PART I. FINANCIAL INFORMATION

Item 1. Financial Statements:

ZORAN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	September 30, 2007			December 31, 2006
ASSETS
Current assets:
Cash and cash equivalents	$	102,520		$			100,034
Short-term investments	254,069			196,195
Accounts receivable, net	60,470			42,640
Inventories	33,601			45,044
Prepaid expenses and other current assets	12,864			10,726
Total current assets	463,524			394,639
Property and equipment, net	17,214			15,673
Other assets and investments	28,508			22,890
Goodwill	172,791			174,259
Intangible assets, net	35,183			69,169
	$	717,220		$		676,630

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	40,052		$		33,767
Accrued expenses and other liabilities	50,859			46,082
Total current liabilities	90,911			79,849
Other long-term liabilities	20,510			12,784
Commitments and Contingencies (Note 11)
Stockholders’ equity:
Common stock, $0.001 par value; 105,000,000 shares authorized at September 30, 2007 and December 31, 2006; 49,979,488 shares issued and outstanding as of September 30, 2007; and 49,433,780 shares issued and outstanding as of December 31, 2006	50			49
Additional paid-in capital	823,661			807,220
Accumulated other comprehensive income	1,689			4,238
Accumulated deficit	(219,601		)	(227,510				)
Total stockholders’ equity	605,799			583,997
	$	717,220		$	676,630

The accompanying 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									Nine Months Ended
	September 30,									September 30,
	2007				2006					2007			2006
Revenues:
Hardware product revenues	$	129,820			$			115,602		$	331,510		$	323,007
Software and other revenues	16,606				13,777					46,478			40,755
License revenues related to litigation settlement	—				—					—			35,792
Total revenues	146,426				129,379					377,988			399,554

Costs and expenses:
Cost of hardware product revenues	69,876				66,810					174,252			180,815
Research and development	28,063				25,255					83,027			74,729
Selling, general and administrative	28,043				25,907					85,050			80,917
Amortization of intangible assets	9,648				12,423					33,986			37,893
Total costs and expenses	135,630				130,395					376,315			374,354

Operating income (loss)	10,796				(1,016				)	1,673			25,200

Interest income	4,287				3,079					11,735			7,539

Other income (loss), net	(241			)	(281				)	398			496

Income before income taxes	14,842				1,782					13,806			33,235

Provision (benefit) for income taxes	1,700				(70				)	6,350			5,921

Net income	$	13,142			$	1,852				$		7,456	$	27,314

Basic net income per share	$		0.26		$		0.04			$		0.15	$		0.57

Diluted net income per share	$		0.26		$		0.04			$		0.15	$		0.54

Shares used to compute basic net income per share	49,863				49,333					49,633			48,013

Shares used to compute diluted net income per share	51,284				50,712					50,861			50,286

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

ZORAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended
	September 30,
	2007			2006
Cash flows from operating activities:
Net income	$	7,456		$	27,314
Adjustments to reconcile net income to net cash provided by operations:
Depreciation	5,932			7,093
Amortization	33,986			37,931
Stock-based compensation expense	10,599			13,728
Gain on sale of investments, net	(796		)	(1,044		)
Changes in current assets and liabilities:
Accounts receivable, net	(17,830		)	7,205
Inventories	11,443			(12,631		)
Prepaid expenses and other current assets and other assets	(7,756		)	1,216
Accounts payable	6,285			(775		)
Accrued expenses and other liabilities and other long term liabilities	14,304			1,787
Net cash provided by operating activities	63,623			81,824

Cash flows from investing activities:
Purchases of property and equipment	(7,473		)	(5,429		)
Purchases of investments	(317,700		)	(308,871		)
Proceeds from sales and maturities of investments	258,073			188,092
Net cash used in investing activities	(67,100		)	(126,208		)

Cash flows from financing activities:
Proceeds from issuance of common stock	5,963			52,079
Net cash provided by financing activities	5,963			52,079

Net increase in cash and cash equivalents	2,486			7,695

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

Cash and cash equivalents at end of period	$	102,520		$	86,551

The accompanying 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, consisting only of normal recurring adjustments, considered necessary 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.

