       | 130,737                          |       | 128,425                        |       | 240,685 |   | 243,959 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Operating income  (loss)                                    |       | (834                             | )          | (496                           | )          | (9,123 | ) | 26,216 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Interest income                                             |       | 3,845                            |       | 2,867                          |       | 7,448 |   | 4,460 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Other income  (loss), net                                   |       | 37                               |       | (416                           | )          | 639 |   | 777 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Income (loss)  before income taxes                          |       | 3,048                            |       | 1,955                          |       | (1,036 | ) | 31,453 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Provision  (benefit) for income taxes                       |       | 2,850                            |       | (2,824                         | )          | 4,650 |   | 5,991 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Net income  (loss)                                          |       | $                                | 198        |                           | $          | 4,779 |   | $ | (5,686 | ) | $ | 25,462 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Basic net income  (loss) per share                          |       | $                                | 0.00       |                           | $          | 0.10 |   | $ | (0.11 | ) | $ | 0.54 |   |
| ** **                                                  | ** ** | ** **                       | ** ** | ** **                     | ** ** | ** ** | ** ** | ** ** | ** ** |
| Diluted net  income (loss) per share                        |       | $                                | 0.00       |                           | $          | 0.09 |   | $ | (0.11 | ) | $ | 0.51 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Shares used to  compute basic net income (loss) per share   |       | 49,600                           |       | 48,461                         |       | 49,527 |   | 47,341 |   |
|                                                        |       |                             |       |                           |       |   |   |   |   |
| Shares used to compute  diluted net income (loss) per share |       | 51,187                           |       | 51,311                         |       | 49,527 |   | 50,028 |   |

 

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

4

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**ZORANCORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**
| ** **                                                                        | ** ** | **Six Months Ended** | ** ** |
|-----------------------------------------------------------------------------------|------------|--------------------------------|------------|
| ** **                                                                        | ** ** | **June 30,**              | ** ** |
| ** **                                                                        | ** ** | **2007**                       | ** ** | **2006** | ** ** |
|                                                                              |       |                           |       |   |   |
| Cash flows from  operating activities:                                            |       |                           |       |   |   |
| Net income (loss)                                                                 |       | $                              | (5,686     | ) | $ | 25,462 |   |
| Adjustments to reconcile net income (loss) to net  cash provided by operations:   |       |                           |       |   |   |
| Depreciation                                                                      |       | 4,021                          |       | 4,763 |   |
| Amortization                                                                      |       | 24,338                         |       | 25,507 |   |
| Stock-based compensation expense                                                  |       | 7,032                          |       | 9,959 |   |
| Gain on sale of investments, net.                                                 |       | (809                           | )          | (1,044 | ) |
| Changes in current assets and liabilities:                                        |       |                           |       |   |   |
| Accounts receivable, net                                                          |       | (6,408                         | )          | 9,559 |   |
| Inventories                                                                       |       | (2,021                         | )          | (15,324 | ) |
| Prepaid expenses and other current assets and other  assets                       |       | (1,791                         | )          | (123 | ) |
| Accounts payable                                                                  |       | 14,871                         |       | 6,430 |   |
| Accrued expenses and other liabilities, goodwill and  other long term liabilities |       | 8,731                          |       | 682 |   |
| Net cash provided by operating activities                                         |       | 42,278                         |       | 65,871 |   |
|                                                                              |       |                           |       |   |   |
| Cash flows from  investing activities:                                            |       |                           |       |   |   |
| Purchases of property and equipment                                               |       | (3,960                         | )          | (3,243 | ) |
| Purchases of investments                                                          |       | (204,086                       | )          | (237,150 | ) |
| Proceeds from sales and maturities of investments                                 |       | 160,546                        |       | 133,386 |   |
| Net cash used in investing activities                                             |       | (47,500                        | )          | (107,007 | ) |
|                                                                              |       |                           |       |   |   |
| Cash flows from  financing activities:                                            |       |                           |       |   |   |
| Proceeds from issuance of common stock                                            |       | 3,682                          |       | 51,637 |   |
| Net cash provided by financing activities                                         |       | 3,682                          |       | 51,637 |   |
|                                                                              |       |                           |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                             |       | (1,540                         | )          | 10,501 |   |
|                                                                              |       |                           |       |   |   |
| Cash and cash  equivalents at beginning of period                                 |       | 100,034                        |       | 78,856 |   |
|                                                                              |       |                           |       |   |   |
| Cash and cash  equivalents at end of period                                       |       | $                              | 98,494     |   | $ | 89,357 |   |

 

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

5

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**ZORANCORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

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

Theaccompanying unaudited condensed consolidated financial statements of ZoranCorporation and its subsidiaries (“Zoran” or the “Company”) have been preparedin conformity with accounting principles generally accepted in the UnitedStates of America.  However, certaininformation or footnote disclosures normally included in financial statementsprepared in accordance with accounting principles generally accepted in theUnited States of America have been condensed or omitted pursuant to the rulesand regulations of the Securities and Exchange Commission (“SEC”).  In the opinion of management, the condensedconsolidated financial statements reflect all adjustments considered necessary,consisting only of normal recurring adjustments, 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***

OnJanuary 25, 2006, the Company entered into an agreement with MediaTek tosettle patent litigation between the companies.  In consideration forlicenses granted by Zoran, MediaTek agreed to pay Zoran $55 million, ofwhich $44 million was paid in February 2006 and $11 million was paid inApril 2006.  These two payments, net of amounts attributable to a holderof rights under the Oak patents involved in the litigation, and amounts payableas legal fees, were recognized as license revenues related to litigationsettlement. Revenues for the three and six month periods ended June 30, 2006include $5.6 million and $35.8 million, respectively, 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 covered MediaTekproducts.  These royalty payments, net of amounts payable by Zoran to aholder of rights under the Oak patents involved in the litigation, and amountspayable as legal fees, are recognized as software and other revenues as theyare received.

***RecentAccounting Pronouncements***

In February 2007, theFinancial Accounting Standards Board (“FASB”) issued Statement of FinancialAccounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFASNo. 159”). This statementexpands the standards under SFAS No. 157, “Fair Value Measurement,” to provide entities the one-timeelection (Fair Value Option or FVO) to measure financial instruments andcertain other items at fair value. Most of the provisions of this statementapply only to entities that elect the fair value option. 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 September 2006, theFASB issued 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 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 2006, theFASB issued SFAS No. 155, “Accounting for Certain Hybrid FinancialInstruments,” an amendment of SFAS No. 133, “Accounting for DerivativeInstruments and Hedging Activities,” and SFAS No. 140, “Accounting forTransfers and Servicing of Financial Assets and Extinguishments of Liabilities.”This Statement permits fair value remeasurement for any hybrid financialinstrument that contains an embedded derivative that otherwise would requirebifurcation. This Statement is effective for the Company for all financialinstruments acquired or issued after July 1, 2007. The adoption of SFASNo. 155 is not expected to have a material effect on the Company’sconsolidated financial position, results of operations or cash flows.

6

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

The following table summarizes stock-based compensation expense relatedto employee stock options, employee stock purchases and restricted stock sharesand restricted stock unit grants for the three and six months ended June 30,2007 and 2006 as recorded in accordance with SFAS No. 123(R) (in thousands):
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                           | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **                           | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Cost of hardware  product revenues   |       | $                                               | 116        |                                          | $          | 138 |   | $ | 176 |   | $ | 291 |   |
| Research and  development            |       | 1,468                                           |       | 1,444                                         |       | 2,163 |   | 3,054 |   |
| Selling, general  and administrative |       | 2,936                                           |       | 3,564                                         |       | 4,693 |   | 6,614 |   |
| Total costs and  expenses            |       | $                                               | 4,520      |                                          | $          | 5,146 |   | $ | 7,032 |   | $ | 9,959 |   |

 

***Valuation Assumptions***

Forpurposes of the disclosure requirements of SFAS No. 123 and therequirements of SFAS No. 123(R), the Company estimates the fair value ofstock options using the Black-Scholes valuation model using the followingweighted-average assumptions:
|                               | ** ** | **Stock Option Plans**                | ** ** |
|-------------------------------|------------|-------------------------------------------------|------------|
| ** **                    | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                    | ** ** | **2007**                                        | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Average expected term (years) |       | 5.5                                             |       | 5.7 |   | 5.5 |   | 5.7 |   |
| Expected volatility           |       | 60                                              | %          | 72 | % | 60 | % | 72 | % |
| Risk-free interest rate       |       | 4.8                                             | %          | 5.0 | % | 4.8 | % | 4.8 | % |
| Dividend  yield               |       | 0                                               | %          | 0 | % | 0 | % | 0 | % |

 
|                               | ** ** | **Employee Stock Purchase Plans** | ** ** |
|-------------------------------|------------|--------------------------------------------------|------------|
| ** **                    | ** ** | **Three Months Ended  June 30,**  | ** ** | **Six Months Ended  June 30,** | ** ** |
| ** **                    | ** ** | **2007**                                         | ** ** | **2006** | ** ** | **2007** | ** ** | **2006** | ** ** |
| Average expected term (years) |       | 1.27                                             |       | 1.25 |   | 1.28 |   | 1.25 |   |
| Expected volatility           |       | 46                                               | %          | 57 | % | 47 | % | 57 | % |
| Risk-free interest rate       |       | 4.9                                              | %          | 2.3 | % | 4.8 | % | 2.3 | % |
| Dividend  yield               |       | 0                                                | %          | 0 | % | 0 | % | 0 | % |

 

*ExpectedTerm:*  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.

*Expected Volatility*:  For the three and six monthsended June 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 regarding the risk-free interest rateon U.S. Treasury zero-coupon issues with an equivalent remaining term.

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

*EstimatedPre-vesting Forfeitures:*Whenestimating forfeitures, the Company considers voluntary termination behaviorbased on actual historical information.

