SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended March 31, 2006

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)

1390 Kifer Road

Sunnyvale, California 94086

(Address of principal executive offices, including zip code)

(408) 523-6500

(Registrant’s telephone number, including area code)

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

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

Large accelerated filer ý Accelerated filer o Non accelerated-filer o

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

As of May 8, 2006, there were outstanding 49,009,551 shares of the registrant’s Common Stock, par value $0.001 per share.

ZORAN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	March 31, 2006			December 31, 2005
ASSETS
Current assets:
Cash and cash equivalents	$	113,752		$	78,856
Short-term investments	104,124			70,490
Accounts receivable, net	62,431			70,174
Inventories	38,663			32,616
Prepaid expenses and other current assets	9,800			11,746
Total current assets	328,770			263,882
Property and equipment, net	14,905			16,057
Other assets and investments	14,179			12,943
Goodwill	180,254			184,254
Intangible assets, net	113,944			127,087
	$	652,052		$	604,223

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	44,737		$	38,999
Accrued expenses and other liabilities	53,562			53,937
Total current liabilities	98,299			92,936
Other long-term liabilities	12,770			11,939
Stockholders’ equity:
Common stock, $0.001 par value; 105,000,000 shares authorized at March 31, 2006 and December 31, 2005; 46,716,431 shares issued and outstanding as of March 31, 2006; and 45,426,912 shares issued and outstanding as of December 31, 2005	47			45
Additional paid-in capital	748,792			727,597
Deferred stock-based compensation	—			(593		)
Accumulated other comprehensive income	2,179			3,094
Accumulated deficit	(210,035		)	(230,795		)
Total stockholders’ equity	540,983			499,348
	$	652,052		$	604,223

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

ZORAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended
	March 31,
	2006		2005

Revenues:
Hardware product revenues	$	99,169	$	59,002
Software and other revenues	12,909		14,882
License revenues related to litigation settlement	30,168		—
Total revenues	142,246		73,884

Costs and expenses:
Cost of hardware product revenues	54,466		36,964
Research and development	24,151		20,100
Selling, general and administrative	24,755		23,174
Amortization of intangible assets	12,735		12,330
Deferred stock compensation	—		517
Total costs and expenses	116,107		93,085

Operating income (loss)	26,139		(19,201		)

Interest income	1,630		535

Other income (loss), net	1,193		(130		)

Income (loss) before income taxes	28,962		(18,796		)

Provision for income taxes	8,202		—

Net income (loss)	$	20,760	$	(18,796	)

Basic net income (loss) per share	$	0.45	$	(0.43	)

Diluted net income (loss) per share	$	0.43	$	(0.43	)

Shares used to compute basic net income (loss) per share	46,207		43,213

Shares used to compute diluted net income (loss) per share	48,487		43,213

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

ZORAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Three Months Ended
	March 31,
	2006			2005
Cash flows from operating activities:
Net income (loss)	$	20,760		$	(18,796	)
Adjustments to reconcile net income (loss) to net cash provided by (used in) operations:
Depreciation and amortization	2,962			3,144
Amortization of intangible assets	12,735			12,330
Stock based compensation expense	4,562			517
Changes in current assets and liabilities:
Accounts receivable	7,743			(8,160		)
Inventories	(6,047		)	15,826
Prepaid expenses and other current assets and other assets	(232		)	(4,969		)
Accounts payable	5,738			(6,062		)
Accrued expenses and other liabilities, goodwill and other long term liabilities	4,456			2,224
Net cash provided by (used in) operating activities	52,677			(3,946		)

Cash flows from investing activities:
Purchases of property and equipment	(1,402		)	(2,059		)
Purchases of investments	(90,952		)	(4,883		)
Proceeds from sales and maturities of investments	57,345			4,103
Net cash used in investing activities	(35,009		)	(2,839		)

Cash flows from financing activities:
Proceeds from issuance of common stock	17,228			375
Net cash provided by financing activities	17,228			375

Net increase (decrease) in cash and cash equivalents	34,896			(6,410		)

Cash and cash equivalents at beginning of period	78,856			37,435

Cash and cash equivalents at end of period	$	113,752		$	31,025

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

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Zoran Corporation and its subsidiaries (“Zoran” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “SEC”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments considered necessary, consisting only of normal recurring adjustments, for a fair statement of the consolidated financial position, operating results and cash flows for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year or in any future period. This quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2005, included in the Zoran Corporation 2005 Annual Report on Form 10-K filed with the SEC.

Revenue

Revenue for the three months ended March 31, 2006 includes $30.2 million in license payment, net of withholding tax and amounts paid to holders of rights under certain patents involved in the litigation and amounts payable as legal fees. The license agreements provided for additional net cash payments of $11.0 million during the three months ending June 30, 2006 and $30.0 million payable in eleven quarterly installments which will be recorded as revenue when actual cash payments are received.

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”), issued Statement of Financial Accounting Standards (“SFAS”) No. 123(R), “Share-Based Payment”, an Amendment of SFAS 123 (“SFAS 123R”). SFAS 123(R) requires the Company to measure all employee stock-based compensation awards using a fair value method and record such expense in its consolidated financial statements. In March 2005, the SEC issued Staff Accounting Bulletin (“SAB”) 107, which provides the Staff’s views regarding interactions between SFAS 123(R) and certain SEC rules and regulations and provides interpretations of the valuation of share-based payments for public companies. Effective January 1, 2006, the Company adopted SFAS 123(R) on a modified prospective basis. As a result, the Company began to include stock-based compensation costs in its results of operations beginning with the quarter ended March 31, 2006. See Note 2 “Stock-Based Compensation”.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”). SFAS 154 replaces Accounting Principals Board Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements.” SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 is effective for all periods beginning after December 15, 2005. The adoption of SFAS 154 did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In November 2005, the FASB issued FASB Staff Position (“FSP”) Nos. FAS 115-1 and FAS 124-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments.” This FSP addresses the determination as to when an investment is considered impaired, whether that impairment is other than temporary, and the measurement of an impairment loss. This FSP also includes accounting considerations subsequent to the recognition of other-than-temporary impairments. The guidance in this FSP is effective for all periods beginning after December 15, 2005. The adoption of this FSP did not have a material effect on the Company’s consolidated financial position, results of operations or cash flows.

In February 2006, the FASB issued SFAS No. 155, “Accounting for Certain Hybrid Financial Instruments, an amendment of FASB Statements No. 133 and 140 (“SFAS No.155”). SFAS No. 155 permits fair value remeasurement for hybrid financial instruments containing an embedded derivative which otherwise requires bifurcation. This statement is effective for all financial instruments acquired or issued by the Company after January 1, 2007. The Company anticipates that the adoption of SFAS No. 155 will not have a material impact on its condensed consolidated financial statements.

2. Stock-Based Compensation

Effective January 1, 2006, Zoran adopted SFAS 123(R), using the modified prospective application transition method, which establishes accounting for stock-based awards exchanged for employee services. Accordingly, stock-based compensation cost is measured at grant date, based on the fair value of the award, over the requisite service period. The Company previously applied Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (“APB 25”), and related interpretations and provided the pro forma disclosures required by SFAS No. 123, “ Accounting for Stock-Based Compensation” (“SFAS 123”).

Periods Prior to the Adoption of SFAS 123(R)

Prior to the adoption of SFAS 123(R), the Company provided the disclosures required under SFAS 123, as amended by SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosures.”

The pro-forma effect of recognizing compensation expense pursuant to SFAS 123 for the three months ended March 31, 2005 was as follows (in thousands except per-share amounts):

	Three Months Ended March 31, 2005
Net loss attributable to common stockholders, as reported	$	(18,796	)

Stock-based compensation expense included in net loss	517

Total employee stock-based compensation expense determined under the fair value method	(6,804		)

Pro forma net loss attributable to common stockholders	$	(25,083	)

Pro forma net loss per share attributable to common stockholders:
Basic	$	(0.58	)
Diluted	$	(0.58	)

Net loss per share as reported attributable to common stockholders:
Basic	$	(0.43	)
Diluted	$	(0.43	)

For purposes of this pro forma disclosure, the value of the options was estimated using the accelerated amortization method under FIN 28 over the respective vesting periods of the awards. Due to the valuation allowance provided on our deferred tax assets, the Company has not recorded any tax benefits attributable to pro forma stock-based compensation.