Revenues

On January 25, 2006, the Company entered into an agreement with MediaTek to settle patent litigation between the companies. In consideration for licenses granted by Zoran, MediaTek agreed to pay Zoran $55 million, of which $44 million was paid in February 2006 and $11 million was paid in April 2006. These two payments, net of amounts attributable to a holder of rights under patents involved in the litigation, and amounts payable as legal fees, were recognized as license revenues related to litigation settlement. Revenues for the nine month period ended September 30, 2006 include $35.8 million in license payments related to the litigation settlement. MediaTek is required to pay quarterly royalties totaling $30 million over a 30-month period that commenced on the date of the agreement based on future sales of covered MediaTek products. These royalty payments, net of amounts payable by Zoran to a holder of rights under patents involved in the litigation, and amounts payable as legal fees, are recognized as software and other revenues as they are received.

Recent Accounting Pronouncements

In September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 157, “Fair Value Measurements” (“SFAS No. 157”), which defined 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 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 February 2007, FASB issued 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 to provide entities the one-time election 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 under SFAS No. 157. 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 June 2007, the FASB ratified EITF Issue No. 07-3 (“EITF 07-3”), Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. This issue provides that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities pursuant to an executory contractual arrangement should be deferred and capitalized and recognized as an expense as the related goods are delivered or the related services are performed. The provisions of EITF 07-3 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.

2. Stock-Based Compensation

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2007			2006			2007			2006

Cost of hardware product revenues	$		133	$		129	$	309		$	420
Research and development	1,318			1,236			3,481			4,290
Selling, general and administrative	2,116			2,405			6,809			9,018
Total costs and expenses	$	3,567		$	3,770		$		10,599	$		13,728

Valuation Assumptions

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

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

	Employee Stock Purchase Plan
	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007		2006

Average expected term (years)	1.27		1.25		1.28		1.25
Expected volatility	46	%	58	%	47	%	58	%
Risk-free interest rate	4.9	%	3.2	%	4.8	%	2.9	%
Dividend yield	0	%	0	%	0	%	0	%

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

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

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

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

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

Stock Option Activity

The following is a summary of stock option activities:

	Shares Underlying Outstanding Options		Weighted Average Exercise Price

Outstanding at January 1, 2007	8,096,344		$	16.58
Granted	1,333,590		$	19.88
Exercised	(448,464	)	$	13.30
Canceled/forfeited/expired	(124,199	)	$	14.72
Outstanding at September 30, 2007	8,857,271		$	17.27

Significant option groups outstanding as of September 30, 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 September 30, 2007	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)		Shares Underlying Options at September 30, 2007	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Aggregate Intrinsic Value (in thousands)

$0.00 to $9.99	511,029	4.33	$	6.56	$	6,973	496,029	4.24	$	6.48	$	6,806
$10.00 to $11.99	1,213,694	6.61	$	10.56	11,697		1,213,694	6.61	$	10.56	11,697
$12.00 to $14.99	1,481,730	5.60	$	13.35	10,154		1,309,759	5.30	$	13.30	9,034
$15.00 to $19.99	3,354,192	7.46	$	18.01	7,338		2,036,615	6.23	$	17.07	6,371
$20.00 to $25.99	1,904,175	6.17	$	23.83	—		1,698,690	5.78	$	24.14	—
$26.00 to $46.53	392,451	3.01	$	28.56	—		387,894	2.94	$	28.57	—
Total	8,857,271	6.38	$	17.27	$	36,162	7,142,681	5.70	$	16.84	$		33,908

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

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company’s closing stock price of $20.20 as of September 30, 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 September 30, 2007 was 5,060,000 shares.

The total intrinsic value of options exercised during the three and nine months ended September 30, 2007 was $1,143,000 and $2,954,000 respectively. The total cash received from employees as a result of employee stock option exercises during the three and nine months ended September 30, 2007 was approximately $2,300,000 and $5,963,000 respectively. In connection with these exercises, there was no tax benefit realized by the Company due to the Company’s full valuation on its deferred tax assets.

As of September 30, 2007, the Company had $18,503,000 of unrecognized stock-based compensation cost related to stock options after estimated forfeitures, which are expected to be recognized over an estimated amortization period of up to four years.

