PART I. FINANCIAL INFORMATION

Item 1. Financial Statements (Unaudited):

ZORAN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	March 31, 2007			December 31, 2006

ASSETS
Current assets:
Cash and cash equivalents	$	90,510		$	100,034
Short-term investments	205,432			196,195
Accounts receivable, net	44,624			42,640
Inventories	44,630			45,044
Prepaid expenses and other current assets	9,639			10,726
Total current assets	394,835			394,639
Property and equipment, net	15,179			15,673
Other assets and investments	22,890			22,890
Goodwill	173,079			174,259
Intangible assets, net	57,000			69,169
	$	662,983		$	676,630

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	27,369		$	33,767
Accrued expenses and other liabilities	36,138			46,082
Total current liabilities	63,507			79,849
Other long-term liabilities	19,840			12,784
Commitments and Contingencies (Note 11)
Stockholders’ equity:
Common stock, $0.001 par value; 105,000,000 shares authorized at March 31, 2007 and December 31, 2006; 49,448,791 shares issued and outstanding as of March 31, 2007; and 49,433,780 shares issued and outstanding as of December 31, 2006	49			49
Additional paid-in capital	809,732			807,220
Accumulated other comprehensive income	2,796			4,238
Accumulated deficit	(232,941		)	(227,510		)
Total stockholders’ equity	579,636			583,997
	$	662,983		$	676,630

The accompanying 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,
	2007			2006

Revenues:
Hardware product revenues	$	87,182		$	99,169
Software and other revenues	14,477			12,909
License revenues related to litigation settlement	—			30,168
Total revenues	101,659			142,246

Costs and expenses:
Cost of hardware product revenues	44,198			53,650
Research and development	24,988			24,248
Selling, general and administrative	28,593			24,901
Amortization of intangible assets	12,169			12,735
Total costs and expenses	109,948			115,534

Operating income (loss)	(8,289		)	26,712

Interest income	3,603			1,593

Other income, net	602			1,193

Income (loss) before income taxes	(4,084		)	29,498

Provision for income taxes	1,800			8,815

Net income (loss)	$	(5,884	)	$	20,683

Basic net income (loss) per share	$	(0.12	)	$	0.45

Diluted net income (loss) per share	$	(0.12	)	$	0.43

Shares used to compute basic net income (loss) per share	49,442			46,207

Shares used to compute diluted net income (loss) per share	49,442			48,487

The accompanying 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,
	2007			2006

Cash flows from operating activities:
Net income (loss)	$	(5,884	)	$	20,683
Adjustments to reconcile net income (loss) to net cash provided by operations:
Depreciation	2,080			2,361
Amortization	12,169			12,772
Stock-based compensation expense	2,512			4,813
Gain on sale of investments, net	(809		)	(1,044		)
Changes in assets and liabilities:
Accounts receivable	(1,984		)	7,743
Inventories	414			(6,047		)
Prepaid expenses and other current assets and other assets	1,087			176
Accounts payable	(6,398		)	5,738
Accrued expenses and other liabilities, goodwill and other long term liabilities	(1,255		)	4,245
Net cash provided by operating activities	1,932			51,440

Cash flows from investing activities:
Purchases of property and equipment	(1,586		)	(1,209		)
Purchases of investments	(85,358		)	(90,037		)
Proceeds from sales and maturities of investments	75,488			57,474
Net cash used in investing activities	(11,456		)	(33,772		)

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

Net increase (decrease) in cash and cash equivalents	(9,524		)	34,896

Cash and cash equivalents at beginning of period	100,034			78,856

Cash and cash equivalents at end of period	$	90,510		$	113,752

The accompanying 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 (“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, 2006, included in the Company’s 2006 Annual Report on Form 10-K filed with the SEC.

Recent Accounting Pronouncements

In February 2007, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS No. 159”). This statement expands the standards under SFAS No. 157, “Fair Value Measurement,” to provide entities the one-time election (Fair Value Option or FVO) to measure financial instruments and certain other items at fair value. Most of the provisions of this statement apply only to entities that elect the fair value option. The provisions of SFAS No. 159 are effective for the Company for fiscal years beginning January 1, 2008. The Company is evaluating the impact of the provisions of this statement on its consolidated financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for the Company for fiscal years beginning after December 31, 2007. The Company is evaluating the impact of the provisions of this statement on its consolidated financial position, results of operations and cash flows.