Impact of Adoption of SFAS 123(R)

During the three months ended March 31, 2006 the Company recorded stock-based compensation expense for awards granted prior to but not yet vested as of January 1, 2006 as if the fair value method required for pro forma disclosure under SFAS 123 were in effect for expense recognition purposes adjusted for estimated forfeitures. For these awards the Company has continued to recognize compensation expense using the accelerated amortization method. For stock-based awards granted after January 1, 2006, the Company recognized compensation expense based on the grant date fair value required under SFAS 123(R). For these awards the Company recognized compensation expense using a straight-line amortization method. As SFAS 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, estimated stock-based compensation for the three-month period ended March 31, 2006 has been reduced for estimated forfeitures. The adoption of SFAS 123(R) resulted in a one-time cumulative benefit of $314,000 related to unvested awards for which compensation expense had already been recorded.

The following table summarizes stock-based compensation expense related to employee stock options, employee stock purchases and restricted stock unit grants for the three months ended March 31, 2006 as recorded in accordance with SFAS 123(R) (in thousands):

	Three Months Ended March 31, 2006

Cost of hardware product revenues	$	145
Research and development	1,513
Selling, general and administrative	2,904
Total costs and expenses	$	4,562

Due to the valuation allowance provided on our deferred tax assets, the Company has not recorded any tax benefits attributable to stock-based compensation. Results for prior periods have not been restated.

Valuation Assumptions

For purposes of the disclosure requirements of SFAS 123 and the requirements of SFAS 123(R), the Company estimates the fair value of stock options using the Black-Scholes valuation model using the following weighted-average assumptions:

	Stock Option Plans
	Three Months Ended March 31, 2006		Three Months Ended March 31, 2005

Average Expected term (years)	5.7		4.0
Expected volatility	55	%	72	%
Risk-free interest rate	4.6	%	3.7	%
Dividend yield	0	%	0	%

	Employee Stock Purchase Plan
	Three Months Ended March 31, 2006		Three Months Ended March 31, 2005

Average Expected term (years)	0.5		0.5
Expected volatility	55	%	55	%
Risk-free interest rate	2.3	%	2.9	%
Dividend yield	0	%	0	%

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

Expected Volatility: For the three months ended March 31, 2006, the Company modified its volatility assumption to use implied volatility for options granted during the quarter. Previously, the Company used only historical volatility in deriving its volatility assumption. Management believes that implied volatility appropriately reflects the market’s expectations of future volatility.

Risk-Free Interest Rate: Management bases its assumptions regarding the risk-free interest rate on U.S. Treasury zero-coupon issues with an equivalent remaining term.

Expected Dividend: The Company has not paid and does not anticipate paying any dividends in the near future.

Estimated Pre-vesting Forfeitures: When estimating forfeitures, the Company considers voluntary termination behavior based on actual historical information.

Stock Option Activity

The following is a summary of stock option activities:

	Shares Underlying Outstanding Options		Weighted Average Exercise Price
Balances, December 31, 2005	12,955,585		$	16.32
Granted	74,360		$	19.76
Exercised	(1,292,519	)	$	13.37
Canceled	(1,231,177	)	$	24.90
Balances, March 31, 2006	10,506,249		$	15.70

Significant option groups outstanding as of March 31, 2006 and the related weighted average exercise price and contractual life information, are as follows:

	Options Outstanding						Options Exercisable
Exercise Prices	Shares Underlying Options at March 31, 2006	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Aggregate intrinsic value		Shares Underlying Options at March 31, 2006	Weighted Average Exercise Price		Aggregate intrinsic value
					(‘000)					(‘000)
$0.00 to $9.99	975,070	5.36	$	6.27	$	15,220	744,599	$	6.31	$	11,596
$10.00 to $11.99	1,832,764	7.84	$	10.62	20,639		841,650	$	10.90	9,242
$12.00 to $14.99	2,252,985	6.84	$	12.94	20,144		1,490,220	$	12.76	13,584
$15.00 to $19.99	3,244,020	7.64	$	17.10	15,519		1,738,627	$	17.20	8,133
$20.00 to $25.99	1,803,029	6.97	$	24.02	206		1,242,385	$	23.87	166
$26.00 to $46.53	398,381	4.39	$	28.75	—		398,131	$	28.75	—
Total	10,506,249	7.05	$	15.70	$	71,728	6,455,612	$	16.09	$	42,721

The weighted average grant date fair value of options, as determined under SFAS 123(R), granted during the three months ended March 31, 2006 was $11.09 per share.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $21.88 as of March 31, 2006, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of shares of common stock underlying in-the-money options exercisable as of March 31, 2006 was 4.9 million.

The total intrinsic value of options exercised during the three month period ended March 31, 2006 was $8.9 million. The total cash received from employees as a result of employee stock option exercises during the three months ended March 31, 2006 was approximately $17.3 million. In connection with these exercises, there was no tax benefit realized by the Company due to the Company’s current loss position.

As of March 31, 2006, the total unamortized compensation cost related to stock options not yet recognized was $16.2 million after estimated forfeitures which are expected to be recognized over an estimated amortization period of four years.

The Company settles employee stock option exercises with newly issued common shares.

Stock Option Plans

As of March 31, 2006, the Company had outstanding options for the purchase of 10.5 million shares of common stock held by employees and directors under the Company’s 2005 Equity Incentive Plan (the “2005” Plan), 2005 Outside Directors Equity 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 result of acquisitions. As of March 31, 2006, 1,673,272 shares remained available for the future grants and awards. Options and stock appreciation rights granted under the 2005 Plan must have exercise prices per share not less than the fair market value of Zoran common stock on the date of grant and may not be repriced without stockholder approval. Such awards will vest and become exercisable upon conditions established by the Compensation Committee and may not have a term exceeding 10 years.

Restricted Shares and Restricted Stock Units

Restricted shares and restricted stock units are granted under the 2005 Equity Incentive Plan. On January 6, 2006, the Company filed a Tender Offer Statement with the Securities and Exchange Commission and commenced an offer to current employees to exchange outstanding options with exercise prices per share that were more than the greater of $20.00 and the closing sale price of Zoran common stock on the offer expiration date of February 6, 2006. The exchange offer was approved by Zoran’s stockholders at their 2005 annual meeting. On February 6, 2006, the Company accepted for exchange options to purchase an aggregate of 1,060,536 shares of Zoran common stock having an exercise price greater than $22.48. Subject to the terms and conditions of the exchange, the Company granted 197,433 restricted shares of common stock or restricted stock units in exchange for the tendered options. The shares of restricted stock and restricted stock units granted as part of this exchange vest over a period of two years. None of the directors or executive officers was eligible for participation in the exchange offer. This exchange was accounted for under the modification rules of FAS 123(R). As of March 31, 2006, there was $0.7 million of total unamortized stock-based compensation expense related to restricted shares and restricted stock units. This cost is expected to be recognized over the vesting period of two to four years.

The following is a summary of restricted shares and restricted stock units activities:

	Outstanding restricted shares and stock units	Weighted- average grant- date fair value		Aggregate intrinsic value
				(‘000)

Balances, December 31, 2005	65,333	$	13.59	$	888
Granted	197,433	$	21.56	4,257
Vested	—	—		—
Forfeited	—	—		—
Balances, March 31, 2006	262,766	$	19.58	$	5,145

Employee Stock Purchase Plan

The Company’s 1995 Employee Stock Purchase Plan (“ESPP”) was adopted by the Company’s Board of Directors in October 1995, and approved by its stockholders in December 1995. The ESPP enables employees to purchase shares through payroll deductions at approximately 85% of the lesser of the fair value of common stock at the beginning of a 24-month offering period or the end of each six-month segment within such offering period. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the U.S. Internal Revenue Code. There were no purchases during the quarter ended March 31, 2006. As of March 31, 2006, 1,574,596 shares were reserved and available for issuance under this plan.

3. Comprehensive Income (Loss)

The following table presents the calculation of comprehensive income (loss) as required by SFAS 130 (“Reporting Comprehensive Income”). The components of comprehensive income (loss), net of tax, are as follows (in thousands):

	Three Months Ended
	March 31,
	2006			2005
Net income (loss)	$	20,760		$	(18,796	)
Change in unrealized gain (loss) on investments, net	(915		)	967
Total comprehensive income (loss)	$	19,845		$	(17,829	)

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

4. Inventories

Inventories are stated at the lower of cost (first in, first out) or market and consisted of the following (in thousands):

	March 31,		December 31,
	2006		2005

Purchased parts and work in process	$	19,082	$	14,904
Finished goods	19,581		17,712
	$	38,663	$	32,616

5. Goodwill and Other Intangible Assets

In accordance with SFAS 142, goodwill is not amortized. The Company monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company performed the annual analysis as of September 30, 2005 and concluded that goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value, including goodwill.