7

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Stock Option 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                         |       | 1,253,593                                            |       | $                                              | 19.95      |   |
| Exercised                       |       | (276,077                                             | )          | $                                              | 13.27      |   |
| Canceled                        |       | (106,661                                             | )          | $                                              | 17.22      |   |
| Outstanding at  June 30, 2007   |       | 8,967,199                                            |       | $                                              | 17.15      |   |

 

Significant option groups outstanding as of June30, 2007 and the related weighted average exercise price and contractual lifeinformation, are as follows:
| ** **               | ** ** | **Options Outstanding**                                 | ** ** | **Options Exercisable**                                 | ** ** |
|--------------------------|------------|--------------------------------------------------------------|------------|--------------------------------------------------------------|------------|
| **Exercise Prices** | ** ** | **Shares  Underlying  Options at  June 30,  2007** | ** ** | **Weighted  Average  Remaining  Contractual  Life  (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  intrinsic value  (‘000)** | ** ** | **Shares  Underlying  Options at  June 30,  2007** | ** ** | **Weighted  Average  Remaining  Contractual  Life  (Years)** | ** ** | **Weighted  Average  Exercise  Price** | ** ** | **Aggregate  intrinsic  value (‘000)** | ** ** |
| ** **               | ** ** | ** **                                                   | ** ** | ** **                                                   | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| $0.00 to $9.99           |       | 532,016                                                      |       | 4.61                                                         |       | $ | 6.57 |   | $ | 7,166 |   | 517,016 |   | 4.51 |   | $ | 6.50 |   | $ | 7,001 |   |
| $10.00 to $11.99         |       | 1,274,545                                                    |       | 6.89                                                         |       | $ | 10.56 |   | 12,081 |   | 1,274,545 |   | 6.89 |   | $ | 10.56 |   | 12,081 |   |
| $12.00 to $14.99         |       | 1,515,067                                                    |       | 5.85                                                         |       | $ | 13.34 |   | 10,148 |   | 1,320,538 |   | 5.51 |   | $ | 13.29 |   | 8,911 |   |
| $15.00 to $19.99         |       | 3,470,383                                                    |       | 7.71                                                         |       | $ | 18.00 |   | 7,079 |   | 2,047,183 |   | 6.47 |   | $ | 17.07 |   | 6,089 |   |
| $20.00 to $25.99         |       | 1,782,737                                                    |       | 6.15                                                         |       | $ | 24.06 |   | — |   | 1,692,826 |   | 6.01 |   | $ | 24.15 |   | — |   |
| $26.00 to $46.53         |       | 392,451                                                      |       | 3.26                                                         |       | $ | 28.59 |   | — |   | 387,468 |   | 3.19 |   | $ | 28.61 |   | — |   |
| Total                    |       | 8,967,199                                                    |       | 6.59                                                         |       | $ | 17.15 |   | $ | 36,474 |   | 7,239,576 |   | 5.95 |   | $ | 16.75 |   | $ | 34,082 |   |

 

The weighted average grant date fair value ofoptions, as determined under SFAS No. 123(R), granted during the three andsix months ended June 30, 2007 was $11.47 per share. The weighted average grantdate fair value of options, as determined under SFAS No. 123(R), grantedduring the three months and six months ended June 30, 2006 was $12.65 and$12.21 per share, respectively.

Theaggregate intrinsic value in the table above represents the total pretaxintrinsic value, based on the Company’s closing stock price of $20.04 as ofJune 30, 2007, which would have been received by the option holders had alloption holders exercised their options as of that date.  The total number of shares of common stockunderlying in-the-money options exercisable as of June 30, 2007 was 5.2million.

Thetotal intrinsic value of options exercised during the three and six monthsended June 30, 2007 was $1.8 million. The total cash received from employees as a result of employee stockoption exercises during the three and six months ended June 30, 2007 wasapproximately $3.7 million.  Inconnection with these exercises, there was no tax benefit realized by theCompany due to the Company’s full valuation on its deferred tax assets.

Asof June 30, 2007, the total unrecognized compensation cost related to stockoptions not yet recognized was $20.5 million after estimated forfeitures whichare expected to be recognized over an estimated amortization period of up tofour years.

Pursuant to a tender offer that expired onJuly 2, 2007, the Company amended certain outstanding options coveringapproximately 204,556 shares of Zoran common stock to increase the per-shareexercise price of each such option to the fair market value of a share of Zorancommon stock on the remeasured grant date of that option. Under the tenderoffer, current employees subject to taxation in the United States had theopportunity to increase the per-share exercise price of the eligible options sothat those options will not be subject to adverse tax consequences underInternal Revenue Code Section 409A. In addition, participants in the tender offer whose eligible optionswere so amended are eligible for cash bonuses in the aggregate amount of$423,000 to compensate them for the higher per-share exercise prices.  The cash bonuses are expected to be paid onJanuary 4, 2008.  The Companyexpects to record approximately $120,000 as expense in the quarter endingSeptember 30, 2007 related to the amendment of eligible options.

8

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

***Stock Option Plans***

Asof June 30, 2007, the Company had outstanding options for the purchase of 9.0million shares of common stock held by employees and directors under theCompany’s 2005 Equity Incentive Plan (the “2005 Plan”), 2005 Outside DirectorsEquity Plan, 2002 Stock Option Plan, 1995 Outside Directors Stock Option Plan,the 1993 Stock Option Plan and other various plans the Company assumed as a resultof acquisitions.  As of June 30, 2007,2.8 million shares remained available for future grants and awards. Options andstock appreciation rights granted under the 2005 Plan must have exercise pricesper share not less than the fair market value of Zoran common stock on the dateof grant and may not be repriced without stockholder approval.  Such awards will vest and become exercisableupon conditions established by the Compensation Committee and may not have a termexceeding 10 years.

***Restricted Shares and Restricted Stock Units***

Restricted shares andrestricted stock units are granted under the 2005 Plan. Asof June 30, 2007, there was $0.1 million of total unrecognized stock-basedcompensation expense related to restricted shares and restricted stock units.This cost is expected to be recognized over the remaining period of two years.

Thefollowing is a summary of restricted shares and restricted stock unitsactivities:
|                              | ** ** | **Outstanding   restricted shares   and stock units** | ** ** | **Weighted-  average grant-   date fair value** | ** ** |
|------------------------------|------------|--------------------------------------------------------------------------------|------------|---------------------------------------------------------------------|------------|
| Balances,  December 31, 2006 |       | 189,716                                                                        |       | $                                                                   | 19.50      |   |
| Released                     |       | (58,982                                                                        | )          | $                                                                   | 13.59      |   |
| Forfeited                    |       | (2,791                                                                         | )          | $                                                                   | 21.56      |   |
| Balances, June 30, 2007      |       | 127,943                                                                        |       | $                                                                   | 19.27      |   |

 

***Employee Stock Purchase Plan***

The Company’s 1995Employee Stock Purchase Plan (“ESPP”) was adopted by the Company’s Board ofDirectors in October 1995, and approved by its stockholders inDecember 1995.  The ESPP enablesemployees to purchase shares through payroll deductions at approximately 85% ofthe lesser of the fair value of common stock at the beginning of a 24-monthoffering period or the end of each six-month segment within such offeringperiod.  The ESPP is intended to qualifyas an “employee stock purchase plan” under Section 423 of the U.S.Internal Revenue Code.  There were nopurchases during the quarter ended June 30, 2007.  As of June 30, 2007, 2.3 million shares werereserved and available for issuance under this plan.

**3.     Comprehensive Income (Loss)**

The following table presents the calculation ofcomprehensive income (loss) as required by SFAS No. 130 “ReportingComprehensive Income.”  The components ofcomprehensive income (loss), net of tax, are as follows (in thousands):
|                                                      | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                           | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                 | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net income  (loss)                                   |       | $                                               | 198        |                                          | $          | 4,779 |   | $ | (5,686 | ) | $ | 25,462 |   |
| Change in unrealized gain (loss) on investments, net |       | (907                                            | )          | 309                                           |       | (2,349 | ) | (569 | ) |
| Total comprehensive  income (loss)                   |       | $                                               | (709       | )                                             | $          | 5,088 |   | $ | (8,035 | ) | $ | 24,893 |   |

 

The components of accumulated other comprehensiveincome (loss) are unrealized gain (loss) on marketable securities.

9

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

The Company’s portfolio ofmarketable securities at June 30, 2007 was as follows (in thousands):
| ** **                         | ** ** | **Cost** | ** ** | **Unrealized  Gains** | ** ** | **Unrealized  Losses** | ** ** | **Estimated  Fair  Value** | ** ** |
|------------------------------------|------------|----------|------------|-----------------------|------------|------------------------|------------|----------------------------|------------|
| Corporate debt                     |       | $        | 98,900     |                  | $          | —                 |       | $                          | (322       | ) | $ | 98,578 |   |
| U.S. government  securities        |       | 65,858   |       | 18                    |       | (152                   | )          | 65,724                     |       |
| Auction rate  securities           |       | 55,650   |       | —                |       | —                 |       | 55,650                     |       |
| Foreign bonds                      |       | 13,171   |       | —                |       | (46                    | )          | 13,125                     |       |
| Municipal bonds                    |       | 1,500    |       | —                |       | —                 |       | 1,500                      |       |
| Total fixed  income securities     |       | 235,079  |       | 18                    |       | (520                   | )          | 234,577                    |       |
| Publicly traded  equity securities |       | 1,227    |       | 2,391                 |       | —                 |       | 3,618                      |       |
| Total                              |       | $        | 236,306    |                  | $          | 2,409                  |       | $                          | (520       | ) | $ | 238,195 |   |

 

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

 

The following table summarizes the maturities of theCompany’s fixed income securities at June 30, 2007 (in thousands):
|                                | ** ** | **Cost** | ** ** | **Estimated  Fair  Value** | ** ** |
|--------------------------------|------------|----------|------------|----------------------------|------------|
| Less than 1 year               |       | $        | 59,275     |                       | $          | 59,195 |   |
| Due in 1 to 2  years           |       | 81,020   |       | 80,725                     |       |
| Due in 2 to 5  years           |       | 39,134   |       | 39,007                     |       |
| Greater than  5 years*    |       | 55,650   |       | 55,650                     |       |
| Total fixed income  securities |       | $        | 235,079    |                       | $          | 234,577 |   |

 

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*Comprised of auction rate securities which havereset dates of 90 days or less but final expiration dates over 5 years.

**5.     Inventories**

Inventories are stated at thelower of cost (first in, first out) or market and consisted of the following(in thousands):
|                                      | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|--------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
|                                 |       |                    |       |                        |       |
| Purchased parts  and work in process |       | $                       | 24,339     |                        | $          | 18,748 |   |
| Finished goods                       |       | 22,726                  |       | 26,296                      |       |
|                                 |       | $                       | 47,065     |                        | $          | 45,044 |   |

 

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**6.****             ****Goodwill and Other IntangibleAssets**

The Company monitors the recoverability of goodwill recorded inconnection with acquisitions, by reporting unit, annually, or sooner if eventsor changes in circumstances indicate that the carrying amount may not berecoverable.  The Company performed theannual analysis as of September 30, 2006 and concluded that goodwill was notimpaired, as the fair value of each reporting unit exceeded its carrying value,including goodwill.