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

2. Stock-Based Compensation

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, 2007 and 2006 as recorded in accordance with SFAS No. 123(R) (in thousands):

	Three Months Ended March 31, 2007		Three Months Ended March 31, 2006

Cost of hardware product revenues	$	60	$	153
Research and development	695		1,610
Selling, general and administrative	1,757		3,050
Total costs and expenses	$	2,512	$	4,813

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

Stock Option Activity

The following is a summary of stock option activities:

	Shares Underlying Outstanding Options		Weighted Average Exercise Price
Outstanding at January 1, 2007	8,096,344		$	16.58
Granted	—		—
Exercised	—		—
Canceled	(71,978	)	$	15.68
Outstanding at March 31, 2007	8,024,366		$	16.59

Significant option groups outstanding as of March 31, 2007 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, 2007	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Aggregate intrinsic value (‘000)		Shares Underlying Options at March 31, 2007	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Aggregate intrinsic value (‘000)

$0.00 to $9.99	574,561	4.86	$	6.28	$	6,169	551,684	4.72	$	6.17	$	5,987
$10.00 to $11.99	1,331,559	7.15	$	10.56	8,604		1,331,559	7.15	$	10.56	8,604
$12.00 to $14.99	1,617,458	6.63	$	13.30	6,021		1,399,399	6.36	$	13.24	5,294
$15.00 to $19.99	2,314,688	6.84	$	17.10	540		2,022,308	6.70	$	17.10	448
$20.00 to $25.99	1,793,649	6.41	$	24.05	—		1,570,977	6.03	$	24.20	—
$26.00 to $46.53	392,451	3.51	$	28.59	—		385,631	3.41	$	28.61	—
Total	8,024,366	6.45	$	16.59	$	21,334	7,261,558	6.25	$	16.47	$	20,333

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

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $17.02 as of March 31, 2007, 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, 2007 was 3.8 million.

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

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

3. Comprehensive Income (Loss)

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

	Three Months Ended
	March 31,
	2007			2006

Net income (loss)	$	(5,884	)	$	20,683
Change in unrealized gain (loss) on investments, net	(1,442		)	(878		)
Total comprehensive income (loss)	$	(7,326	)	$	19,805

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

4. Marketable Securities

The Company’s portfolio of marketable securities at March 31, 2007 was as follows (in thousands):

	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Corporate debt	$	93,663	$	30	$	(98	)	$	93,595
U.S. government securities	58,402		41		(66		)	58,377
Auction rate securities	40,575		—		—			40,575
Foreign bonds	7,269		—		(6		)	7,263
Municipal bonds	1,500		—		(1		)	1,499
Total fixed income securities	201,409		71		(171		)	201,309
Publicly traded equity securities	1,227		2,896		—			4,123
Total	$	202,636	$	2,967	$	(171	)	$	205,432

The Company’s portfolio of marketable securities at December 31, 2006 was as follows (in thousands):

	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Corporate debt	$	97,175	$	10	$	(245	)	$	96,940
U.S. government securities	42,822		7		(141		)	42,688
Auction rate securities	37,550		—		—			37,550
Foreign bonds	11,427		1		(12		)	11,416
Municipal bonds	1,500		—		(1		)	1,499
Total fixed income securities	190,474		18		(399		)	190,093
Publicly traded equity securities	1,483		4,619		—			6,102
Total	$	191,957	$	4,637	$	(399	)	$	196,195

The following table summarizes the maturities of the Company’s fixed income securities at March 31, 2007 (in thousands):

	Cost		Estimated Fair Value
Less than 1 year	$	83,369	$	83,290
Due in 1 to 2 years	46,422		46,387
Due in 2 to 5 years	31,043		31,057
Greater than 5 years*	40,575		40,575
Total fixed income securities	$	201,409	$	201,309

*Comprised of auction rate securities with reset dates of 90 days or less but final expiration dates beyond 5 years.