Components of Acquired Intangible Assets (in thousands):

		March 31, 2006							December 31, 2005
	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	$	(114,700	)	$	80,805	$	195,505	$	(105,088	)	$	90,417
Patents	3-5	40,265		(22,359		)	17,906		40,265		(19,978		)	20,287
Customer base	3-5	13,860		(7,738		)	6,122		13,860		(7,123		)	6,737
Tradename and others	3-5	3,350		(1,687		)	1,663		3,350		(1,560		)	1,790
Purchased core technology *	4-5	15,162		(7,714		)	7,448		14,969		(7,113		)	7,856
Total		$	268,142	$	(154,198	)	$	113,944	$	267,949	$	(140,862	)	$	127,087

* The Company records the amortization of purchased core technology as cost of product sales.

Estimated future intangible amortization expense, based on current balances, as of March 31, 2006 is as follows (in thousands):

Remaining nine months of 2006	$	39,579
Year ending December 31, 2007	46,159
Year ending December 31, 2008	24,982
Year ending December 31, 2009	2,409
Year ending December 31, 2010	815
	$	113,944

Goodwill by reporting units was as follows (in thousands):

	March 31,		December 31,
	2006		2005

Consumer	$	174,597	$	178,197
Imaging	5,657		6,057
	$	180,254	$	184,254

6. Income Taxes

The provision for income taxes reflects the effective tax rate applied to earnings, excluding charges for amortization of intangible assets for the interim periods. The effective tax rate differs from the U.S. statutory rate due to utilization of net operating losses and State of Israel tax benefits on foreign earnings. The provision includes primarily taxes on income in excess of net operating loss carryover limitations and foreign withholding taxes.

7. Segment Reporting

SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the manner in which management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company’s chief operating decision-maker is considered to be the Chief Executive Officer.

The Company’s products are based on highly integrated application-specific integrated circuits, or ASICs, and system-on-a-chip, or SOC, solutions. The Company also licenses certain software and other intellectual property. During the first quarter of 2006, the Company reorganized its operating structure to bring together its consumer electronic product lines under a single operating group, in recognition of the accelerating convergence of consumer products and the Company’s strategy of sharing technology among its various product lines. The new Consumer group combines the former Digital Versatile Disc (DVD), Digital Television (DTV) and Mobile product groups whose operations were previously reported separately. The Company will continue to report the operations of its Imaging group as a separate operating segment.

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

The chief operating decision maker allocates resources to and evaluates operating segment performance based on net revenues and operating expenses of these segments. The accounting policies of the operating segments are the same as those described in the summary of accounting policies. No reportable segments have been aggregated.

Information about reported segment income or loss is as follows for the three months ended March 31, 2006 and 2005 (in thousands):

	Three Months Ended March 31,
	2006		2005
Net revenues:
Consumer	$	123,556	$	52,976
Imaging	18,690		20,908
	$	142,246	$	73,884

Operating expenses:
Consumer	$	88,257	$	65,322
Imaging	15,115		14,916
	$	103,372	$	80,238

Contribution margin:
Consumer	$	35,299	$	(12,346	)
Imaging	3,575		5,992
	$	38,874	$	(6,354	)

A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements for the three months ended March 31, 2006 and 2005 is as follows (in thousands):

	Three Months Ended March 31,
	2006		2005
Contribution margin from operating segments	$	38,874	$	(6,354	)
Amortization of intangibles	12,735		12,330
Amortization of deferred stock compensation	—		517
Total operating income (loss)	$	26,139	$	(19,201	)

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

The geographic distribution of total revenues for the three months ended March 31, 2006 and 2005 was as follows (in thousands):

	Three Months Ended March 31,
	2006		2005
Revenue from unaffiliated customers originating from:
China	$	39,605	$	27,965
Japan	27,364		24,046
Korea	8,562		3,910
Taiwan	53,708		5,403
United States	7,118		5,610
North America (excluding United States)	12		693
Other	5,877		6,257
Total revenues	$	142,246	$	73,884

For the three months ended March 31, 2006, one customer accounted for 21% of total revenues attributable to the license revenue related to litigation settlement. For the same period of 2005, one customer accounted for 13% of total revenues.

As of March 31, 2006, two customers accounted for approximately 10% and 12% of total net accounts receivable, respectively, and as of December 31, 2005 one customer accounted for approximately 14% of the net accounts receivable balance.

8. Acquisitions

Oren Semiconductor, Inc.

On June 10, 2005, Zoran completed the acquisition of Oren Semiconductor, Inc. (“Oren”), a privately-held provider of demodulator ICs for the global high definition television market. Prior to this acquisition, Zoran had made investments in Oren that represented a 17% ownership interest. Under the terms of the acquisition agreement, Zoran acquired the remaining 83% of Oren’s outstanding stock by means of a merger of Oren with a wholly-owned subsidiary of Zoran, in consideration for which Zoran paid an aggregate of $28.4 million in cash and issued 1,188,061 shares of Zoran common stock valued at $12.9 million, for total consideration of $41.3 million, to the other stockholders of Oren and to employees holding Oren options. The Company considered the requirements under Accounting Principles Board Opinions 18 (“APB 18”), “The Equity Method of Accounting for Investments in Common Stock,” to retroactively record the gains or losses on investment of the prior 17% ownership under the equity basis. Based on the Company’s analysis, such adjustments were considered to be immaterial to the prior financial results of the Company and, accordingly, such adjustments are not reflected in the Company’s previously reported results of operations.

The primary purpose of the acquisition was to obtain Oren’s demodulator IC technology for the global high definition television market. The Company intends to combine this technology with Zoran’s digital television technology to deliver a complete and cost-effective system solution for digital television makers.

Allocation of the purchase price is as follows (in thousands):

Net liabilities acquired	$	(941	)
In process research and development	2,650
Intangible assets	9,100
Goodwill	35,305
	$	46,114

The purchase price exceeded the net assets acquired resulting in the recognition of goodwill. The amounts allocated to intangible assets include purchased technology totaling $7.0 million, tradename and others totaling $1.25 million and customer base totaling $850,000 which are being amortized over their estimated useful lives of five years.

Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations of Zoran and Oren as if the acquisition had occurred as of the beginning of the period presented, after giving effect to certain adjustments, including amortization of intangibles. The unaudited pro forma financial information does not necessarily reflect the results of operations that would have occurred had the combined companies constituted a single entity during such periods, and is not necessarily indicative of results which may be obtained in the future.

	Year Ended December 31,
	2005

In thousands except for per share data:
Pro forma revenues	$	396,737

Pro forma net income (loss)	$	(29,941	)

Pro forma net income (loss) per share:
Basic	$	(0.68	)

Diluted	$	(0.68	)

9. Net Income (Loss) Per Share

Basic net income (loss) per share is calculated by dividing net income available to common stockholders by the weighted average number of common shares outstanding during the period. Diluted net income per share is calculated by using the weighted average number of common shares outstanding during the period increased to include the number of additional shares of common stock that would have been outstanding if the dilutive potential shares of common stock had been issued. The dilutive effect of outstanding options and restricted stock for the three months ended Match 31, 2006 is reflected in diluted net income per share by application of the treasury stock method, which includes consideration of stock-based compensation required by SFAS No. 123(R).

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

	Three Months Ended March 31,
	2006		2005

Net income (loss)	$	20,760	$	(18,796	)

Weighted average shares outstanding	46,207		43,213
Effect of dilutive options and restricted stock units	2,280		—
Dilutive weighted average shares	48,487		43,213

Net income (loss) per share:(1)
Basic	$	0.45	$	(0.43	)
Diluted	$	0.43	$	(0.43	)

(1)Net income for the three months ended March 31, 2006 includes $4.6 million of stock-based compensation expense, net of tax. The effect of recording stock-based compensation expense on basic and diluted net income per share was $0.10 and $0.08 per share, respectively, for the three months ended March 31, 2006.

Options to purchase 3,413,722 shares were excluded from the computation of diluted net income per share for the three months ended March 31, 2006 as these shares would have had an anti-dilutive effect.

Options to purchase 13,932,000 shares were excluded from the computation of diluted net loss per share for the three months ended March 31, 2005 as these shares would have had an anti-dilutive effect.

10. Legal Proceedings

Zoran and its subsidiary, Oak Technology, Inc., have been involved in five separate legal actions against MediaTek, Inc. and customers of MediaTek based on claims of patent infringement.