Pursuant to a tender offer that expired on July 2, 2007, the Company amended outstanding options covering approximately 204,556 shares of Zoran common stock to increase the per-share exercise price of each such option to the fair market value of a share of Zoran common stock on the remeasured grant date of that option. Under the tender offer, current employees subject to taxation in the United States had the opportunity to increase the per-share exercise price of the eligible options so that those options will not be subject to adverse tax consequences under Internal Revenue Code Section 409A. In addition, participants in the tender offer whose eligible options were so amended are eligible for cash bonuses in the aggregate amount of $423,000 to compensate them for the higher per-share exercise prices. The cash bonuses are expected to be paid on January 4, 2008 and are accrued as of September 30, 2007. The Company recorded $120,000 as expense in the three months ended September 30, 2007 related to the amendment of eligible options for the incremental fair value representing the excess of the fair value of the replacement award and cash bonuses over the fair value of the cancelled award.

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

Stock Option Plans

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

Restricted Shares and Restricted Stock Units

Restricted shares and restricted stock units are granted under the 2005 Plan. As of September 30, 2007, we had $191,000 of unrecognized stock-based compensation cost related to restricted shares and restricted stock units, which we expect to recognize over the remaining period of up to four years.

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

	Outstanding Restricted Shares And Stock Units		Weighted- Average Grant- Date Fair Value
Balances, December 31, 2006	189,716		$	19.50
Granted	5,000		$	20.31
Vested	(108,257	)	$	20.36
Forfeited	(4,448	)	$	21.56
Balances, September 30, 2007	82,011		$	18.31

Employee Stock Purchase Plan

The Company’s 1995 Employee Stock Purchase Plan (“ESPP”) was adopted by the Company’s Board of Directors in October 1995 and approved by its stockholders in December 1995. The ESPP enables employees to purchase shares through payroll deductions at approximately 85% of the lesser of the fair value of common stock at the beginning of a 24-month offering period or the end of each six-month segment within such offering period. The ESPP is intended to qualify as an “employee stock purchase plan” under Section 423 of the U.S. Internal Revenue Code. There were no purchases during the quarter ended September 30, 2007. As of September 30, 2007 2,311,447 shares were reserved and available for issuance under the ESPP.

3. Comprehensive Income

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

	Three Months Ended					Nine Months Ended
	September 30,					September 30,
	2007			2006		2007						2006

Net income	$	13,142		$	1,852		$		7,456				$		27,314
Change in unrealized gain (loss) on investments, net	(200		)	1,060		(2,549					)	491
Total comprehensive income	$	12,942		$	2,912			$		4,907				$		27,805

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

4. Marketable Securities

The Company’s portfolio of marketable securities at September 30, 2007 was as follows (in thousands):

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

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 and municipal bonds	12,927			1			(13			)	12,915
Total fixed income securities	190,474			18			(399			)	190,093
Publicly traded equity securities	1,483			4,619			—				6,102
Total	$	191,957		$		4,637	$		(399	)	$		196,195

The following table summarizes the maturities of the Company’s fixed income securities at September 30, 2007 (in thousands):

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

*Comprised of auction rate securities which have reset dates of 90 days or less but final expiration dates over five years.

5. Inventories

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

	September 30,			December 31,
	2007			2006

Purchased parts and work in process	$	17,575		$		18,748
Finished goods	16,026			26,296
	$		33,601	$	45,044

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, 2007 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):

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

Estimated future intangible amortization expense, based on current balances, as of September 30, 2007 is as follows (in thousands):

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

Goodwill by reportable segment was as follows (in thousands):