***Componentsof Acquired Intangible Assets****(in thousands):*
| ** **                    | ** ** | ** **        | ** ** | **June 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    |                            | $          | (160,750 | ) | $ | 34,755 |   | $ | 195,505 |   | $ | (142,658 | ) | $ | 52,847 |   |
| Patents                       |       | 3-5               |       | 40,265                      |       | (34,261                         | )          | 6,004 |   | 40,265 |   | (29,500 | ) | 10,765 |   |
| Customer base                 |       | 3-5               |       | 13,860                      |       | (10,813                         | )          | 3,047 |   | 13,860 |   | (9,583 | ) | 4,277 |   |
| Tradename and others          |       | 3-5               |       | 3,350                       |       | (2,325                          | )          | 1,025 |   | 3,350 |   | (2,070 | ) | 1,280 |   |
| Total                         |       |              |       | $                           | 252,980    |                            | $          | (208,149 | ) | $ | 44,831 |   | $ | 252,980 |   | $ | (183,811 | ) | $ | 69,169 |   |

 

Estimated future intangibleamortization expense, based on current balances, as of June 30, 2007 is asfollows (in thousands):
| Remaining six months of 2007   |   | $      | 18,886 |   |
|--------------------------------|--------|--------|--------|--------|
| Year ending  December 31, 2008 |   | 23,315 |   |
| Year ending  December 31, 2009 |   | 1,820  |   |
| Year ending  December 31, 2010 |   | 810    |   |
|                           |   | $      | 44,831 |   |

 

Goodwill by reportable segmentwas as follows (in thousands):
|            | ** ** | **June 30,  2007** | ** ** | **December 31,  2006** | ** ** |
|------------|------------|-------------------------|------------|-----------------------------|------------|
| ** ** | ** ** | ** **              | ** ** | ** **                  | ** ** |
| Consumer   |       | $                       | 167,744    |                        | $          | 169,060 |   |
| Imaging    |       | 5,052                   |       | 5,199                       |       |
|       |       | $                       | 172,796    |                        | $          | 174,259 |   |

 

# **7.     Income Taxes**

The provision for income taxes reflects the effective tax rate appliedto year to date earnings adjusted to exclude charges for amortization ofintangible assets and stock-based compensation expense.  The effective tax rate differs from the U.S.statutory rate due to utilization of previously unbenefitted operating lossesand State of Israel tax benefits on foreign earnings.  The provision is due primarily to domesticincome offset by previously unbenefitted purchased NOLs which when utilizedreduce goodwill and not tax expense.

The Company adopted the provisions of Financial Standards AccountingBoard Interpretation No. 48 Accounting for Uncertainty in Income Taxes (“FINNo. 48”) an interpretation of FASB Statement No. 109 (“SFAS No. 109”) onJanuary 1, 2007.  As a result of theimplementation of FIN No. 48 on January 1, 2007,  the Company reduced its tax liability by $1.6million with an offsetting increase of $0.4 million to opening accumulateddeficit, and a decrease in goodwill of $1.2 million.  Additionally, the Company decreased deferredtax assets and their associated valuation allowance by $12.7 million. Theadoption resulted in a reclassification of certain tax liabilities from currentto non-current.

At the adoption date of January 1, 2007, the Company had $27.5 millionof unrecognized tax benefits, $6.5 million of which was classified as otherlong-term liabilities, which if recognized in the future would affect oureffective tax rate.  The remainder wouldincrease deferred tax assets for which the Company would require a full valuationallowance.

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The tax years 2003 through 2006 remain open to examination by the majortaxing jurisdictions to which the Company is subject.  During the second quarter of 2007 the Companywas contacted by the ITA (Israel Tax Authority) in regards to an audit of its2003, 2004 and 2005 tax returns.  It ispossible that the audit will result in a positive or negative adjustment to theCompany’s unrecognized tax benefits within the next 12 months.  The Company is unable to estimate the rangeof the benefit or detriment at this point.  The Company continues to account for tax related interest and penaltiesas part of the income tax provision.  AtJanuary 1, 2007, accrued interest and penalties were immaterial.

Realization of deferred tax assets is based on our ability to generatesufficient future taxable income. The valuation allowance was determined inaccordance with the provisions of SFAS No. 109 which requires anassessment of both positive and negative evidence when determining whether itis more likely than not that deferred tax assets are recoverable; suchassessment is required on a jurisdiction by jurisdiction basis.  Historical operating results and continuingbusiness uncertainty represent sufficient negative evidence which it wasdifficult for positive evidence to overcome and accordingly, a full valuationallowance was recorded. The amount of the deferred tax asset valuationallowance, however, could be reduced in the near term if it becomes more likelythan not that some or all of the Company’s deferred tax assets will berealized.

**8.     Segment Reporting**

TheCompany’s products are based on highly integrated application-specificintegrated circuits, or ASICs, and system-on-a-chip, or SOC, solutions.  The Company also licenses certain softwareand other intellectual property.  TheCompany has two operating segments – Consumer group and Imaging group.

TheConsumer group provides products for use in DVD players, recordable DVDplayers, standard and high definition digital television products, digital cameraproducts and multimedia mobile phone products. The Imaging group provides products used in digital copiers, laser andinkjet printers as well as multifunction peripherals.

Information about reportedsegment income or loss is as follows for the three and six months ended June 30, 2007 and 2006 (in thousands):
| ** **            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **            | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| ** **            | ** ** | ** **                                      | ** ** | ** **                                    | ** ** | ** ** | ** ** | ** ** | ** ** |
| Net revenues:         |       |                                            |       |                                          |       |   |   |   |   |
| Consumer              |       | $                                               | 107,281    |                                          | $          | 109,760 |   | $ | 188,733 |   | $ | 233,316 |   |
| Imaging               |       | 22,622                                          |       | 18,169                                        |       | 42,829 |   | 36,859 |   |
|                  |       | $                                               | 129,903    |                                          | $          | 127,929 |   | $ | 231,562 |   | $ | 270,175 |   |
|                  |       |                                                 |       |                                               |       |  |   |  |   |
| Operating  expenses:  |       |                                            |       |                                          |       |   |   |   |   |
| Consumer              |       | $                                               | 102,230    |                                          | $          | 99,360 |   | $ | 184,516 |   | $ | 186,975 |   |
| Imaging               |       | 16,338                                          |       | 16,330                                        |       | 31,831 |   | 31,514 |   |
|                  |       | $                                               | 118,568    |                                          | $          | 115,690 |   | $ | 216,347 |   | $ | 218,489 |   |
|                  |       |                                                 |       |                                               |       |  |   |  |   |
| Contribution  margin: |       |                                            |       |                                          |       |   |   |   |   |
| Consumer              |       | $                                               | 5,051      |                                          | $          | 10,400 |   | $ | 4,217 |   | $ | 46,341 |   |
| Imaging               |       | 6,284                                           |       | 1,839                                         |       | 10,998 |   | 5,345 |   |
|                  |       | $                                               | 11,335     |                                          | $          | 12,239 |   | $ | 15,215 |   | $ | 51,686 |   |

 

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A reconciliation of the totalsreported for the operating segments to the applicable line items in theconsolidated financial statements for the three and six months ended June 30,2006 and 2005 is as follows (in thousands):
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                   | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                         |       |                                            |       |                                          |       |   |   |   |   |
| Contribution  margin from operating segments |       | $                                               | 11,335     |                                          | $          | 12,239 |   | $ | 15,215 |   | $ | 51,686 |   |
| Amortization of  intangible assets           |       | 12,169                                          |       | 12,735                                        |       | 24,338 |   | 25,470 |   |
| Total operating  income (loss)               |       | $                                               | (834       | )                                             | $          | (496 | ) | $ | (9,123 | ) | $ | 26,216 |   |

 

Zoran maintains operations in Canada, China, Germany, Israel, Japan,Korea, Taiwan, the United Kingdom and the United States.  Activities in Israel and the United Statesconsist of corporate administration, product development, logistics andworldwide sales management.  Otherforeign operations consist of sales, product development and technical support.

The geographic distribution oftotal revenues for the three and six months ended June 30, 2007and 2006 was as follows (in thousands):
| ** **                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                 | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
| **Revenue  from unaffiliated customers originating from:** |       |                                            |       |                                          |       |   |   |   |   |
| China                                                      |       | $                                               | 51,866     |                                          | $          | 46,948 |   | $ | 82,379 |   | $ | 86,553 |   |
| Japan                                                      |       | 21,807                                          |       | 27,631                                        |       | 46,905 |   | 54,995 |   |
| Korea                                                      |       | 3,932                                           |       | 6,756                                         |       | 9,999 |   | 15,318 |   |
| Taiwan                                                     |       | 35,983                                          |       | 28,380                                        |       | 61,652 |   | 82,088 |   |
| United States                                              |       | 7,401                                           |       | 11,077                                        |       | 14,570 |   | 18,195 |   |
| North America  (excluding United States)                   |       | 162                                             |       | 26                                            |       | 244 |   | 38 |   |
| Other                                                      |       | 8,752                                           |       | 7,111                                         |       | 15,813 |   | 12,988 |   |
| **Total revenues**                                         |       | $                                               | 129,903    |                                          | $          | 127,929 |   | $ | 231,562 |   | $ | 270,175 |   |

 

For the three months endedJune 30, 2007, one customer accounted for 14% of total revenues. For the sameperiod of 2006, two customers accounted for 11% and 13% of total revenues,respectively.  For the six months endedJune 30, 2007 one customer accounted for 14% of total revenues. For the sameperiod of 2006, one customer accounted for 14% of total revenues attributableto the license revenues related to litigation settlement and one other customeraccounted for 10% of total revenues.

Asof June 30, 2007, three customers accounted for approximately 14%, 13% and 12%of total net accounts receivable, respectively, and as of December 31, 2006 four customers accounted for approximately 13%,10%, 10% and 10% of the net accounts receivable balance, respectively.

# **9.     Employee Benefit Plans**

UnderIsraeli law, the Company is required to make severance payments to its retiredor dismissed Israeli employees and Israeli employees leaving its employment incertain other circumstances. The Company’s severance pay liability to itsIsraeli employees, which is calculated based on the salary of each employeemultiplied by the years of such employee’s employment, is reflected in theCompany’s balance sheet in other long-term liabilities on an accrual basis, andis partially funded by the purchase of insurance policies in the name of theemployees. The surrender value of the insurance policies is recorded in otherassets and investments. The severance pay expenses for the three and six monthsended June 30, 2007 were $137,000 and $186,000 respectively.  The severance pay expenses for the three andsix months ended June 30, 2006 were $489,000 and $535,000 respectively.