On March 11, 2004, Zoran and Oak filed a complaint with the United States International Trade Commission (the “ITC”) alleging that certain MediaTek DVD player and optical disk controller chips and chipsets, and products in which they are used, infringe Zoran’s and Oak’s patents. In addition to MediaTek, the complaint named a number of other proposed respondents that sell products, including DVD players and PC optical storage devices that use MediaTek’s chips and chipsets. On September 28, 2005, the ITC issued its final ruling finding one of Zoran’s patents to be valid and infringed by optical disk controller chips and chipsets sold by MediaTek and by products using the infringing chips and chipsets sold by a number of MediaTek customers. The ITC also issued an exclusion order prohibiting MediaTek and specified MediaTek customers from importing into the United States any optical disk controller chip or chipset that infringes the Zoran patent, or any optical disk storage product containing such a chip or chipset and cease and desist orders to the affected companies located in the United States prohibiting them from importing or selling infringing products in the United States. In November 2005, both parties filed notices of appeal with the United States Court of Appeals for the Federal Circuit. On January 19, 2006, the court issued an order temporarily staying enforcement of the ITC’s orders.

On March 15, 2004, Zoran and Oak filed a complaint against MediaTek and one of its customers in the United States District Court, Central District of California alleging similar facts regarding infringement by MediaTek’s chips and chipsets and products in which they are used. The lawsuit sought both monetary damages and an injunction to stop the importation and sale of infringing products. The complaint was subsequently amended to name additional MediaTek customers as defendants. Trial of this case was set to begin May 15, 2006.

On July 23, 2004, MediaTek filed a complaint with the ITC alleging that certain Zoran and Oak DVD player and optical disk controller chips and chipsets infringe two MediaTek patents. The complaint requested that the ITC institute an investigation into the accused products and issue exclusion and cease and desist orders prohibiting importation into the United States of allegedly infringing chips and products that contain them. On September 30, 2005, the ITC Administrative Law Judge issued his initial determination finding that none of Zoran’s optical disk controller chips infringe any claim of the two patents asserted against Zoran; that one of the two patents is invalid; that Oak’s devices do not infringe one of the two patents asserted against Oak and that the other patent is invalid; and that MediaTek has failed to establish that it has a domestic industry in the United States related to the patents at issue – a basic requirement for obtaining relief from the ITC. The initial determination was subject to review by the full ITC. The target date for completion of the investigation was March 1, 2006.

On July 23, 2004, MediaTek filed a complaint against Zoran and Oak in the United States District Court, District of Delaware alleging infringement of the same two patents asserted in MediaTek’s ITC complaint and seeking monetary damages and injunctive relief. This action was stayed by order of the court on October 4, 2004.

On February 2, 2005, MediaTek filed a complaint against Zoran and Zoran Digital Technologies (Shenzhen) Ltd. (Zoran’s local Chinese operations) in the Shenzhen People’s Republic of China court alleging infringement of the Chinese counterpart patent of one of the two patents asserted in MediaTek’s ITC complaint and seeking monetary damages. Because Zoran had not been served with the complaint, the initiation of the proceeding has been stayed.

On January 25, 2006, Zoran and Oak entered into an agreement with MediaTek to settle the litigation. Under the agreement, each party agreed to dismiss its respective claims and counterclaims under all of the pending lawsuits. The parties also agreed to dismiss all proceedings pending against each other before the ITC, including all appeals and enforcement proceedings pending before the ITC, United States Customs and Border Protection and the United States Court of Appeals for the Federal Circuit related to the ITC’s September 28, 2005 order excluding the importation into the United States of certain MediaTek chips and products incorporating those chips.

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

This report includes a number of forward-looking statements which reflect the Company’s current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below under the heading “Future Performance and Risk Factors” and in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Future Performance and Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2005. In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Overview

Our products consist of integrated circuits and related products used in digital 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 digital television applications that enable the delivery and display of digital video content through a set-top box or television as well as digital imaging products consisting of semiconductor hardware and software that enable users to print, scan, process and transmit documents to computer peripherals that perform printing functions. Subsequent to our acquisition of Emblaze Semiconductor Ltd. on July 8, 2004, we also provide high performance, low-power application processors, technology and products for the multimedia mobile telephone market. Through the acquisition of Oren Semiconductor, Inc. on June 10, 2005, Zoran obtained Oren’s demodulator IC technology for the global high definition television market.

We derive most of our revenues from the sale of our integrated circuit products. Historically, average selling prices in the semiconductor industry in general, and for our products in particular, have decreased over the life of a particular product. Average selling prices for our hardware products have fluctuated substantially from period to period, primarily as a result of changes in our customer mix of original equipment manufacturer, or OEM, sales versus sales to resellers and the transition from low-volume to high-volume production. In the past, we have periodically reduced the prices of some of our products in order to better penetrate the consumer market. We believe that, as our product lines continue to mature and competitive markets evolve, we are likely to experience further declines in the average selling prices of our products, although we cannot predict the timing and amount of such future changes with any certainty.

Our cost of hardware product revenues consists primarily of fabrication costs, assembly and test costs, and the cost of materials and overhead from operations. If we are unable to reduce our cost of hardware product revenues to offset anticipated decreases in average selling prices, our product gross margins will decrease. Our hardware product gross margin is also dependent on product mix and on the proportion of products sold directly to our OEM customers versus indirectly through our marketing partners. These marketing partners purchase our products at lower prices but absorb most of the associated marketing and sales support expenses, maintain inventories and provide customer support and training. As a result, lower gross margins on sales to these resellers are partially offset by reduced selling and marketing expenses related to such sales. We expect both product and customer mix to continue to fluctuate in future periods, causing further fluctuations in margins.

We also derive revenue from licensing our software and other intellectual property. Licensing revenue includes one-time license fees and royalties based on the number of units distributed by the licensee. Quarterly licensing revenue can be significantly affected by the timing of a small number of licensing transactions, each accounting for substantial revenues. Accordingly, licensing revenues have fluctuated, and will continue to fluctuate, on a quarterly basis. In addition, we have historically generated a portion of our total revenues from development contracts, primarily with key customers, although development revenue has declined substantially as a percentage of total revenues over the past several years. These development contracts have provided us with partial funding for the development of some of our products. These development contracts provide for license and milestone payments which are recorded as development revenue. We classify all development costs, including costs related to these development contracts, as research and development expenses. We retain ownership of the intellectual property developed by us under these development contracts. While we intend to continue to enter into development contracts with certain strategic partners, we expect development revenue to continue to decline as a percentage of total revenues.

We recognize software license revenues in accordance with the provisions of Statement of Position (SOP) 97-2, Software Revenue Recognition, as amended by SOP 98-9, Modification of SOP 97-2, Software Revenue Recognition, With Respect to Certain Transactions. Our software license agreements typically include obligations to provide maintenance and other support over a fixed term and allow for renewal of maintenance services on an annual basis. We determine the fair value of our maintenance obligations with reference to substantive renewal rates within the agreement or objective evidence of fair value as required under SOP 97-2. Maintenance and support revenue is recognized ratably over the term of the arrangement. We also receive royalty revenues based on

per unit shipments of products embedding our software which we recognize upon receipt of a royalty report from the customer, typically one quarter in arrears.

Our research and development expenses consist of salaries and related costs of employees engaged in ongoing research, design and development activities and costs of engineering materials and supplies. We are a party to research and development agreements with the Chief Scientist in Israel’s Ministry of Industry and Trade and the Israel-United States Binational Industrial Research and Development Foundation, which fund up to 50% of incurred project costs for approved products up to specified contract maximums. These agreements require us to use our best efforts to achieve specified results and require us to pay royalties at rates of 3% to 5% of resulting product sales, and up to 30% of resulting license revenues, up to a maximum of 100% to 150% of total funding received.

Reported research and development expenses are net of these grants, which fluctuate from period to period. We believe that significant investments in research and development are required for us to remain competitive, and we expect to continue to devote significant resources to product development, although such expenses as a percentage of total revenues may fluctuate.

Our selling, general and administrative expenses consist primarily of employee-related expenses, sales commissions, product promotion and other professional services. We expect that selling, general and administrative expenses will continue to increase to support our anticipated growth.