	September 30,			December 31,
	2007			2006

Consumer	$		167,740	$	169,060
Imaging	5,051			5,199
	$	172,791		$		174,259

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

7. Income Taxes

The provision for income taxes reflects the effective tax rate applied to year to date earnings adjusted to exclude charges for amortization of intangible assets and stock-based compensation expense. 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 FASB Interpretation No. 48 “Accounting for Uncertainty in Income taxes” (“FIN No. 48”) an interpretation of SFAS No. 109 on January 1, 2007. As a result of the implementation of FIN No. 48 on January 1, 2007, the Company reduced its tax liability by $1,634,000 with an offsetting decrease of $454,000 to opening accumulated deficit, and a decrease in goodwill of $1,180,000. Additionally, the Company decreased deferred tax assets and their associated valuation allowance by $12,749,000. 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 $27,499,000 of unrecognized tax benefits, $6,503,000 of which was classified as other long-term liabilities, which if recognized in the future would benefit 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. During the second quarter of 2007 the Company was contacted by the ITA (Israel Tax Authority) about an audit of the Company’s 2003, 2004 and 2005 tax returns. It is possible that the audit will result in a positive or negative adjustment to our unrecognized tax benefits within the next 12 months. The Company is unable to estimate the range of the benefit or detriment at this point. The Company continues to account for tax related interest and penalties as part of the income tax provision. At January 1, 2007 and September 30, 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 and accordingly, a full valuation allowance was recorded as of September 30, 2007. 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 and system-on-a-chip solutions. The Company also licenses certain software and other intellectual property. The Company has two reportable 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 reportable segment income or loss is as follows for the three and nine months ended September 30, 2007 and 2006 is as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007			2006

Net revenues:
Consumer	$	120,957	$	109,681	$		309,690	$	342,997
Imaging	25,469		19,698		68,298			56,557
	$	146,426	$	129,379	$		377,988	$	399,554

Operating expenses:
Consumer	$	108,561	$	102,806	$		293,077	$	289,781
Imaging	17,421		15,166		49,252			46,680
	$	125,982	$	117,972	$	342,329		$	336,461

Contribution margin:
Consumer	$	12,396	$	6,875	$	16,613		$	53,216
Imaging	8,048		4,532		19,046			9,877
	$	20,444	$	11,407	$	35,659		$	63,093

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

	Three Months Ended September 30,							Nine Months Ended September 30,
	2007			2006				2007			2006

Contribution margin from reportable segments	$		20,444	$	11,407			$	35,659		$	63,093
Amortization of intangible assets	9,648			12,423				33,986			37,893
Total operating income (loss)	$	10,796		$		(1,016	)	$		1,673	$		25,200

Zoran maintains operations in Canada, China, Germany, Israel, 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 and nine months ended September 30, 2007 and 2006 was as follows (in thousands):

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

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

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

9. Employee Benefit Plans

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 assets and investments. The severance pay expenses (benefit) for the three and nine months ended September 30, 2007 were $(173,000) and $13,000 respectively. The severance pay expenses for the three and nine months ended September 30, 2006 were $367,000 and $922,000 respectively.

The severance pay detail is as follows (in thousands):

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

10. Net Income Per Share

Basic net income per share is calculated by dividing net 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 per share computations (in thousands, except per share data):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2007		2006		2007			2006
Net income	$	13,142	$	1,852	$		7,456	$		27,314

Weighted average shares outstanding	49,863		49,333		49,633			48,013
Effect of dilutive options, restricted shares, and restricted stock units	1,421		1,379		1,228			2,273
Dilutive weighted average shares	51,284		50,712		50,861			50,286

Net income per share:
Basic	$	0.26	$	0.04	$		0.15	$		0.57
Diluted	$	0.26	$	0.04	$	0.15		$	0.54

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

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

11. Legal Proceedings

Matters Related to Historical Stock Option Practices: As discussed further below, certain persons and entities identifying themselves as shareholders of Zoran have filed 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 the Company’s historical accounting for stock options. These actions are still in the early stages, and it is not possible for us to quantify the extent of our potential liability, if any.

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. On June 5, 2007 the Court issued an order granting in part and denying in part defendants’ motion to dismiss. The case is currently in the discovery phase. On September 11, 2007, the parties participated in a court-ordered mediation session.

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. The co-lead plaintiffs filed a consolidated amended complaint on March 26, 2007. On June 15, 2007 the Court issued an order staying all proceedings until further order of the Court.

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 continue cooperating fully with investigations by the U.S. Attorney, SEC or any other government regulator relating to historical stock option practices. The staff of the Securities and Exchange Commission notified Zoran by letter dated November 2, 2007 that the staff's investigation of Zoran’s historical stock option granting practices has been terminated and that no enforcement action against Zoran has been recommended to the Commission.