5. 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,
	2007		2006

Purchased parts and work in process	$	17,468	$	18,748
Finished goods	27,162		26,296
	$	44,630	$	45,044

6. Goodwill and Other Intangible Assets

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

Estimated future intangible amortization expense, based on current balances, as of March 31, 2007 is as follows (in thousands):

Remaining nine months of 2007	$	31,055
Year ending December 31, 2008	23,315
Year ending December 31, 2009	1,820
Year ending December 31, 2010	810
	$	57,000

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

	March 31,		December 31,
	2007		2006

Consumer	$	167,999	$	169,060
Imaging	5,080		5,199
	$	173,079	$	174,259

7. Income Taxes

The provision for income taxes reflects the effective tax rate applied to pretax earnings adjusted for amortization of intangible assets and stock-based compensation expense for the interim periods. The effective tax rate differs from the U.S. statutory rate due to utilization of previously unbenefitted operating losses and State of Israel tax benefits on foreign earnings. The provision is due primarily to domestic income offset by previously unbenefitted purchased NOLs which when utilized reduce goodwill and not tax expense.

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

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

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

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

8. Segment Reporting

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. The Company has two operating segments – Consumer group and Imaging group.

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.

Information about reported segment income or loss is as follows for the three months ended March 31, 2007 and 2006 (in thousands):

	Three Months Ended March 31,
	2007			2006

Net revenues:
Consumer	$	81,452		$	123,556
Imaging	20,207			18,690
	$	101,659		$	142,246

Operating expenses:
Consumer	$	82,286		$	87,615
Imaging	15,493			15,184
	$	97,779		$	102,799

Contribution margin:
Consumer	$	(834	)	$	35,941
Imaging	4,714			3,506
	$	3,880		$	39,447

A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements for the three months ended March 31, 2007 and 2006 is as follows (in thousands):

	Three Months Ended March 31,
	2007			2006

Contribution margin from operating segments	$	3,880		$	39,447
Amortization of intangibles	12,169			12,735
Total operating income (loss)	$	(8,289	)	$	26,712

Zoran maintains operations in Canada, China, Germany, Israel, India, Japan, Korea, Taiwan, the United Kingdom and the United States. Activities in Israel and the 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, 2007 and 2006 was as follows (in thousands):

	Three Months Ended March 31,
	2007		2006
Revenue from unaffiliated customers originating from:
China	$	30,513	$	39,605
Japan	25,098		27,364
Korea	6,067		8,562
Taiwan	25,669		53,708
United States	7,169		7,118
North America (excluding United States)	82		12
Other	7,061		5,877
Total revenues	$	101,659	$	142,246

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

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

9. Employee Benefit Plans

Under Israeli law, the Company is required to make severance payments to its retired or dismissed Israeli employees and Israeli employees leaving its employment in certain other circumstances. The Company’s severance pay liability to its Israeli employees, which is calculated based on the salary of each employee multiplied by the years of such employee’s employment, is reflected in the Company’s balance sheet in other long-term liabilities on an accrual basis, and is partially funded by the purchase of insurance policies in the name of the employees. The surrender value of the insurance policies is recorded in other non-current assets. The severance pay expenses for the three months ended March 31, 2007 and 2006 were $49,000 and $46,000 respectively.

10. 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 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,
	2007			2006

Net income (loss)	$	(5,884	)	$	20,683

Weighted average shares outstanding	49,442			46,207
Effect of dilutive options and restricted stock units	—			2,280
Dilutive weighted average shares	49,442			48,487