We conduct a material amount of our research and development and certain sales and marketing and administrative operations in our foreign subsidiary offices. As a result, some of our expenses are incurred in foreign currency. To date, substantially all of our hardware product revenues and our software and other revenues have been denominated in U.S. dollars and most costs of hardware product revenues have been incurred in U.S. dollars. We expect that most of our revenues and costs of revenue will continue to be denominated and incurred in U.S. dollars for the foreseeable future. We have not experienced material losses or gains as a result of currency exchange rate fluctuations and have not engaged in hedging transactions to reduce our exposure to such fluctuations. We may in the future elect to take action to reduce our foreign exchange risk.

Our effective income tax rate has benefited from the availability of net operating losses which we have utilized to reduce taxable income for U.S. federal income tax purposes and by our Israel based subsidiary’s status as an “Approved Enterprise” under Israeli law, which provides a ten-year tax holiday for income attributable to a portion of our operations in Israel. Our U.S. federal net operating losses expire at various times between 2006 and 2025, and the benefits from our subsidiary’s Approved Enterprise status expire at various times beginning in 2006.

Recent Acquisition

On June 10, 2005, we completed our acquisition of Oren Semiconductor, Inc. (“Oren”), a privately-held provider of demodulator ICs for the global high definition television market. Prior to this acquisition, we had made investments in Oren that represented a 17% ownership interest. Under the terms of the acquisition agreement, we acquired the remaining 83% of Oren’s outstanding stock by means of a merger of Oren with a wholly-owned subsidiary of Zoran, in consideration for which we paid an aggregate of $28.4 million in cash and issued 1,188,061 shares of Zoran common stock valued at $12.9 million, for total consideration of $41.3 million, to the other stockholders of Oren and to employees holding Oren options. The acquisition was accounted for under the purchase method of accounting.

Following the completion of the acquisition, the results of operations of Oren have been included in our consolidated financial statements. Accordingly, our results of operations for the three month period ended March 31, 2006 include Oren’s operations, while such operations are not reflected in our results of operations for the same period of the prior year.

Segments

Our products are based on highly integrated application-specific integrated circuits, or ASICs, and system-on-a-chip, or SOC, solutions. We also license certain software and other intellectual property. During the first quarter of 2006, we reorganized our operating structure to bring together our consumer electronic product lines under a single operating group, in recognition of the accelerating convergence of consumer products and our strategy of sharing technology among its various product lines. The new Consumer group combines the former Digital Versatile Disc (DVD), Digital Television (DTV) and Mobile product groups whose operations were previously reported separately. We will continue to report the operations of its Imaging group as a separate operating segment.

Results of Operations

Revenues

Total revenues increased 92.4% to $142.2 million for the three months ended March 31, 2006 compared to $73.9 million for the three months ended March 31, 2005. Consumer segment revenues increased $70.6 million while Imaging segment revenues decreased $2.2 million. Within the Consumer segment, license revenues related to the settlement of litigation in the first quarter of 2006 accounted for $30.2 million of the increase. The remaining increase of $40.4 million in Consumer segment revenues was a result of increased revenues in the Mobile, DTV and DVD product lines of $23.1 million, $13.0 million and $4.3 million, respectively.

Hardware product revenues for the three months ended March 31, 2006 were $99.2 million compared to $59.0 million for the comparable period of the prior year. Hardware product revenues increased $41.4 million in the Consumer segment and decreased $1.2 million in the Imaging segment. Within the Consumer segment, hardware product revenues increased $23.6 million in the Mobile product line, $13.7 million in the DTV product line and $4.1 million in the DVD product line, in each case driven by increased unit shipments.

Software and other revenues were $12.9 million and $14.9 million for the three months ended March 31, 2006 and 2005, respectively. The decrease in software and other revenues was largely attributable to a $1.0 million decrease in the Imaging segment.

Cost of Hardware Product Revenues

Cost of hardware product revenues was $54.5 million for the quarter ended March 31, 2006 compared to $37.0 million for the same period of 2005. The increase in costs was primarily a result of the corresponding increase in hardware product revenues. As a percentage of hardware product revenues, hardware product costs decreased from 62.6% for the three months ended March 31, 2005 to 54.9% for the three months ended March 31, 2006. The decrease in hardware product costs as a percentage of hardware product revenues was primarily due to a change in product mix within the DVD product line to an increased percentage of lower cost products. During the quarter ended March 31, 2006, we recorded a charge of approximately $800,000 of royalty expenses attributable to products shipped during 2004 and 2005. We determined that the impact of this excluded royalty expense on each of the affected prior quarters and the first quarter of 2006 was immaterial.

Research and Development

Research and development expenses were $24.1 million for the three months ended March 31, 2006, compared to $20.1 million for the same period of 2005. This increase was primarily attributed to stock-based compensation expenses of $1.5 million recorded in the current period as a result of the adoption of SFAS123(R) and the inclusion of the operations of Oren which was acquired in June 2005.

Selling, General and Administrative

Selling, general and administrative expenses were $24.8 million for the three months ended March 31, 2006 compared to $23.2 million for the same period of 2005. This increase was primarily attributed to stock-based compensation expenses of $2.9 million recorded under SFAS 123(R) in the current period, continued increases in marketing and field application support expenses to support revenue growth in our Asia Pacific markets and the inclusion of the Oren operations. These increases were partially offset by a decrease in legal fees as a result of the settlement of our patent litigation with Mediatek, Inc.

Amortization of Intangible Assets

During the three months ended March 31, 2006, we incurred charges of $12.7 million related to the amortization of intangible assets compared to $12.3 million for the three months ended March 31, 2005. This increase was a result of the addition of $9.1 million of amortizable intangible assets acquired in the Oren acquisition in June 2005. At March 31, 2006, we had approximately $106.5 million in net intangible assets acquired through the Oak, Emblaze and Oren acquisitions which we will continue to amortize on a straight line basis through 2010.

Amortization of Deferred Stock Compensation

As a result of the adoption of SFAS No. 123(R) during the first quarter of 2006, we now record a charge for all stock-based compensation expenses as described in Note 2 to Condensed Consolidated Financial Statements. As a result, we no longer record a separate charge for amortization of deferred stock compensation. For the three months ended March 31, 2005, we recorded a charge of $517,000 related to the amortization of deferred stock compensation primarily as a result of stock options granted in connection with the Oak acquisition.

Interest and Other Income

Interest and other income was $2.8 million for the three month period ended March 31, 2006, compared to $405,000 for the same period of 2005. This increase was a result of net gains in investments of $1.0 million recorded during the first quarter of 2006 as well as an increase in interest income as a result of our higher average cash and short term investment balances.

Provision for Income Taxes

We recorded a tax provision of $8.2 million for the three month period ended March 31, 2006. We did not record a tax provision or benefit for the quarter ended March 31, 2005. The provision for income taxes reflects the estimated annualized effective tax rate applied to earnings excluding charges for amortization of intangible assets for the interim periods. The effective tax rate differs from the U.S. statutory rate due to utilization of net operating losses and State of Israel tax benefits on foreign earnings. The provision includes primarily taxes on income in excess of net operating loss carryover limitations and foreign withholding taxes. At March 31, 2006, we continue to carry a full valuation allowance against our net deferred tax assets as management has determined that it is more likely than not that our deferred tax assets may not be realized.

Liquidity and Capital Resources

At March 31, 2006, we had $113.8 million of cash and cash equivalents and $104.1 million of short-term investments. At March 31, 2006, we had $230.5 million of working capital.

Our operating activities generated cash of $52.7 million during the first quarter of 2006, primarily due to net income of $20.8 million and non-cash items such as amortization of intangibles assets of $12.7 million, depreciation and amortization of $3.0 million and stock based compensation expense of $4.6 million. Cash provided by operations also increased due to a decrease of $7.7 million in accounts receivable due to the timing of collections and a net increase in accounts payable, accrued expenses and other liabilities, goodwill and other long term liabilities totaling $10.2 million. These increases were partially offset by a $6.0 million increase in inventories to meet the increasing demand for our products.

Cash used in investing activities was $35.0 million during the three months ended March 31, 2006, principally reflecting the net purchase of investments of $33.6 million. In addition we spent $1.4 million for property and equipment.

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

Net cash used in operating activities during the first three months of 2005 was $3.9 million. While we recorded a net loss of $18.8 million, this loss included non-cash charges of $3.1 million for depreciation of property and equipment, $12.3 million for amortization of intangible assets and $517,000 for amortization of deferred stock compensation. Additional cash used in operating activities was a result of the changes in current assets and liabilities totaling $1.0 million.

Cash used in investing activities was $2.8 million during the three months ended March 31, 2005, reflecting the net purchase of investments of $780,000 and the purchases of $2.0 million of property and equipment.

Cash provided by financing activities was $375,000 during the three months ended March 31, 2005 attributable to the issuance of common stock during the period.