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The severance pay detail is as follows (inthousands):
|                                              | ** ** | **June 30,2007** | ** ** | **December 31,2006** | ** ** |
|----------------------------------------------|------------|-----------------------|------------|---------------------------|------------|
| Accrued  severance                           |       | $                     | 11,531     |                      | $          | 11,052 |   |
| Less: amount  funded                         |       | (10,619               | )          | (9,702                    | )          |
| Unfunded portion, net  accrued severance pay |       | $                     | 912        |                      | $          | 1,350 |   |

 

# **10.  Net Income (Loss) Per Share**

Basicnet income (loss) per share is calculated by dividing net income available tocommon stockholders by the weighted average number of common shares outstandingduring the period.  Diluted net income per share is calculated by usingthe weighted average number of common shares outstanding during the periodincreased to include the number of additional shares of common stock that wouldhave been outstanding if the dilutive potential shares of common stock had beenissued.

The following table provides a reconciliation of thecomponents of the basic and diluted net income (loss) per share computations(in thousands, except per share data):
| ** **                                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                                 | ** ** | **2007**                                        | ** ** | **2006**                                      | ** ** | **2007** | ** ** | **2006** | ** ** |
|                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Net income  (loss)                                                         |       | $                                               | 198        |                                          | $          | 4,779 |   | $ | (5,686 | ) | $ | 25,462 |   |
|                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Weighted average  shares outstanding                                       |       | 49,600                                          |       | 48,461                                        |       | 49,527 |   | 47,341 |   |
| Effect of  dilutive options, restricted shares, and restricted stock units |       | 1,587                                           |       | 2,850                                         |       | — |   | 2,687 |   |
| Dilutive  weighted average shares                                          |       | 51,187                                          |       | 51,311                                        |       | 49,527 |   | 50,028 |   |
|                                                                       |       |                                            |       |                                          |       |   |   |   |   |
| Net income  (loss) per share:                                              |       |                                            |       |                                          |       |   |   |   |   |
| Basic                                                                      |       | $                                               | 0.00       |                                          | $          | 0.10 |   | $ | (0.11 | ) | $ | 0.54 |   |
| Diluted                                                                    |       | $                                               | 0.00       |                                          | $          | 0.09 |   | $ | (0.11 | ) | $ | 0.51 |   |

 

**For thethree months ended June 30, 2007 and 2006 outstanding options, restrictedshares, and restricted stock units totaling 3.3 million and 1.6 million shares,respectively, were excluded from the computation of diluted net income (loss)per share as the inclusion of such shares would have had an anti-dilutiveeffect.**

**For thesix months ended June 30, 2007 and 2006 outstanding options and restrictedstock units totaling 9.0 million and 2.4 million shares, respectively, wereexcluded from the computation of diluted net income (loss) per share as theinclusion of such shares would have had an anti-dilutive effect.**

# **11.****      ****Legal Proceedings**

*Matters Related to HistoricalStock Option Practices:*****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.

*Pfeifferv. Zoran Corporation et al.*  On September 7, 2006, apurported shareholder derivative action was filed by Milton Pfeiffer againstZoran as a nominal defendant and certain of its officers and directors in theUnited States District Court, Northern District of California, alleging, interalia, violations of federal securities laws and breaches of fiduciary duties.

*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

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District Court, Northern District of California, alleging, inter alia,violations of federal securities laws and breaches of fiduciary duty.  On December 8, 2006, the Court issued anorder 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.

*Barone v. Gerzberg et al.; Durco v. Gerzberg et al.* OnOctober 23, 2006, two purported shareholder derivative actions were filed byMoshe Barone and John Durco against Zoran as a nominal defendant and certain ofits current and former officers and directors in the California Superior Courtof Santa Clara County, alleging, inter alia, violations of state securitieslaws and breaches of fiduciary duty.  OnJanuary 24, 2007 the Court consolidated the *Barone*and *Durco*actions, appointed Messrs. Barone and Durco as co-leadplaintiffs and approved their selection of counsel for the consolidatedderivative action.  The co-lead plaintiffsfiled a consolidated amended complaint on March 26, 2007. On June 15, 2007 theCourt issued an order staying all proceedings until further order of the Court.

*U.S. Attorney and SEC Investigations:* On July3, 2006, Zoran disclosed in a press release that it received a grand jurysubpoena from the office of the U.S. attorney for the Northern District ofCalifornia requesting documents from 1995 through the present referring to,relating to or involving stock options, and also received an informal inquiry fromthe SEC requesting 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.

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 there on in the amountof approximately $525,000, under four separate convertible promissorynotes.  On February 28, 2007, the Company filed an application with theCourt seeking to attach assets of ArcSoft as security for the payment of itsobligations under the notes.  The notes represent amounts loaned by theCompany to ArcSoft in 2004. At that time Zoran also entered into atransaction with ArcSoft involving the licensing and grant of certain rights toArcSoft related to a certain product then under development and relatedagreements regarding the continued development and commercialization of theproduct. On March 28, 2007, ArcSoft filed an answer denying liability under thenotes and 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.  The Company respondedto the cross-compliant, in part, by filing a motion to compel private, bindingarbitration of the claims of the cross-complaint pursuant to the terms of theparties’ contracts. The hearing on the Company’s application for a writ ofattachment and the Company’s motion to compel arbitration was held on May 25,2007. The parties are awaiting the Court’s ruling on both matters. The Courthas scheduled a Case Management Conference for August 10, 2007.

*Indemnification Obligations***.** Subject to certain limitations, the Company is obligated to indemnifyits current and former directors, officers and employees in connection with theinvestigation of the Company’s historical stock option practices and relatedgovernment inquiries and litigation. These obligations arise under the terms ofthe Company’s certificate of incorporation, its bylaws, applicable contracts,and Delaware and California law. The obligation to indemnify generally meansthat the Company is required to pay or reimburse the individuals’ reasonablelegal expenses and possibly damages and other liabilities incurred inconnection with these matters. The Company is currently paying or reimbursinglegal expenses being incurred in connection with these matters by a number ofits current and former directors, officers and employees.

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

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**Item 2.    Management’s Discussionand Analysis of Financial Condition and Results of Operations**

*Thisreport includes a number of forward-looking statements which reflect theCompany’s current views with respect to future events and financialperformance. These forward-looking statements are subject to certainrisks and uncertainties, including those discussed in “Part II, Item 1A. RiskFactors” below. In this report, the words “anticipates,” “believes,” “expects,”“intends,” “future” and similar expressions identify forward-lookingstatements. Readers are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date hereof.*

**Overview**

Our products consist of integrated circuits and related products used indigital versatile disc players, or DVDs, movie and home theater systems,digital cameras and video editing systems. We also provide integrated circuits, software and platforms for standardand high definition digital television applications that enable the deliveryand display of digital video content through a set-top box or television,demodulator IC technology for the global high definition television market. Wealso provide digital imaging products consisting of semiconductor hardware andsoftware that enable users to print, scan, process and transmit documents tocomputer peripherals that perform printing functions. We also provide high performance, low-power applicationprocessors, technology and products for the multimedia mobile telephone market.

*Revenues*

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

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

We recognize software license revenues in accordance with the provisionsof Statement of Position (SOP) 97-2, *SoftwareRevenue Recognition,*as amended by SOP 98-9, *Modification of*SOP 97-2, *Software Revenue Recognition, With Respect to CertainTransactions.* Our software license agreements typically includeobligations to provide maintenance and other support over a fixed term andallow for renewal of maintenance services on an annual basis. We determine thefair value of our maintenance obligations with reference to substantive renewalrates within the agreement or objective evidence of fair value as requiredunder SOP 97-2. Maintenance and support revenue is recognized ratably over theterm of the arrangement.  We also receiveroyalty revenues based on per unit shipments of products embedding our softwarewhich we recognize upon receipt of a royalty report from the customer,typically one quarter in arrears.

*Costof Hardware Product Revenues*

Our cost of hardware product revenues consists primarily of fabricationcosts, assembly and test costs, and the cost of materials and overhead fromoperations.  If we are unable to reduceour cost of hardware product revenues to offset anticipated decreases inaverage selling prices, our product gross margins will decrease.  We expect both product and customer mix tocontinue to fluctuate in future periods, causing fluctuations in margins.

*Researchand Development*

Our research and development expenses consist of salaries and relatedcosts of employees engaged in ongoing research, design and developmentactivities and costs of engineering materials and supplies.  We are a party to research and developmentagreements with the Chief Scientist in Israel’s Ministry of Industry and Tradeand the Israel-United States Binational Industrial Research and

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Development Foundation, which fund up to 50% of incurred project costsfor approved products up to specified contract maximums.  These agreements require us to use our bestefforts to achieve specified results and require us to pay royalties at ratesof 3% to 5% of resulting product sales, and up to 30% of resulting licenserevenues, up to a maximum of 100% to 150% of total funding received. Reportedresearch and development expenses are net of these grants, which fluctuate fromperiod to period.  We believe thatsignificant investments in research and development are required for us toremain competitive, and we expect to continue to devote significant resourcesto product development, although such expenses as a percentage of totalrevenues may fluctuate.

*Selling,General and Administrative*

Our selling, general and administrative expenses consist primarily ofemployee-related expenses, sales commissions, product promotion and otherprofessional services.  We expect thatselling, general and administrative expenses will continue to increase tosupport our anticipated growth.

*IncomeTaxes*

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

***RecentAccounting Pronouncements***

InFebruary 2007, the Financial Accounting Standards Board (“FASB”) issuedStatement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assetsand Financial Liabilities” (“SFAS No. 159”). This statement expands the standards under SFAS No. 157, “Fair Value Measurement,” to provideentities the one-time election (Fair Value Option or FVO) to measure financialinstruments and certain other items at fair value. Most of the provisions ofthis statement apply only to entities that elect the fair value option. Theprovisions of SFAS No. 159 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.

InSeptember 2006, the FASB issued SFAS No. 157, “Fair ValueMeasurements” (“SFAS No. 157”), which defines fair value, establishes aframework for measuring fair value in accordance with generally acceptedaccounting principles, and expands disclosures about fair value measurements.The provisions of SFAS No. 157 are effective for fiscal years beginningafter December 31, 2007. We are evaluating the impact of the provisions ofthis statement on our consolidated financial position, results of operationsand cash flows.

InFebruary 2006, the FASB issued SFAS No. 155, “Accounting for CertainHybrid Financial Instruments,” an amendment of SFAS No. 133, “Accountingfor Derivative Instruments and Hedging Activities,” and SFAS No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities.” This Statement permits fair value remeasurement for any hybridfinancial instrument that contains an embedded derivative that otherwise wouldrequire bifurcation. This Statement is effective for all financial instrumentsacquired or issued after July 1, 2007. The adoption of SFAS No. 155is not expected to have a material effect on our consolidated financial position,results of operations or cash flows.