Net income (loss) per share:
Basic	$	(0.12	)	$	0.45
Diluted	$	(0.12	)	$	0.43

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

11. Legal Proceedings

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

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

Late SEC Filings and Nasdaq Delisting Proceedings Due to the Special Committee investigation and the resulting restatements, the Company did not file on time its Quarterly Reports on Form 10-Q for the quarters ended June 30, 2006 and September 30, 2006 or its Annual Report on Form 10-K for the year ended December 31, 2006. As a result, the Company received Nasdaq Staff Determination letters dated August 14, 2006, November 15, 2006 and March 20, 2007 stating that it was not in compliance with the filing requirements of Marketplace Rule 4310(c)(14) and, therefore, that the Company’s stock was subject to delisting from the Nasdaq Global Select Market. On April 20, 2007, the Company filed its Quarterly Reports on Form 10-Q for the quarters ended June 30, 2006 and September 30, 2006, an amendment to its Quarterly Report on Form 10-Q for the quarter ended March 31, 2006 and its Annual Report on Form 10-K for the year ended December 31, 2006. On April 30, 2007, the Company announced in a press release that a Nasdaq Listing Qualifications Panel has notified the Company that is has regained compliance with the continued listing requirements of Nasdaq Marketplace Rule 4310(c) (14) related to the filing of periodic reports with the U.S Securities and Exchange Commission and has demonstrated compliance with all other Nasdaq Marketplace Rules. Accordingly, the Nasdaq Listing Qualification Panel has determined that the Company’s common stock will continue to be listed on the Nasdaq Global Select Market.

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

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

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

Pfeiffer v. Zoran Corporation et al. On September 7, 2006, a purported shareholder derivative action was filed by Milton Pfeiffer against Zoran as a nominal defendant and certain of its officers and directors in the United States District Court, Northern District of California, alleging, inter alia, violations of federal securities laws and breaches of fiduciary duties.

Gerald del Rosario v. Aharon et al. On September 26, 2006, a purported shareholder derivative action was filed by Gerald del Rosario against Zoran as a nominal defendant and certain of its current and former officers and directors in the United States District Court, Northern District of California, alleging, inter alia, violations of federal securities laws and breaches of fiduciary duty. On December 8, 2006, the Court issued an order consolidating the Del Rosario action with the Pfeiffer action. The Court selected del Rosario as lead plaintiff and approved lead plaintiff’s selection of counsel for the consolidated derivative action. Plaintiffs filed a consolidated amended complaint on March 14, 2007.

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

On February 20, 2007, the Company filed a complaint against ArcSoft Inc. in the California Superior Court for the County of Alameda, seeking, payment of $4 million in principal, included in other assets, together with accrued interest then in the amount of approximately $525,000, under four separate convertible promissory notes. On February 28, 2007, the Company filed an application with the Court seeking to attach assets of ArcSoft as security for the payment of its obligations under the notes. The notes represent amounts loaned by the Company to ArcSoft in 2004. At that time Zoran also entered into a transaction with ArcSoft involving the licensing and grant of certain rights to ArcSoft related to a certain product then under development and related agreements regarding the continued development and commercialization of the product. On March 28, 2007, ArcSoft filed an answer denying liability under the notes and asserting various affirmative defenses. ArcSoft also filed a cross complaint alleging fraud in the inducement of the business arrangement, fraudulent and negligent misrepresentation, breach of contract and of the implied covenant of good faith and fair dealing, and unjust enrichment and seeking monetary damages of more than $6.9 million. The hearing on our application for an attachment is currently scheduled for May 14, 2007. The Company has also filed a petition to compel arbitration of ArcSoft’s cross-complaint, which is currently scheduled to be heard on May 18, 2007.

Indemnification Obligations. Subject to certain limitations, the Company is obligated to indemnify its current and former directors, officers and employees in connection with the investigation of the Company’s historical stock option practices and related government inquiries and litigation. These obligations arise under the terms of the Company’s certificate of incorporation, its bylaws, applicable contracts, and Delaware and California law. The obligation to indemnify generally means that the Company is required to pay or reimburse the individuals’ reasonable legal expenses and possibly damages and other liabilities incurred in connection with these matters. The Company is currently paying or reimbursing legal expenses being incurred in connection with these matters by a number of its current and former directors, officers and employees.

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

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 in “Part II, Item 1A. Risk Factors” below. 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 standard and high definition digital television applications that enable the delivery and display of digital video content through a set-top box or television, demodulator IC technology for the global high definition television market. We also provide 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. We also provide high performance, low-power application processors, technology and products for the multimedia mobile telephone market.

Revenues

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.