On February 20, 2007, the Company filed a complaint against ArcSoft Inc. in the California Superior Court for the County of Alameda, seeking payment of $4 million in principal, together with accrued interest thereon in the amount of approximately $525,000, under four separate convertible promissory 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 (“Agreement”) 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. On August 9, 2007, the Company filed an answer to ArcSoft’s cross-complaint denying liability and asserting various affirmative defenses. The Company also filed a cross-complaint alleging ArcSoft breached the Agreement. On August 10, 2007, the Court held the initial Case Management Conference. The Court scheduled a further case management conference for November 26, 2007. The current fact discovery cutoff is June 9, 2008, and the current expert discovery cutoff is June 23, 2008. The first day of trial is set for July 7, 2008.

Indemnification Obligations. Subject 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 that reflect the Company’s current views with respect to future events and financial performance. These forward-looking statements are subject to many risks and uncertainties, including those discussed in “Part II, Item 1A. Risk Factors” below. In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify forward-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 DVD players, movie and digital television, digital cameras and video editing systems. We also provide integrated circuits, software and platforms for imaging applications that enable the delivery and display of digital video content through a set-top box or television as well as digital imaging products consisting of semiconductor hardware and software that enable users to print, scan, process and transmit documents to computer peripherals that perform printing functions. We sell our products to original equipment manufacturers, or OEMs, that incorporate them into digital video and audio products for consumer and commercial applications.

Revenues

We derive most of our revenues from the sale of integrated circuits and related products. In the semiconductor industry in general, and for our products in particular, average selling prices historically 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 certainty.

We also derive revenue from licensing our software and other intellectual property. Licensing revenues have fluctuated, and will continue to fluctuate, on a quarterly basis. Licensing revenue includes one-time license fees and royalties based on the number of units distributed by the licensee. Licensing revenue can be significantly affected by the timing of a small number of licensing transactions. 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 that 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 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 tax expense for U.S. federal income tax purposes, and by our Israel 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 September 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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 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 February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities”. This statement expands the standards under SFAS No. 157 to provide entities the one-time election 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 under SFAS No. 157. 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 June 2007, the FASB ratified EITF Issue No. 07-3 (“EITF 07-3”), Accounting for Nonrefundable Advance Payments for Goods or Services to Be Used in Future Research and Development Activities. This issue provides that nonrefundable advance payments for goods or services that will be used or rendered for future research and development activities pursuant to an executory contractual arrangement should be deferred and capitalized and recognized as an expense as the related goods are delivered or the related services are performed. The provisions of EITF 07-3 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.

Segments

Our products are based on highly integrated application-specific integrated circuits and system-on-a-chip solutions. We also license software and other intellectual property. We operate in two reportable 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

The following table summarizes selected consolidated statement of operations data and changes from the period to period

($ in thousands, except for percentages):

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

*not meaningful

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

*not meaningful

Revenues

The $17.0 million increase in total revenues for the three months ended September 30, 2007 compared to the same period of 2006 represents an $11.3 million increase in Consumer segment revenues and a $5.7 million increase in Imaging segment revenues. The increase in Consumer segment revenues reflects increases in Mobile hardware product revenue of $10.8 million and DTV hardware product revenue of $2.3 million partially offset by a decrease in DVD hardware product revenues of $1.8 million. The increase in Imaging segment revenues reflects an increase in Imaging hardware product revenues of $3.4 million and an increase in Imaging software and other revenues of $2.3 million.

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

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

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

Software and other revenues increased by $2.8 million for the three months ended September 30, 2007 compared to the same period of the prior year primarily due to a $2.3 million increase in Imaging segment revenues. The increase in software and other revenues of $5.7 million for the nine months ended September 30, 2007 compared to the same period in 2006 was a result of a $2.1 million increase in Consumer segment revenues and a $3.6 million increase in Imaging segment revenues. These changes were primarily due to the timing of new agreements.

Cost of Hardware Product Revenues

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

Research and Development

Research and development expenses increased for the three and nine months periods ended September 30, 2007, compared to the same periods in 2006, primarily due to fluctuations 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 increased by $2.1 million for the three month period ended September 30, 2007, compared to the same period in 2006 and increased by $4.1 million for the nine months ended September 30, 2007 compared to the same period in 2006. This increase was primarily due to continued increases in marketing and field application support expenses to support revenue growth in our Asia Pacific markets.