**Segments**

Our products are based on highly integrated application-specificintegrated circuits, or ASICs, and system-on-a-chip, or SOC, solutions.  We also license certain 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.

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**Results of Operations**

The following table summarizesselected consolidated statement of operations data and changes from the periodto period (in thousands, except for percentages):
|                                                             | ** ** | **Three months ended  June 30,** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------|------------|-------------------------------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **2007**                                        | ** ** | **2006**   | ** ** | **$** | ** ** | **%** | ** ** |
|                                                        |       |                                            | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                   |       |                                            |       |       |       |   |   |   |   |
| Hardware product revenues                                   |       | $                                               | 114,508    |       | $          | 108,236 |   | $ | 6,272 |   | 5.8 | % |
| Software and other revenues                                 |       | 15,395                                          |       | 14,069     |       | 1,326 |   | 9.4 | % |
| License revenues related to litigation settlement           |       | —                                          |       | 5,624      |       | (5,624 | ) | (100 | )% |
| Total revenues                                              |       | 129,903                                         |       | 127,929    |       | 1,974 |   | 1.5 | % |
| Cost and  expenses:                                         |       |                                            |       |       |       |   |   |   |   |
| Cost of hardware product revenues                           |       | 60,178                                          |       | 60,355     |       | (177 | ) | (0.3 | )% |
| Research and development                                    |       | 29,976                                          |       | 25,226     |       | 4,750 |   | 18.8 | % |
| Selling, general and administrative                         |       | 28,414                                          |       | 30,109     |       | (1,695 | ) | (5.6 | )% |
| Amortization of intangible assets                           |       | 12,169                                          |       | 12,735     |       | (566 | ) | (4.4 | )% |
| Total costs and expenses                                    |       | 130,737                                         |       | 128,425    |       | 2,312 |   | 1.8 | % |
| Operating loss                                              |       | (834                                            | )          | (496       | )          | (338 | ) | (68.1 | )% |
| Interest and other  income (loss), net                      |       | 3,882                                           |       | 2,451      |       | 1,431 |   | 58.4 | % |
| Provision  (benefit) for income taxes                       |       | 2,850                                           |       | (2,824     | )          | 5,674 |   | * |   |
| Net income  (loss)                                          |       | $                                               | 198        |       | $          | 4,779 |   | $ | (4,581 | ) | (95.9 | )% |
| Supplemental operating  data:                               |       |                                            |       |       |       |   |   |   |   |
| Cost of hardware product as % of hardware product  revenues |       | 52.6                                            | %          | 55.8       | %          |   |   | (5.8 | )% |

 

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*     notmeaningful

 
|                                                             | ** ** | **Six months ended  June 30,** | ** ** | **Change** | ** ** |
|-------------------------------------------------------------|------------|-----------------------------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **2007**                                      | ** ** | **2006**   | ** ** | **$** | ** ** | **%** | ** ** |
|                                                        |       |                                          | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Revenues:                                                   |       |                                          |       |       |       |   |   |   |   |
| Hardware product revenues                                   |       | $                                             | 201,690    |       | $          | 207,405 |   | $ | (5,715 | ) | (2.8 | )% |
| Software and other revenues                                 |       | 29,872                                        |       | 26,978     |       | 2,894 |   | 10.7 | % |
| License revenues related to litigation settlement           |       | —                                        |       | 35,792     |       | (35,792 | ) | (100 | )% |
| Total revenues                                              |       | 231,562                                       |       | 270,175    |       | (38,613 | ) | (14.3 | )% |
| Cost and  expenses:                                         |       |                                          |       |       |       |   |   |   |   |
| Cost of hardware product revenues                           |       | 104,376                                       |       | 114,005    |       | (9,629 | ) | (8.4 | )% |
| Research and development                                    |       | 54,964                                        |       | 49,474     |       | 5,490 |   | 11.1 | % |
| Selling, general and administrative                         |       | 57,007                                        |       | 55,010     |       | 1,997 |   | 3.6 | % |
| Amortization of intangible assets                           |       | 24,338                                        |       | 25,470     |       | (1,132 | ) | (4.4 | )% |
| Total costs and expenses                                    |       | 240,685                                       |       | 243,959    |       | (3,274 | ) | (1.3 | )% |
| Operating income  (loss)                                    |       | (9,123                                        | )          | 26,216     |       | (35,339 | ) | (134.8 | )% |
| Interest and other  income (loss), net                      |       | 8,087                                         |       | 5,237      |       | 2,850 |   | 54.4 | % |
| Provision  (benefit) for income taxes                       |       | 4,650                                         |       | 5,991      |       | (1,341 | ) | * |   |
| Net income  (loss)                                          |       | $                                             | (5,686     | )          | $          | 25,462 |   | $ | (31,148 | ) | (122.3 | )% |
| Supplemental operating  data:                               |       |                                          |       |       |       |   |   |   |   |
| Cost of hardware product as % of hardware product  revenues |       | 51.8                                          | %          | 55.0       | %          |   |   | (5.9 | )% |

 

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*     notmeaningful

 

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*Revenues*

The increase in total revenues of $2.0 million for the three monthsended June 30, 2007 compared to the same period of 2006 was a result of a $4.5million increase in Imaging segment revenues primarily due to an increase inunit shipments. This increase was partially offset by a $2.5 million decreasein Consumer segment revenues for the three month period ended June 30, 2007compared to the three month period ended June 30, 2006. The decrease inConsumer segment revenues was primarily due to $5.6 million of license revenuesrelated to the litigation settlement recorded during the three months endedJune 30, 2006 that did not recur during the three months ended June 30,2007.  Excluding revenues related to thelitigation settlement, Consumer segment revenues increased by $3.1 million inthe three months ended June 30, 2007 compared to the same period in 2006. Theincrease in revenues was primarily due to anincrease in Mobile products of $12.1 million which was driven by increased unitshipments.Partially offsetting theincrease in Mobile products’ revenues was a decrease in revenues for DVD and DTV products of $3.4 millionand $5.6 million respectively. The decrease in DVD products’ revenue was due tolower average selling prices while the decrease in DTV products’ revenues wasdue to a decrease in unit shipments and average selling prices.

The decrease in total revenues of $38.6 million for the six months endedJune 30, 2007 compared to the same period of 2006 was a result of a $44.6million decrease in Consumer segment revenues in 2007 compared to the sameperiod in 2006. This decrease was partially offset by a $6.0 million increasein the Imaging segment revenues primarily due to an increase in unit shipments.Within the Consumer segment, license revenues related to the litigationsettlement accounted for $35.8 million of the decrease and the remainingdecrease of $8.8 million was primarily the result of decreases in revenues in the DVD and DTV products of $13.3 millionand $9.7 million, respectively, which was partially offset by an increase inMobile products of $14.2 million compared to the same periods in 2006.

Hardware product revenues for the three months ended June 30, 2007increased by $6.3 million compared to the same period of the prior year due toincreases of $3.1 million in the Consumer segment and $3.2 million in theImaging segment. These increases were due to an increase in unit shipments forthe three months ended June 30, 2007 compared to the same period of the prioryear.  Within the Consumer segment, hardware product revenues increased $12.4 millionfor Mobile products partially offset by decreases of $3.9 million for DVDproducts and $5.4 million for DTV products. The decrease for DVD products wasprimarily attributable to a decrease in average selling prices while thedecrease for DTV products was due to lower unit shipments based on reducedvolume of stand alone front end integrated circuits and lower average sellingprices.

Hardware product revenues for the six months ended June 30, 2007,decreased $5.7 million compared to the same period of 2006 primarily due to thedecrease in the Consumer segment of $10.4 million, offset by an increase of$4.7 million in the Imaging segment. Within the Consumer segment, hardwareproduct revenues increased $14.5 million in the Mobile product line driven byan increase in unit shipments, offset by decreases of $15.5 million in the DVDproduct line and $9.4 million in the DTV product line. The decrease for DVD productswas primarily attributable to a decrease in average selling prices while thedecrease for DTV products was due to lower unit shipments based on reducedvolume of stand alone front end integrated circuits.

Software and other revenues increased by $1.3 million for the threemonths ended June 30, 2007 compared to the same period of the prior yearprimarily due to a $1.3 million increase in Imaging segment revenues. Theincrease in software and other revenues for the six months ended June 30, 2007compared to the same period in 2006 was a result of a $1.6 million increase inConsumer segment revenues and a $1.3 million increase in Imaging segmentrevenues.  These changes were primarilydue to the timing of new agreements.

*Cost of Hardware Product Revenues*

Thedecrease in hardware product costs as a percentage of hardware product revenuesfor the three and six months ended June 30, 2007 compared to the same period in2006 was primarily due to a change in product mix with an increase in therevenue share from higher margin Mobile and Imaging products.

*Research and Development*

Research and development expenses increased for the three and six monthsperiods ended June 30, 2007, compared to the same period in 2006, primarily dueto fluctuations based on the timing of major engineering-related expenses, suchas tape-outs as well as continued investments in research and developmentacross all our segments.

*Selling, General and Administrative*

Selling,general and administrative expenses decreased by $1.7 million for the threemonth period ended June 30, 2007, compared to the same period in 2006 primarilydue to an increase in the allowance for doubtful accounts receivable by $3.4million recorded in 2006 to cover slow paying accounts, partially offset byincrease in legal expenses compared to 2006. The increase of $2.0 million forthe six months ended June 30, 2007 was due to increase in legal expenses by$5.0 million primarily attributed to $4.2 million incurred in 2007 inconnection with our review of historical stock option granting practices whichcommenced in the third quarter of 2006. This increase was partially offset byan increase in allowance for doubtful accounts receivable by $3.4 millionrecorded in the prior period to cover slow paying accounts.

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*Amortization of Intangible Assets*

AtJune 30, 2007, we had approximately $44.8 million in net intangible assetsacquired through the Oak, Emblaze and Oren acquisitions which we will continueto amortize on a straight line basis through 2010.

*Interestand Other Income*

The increase in interest and other income for thethree and six month periods ended June 30, 2007 compared to the same periods in2006 was a result of an increase in interest income as a result of our higheraverage cash and short term investment balances.