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.

Cost of Hardware Product Revenues

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. We expect both product and customer mix to continue to fluctuate in future periods, causing fluctuations in margins.

Research and Development

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.

Selling, General and Administrative

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.

Income Taxes

Our effective income tax rate has benefited from the availability of previously unbenefitted 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 2017 and 2024, and the benefits from our subsidiary’s Approved Enterprise status expire at various times beginning in 2008.

Recent Accounting Pronouncements

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

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS No. 157 are effective for fiscal years beginning after December 31, 2007. We are evaluating the impact of the provisions of this statement on our consolidated financial position, results of operations and cash flows.

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

Segments

Our products are based on highly integrated application-specific integrated circuits, or ASICs, and system-on-a-chip, or SOC, solutions. We also license certain software and other intellectual property. We operate in two operating segments – Consumer group and Imaging group. 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.

Results of Operations

Revenues

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

Hardware product revenues for the three months ended March 31, 2007 were $87.2 million compared to $99.2 million for the comparable period of the prior year. Hardware product revenues decreased $13.5 million in the Consumer segment and increased $1.5 million in the Imaging segment. Within the Consumer segment, hardware product revenues increased $1.7 million in the Mobile products driven by increased unit shipments. This increase was offset by decreases of $11.2 million in the DVD products attributable to reductions in unit shipments and average selling prices and $4.0 million in the DTV products due to decrease in unit shipments of stand alone front end integrated circuits and a decrease in average selling prices.

Software and other revenues were $14.5 million and $12.9 million for the three months ended March 31, 2007 and 2006, respectively. The increase in software and other revenues was largely attributable to a $1.5 million increase in the Consumer segment.

Cost of Hardware Product Revenues

Cost of hardware product revenues was $44.2 million for the quarter ended March 31, 2007 compared to $53.7 million for the same period of 2006. The decrease in costs was primarily a result of the corresponding decrease in hardware product revenues. As a percentage of hardware product revenues, hardware product costs decreased from 54.1% for the three months ended March 31, 2006 to 50.7% for the three months ended March 31, 2007. The decrease in hardware product costs as a percentage of hardware product revenues was primarily due to a change in product mix with an increase in the revenue share from higher margin Mobile and Imaging products.

Research and Development

Research and development expenses were $25.0 million for the three months ended March 31, 2007, compared to $24.2 million for the same period of 2006. Research and development expenses tend to fluctuate based on the timing of major engineering-related expenses, such as tape-outs as well as continued investments in research and development across all our segments.

Selling, General and Administrative

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

Amortization of Intangible Assets

During the three months ended March 31, 2007, we incurred charges of $12.2 million related to the amortization of intangible assets compared to $12.7 million for the three months ended March 31, 2006. At March 31, 2007, we had approximately $57.0 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.

Interest and Other Income

Interest and other income was $4.2 million for the three month period ended March 31, 2007, compared to $2.8 million for the same period of 2006. This increase was a result of an increase 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 $1.8 million for the three month period ended March 31, 2007 compared to a tax provision of $8.8 million for the three month period ended March 31, 2006. The tax provision for the three month period ended March 31, 2006 included a one time charge of $6.7 million related to license litigation settlement revenues. Our effective income tax rate has benefited from the availability of previously unbenefitted 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 2017 and 2024, and the benefits from our subsidiary’s Approved Enterprise status expire at various times beginning in 2008. At March 31, 2007, 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, 2007, we had $90.5 million of cash and cash equivalents and $205.4 million of short-term investments. At March 31, 2007, we had $331.3 million of working capital.

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

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

Our operating activities generated cash of $51.4 million during the first quarter of 2006, primarily due to net income of $20.7 million and non-cash items such as amortization of $12.8 million, depreciation of $2.4 million and stock-based compensation expense of $4.8 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 $10.1 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 $33.8 million during the three months ended March 31, 2006, principally reflecting the net purchase of investments of $32.6 million. In addition we spent $1.2 million for property and equipment.