At March 31, 2006, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to the type of financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

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

• the levels at which we maintain inventories and accounts receivable;

• the market acceptance of our products;

• the levels of promotion and advertising required to launch our new products or to enter markets and attain a competitive position in the marketplace;

• our business, product, capital expenditure and research and development plans and technology roadmap;

• volume pricing concessions;

• capital improvements to new and existing facilities;

• technological advances;

• the response of competitors to our products; and

• our relationships with our suppliers and customers.

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

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

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Zoran and its subsidiary, Oak Technology, Inc., have been involved in five separate legal actions against MediaTek, Inc. and customers of MediaTek based on claims of patent infringement.

In connection with the settlement, Zoran, Oak and MediaTek entered into agreements granting each other non-exclusive licenses under the patents that were the subject of the litigation, and additional patents used in the design and manufacture of optical storage devices for personal computer products. In consideration for licenses granted by Zoran, MediaTek agreed to make a cash payment of $55 million to Zoran, $44 million of which was paid in February 2006 and $11 million of which was paid in April 2006. In addition, MediaTek will be required to make royalty payments of up to $30 million over the 30-month period commencing on the date of the agreement based on future sales of covered MediaTek products. Net of amounts payable by Zoran to a holder of rights under the Oak

patents involved in the litigation, and amounts payable as legal fees, Zoran will realize approximately $28.1 million of the cash payment and up to approximately $15.3 million of the future royalty payments.

On February 9, 2006, Zoran and Oak entered into an agreement to settle separate litigation between Oak, on the one hand, and MediaTek and United Microelectronics Corporation, on the other hand. This litigation, which involved various contract-related claims and counterclaims, was instituted in 1997, prior to Zoran’s acquisition of Oak. Under the agreement, the litigation was dismissed, and a subsidiary of MediaTek paid Zoran $15 million. Net of amounts payable by Zoran to a holder of rights under certain Oak patents, and amounts payable as legal fees, Zoran realized approximately $7.7 million of the payment. In connection with the settlement, Zoran and MediaTek also granted each other cross-licenses under certain of their patents.

Item 1A. Risk Factors

Our future business, operating results and financial condition are subject to various risks and uncertainties, including those described below. The risk factors described below do not contain any material changes from those disclosed in Item 1A of our annual report on Form 10-K for the year ended December 31, 2005.

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

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

• fluctuation in demand for our products;

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

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

• the timing or cancellation of large customer orders;

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

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

• the cyclical nature of the semiconductor industry;

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

• changes in the mix of products sold;

• seasonality in demand for our products;

• increased competition in product lines, and competitive pricing pressures; and

• the evolving and unpredictable nature of the markets for products incorporating our integrated circuits and embedded software.

We expect that our operating results will continue to fluctuate in the future 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 new product introductions.

Our operating results could also be harmed by:

• economic conditions generally or in various geographic areas where we or our 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; or

• a downturn in the markets for our customers’ products, particularly the consumer electronics market.

These factors are difficult or impossible to forecast. We place orders with independent foundries several months in advance of the scheduled delivery date, often in advance of receiving non-cancelable orders from our customers. This limits our ability to react to fluctuations in demand for their products. If anticipated shipments in any quarter are canceled or do not occur as quickly as expected, or if we fail to foresee a technology change that could render a product obsolete, expense and inventory levels could be disproportionately high. If anticipated license revenues in any quarter are canceled or do not occur, gross margins may be reduced. A significant portion of our expenses are relatively fixed, and the timing of increases in expenses is based in large part on our forecast of future revenues. As a result, if revenues do not meet our expectations, we may be unable to quickly adjust expenses to levels appropriate to actual revenues, which could harm our operating results.

Product supply and demand fluctuations common to the semiconductor industry are historically characterized by periods of manufacturing capacity shortages immediately followed by periods of overcapacity, which are caused by the addition of manufacturing capacity in large increments. We cannot predict whether we will achieve timely, cost-effective access to that capacity when needed, or when there will be a capacity shortage again in the future.

As a result of these factors, our operating results may vary significantly from quarter to quarter. Any shortfall in revenues or net income from levels expected by the investment community could cause a decline in the trading price of our stock.

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

Because the markets that our customers serve are characterized by numerous new product introductions and rapid product enhancements, our operating results may vary significantly from quarter to quarter. During the final production of a mature product, our customers typically exhaust their existing inventories of our products. Consequently, orders for our products may decline in those circumstances, even if the products are incorporated into both mature products and replacement products. A delay in a customer’s transition to commercial production of a replacement product would delay our ability to recover the lost sales from the discontinuation of the related mature product. Our customers also experience significant seasonality in the sales of their consumer products, which affects their orders of our products. Typically, the second half of the calendar year represents a disproportionate percentage of sales for our customers due to the holiday shopping period for consumer electronics products, and therefore, a disproportionate percentage of our sales. We expect these seasonal sales fluctuations to continue for the foreseeable future.

Product supply and demand in the semiconductor industry is subject to cyclical variations.

The semiconductor industry is subject to cyclical variations in product supply and demand. Downturns in the industry often occur in connection with, or anticipation of, maturing product cycles for both semiconductor companies and their customers and declines in general economic conditions. These downturns have been characterized by abrupt fluctuations in product demand, production over-capacity and accelerated decline of average selling prices. In some cases, these downturns have lasted more than one year. A downturn in the semiconductor industry could harm our sales and revenues if demand drops, or our gross margins if average selling prices decline.

Our success for the foreseeable future will be dependent on growth in demand for integrated circuits for a limited number of applications.

In recent years, we have derived a substantial majority of our product revenues from the sale of integrated circuits for DVD and digital camera applications. We expect that sales of our products for these applications will continue to account for a significant portion of our revenues for the foreseeable future. Our future financial performance will also depend on our ability to successfully develop and market new products in the digital television, HDTV and digital imaging markets. If the markets for these products and applications decline or fail to develop as expected, or we are not successful in our efforts to market and sell our products to manufacturers who incorporate integrated circuits into these products, our financial results will be harmed.

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

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

In the consumer electronic market, our performance has been dependent on our successful development and timely introduction of integrated circuits for DVD players, DVD recorders, digital cameras, broadband digital television and HDTV. These markets are characterized by the incorporation of a steadily increasing level of integration and numbers of features on a chip at the same or lower system cost, enabling original equipment manufacturers, or OEMs, to continually improve the features or reduce the prices of the systems they sell. If we are unable to continually develop and introduce integrated circuits with increasing levels of integration and new features at competitive prices, our operating results will suffer.

In the digital office market, our performance has been dependant on our ability to successfully develop embedded image processing system on a chip, or SOC, solutions for the digital office market, in particular, embedded digital color copier technology and image processing chips for a variety of imaging peripherals, including printers and multi-function peripherals, or MFPs. Among other technological changes, embedded PDF and color capability are rapidly emerging as market requirements for printers and other imaging devices. Some of our competitors have the capacity to supply these solutions, and some of their solutions have been well received in the marketplace. We face the challenge of developing new imaging products with the capability to handle greater color and image complexity, including web-based documents, and work with higher-performing devices in networked environments. If we are unable to meet these challenges with the development of products that can effectively compete in the OEM software and solutions market, our future operating results could suffer.

We must keep pace with rapid technological changes and evolving industry standards to remain competitive.

Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards and our customers’ changing demands. The consumer electronics market, in particular, is characterized by rapidly changing technology, 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, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. If new industry standards emerge, our products or the products of our customers could become unmarketable or obsolete, and we could lose market share or be required to incur substantial unanticipated costs to comply with these new standards.

Our success will also depend on the successful development of new markets and the application and acceptance of new technologies and products in those new markets. For example, our success will depend on the ability of our customers to develop new products and enhance existing products in the recordable DVD player market and products for the broadband digital television and HDTV markets and to introduce and promote those products successfully. These markets may not continue to develop to the extent or in the time periods that we currently anticipate due to factors outside our control, such as delays in implementation of FCC 02-320 requiring all

new televisions to include a digital receiver. If new markets do not develop as we anticipate, or if our products do not gain widespread acceptance in these markets, our business, financial condition and results of operations could be materially and adversely affected. The emergence of new markets for our products is also dependent in part upon third parties developing and marketing content in a format compatible with commercial and consumer products that incorporate our products. If this content is not available, manufacturers may not be able to sell products incorporating our products, and our sales would suffer.