Amortization of Intangible Assets

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

Interest and Other Income

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

Provision for Income Taxes

The tax provision for the three and nine months ended September 30, 2007 was $1.7 million and $6.4 million, respectively. The estimated tax expense for the three and nine month periods ended September 30, 2007 has increased compared to the same periods in 2006 primarily due to a change in the geography of our pre-tax income. In addition, the tax provision for the three months ended Sept. 2006 benefited from the release of certain domestic tax reserves and the tax provision for the nine month period ended September 30, 2006 of $6.0 million included a one time charge of $4.3 million for tax expense related to the MediaTek settlement. Our effective income tax rate has benefited from the availability of previously unbenefitted net operating losses which we have utilized to reduce tax expense 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. The remaining tax expense is related to the utilization of previously unbenefitted purchased NOL’s which when utilized reduce goodwill and not tax expense along with statutory taxes in our non-U.S. subsidiaries. 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 September 30, 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. We continue to monitor the relative weight of positive and negative evidence of future profitability in relevant jurisdictions. It is possible that sometime in the next 12 months the positive evidence will be sufficient to release a material amount of our valuation allowance; however there is no assurance that this will occur.

Liquidity and Capital Resources

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

Our operating activities generated cash of $63.6 million during the first nine months of 2007, primarily due to net income of $7.5 million adjusted for non-cash items such as amortization of $34.0 million, depreciation of $5.9 million and stock- based compensation expense of $10.6 million. Cash provided by operations also increased due to a $6.3 million increase in accounts payable; $14.3 million increase in accrued expenses and other liabilities and other long term liabilities due to timing of payments and a $11.4 million decrease in inventory as a result of an increase in shipments. These increases were partially offset by an increase in accounts receivable by $17.8 million due to increase in revenues that occurred late in the quarter and an increase in prepaid expenses and other current assets by $7.8 million.

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

Cash provided by financing activities during the nine months ended September 30, 2007 was $6.0 million and consisted of proceeds received from issuances of common stock through exercises of employee stock options.

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

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

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

At September 30, 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 September 30, 2007, a near-term 10% appreciation or depreciation of the New Israeli Shekel would have an immaterial affect on our financial condition.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

Item 1A. Risk Factors

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

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 and derivative law suits have required us to expend significant management time and incur significant accounting, legal and other expenses totaling $5.8 million in 2006 and $6.9 million in the nine months ended September 30, 2007. 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.

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 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 purported shareholder derivative actions were filed against certain of our current and former directors, officers and certain other individuals, which purport to assert

claims on Zoran’s behalf. 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, results of operations or cash flows.

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, management 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 December 31, 2006. In addition, management determined that as of September 30, 2007 there continued to be effective controls designed and in place to prevent or detect a material misstatement and therefore the likelihood of material misstatement of the consolidated financial statements 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 OEMs to 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, 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, M-Star, MediaTek, Renesas Technology 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 Global Graphics, Marvell Semiconductor, Monotype Imaging, Peerless Systems, Sigmatel Inc., Software Imaging 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 14% of our total revenues, while sales to our four largest customers accounted for 36% 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, System On a Chip platform firmware and drivers for the digital office market and in limited circumstances with respect to 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 and breach of contract claims 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 or have breached our contractual obligations to others. Claims that our products infringe proprietary rights or that we have breached contractual obligations would force us to defend ourselves and possibly our customers or manufacturers against the alleged infringement or breach. 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 and breach of contract 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 and overseas. 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 September 30, 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:

• 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.

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

		Page
PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements

	Condensed Consolidated Balance Sheets as of September 30, 2007 and December 31, 2006 (unaudited)	3

	Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2007 and 2006 (unaudited)	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2007 and 2006 (unaudited)	5

	Notes to Condensed Consolidated Financial Statements (unaudited)	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	21

Item 4.	Controls and Procedures	22



PART II. OTHER INFORMATION

Item 1.	Legal Proceedings	23

Item 1A.	Risk Factors	23

Item 4.	Submission of Matters to a Vote of Security Holders	35

Item 6.	Exhibits	35

Signatures		36

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.

	ZORAN CORPORATION




Dated: November 9, 2007		/s/ Karl Schneider
		Karl Schneider
		Senior Vice President, Finance
		and Chief Financial Officer

FORM 10-Q

Page

10. Net Income Per Share

11. Legal Proceedings