*Provisionfor Income Taxes*

The tax provision for the six months ended June 30,2007 was $4.7 million.  The estimated taxexpense for 2007 has increased over 2006 primarily due to a change in thegeography of our pre-tax income.  Inaddition, the tax provision for the six month period ended June 30, 2006 of$6.0 million included a one time charge of $4.3 million for tax expense relatedto the Media-Tek settlement. Our effective income tax rate has benefited fromthe availability of previously unbenefitted net operating losses which we haveutilized to reduce taxable income for U.S. federal income tax purposes and by our Israel based subsidiary’s statusas an “Approved Enterprise” under Israeli law, which provides a ten-year taxholiday for income attributable to a portion of our operations in Israel. Theremaining tax expense is related to the utilization of previously unbenefittedpurchased NOL’s which when utilized reduce goodwill and not tax expense alongwith statutory taxes in our non-U.S. subsidiaries.  Our U.S. federal net operating losses expireat various times between 2017 and 2024, and the benefits from our subsidiary’sApproved Enterprise status expire at various times beginning in 2008.

At June 30, 2007, we continue to carry a full valuationallowance against our net deferred tax assets as management has determined thatit is more likely than not that our deferred tax assets may not berealized.  Management continues tomonitor the relative weight of positive and negative evidence of futureprofitability in relevant jurisdictions. It is possible that sometime in the next 12 months the positive evidencewill be sufficient to release a material amount of our valuation allowance;however there is no assurance that this will occur.

**Liquidityand Capital Resources**

At June 30, 2007, we had $98.5 million of cash andcash equivalents and $238.2 million of short-term investments.  At June 30, 2007, we had $347.6 million ofworking capital.

Our operating activities generated cash of $42.3million during the first six months of 2007. While we recorded a net loss of$5.7 million, this loss included non-cash items such as amortization of $24.3million, depreciation of $4.0 million and stock- based compensation expense of$7.0 million.  Cash provided by operationsalso increased due to an increase in accounts payable by $14.9 million; accruedexpenses and other liabilities, goodwill and other long term liabilities by$8.7 million due to timing of payments. These increases were partially offsetby an increase in accounts receivable by $6.4 million due to increase inrevenue, increase in inventory by $2.0 million and an increase in prepaidexpenses and other current assets by $1.8 million.

Cash used in investing activities was $47.5 millionduring the six months ended June 30, 2007, principally reflecting the net purchase of investments of $43.5 million.In addition we spent $4.0 million for the purchases of property and equipment.

Cash provided by financing activities during thesix months ended June 30, 2007 was $3.7 million consisting of proceedsreceived from issuances of common stock through exercises of employee stockoptions.

Our operating activities generated cash of $65.9million during the first six months of 2006, primarily due to net income of$25.5 million adjusted for non-cash items such as amortization of $25.5million, depreciation of $4.8 million and stock-based compensation expense of$10.0 million.  Cash provided byoperations also increased due to a decrease of $9.6 million in accounts receivabledue to the timing of collections and a net increase in accounts payable,accrued expenses and other liabilities, and other long term liabilitiestotaling $7.1 million.  These increaseswere partially offset by a $15.3 million increase in inventories to meet theincreasing demand for our products.

Cash used in investing activities was $107.0 millionduring the six months ended June 30, 2006, principally reflecting the net purchase of investments of $103.8 million.In addition we spent $3.2 million for purchases of property and equipment.

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Cash provided by financingactivities during the six months ended June 30, 2006 was $51.6 millionconsisting of proceeds received from issuances of common stock throughexercises of employee stock options and proceeds from the sale of stock underour employee stock purchase plan.

At June 30, 2007, we did nothave any relationships with unconsolidated entities or financial partnerships,such as entities often referred to as structured finance or special purposeentities, established for the purpose of facilitating off-balance sheetarrangements or other contractually narrow or limited purposes.  Accordingly, we are not exposed to the typeof financing, liquidity, market or credit risk that could arise if we hadengaged in such relationships.

Webelieve that our current balances of cash, cash equivalents and short-terminvestments, and anticipated cash flow from operations, will satisfy ouranticipated 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:

·                  thelevels at which we maintain inventories and accounts receivable;

·                  themarket 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 expenditure andresearch and development plans and technology roadmap;

·                  volume pricing concessions;

·                  capital improvements to new and existingfacilities;

·                  technological advances;

·                  the response of competitors to our products;and

·                  our relationships with our suppliers andcustomers.

Inaddition, we may require an increase in the level of working capital toaccommodate planned growth, hiring and infrastructure needs.  Additional capital may also be required foradditional acquisitions of businesses, products or technologies.

To the extent that our existing resources and cashgenerated from operations are insufficient to fund our future activities, wemay need to raise additional funds through public or private financings orborrowings.  If additional funds areraised through the issuance of debt securities, these securities could have rights,preferences and privileges senior to holders of common stock, and the terms ofthis debt could impose restrictions on our operations.  The sale of additional equity or convertibledebt securities could result in additional dilution to our stockholders.  We cannot be certain that additionalfinancing will be available in amounts or on terms acceptable to us, if atall.  If we are unable to obtain thisadditional financing, we may be required to reduce the scope of our plannedproduct development and sales and marketing efforts, which could harm ourbusiness, financial condition and operating results.

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

We are exposed to financial market risks includingchanges in interest rates and foreign currency exchange rates.

The fair value of our investmentportfolio or related income would not be significantly impacted by either a 10%increase or decrease in interest rates due mainly to the short-term nature ofthe major portion of our investment portfolio.

A majority of our revenue andcapital spending is transacted in U.S. dollars, although a portion of the costof our operations, relating mainly to our personnel 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 June 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 the participation of our management,including our Chief Executive Officer and our Chief Financial Officer, weevaluated the effectiveness of our disclosure controls and procedures, as suchterm is defined under Rule 13a-15(e) promulgated under the SecuritiesExchange Act of 1934, as amended. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer****concluded that our disclosure controls and procedures were effectiveas of the end of the period covered by this quarterly report.

**Changesto Internal Control Over Financial Reporting**

There were no changesin our internal control over financial reporting during the quarter ended June30, 2007 that have materially affected****orare reasonably likely to materially affect our internal control over financialreporting.

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**PART II. OTHER INFORMATION**

**Item 1. Legal Proceedings**

SeePart I, Item 1, Note 11, “Legal Proceedings” for discussion of our legal proceedings.

**Item 1A.   Risk Factors**

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

**The discovery that the appropriate measurement dates for financialaccounting purposes of certain stock option grants differed from the recordedgrant dates of those awards has had, and may continue to have, a materialadverse effect on our historical financial results and could have a materialadverse effect on our financial results going forward.**

We cannot predict the outcomeof the pending government inquiries or stockholder lawsuits, and we may faceadditional government actions, stockholder lawsuits and other legal proceedingsrelated to our historical stock option practices and the remedial actions wehave taken. All of these events have required us, and will continue to requireus, to expend significant management time and incur significant accounting,legal, and other expenses. This could divert attention and resources from theoperation of our business and adversely affect our financial condition andresults of operations in a manner that could potentially be material.

**The independent investigationof our historical stock option practices and resulting restatements has beentime consuming and expensive, and has had an adverse effect on our financialperformance.**

The independent investigationof our historical stock option practices and resulting restatement activitieshave required us to expend significant management time and incur significantaccounting, legal and other expenses totaling $5.8 million in 2006 and$4.2 million in the six months ended June 30, 2007. The resulting restatementshave had a material adverse effect on our results of operations. We haverecorded additional stock-based compensation expense of $11.7 million forstock option grants, recognized over the periods from 1997 to 2005. There wasno tax impact of these additional stock-based compensation expenses due to thefull valuation allowance on our tax assets. In addition, we have recorded otheradjustments previously considered to be immaterial totaling $1.3 million (netof tax of $0.2 million). As a result, our restated consolidated financialstatements reflect a decrease in net income of $13.0 million for theperiod of 1997 to 2005.

**Ongoing government inquiries relating to our historical stock optionpractices are time consuming and expensive and could result in injunctions,fines and penalties that may have a material adverse effect on our financialcondition and results of operations.**

The inquiries by the UnitedStates Attorney’s Office for the Northern District of California (“USAO”) andthe 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, investigationsor other actions related to our historical stock option practices. Theseinquiries will likely require us to continue to expend significant managementtime and incur significant legal and other expenses, and could result in civiland criminal actions seeking, among other things, injunctions against theCompany and the payment of significant fines and penalties by the Company,which may have a material adverse effect on our financial condition, results ofoperations and cash flow.

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

From August2006 to April 2007, we we were unable to file our periodic reportswith the SEC on time and faced the possibility of delisting of our stock fromthe Nasdaq Global Select Market. As a result of our delay in filing periodicreports on a timely basis, we will not be eligible to use a registrationstatement on Form S-3 to register offers and sales of oursecurities until all periodic reports have been timely filed for at least 12months. If in the future we have similar issues filing periodic reportsand fail to comply with applicable listing requirements, then our commonstock may be de-listed and the market for resales of our common stock maybecome less liquid.  If this happens, the price of our stock and theability of our stockholders to trade in our stock could be adversely affected.In addition, we would be subject to restrictions regarding the registration ofour stock under federal securities laws, and we would not be able to 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.

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**We have been named as a party to stockholder derivative lawsuitsrelating to our historical stock option practices, and we may be named inadditional lawsuits in the future. This litigation could become time consumingand expensive and could result in the payment of significant judgments andsettlements, which could have a material adverse effect on our financialcondition and results of operations.**

In connection with ourhistorical stock option practices and resulting restatements, a number ofpurported shareholder derivative actions were filed against certain of ourcurrent and former directors, officers and certain other individuals, whichpurport to assert claims on Zoran’s behalf. There may be additional lawsuits ofthis nature filed in the future. We cannot predict the outcome of theselawsuits, nor can we predict the amount of time and expense that will berequired to resolve these lawsuits. If these lawsuits become time consuming andexpensive, or if there are unfavorable outcomes in any of these cases, therecould be a material adverse effect on our business, financial condition andresults of operations.

Our insurance coverage willnot cover our total liabilities and expenses in these lawsuits, in part becausewe 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 and officers,although our insurance coverage may not be sufficient in some or all of thesematters. Furthermore, the insurers may seek to deny or limit coverage in someor all of these matters, in which case we may have to self-fund all or asubstantial portion of our indemnification obligations.

**Failure to maintain effective internal controls may cause us to delayfiling our periodic reports with the SEC, affect our Nasdaq listing, andadversely affect our stock price.**

We are required to include areport of management on internal control over financial reporting in our AnnualReport on Form 10-K that contains an assessment by management of theeffectiveness of our internal control over financial reporting. In addition,our independent registered public accounting firm must attest to and report onmanagement’s assessment of the effectiveness of the internal control overfinancial reporting. The restatement of financial statements in prior filingswith the SEC is a strong indicator of the existence of a “material weakness” inthe design or operation of internal control over financial reporting. However,we have concluded that the control deficiencies that resulted in therestatement of the previously issued consolidated financial statements did notconstitute a material weakness as of June 30, 2007 because managementdetermined that as of June 30, 2007 there were effective controls designed andin place to prevent or detect a material misstatement and therefore thelikelihood of stock-based compensation, deferred compensation and deferred taxassets being materially misstated is not more than remote.