We rely on independent foundries and contractors for the manufacture, assembly and testing of our integrated circuits and other hardware products, and the failure of any of these third parties to deliver products or otherwise perform as requested could damage our relationships with our customers and harm our sales and financial results.

We do not operate any manufacturing facilities, and we rely on independent foundries to manufacture substantially all of our products. These independent foundries fabricate products for other companies and may also produce products of their own design. From time to time, there are manufacturing capacity shortages in the semiconductor industry. We do not have long-term supply contracts with any of our suppliers, including our principal supplier, Taiwan Semiconductor Manufacturing Company, or TSMC. Therefore, TSMC and our other suppliers are not obligated to manufacture products for us for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular 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 process technologies necessary for manufacture of our products;

• lack of control over delivery schedules;

• lack of control over quality assurance;

• lack of control over manufacturing yields and cost; and

• potential misappropriation of our intellectual property.

In addition, TSMC and some of our other foundries are located in areas of the world that are subject to natural disasters such as earthquakes. While the 1999 earthquake in Taiwan did not have a material impact on our independent foundries, a similar event centered near TSMC’s facility could severely reduce TSMC’s ability to manufacture our integrated circuits. The loss of any of our manufacturers as a supplier, our inability to expand the supply of their products in response to increased demand, or our inability to obtain timely and adequate deliveries from our current or future suppliers due to a natural disaster or any other reason could delay or reduce shipments of our products. Any of these circumstances could damage our relationships with current and prospective customers and harm our sales and financial results.

We also rely on a limited number of independent contractors for the assembly and testing of our products. Our reliance on independent assembly and testing houses limits our control over delivery schedules, quality assurance and product cost. Disruptions in the services provided by our assembly or testing houses or other circumstances that would require them to seek alternative sources of assembly or testing could lead to supply constraints or delays in the delivery of our products. These constraints or delays could damage our relationships with current and prospective customers and harm our financial results.

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

If we are not able to obtain additional foundry capacity as required, our relationships with our customers would be harmed and our sales would likely be 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 for capacity commitments;

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

• issuance of our equity securities to a foundry;

• investment in a foundry;

• joint ventures; or

• other partnership relationships with foundries.

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

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

The fabrication of silicon wafers is a complex process. Minute levels of contaminants in the manufacturing environment, defects in photo masks used to print circuits on a wafer, difficulties in the fabrication process or other factors can cause a substantial 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 the manufacturing process and may be time consuming and expensive to correct. As a result, foundries often experience problems achieving acceptable yields, which are represented by the number of good integrated circuits as a proportion of the number of total integrated circuits on any particular wafer. Poor yields from our independent foundries would reduce our ability to deliver our products to customers, harm our relationships with our customers and harm our business.

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

We face intense competition in the markets in which we compete. We expect that the level of competition will increase in the future from existing competitors and from other companies that may enter our existing or future markets with solutions that may be less costly or provide higher performance or additional features.

Competition in Zoran’s core compression technology market has historically been dominated by large companies, such as ST Microelectronics, and companies that develop and use their own integrated circuits, such as Sony and Matsushita. As this market continues to develop, we face competition from other large semiconductor vendors.

The DVD market continues to expand, and additional competitors are expected to enter the market for DVD players and software. Some of these potential competitors may develop captive implementations for use only with their own PC and consumer electronics products. It is also possible that application software vendors, such as Microsoft, may attempt to enter the DVD application market in the future. This increased competition may result in price reductions, reduced profit margins and loss of market share.

We face competition from several large semiconductor companies in the broadband digital television and set-top box markets. We expect competition to continue to increase in these markets as industry standards become well known and as other competitors enter these markets.

We also face significant competition in the digital office market. The future growth of the digital office market is highly dependent on OEMs continuing to outsource an increasing portion of their product development work. While the trend toward outsourcing on the part of our OEM customers in this market has accelerated in recent years, any reversal of this trend, or a change in the way they outsource, could seriously harm our business.

Many of our existing competitors, as well as OEM customers that are expected to compete with us in the future, have substantially greater financial, manufacturing, technical, marketing, distribution and other resources, broader product lines and longer standing relationships with customers than we have. In addition, much of our future success is dependent on the success of our OEM customers. If we or our OEM customers are unable to compete successfully against current and future competitors, we could experience price reductions, order cancellations and reduced gross margins, any one of which could harm our business.

Our products are characterized by average selling prices that decline over relatively short time periods; if we are unable to reduce our costs or introduce new products with higher average selling prices, our financial results will suffer.

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

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

Our largest customers have accounted for a substantial percentage of our revenues. In 2005, no single customer accounted for more than 10% of our total revenues, although sales to our four largest customers accounted for 29% of our total revenues. In 2004, one customer accounted for 11% of our total revenues while sales to our four largest customers accounted for 35% of our total revenues. Sales to these large customers have varied significantly from year to year and will continue to fluctuate in the future. These sales also may fluctuate significantly from quarter to quarter. We may not be able to retain our key customers, or these customers may cancel purchase orders or reschedule or decrease their level of purchases from us. Any substantial decrease or delay in sales to one or more of our key customers could harm our sales and financial results. In addition, any difficulty in collecting amounts due from one or more key customers could harm our financial results.

Our products generally have long sales cycles and implementation periods, which increases our costs in obtaining orders and reduces the predictability of our operating results.

Our products are technologically complex. Prospective customers generally must make a significant commitment of resources to test and evaluate our products and to integrate them into larger systems. As a result, our sales processes are often subject to delays associated with lengthy approval processes that typically accompany the design and testing of new products. The sales cycles of our products often last for many months or even years. Longer sales cycles require us to invest significant resources in attempting to make sales and delay the generation of revenue.

Long sales cycles also subject us to other risks, including customers’ budgetary constraints, internal acceptance reviews and cancellations. In addition, orders expected in one quarter could shift to another because of the timing of customers’ purchase decisions. The time required for our customers to incorporate our products into their own can vary significantly with the needs of our customers and generally exceeds several months, which further complicates our planning processes and reduces the predictability of our operating results.

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

We generally do not enter into long-term purchase contracts with our customers, and we cannot be certain as to future order levels from our customers. Customers generally purchase our products subject to cancelable short-term purchase orders. We cannot predict whether our current customers will continue to place orders, whether existing orders will be canceled, or whether customers who have ordered products will pay invoices for delivered products. When we do enter into a long-term contract, the contract is generally terminable at the convenience of the customer. In the event of an early termination by one of our major customers, it is unlikely that we will be able to rapidly replace that revenue source, which would harm our financial results.

Regulation of our customers’ products may slow the process of introducing new products and could impair our ability to compete.

The Federal Communications Commission, or FCC, has broad jurisdiction over our target markets in the digital television business. Various international entities or organizations may also regulate aspects of our business or the business of our customers. Although our products are not directly subject to regulation by any agency, the transmission pipes, as well as much of the equipment into which our products are incorporated, are subject to direct government regulation. For example, before they can be sold in the United States, advanced televisions and emerging interactive displays must be tested and certified by Underwriters Laboratories and meet FCC regulations. Accordingly, the effects of regulation on our customers or the industries in which our customers operate may in turn harm our business. FCC regulatory policies affecting the ability of cable operators or telephone companies to offer certain services and other terms on which these companies conduct their business may impede sales of our products. In addition, our digital television

business may also be adversely affected by the imposition of tariffs, duties and other import restrictions on our suppliers or by the imposition of export restrictions on products that we sell internationally. Changes in current laws or regulations or the imposition of new laws or regulations in the United States or elsewhere could harm our business. For example, any delays by the FCC in imposing its pending requirement that all new televisions have a digital receiver could have an adverse effect on our HDTV business.

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

During 2005, only 6% of our total revenues were derived from North America sales. We anticipate that international sales will continue to account for a substantial majority of our total revenues for the foreseeable future. In addition, substantially all of our semiconductor products are manufactured, assembled and tested outside of the United States by independent foundries and subcontractors.

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

• unexpected changes in regulatory requirements;

• fluctuations in exchange rates;

• political and economic instability;

• imposition of tariffs and other barriers and restrictions;

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

• health risks in a particular region.

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

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

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

Our business and future operating results could be harmed by terrorist activity or armed conflict.

Our business and operating results are subject to uncertainties arising out of possible terrorist attacks on the United States and other regions of the world including locations where we maintain operations and by armed conflict in the Middle East and related economic instability. Our operations could be harmed due to:

• disruption in commercial activities associated with heightened security concerns affecting international travel and commerce;

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

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

• potential expansion of armed conflict in the Middle East which could adversely affect our operations in Israel.