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

At March 31, 2007, 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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

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

A majority of our revenue and capital spending is transacted in U.S. dollars, although 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 U.S. dollars compared to the Israeli shekel will increase our costs as expressed in U.S. dollars. We have not engaged in hedging transactions to reduce our exposure to fluctuations that may arise from changes in foreign exchange rates. Based on our overall currency rate exposure at March 31, 2007, a near-term 10% appreciation or depreciation of the New Israeli Shekel would have an immaterial affect on our financial condition.

Item 4. Controls and Procedures

Disclosure Controls and Procedures. Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Changes to Internal Control Over Financial Reporting

There were no changes in our internal control over financial reporting during the quarter ended March 31, 2007 that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

The discussion of our legal proceedings contained in Note 11, “Legal Proceedings” of Notes to Condensed Consolidated Financial Statements in Part I, Item 1, of this report is incorporated herein by reference.

Item 1A. Risk Factors

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

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

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

The independent investigation of our historical stock option practices and resulting restatements has been time consuming and expensive, and has had an adverse effect on our financial performance.

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

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

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

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

From August 2006 to April 2007, we we were unable to file our periodic reports with the SEC on time and faced the possibility of delisting of our stock from the Nasdaq Global Select Market. As a result of our delay in filing periodic reports on a timely basis, we will not be eligible to use a registration statement on Form S-3 to register offers and sales of our securities until all periodic reports have been timely filed for at least 12 months. If in the future we have similar issues filing periodic reports and fail to comply with applicable listing requirements, then our common stock may be de-listed and the market for resales of our common stock may become less liquid. If this happens, the price of our stock and the ability of our stockholders to trade in our stock could be adversely affected. In addition, we would be subject to restrictions regarding the registration of our stock under federal securities laws, and we would not be able to issue stock options or other equity awards to our employees or allow them to exercise their outstanding options, which could adversely affect our business and results of operations.

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

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

Our insurance coverage will not cover our total liabilities and expenses in these lawsuits, in part because we have a significant deductible on certain aspects of the coverage. In addition, we are obligated to indemnify our current and former directors, officers and employees in connection with the investigation of our historical stock option practices and the related government inquiries and litigation. We currently hold insurance policies for the benefit of our directors and officers, although our insurance coverage may not be sufficient in some or all of these matters. Furthermore, the insurers may seek to deny or limit coverage in some or all of these matters, in which case we may have to self-fund all or a substantial portion of our indemnification obligations.

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

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

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

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

We expect that the issues arising from our historical stock option grant practices and the related accounting will make it more difficult to obtain director and officer insurance coverage in the future. If we are able to obtain this coverage, it could be significantly more costly than in the past, which would have an adverse effect on our financial results and cash flow. As a result of this and related factors, our directors and officers could face increased risks of personal liability in connection with the performance of their duties. As a result, we may have difficultly attracting and retaining qualified directors and officers, which could adversely affect our business.

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

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

· fluctuation in demand for our products;

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

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

· 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.

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.

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.

Our ability to match production mix with the product mix needed to fill current orders and orders to be delivered in the given quarter may affect our ability to meet that quarter’s revenue forecast. In addition, when responding to customers’ requests for shorter shipment lead times, we manufacture products based on forecasts of customers’ demands. These forecasts are based on multiple assumptions. If we inaccurately forecast customer demand, we may hold inadequate, excess or obsolete inventory that would reduce our profit margins and adversely affect our results of operations and financial condition.

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.

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

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.

The markets in which we compete are intensely competitive and are characterized by rapid technological change, declining average unit selling prices and rapid product obsolescence. We expect competition to increase in the future from existing competitors and from other companies that may enter our existing or future markets with solutions which may be less costly or provide higher performance or more desirable features than our products. Competition typically occurs at the design stage, when customers evaluate alternative design approaches requiring integrated circuits. Because of short product life cycles, there are frequent design win competitions for next-generation systems.

Our existing and potential competitors include many large domestic and international companies that have substantially greater financial, manufacturing, technological, market, distribution and other resources. These competitors may also have broader product lines and longer standing relationships with customers and suppliers than we have.