The SEC may disagree with themanner 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.

**It may be difficult or costly to obtain director and officer liabilityinsurance coverage as a result of our stock options issues.**

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

**Our annual revenues and operating results fluctuate due to a variety offactors, which may result in volatility or a decline in the prices of ourcommon stock.**

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

·       fluctuation in demand for our products;

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

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

·       the timing or cancellation of large customer orders;

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

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

·       the cyclical nature of the semiconductor industry;

·       the availability of development funding and the timing of developmentrevenue;

·       changes in the mix of products sold;

·       seasonality in demand for our products;

·       increased competition in product lines, and competitive pricingpressures; and

·       the evolving and unpredictable nature of the markets for productsincorporating our integrated circuits and embedded software.

We expect that our operating results will continue to fluctuate in thefuture as a result of these factors and a variety of other factors, including:

·       the cost and availability of adequate foundry capacity;

·       fluctuations in manufacturing yields;

·       changes in or the emergence of new industry standards;

·       failure to anticipate changing customer product requirements;

·       the loss or gain of important customers;

·       product obsolescence; and

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

Our operating results could also be harmed by:

·       economic conditions generally or in various geographic areas where we orour customers do business;

·       terrorism and international conflicts or other crises;

·       other conditions affecting the timing of customer orders;

·       changes in governmental regulations that could affect our products;

·       a downturn in the markets for our customers’ products, particularly theconsumer electronics market;

·       disruption in commercial activities associated with heightened securityconcerns affecting international travel and commerce;

·       reduced demand for consumer electronic products due to a potentialeconomic slowdown;

·       tightened immigration controls that may adversely affect the residencestatus of key non-U.S. managers and technical employees in our U.S. facilitiesor our ability to hire new non-U.S. employees in such facilities; or

·       potential expansion of armed conflict in the Middle East which couldadversely affect our operations 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 of ourexpenses are relatively fixed, and the timing of increases in expenses is basedin large part on our forecast of future revenues. As a result, if revenues donot meet our expectations, we may be unable to quickly adjust expenses tolevels appropriate to actual revenues, which could harm our operating results.

**Our customers experience fluctuating product cycles and seasonality,which causes their sales to fluctuate.**

Because the markets that ourcustomers serve are characterized by numerous new product introductions andrapid product enhancements, our operating results may vary significantly fromquarter to quarter. During the final production of a mature product, ourcustomers typically exhaust their existing inventories of our products.Consequently, orders for our products may decline in those circumstances, evenif the products are incorporated into both mature products and replacementproducts. A delay in a 

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customer’s transition tocommercial production of a replacement product would delay our ability torecover the lost sales from the discontinuation of the related mature product.Our customers also experience significant seasonality in the sales of theirconsumer products, which affects their orders of our products. Typically, thesecond half of the calendar year represents a disproportionate percentage ofsales for our customers due to the holiday shopping period for consumerelectronics products, and therefore, a disproportionate percentage of oursales. We expect these seasonal sales fluctuations to continue for theforeseeable 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.

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

Average selling prices forour 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.

**Product supply and demand in the semiconductor industry is subject tocyclical variations.**

The semiconductor industry issubject to cyclical variations in product supply and demand. Downturns in theindustry often occur in connection with, or anticipation of, maturing productcycles for both semiconductor companies and their customers and declines ingeneral economic conditions. These downturns have been characterized by abruptfluctuations in product demand, production over-capacity and accelerateddecline of average selling prices. In some cases, these downturns have lastedmore than one year. We cannot predict whether we will achieve timely,cost-effective access to that capacity when needed, or when there will be acapacity shortage again in the future. A downturn in the semiconductor industrycould harm our sales and revenues if demand drops, or our gross margins ifaverage selling prices decline.

**Our success for the foreseeable future will depend on demand forintegrated circuits 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.

**Our financial performance is highly dependent on the timely andsuccessful introduction of new and enhanced products.**

Our financial performancedepends in large part on our ability to successfully develop and marketnext-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 consumer electronicmarket, our performance has been dependent on our successful development andtimely introduction of integrated circuits for DVD players, DVD recorders,digital cameras, broadband digital television and HDTV. These markets arecharacterized by the incorporation of a steadily increasing level ofintegration and numbers of features on a chip at the same or lower system cost,enabling original equipment manufacturers, or OEMs, to continually improve thefeatures or reduce the prices of the systems they sell. If we are unable tocontinually develop and introduce integrated circuits with increasing levels ofintegration and new features at competitive prices, our operating results willsuffer.

In the Imaging market, ourperformance has been dependent on our successful development and timelyintroduction of integrated circuits for printers and multi-functionperipherals. These markets are characterized by the incorporation of a steadilyincreasing level of integration and higher speeds on a chip at the same orlower system cost, enabling original equipment manufacturers, or OEMs, tocontinually 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 licensing business is dependent on our ability to develop andintroduce new releases of our software, which incorporate new or enhancedprinting standards, as well as performance enhancements required by our OEMcustomers. If we are unable to develop and release versions of our softwaresupporting required standards and offering enhanced performance, our operatingresults will suffer.

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**We face competition or potential competition from companies with greaterresources than ours, and if we are unable to compete effectively with thesecompanies, 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 and potentialcompetitors include many large domestic and international companies that havesubstantially greater financial, manufacturing, technological, market,distribution and other resources. These competitors may also have broaderproduct lines and longer standing relationships with customers and suppliersthan 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, LSI Logic, Magnum Semiconductor, Matsushita, MediaTek, RenesasTechnology, Samsung and Sunplus. In the markets for JPEG-based products for usein digital cameras, our principal competitors are in-house solutions developedand used by major Japanese OEMs, as well as products sold by Mediatek, Sunplusand Texas Instruments. In the market for JPEG-based products for desktop videoediting applications, our principal competitor is Sunplus. Cirrus Logic(Crystal Semiconductor), Fujitsu, Freescale Semiconductor, STMicroelectronicsand Yamaha are currently shipping Dolby Digital-based audio compressionproducts. Our principal competitors for digital semiconductor devices in thedigital television market include Advanced Micro Devices, Broadcom, RenesasTechnology, M-Star, Mediatek and ST Microelectronics. Others who alsoparticipate in this market are ALi Corporation, Cheertek, Fujitsu, GenesisMicrochip, NEC, Pixelworks and Trident Microsystems. Competitors in the Printerand Multifunction peripheral space include Sigmatel Inc., MarvellSemiconductor, Peerless Systems, Global Graphics and in-house captivesuppliers.

Webelieve that growth of the DVD player market will be modest in the foreseeablefuture, and that continued strong competition will lead to further pricereductions, and reduced profit margins. We also face significant competition in the digital Imaging and digitalcamera markets. 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.

**We must keep pace with rapid technological changes and evolving industrystandards to 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 of integration.Our ability to adapt to these changes and to anticipate future standards, andthe rate of adoption and acceptance of those standards, will be a significantfactor in maintaining or improving our competitive position and prospects forgrowth. If new industry standards emerge, our products or the products of ourcustomers could become unmarketable or obsolete, and we could lose market shareor be required to incur substantial unanticipated costs to comply with thesenew standards.

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

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**We rely on independent foundriesand contractors for the manufacture, assembly and testing of our integratedcircuits and other hardware products, and the failure of any of these thirdparties to deliver products or otherwise perform as requested could damage ourrelationships with our customers and harm our sales and financial results.**

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.

Our reliance on independent foundries involves a number of risks,including:

·       the inability to obtain adequate manufacturing capacity;

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

·       lack of control over delivery schedules;

·       lack of control over quality assurance;

·       lack of control over manufacturing yields and cost; and

·       potential misappropriation of our intellectual property.

In addition, TSMC and some ofour other foundries are located in areas of the world that are subject tonatural disasters such as earthquakes. While the 1999 earthquake in Taiwan didnot 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 a limitednumber of independent contractors for the assembly and testing of our products.Our reliance on independent assembly and testing houses limits our control overdelivery schedules, quality assurance and product cost. Disruptions in theservices provided by our assembly or testing houses or other circumstances thatwould require them to seek alternative sources of assembly or testing couldlead to supply constraints or delays in the delivery of our products. Theseconstraints or delays could damage our relationships with current andprospective customers and harm our financial results.

**Because foundry capacity is limited from time to time, we may berequired to enter into costly long-term supply arrangements to secure foundrycapacity.**

If we are not able to obtain additional foundry capacity as required,our relationships with our customers would be harmed and our sales would likelybe reduced. 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 other prepayments to a foundry;

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

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

·       issuance of our equity securities to a foundry;

·       investment in a foundry;

·       joint ventures; or

·       other partnership relationships with foundries.

We may not be able to makeany such arrangement in a timely fashion or at all, and such arrangements, ifany, 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.

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**If our independent foundries do not achieve satisfactory yields, ourrelationships with our customers may be harmed.**

The fabrication of siliconwafers is a complex process. Minute levels of contaminants in the manufacturingenvironment, defects in photo masks used to print circuits on a wafer,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.

**We are dependent upon our international sales and operations; economic,political or military events in a country where we make significant sales orhave significant operations could interfere with our success or operationsthere and harm our business.**

During 2006, only 7% of ourtotal 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.

We are subject to a variety of risks inherent in doing businessinternationally, including:

·       unexpected changes in regulatory requirements;

·       fluctuations in exchange rates;

·       political and economic instability;

·       imposition of tariffs and other barriers and restrictions;

·       the burdens of complying with a variety of foreign laws; and

·       health risks 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 dutyannually. The absence of these employees for significant periods during thework week may cause us to operate inefficiently during these periods.

Our operations in China aresubject to the economic and political uncertainties affecting that country. Forexample, 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 significant concentrationof our manufacturing activities with third party foundries in Taiwan exposes usto the risk of political instability in Taiwan, including the potential forconflict between Taiwan and China. We have several significant OEM customers inJapan, Korea and other parts of Asia. Adverse economic circumstances in Japanand elsewhere in Asia could affect these customers’ willingness or ability todo business with us in the future or their success in developing and launchingdevices containing our products.

**The prices of our products may become less competitive due to foreignexchange fluctuations.**

Foreign currency fluctuationsmay affect the prices of our products. Prices for our products are currentlydenominated in U.S. dollars for sales to our customers throughout the world. Ifthere is a significant devaluation of the currency in a specific country, theprices of our products will increase relative to that country’s currency, ourproducts may be less competitive in that country and our revenues may beadversely affected. Also, we cannot be sure that our international customerswill continue to be willing to place orders denominated in U.S. dollars. Ifthey do not, our revenue and operating results will be subject to foreignexchange fluctuations.