The prices of our products may become less competitive due to foreign exchange fluctuations.

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

Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights.

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

The protection offered by patents is subject to numerous uncertainties. For example, our competitors may be able to effectively design around our patents, or the patents may be challenged, invalidated or circumvented. Those competitors may also independently develop technologies that are substantially equivalent or superior to our technology. Moreover, while we hold, or have applied for, patents relating to the design of our products, some of our products are based in part on standards, for which we do not hold patents or other intellectual property rights.

We have generally limited access to and distribution of the source and object code of our software and other proprietary information. With respect to its page description language software and drivers for the digital office market and in limited circumstances with respect to firmware and platforms for its HDTV products, Oak has granted licenses that give its customers access to and restricted use of the source code of Oak’s software. This access increases the likelihood of misappropriation or misuse of our technology.

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

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

• stop selling products that incorporate the challenged intellectual property;

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

• pay damages; or

• redesign those products that use such technology.

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

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

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

Certain technology used in our products is licensed from third parties, and in connection with these licenses, we are required to fulfill confidentiality obligations and, in some cases, pay royalties. Some of our products require various types of copy protection software that we must license from third parties. If we are unable to obtain or maintain our right to use the necessary copy protection software, we would be unable to sell and market these products.

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

Our future net income and cash flow will be affected by our ability to apply our net operating losses, or NOLs, against taxable income in future periods. Our NOLs totaled approximately $268 million for federal and $85 million for state tax reporting purposes as of December 31, 2005. As a result of the change of control resulting from our initial public offering in 1995, the amount of NOLs that we can use to reduce future taxable income for federal tax purposes is limited to approximately $3.0 million per year for NOLs incurred prior to the initial public offering. The Internal Revenue Code contains a number of provisions that could limit the use of NOLs against income of the combined company as a result of the merger or as a result of the combination of these transactions. Our utilization of Oak’s NOLs may be further limited due to prior Oak transactions. No opinion or IRS ruling has been sought regarding the potential application of any of these provisions. Changes in tax laws in the United States may further limit our ability to utilize these NOLs. Any further limitation on our ability to utilize these respective NOLs could harm our financial condition.

Any additional acquisitions we make could disrupt our business and severely 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 the future. In the event of any future acquisitions, we could:

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

• incur debt;

• assume liabilities;

• incur expenses related to the future impairment of goodwill and the amortization 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 numerous risks, 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 limited prior experience; and

• potential loss of key employees, particularly those of the purchased organizations.

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

In addition, we have made minority equity investments in early-stage companies, and we expect to continue to review opportunities to make additional investments in such companies where we believe such investments will provide us with opportunities to gain access to important technologies or otherwise enhance important commercial relationships. We have little or no influence over the early-stage companies in which we have made or may make strategic, minority equity investments. Each of these investments involves a high degree of risk. We may not be successful in achieving the technological or commercial advantage upon which any given investment is premised, and failure by the early-stage company to achieve its own business objectives could result in a loss of all or part of our invested capital and require us to write off all or a portion of such investment.

Our products could contain defects, which could reduce sales of those products or result in claims against us.

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

If we do not maintain current development contracts or are unable to enter into new development contracts, our business could be harmed.

We historically have generated a portion of our total revenues from development contracts, primarily with key customers. These development contracts have provided us with partial funding for the development of some of our products. Under these contracts, we receive payments upon reaching certain development milestones. If we fail to achieve the milestones specified in our existing development contracts, if our existing contracts are terminated or if we are unable to secure future development contracts, our ability to cost-effectively develop new products would be reduced and our business would be harmed.

We may need additional funds to execute our business plan, and if we are unable to obtain such funds, we will not be able to expand our business as planned.

We may require substantial additional capital to finance our future growth, secure additional foundry capacity and fund our ongoing research and development activities beyond 2006. Our capital requirements will depend on many factors, including:

• acceptance of and demand for our products;

• the types of arrangements that we may enter into with our independent foundries;

• the extent to which we invest in new technology and research and development projects; and

• any additional acquisitions that we may make.

To the extent that our existing sources of liquidity and cash flow from operations are insufficient to fund our activities, we may need to raise additional funds. If we raise additional funds through the issuance of equity securities, the percentage ownership of our existing stockholders would be reduced. Further, such equity securities may have rights, preferences or privileges senior to those of our common stock. Additional financing may not be available to us when needed or, if available, it may not be available on terms favorable to us.

If we fail to manage our future growth, if any, our business would be harmed.

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

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

Our success depends to a significant degree upon the continuing contributions of our senior management. Management and other employees may voluntarily terminate their employment with us at any time upon short notice. The loss of key personnel could delay product development cycles or otherwise harm our business. We believe that our future success will also depend in large part on our ability to attract, integrate and retain highly-skilled engineering, managerial, sales and marketing personnel, located in the United States, Israel and China. Competition for such personnel is intense, and we may not be successful in attracting, integrating and retaining such personnel. Failure to attract, integrate and retain key personnel could harm our ability to carry out our business strategy and compete with other companies.

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

A portion of the cost of 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 of inflation in Israel or the decline in the value of United States dollar compared to the Israeli shekel will increase our costs as expressed in United States dollars. To date, we have not engaged in hedging transactions. In the future, we may enter into currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rate of the United States dollar against the new Israeli shekel. These measures may not adequately protect us from the impact of inflation in Israel.

The government programs in which we participate and tax benefits we receive require us to meet several conditions and may be terminated or reduced in the future, which would increase our costs.

Historically, we have financed a portion of our research and development activities with grants for research and development from the Chief Scientist in Israel’s Ministry of Industry and Trade. We earned proceeds from such grants in 2004. Although we did not earn proceeds from such grants in 2005, we plan to seek additional grants from the Chief Scientist in the future. To be eligible for these grants, our development projects must be approved by the Chief Scientist on a case-by-case basis. If our development projects are not approved by the Chief Scientist, we will not receive grants to fund these projects, which would increase our research and development costs. We also receive tax benefits, in particular exemptions and reductions as a result of the “Approved Enterprise” status of our existing operations in Israel. To be eligible for these tax benefits, we must maintain our Approved Enterprise status by meeting conditions, including making specified investments in fixed assets located in Israel and investing additional equity in our Israeli subsidiary. These tax benefits may not be continued in the future at their current levels or at any level. Israeli governmental authorities have indicated that the government may reduce or eliminate these benefits in the future, which would harm our business.

Provisions in our charter documents and Delaware law could prevent or delay a change in control of Zoran.

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

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

• requiring advance notice of any stockholder nominations of candidates for election to our board of directors.

Our stock price has fluctuated and may continue to fluctuate widely.

The market price of our common stock has fluctuated significantly since our initial public offering in 1995. Between January 1, 2005 and March 31, 2006, the closing sale price of our common stock, as reported on The Nasdaq National Market, ranged from a low of $8.97 to a high of $22.48. The market price of our common stock is subject to significant fluctuations in the future in response to a variety of factors, including:

• announcements concerning our business or that of 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 in product pricing policies by Zoran or its competitors;

• loss of key personnel;

• proprietary rights or other litigation;

• general conditions in the semiconductor industry; and

• developments in the financial markets.

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

Item 6. Exhibits

10.48(1)		Amended Summary of Compensation Arrangements with Named Executive officers and Non Employee Directors
10.54*		PC Optical Storage Patent Cross License Agreement dated as of January 25, 2006 among Zoran, Zoran’s subsidiary Oak Technology, Inc., and MediaTek, Inc.
10.55*		PC Optical Storage Technology Patent License Agreement dated as of January 25, 2006 among Zoran, Zoran’s subsidiary Oak Technology, Inc., and MediaTek, Inc.
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-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.

(1) Incorporated by reference to Exhibit 99.1 to Registrant’s Form 8-K Current Report filed on March 31, 2006.

* Confidential treatment has been requested with respect to portions of this Exhibit.

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets as of March 31, 2006 and December 31, 2005

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2006 and 2005

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2006 and 2005

	Notes to Condensed Consolidated Financial Statements

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

Item 3.	Quantitative and Qualitative Disclosures About Market Risk

Item 4.	Controls and Procedures


PART II. OTHER INFORMATION

Item 1.	Legal Proceedings

Item 1A.	Risk Factors

Item 6.	Exhibits

Signatures

	ZORAN CORPORATION


Dated: May 10, 2006	/s/ Karl Schneider
	Karl Schneider
	Senior Vice President, Finance
	and Chief Financial Officer
	(Principal Financial and Accounting Officer)