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

We believe that growth of the DVD player market will be modest in the foreseeable future, and that continued strong competition will lead to further price reductions, and reduced profit margins. We also face significant competition in the digital Imaging and digital camera markets. The future growth of both markets is highly dependent on OEMs continuing to outsource an increasing portion of their product development work. 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.

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 by February 2009. 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 harmed. 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 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 2006, only 7% 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.

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.

Because we have significant operations in Israel, our business and future operating results could be harmed by future terrorist activity or military conflict.

We conduct a significant portion of our research and development and engineering activities at our design center in Haifa, Israel, a 109,700 square foot facility where we employ approximately 390 people. We also conduct a portion of our sales and marketing operations at our Haifa facility. We have an additional 16,100 square foot facility in Kfar Netter, Israel, where we conduct research and development activities.

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

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

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 New 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.

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 2006, one customer accounted for 12% of our total revenues, while sales to our four largest customers accounted for 34% of our total revenues. In 2005, no single customer accounted for more than 10% of our total revenues, and sales to our four largest customers accounted for 29% 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. As of December 31, 2006 four customers accounted for approximately 13%, 10%, 10% and 10% of the net accounts receivable balance, respectively.

Our products generally have long sales cycles and 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. 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. Early termination by one of our major customers would harm our financial results.

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.

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.

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 our page description language software, SOC platform firmware and drivers for the digital office market and in limited circumstances with respect to firmware on SCS products, firmware and platforms for our DTV, DVDR products, we grant licenses that give our customers access to and restricted use of the source code of our 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 has 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.

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

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 $185 million for federal and $36 million for state tax reporting purposes as of December 31, 2006. The Internal Revenue Code contains a number of provisions that limit the use of NOLs under certain circumstances. During 2006 we reduced the NOL deferred tax asset for amounts which we believe will expire before they become available for utilization. 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.

Changes in, or interpretations of, tax rules and regulations may adversely affect our effective tax rates.

Unanticipated changes in our tax rates could affect our future results of operations. Our future effective tax rates could be unfavorably affected by changes in tax laws or the interpretation of tax laws, by unanticipated decreases in the amount of revenue or earnings in countries with low statutory tax rates, or by changes in the valuation of our deferred tax assets and liabilities. While we believe our tax reserves adequately provide for any tax contingencies, the ultimate outcomes of any future tax audits are uncertain, and we can give no assurance as to whether an adverse result from one or more of them will have a material effect on our operating results and financial position.

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;

· use a significant amount of our cash;

· 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.

If our goodwill or amortizable intangible assets become impaired we may be required to record a significant charge to earnings.

Under generally accepted accounting principles, we review our amortizable intangible assets for impairment when events or changes in circumstances indicate the carrying value may not be recoverable. Goodwill is required to be tested for impairment at least annually. Factors that may be considered a change in circumstances indicating that the carrying value of our goodwill or amortizable intangible assets may not be recoverable include a decline in stock price and market capitalization, future cash flows, and slower growth rates in our industry. We may be required to record a significant charge to earnings in our financial statements during the period in which any impairment of our goodwill or amortizable intangible assets is determined resulting in an impact on our results of operations.

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.

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, 2006 and March 31, 2007, the closing sale price of our common stock, as reported on the Nasdaq Global Select Market, ranged from a low of $13.57 to a high of $29.13. The market price of our common stock is subject to significant fluctuations in the future in response to a variety of factors, including:

· results of regulatory investigations;

· 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

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

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

		ZORAN CORPORATION



Dated: May 10, 2007		/s/ Karl Schneider
		Karl Schneider
		Senior Vice President, Finance
		and Chief Financial Officer
		(Principal Financial and Accounting Officer)

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

For the Quarterly Period Ended March 31, 2007

OR

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

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

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PART I. FINANCIAL INFORMATION


Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets as of March 31, 2007 and December 31, 2006	3

	Condensed Consolidated Statements of Operations for the Three Months Ended March 31, 2007 and 2006	4

	Condensed Consolidated Statements of Cash Flows for the Three Months Ended March 31, 2007 and 2006	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	15

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	19

Item 4.	Controls and Procedures	19



PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	21

Item 6.	Exhibits	33

Signatures		34

FORM 10-Q