**Because we have significant operations in Israel, our business andfuture operating results could be harmed by future terrorist activity ormilitary 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 

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conflicts,significant damage to our facilities in Israel, injury of our employees workingthere, or damage to the Israeli business or transportation infrastructure as aresult of future military conflict or terrorist activity could materiallyaffect our operations in Israel and harm our business. In addition, some of ouremployees in Israel serve in the military reserve. Any prolonged absence of asubstantial number of these employees could materially harm our business.

In addition to their impacton our operations in Israel, military conflict in the Middle East or futureterrorist activities there or elsewhere in the world could harm our business asa result of a disruption in commercial activity affecting internationalcommerce or a general economic slowdown and reduced demand for consumerelectronic products.

**The Israeli rate of inflation may negatively impact our costs if it exceedsthe rate of devaluation of the new Israeli shekel against the United Statesdollar.**

A portion of the cost of ouroperations, 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.

**We derive most of our revenue from sales to a small number of largecustomers, and if we are not able to retain these customers, or theyreschedule, reduce or cancel orders, our revenues would be reduced and ourfinancial results would suffer.**

Our largest customers haveaccounted for a substantial percentage of our revenues. In 2006, one customeraccounted for 14% of our total revenues, while sales to our four largestcustomers accounted for 36% of our total revenues. In 2005, no single customeraccounted 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.

**Our products generally have long sales cycles and implementationperiods, which increases our costs in obtaining orders and reduces thepredictability of our operating 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 alsosubject us to other risks, including customers’ budgetary constraints, internalacceptance reviews and cancellations. In addition, orders expected in onequarter could shift to another because of the timing of customers’ purchasedecisions. The time required for our customers to incorporate our products intotheir own can vary significantly with the needs of our customers and generallyexceeds several months, which further complicates our planning processes andreduces the predictability of our operating results.

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

We generally do not enterinto long-term purchase contracts with our customers, and we cannot be certainas to future order levels from our customers. Customers generally purchase ourproducts subject to cancelable short-term purchase orders. We cannot predictwhether our current customers will continue to place orders, whether existingorders will be canceled, or whether customers who have ordered products willpay invoices for delivered products. When we do enter into a long-termcontract, the contract is generally terminable at the convenience of thecustomer. Early termination by one of our major customers would harm ourfinancial results.

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**Our products could contain defects, which could reduce sales of thoseproducts or result 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.

**Regulation of our customers’ products may slow the process ofintroducing new products and could 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.

**Our ability to compete could be jeopardized if we are unable to protectour intellectual property rights.**

Our success and ability tocompete depend in large part upon protection of our proprietary technology. Werely 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 bypatents is subject to numerous uncertainties. For example, our competitors maybe able to effectively design around our patents, or the patents may bechallenged, invalidated or circumvented. Those competitors may alsoindependently develop technologies that are substantially equivalent orsuperior to our technology. Moreover, while we hold, or have applied for,patents relating to the design of our products, some of our products are basedin part on standards, for which we do not hold patents or other intellectualproperty rights.

We have generally limitedaccess to and distribution of the source and object code of our software andother proprietary information. With respect to our page descriptionlanguage software, SOC platform firmware and drivers for the digital officemarket and in limited circumstances with respect to firmware on SCS products,firmware and platforms for our DTV, DVDR products, we grant licenses that giveour customers access to and restricted use of the source code of our****software. This access increases thelikelihood of misappropriation or misuse of our technology.

**Claims and litigation regarding intellectual property rights couldseriously harm our business and require us to incur significant costs.**

In recent years, there hasbeen significant litigation in the United States involving patents and otherintellectual property rights. In the past, Zoran has been subject to claims andlitigation regarding alleged infringement of other parties’ intellectualproperty rights, and both Oak and Zoran have been parties to a number ofpatent-related lawsuits, both as plaintiff and defendant. We could becomesubject to additional litigation in the future, either to protect ourintellectual property or as a result of allegations that we infringe others’intellectual property rights. Claims that our products infringe proprietaryrights would force us to defend ourselves and possibly our customers ormanufacturers against the alleged infringement. Future litigation against us,if successful, could subject us to significant liability for damages orinvalidation of our proprietary rights. These lawsuits, regardless of theirsuccess, are time-consuming and expensive to 

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resolve and requiresignificant management time and attention. Future intellectual propertylitigation could force us to do one or more of the following:

·       stop selling products that incorporate the challenged intellectualproperty;

·       obtain from the owner of the infringed intellectual property right alicense to sell or use the relevant technology, which license may not beavailable on reasonable terms or at all;

·       pay damages; or

·       redesign those products that use such technology.

Although patent disputes inthe 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.

**If necessary licenses of third-party technology are not available to usor are very expensive, our products could become obsolete.**

From time to time, we may berequired to license technology from third parties to develop new products orproduct enhancements. Third party licenses may not be available on commerciallyreasonable terms, if at all. If we are unable to obtain any third-party licenserequired to develop new products and product enhancements, we may have toobtain substitute technology of lower quality or performance standards or atgreater cost, either of which could seriously harm the competitiveness of ourproducts.

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 license agreementswe must fulfill confidentiality obligations and pay royalties. If we fail toabide by the terms of the license, we would be unable to sell and market theproducts under license. In addition, we do not control the prosecution of thepatents subject to this license or the strategy for determining when suchpatents should be enforced. As a result, we are dependent upon our licensor todetermine the appropriate strategy for prosecuting and enforcing those patents.

**If we are not able to apply our net operating losses against taxableincome in future periods, our financial results will be harmed.**

Our future net income andcash flow will be affected by our ability to apply our net operating losses, orNOLs, against taxable income in future periods. Our NOLs totaled approximately$185 million for 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.

**Changes in, or interpretations of, tax rules and regulations mayadversely affect our effective tax rates.**

Unanticipated changes in ourtax rates could affect our future results of operations. Our future effectivetax 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.

**Any additional acquisitions we make could disrupt our business andseverely harm our financial condition.**

We have made investments in,and acquisitions of other complementary companies, products and technologies,and we may acquire additional businesses, products or technologies in thefuture. In the event of any future acquisitions, we could:

·       issue stock that would dilute its current stockholders’ percentage ownership;

·       incur debt;

·       use a significant amount of our cash;

·       assume liabilities;

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·       incur expenses related to the future impairment of goodwill and theamortization of other intangible assets; or

·       incur other large write-offs immediately or in the future.

Our operation of any other acquired business will also involve numerousrisks, including:

·       problems combining the purchased operations, technologies or products;

·       unanticipated costs;

·       diversion of management’s attention from our core business;

·       adverse effects on existing business relationships with customers;

·       risks associated with entering markets in which we have no or limitedprior experience; and

·       potential loss of key employees, particularly those of the purchasedorganizations.

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.

**If our goodwill or amortizable intangible assets become impaired we maybe required 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 intangible assetsmay 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.

**If we fail to manage our future growth, if any, our business would beharmed.**

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

**We rely on the services of our executive officers and other keypersonnel, whose knowledge of our business and industry would be extremelydifficult 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, Israel and China. Competition for such personnelis intense, and we may not be successful in attracting, integrating andretaining such personnel. Failure to attract, integrate and retain key personnelcould harm our ability to carry out our business strategy and compete withother companies.

**Provisions in our charter documents and Delaware law could prevent ordelay a change in control 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 merger with a party that has acquired control of 15% or moreof our outstanding common stock, such as a party that has completed asuccessful tender offer, until three years after that party acquired control of15% of our outstanding common stock;

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

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

·       requiring advance notice of any stockholder nominations of candidatesfor election to our board of directors.

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**Our stock price has fluctuated and may continue to fluctuatewidely.**

Themarket price of our common stock has fluctuated significantly since our initialpublic offering in 1995.  BetweenJanuary 1, 2006 and June 30, 2007, the closing sale price of our commonstock, as reported on the Nasdaq Global Select Market, ranged from a low of$13.57 to a high of $29.13.  The marketprice of our common stock is subject to significant fluctuations in the futurein response to a variety of factors, including:

·                        announcements concerning our business or thatof our competitors or customers;

·                        annual and quarterly variations in our operating results;

·                        changes in analysts’ earnings estimates;

·                        announcements of technological innovations;

·                        the introduction of new products or changes inproduct 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.

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

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

Our 2007 Annual Meeting of Stockholderswas held on July 18, 2007.  At the meeting, the following eight personsnominated by management were elected to serve as members of our Board ofDirectors:
|                      | ** ** | **Shares**         | ** ** |
|----------------------|------------|--------------------|------------|
| **Nominee**          | ** ** | **Voted For** | ** ** | **Withheld** | ** ** |
|                 |       |               |       |   |   |
| Levy Gerzberg        |       | 37,443,382         |       | 1,156,146 |   |
|                 |       |               |       |   |   |
| Uzia Galil           |       | 35,744,002         |       | 2,855,526 |   |
|                 |       |               |       |   |   |
| Raymond A. Burgess   |       | 37,978,230         |       | 621,298 |   |
|                 |       |               |       |   |   |
| James D. Meindl      |       | 37,314,702         |       | 1,284,826 |   |
|                 |       |               |       |   |   |
| James B. Owens,  Jr. |       | 36,437,847         |       | 2,161,681 |   |
|                 |       |               |       |   |   |
| David Rynne          |       | 37,946,509         |       | 653,019 |   |
|                 |       |               |       |   |   |
| Arthur B.  Stabenow  |       | 35,630,070         |       | 2,969,458 |   |
|                 |       |               |       |   |   |
| Philip M. Young      |       | 37,350,658         |       | 1,248,870 |   |

 

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The followingadditional proposal was voted upon at the meeting:

Proposalto ratify the appointment of PricewaterhouseCoopers LLP as our independentregistered public accounting firm for the fiscal year ending December 31, 2007was approved by a vote of 37,371,262 shares for; 1,219,585 shares against and8,681 shares abstaining.

**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**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
| ** **                  |   | **ZORAN CORPORATION**                        |
|-----------------------------|--------|----------------------------------------------|
| ** **                  |   |                                         |
| ** **                  |   |                                         |
| Dated: August  9, 2007 |   | /s/ Karl Schneider                           |   |   |
|                        |   | Karl Schneider                               |
|                        |   | Senior Vice President, Finance               |
|                        |   | and Chief Financial Officer                  |
|                        |   | (Principal Financial and Accounting Officer) |

 

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