Title of each class		Name of Exchange on which registered
None		None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes o No ý

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes o No ý

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ý

Indicate by check mark whether registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act. (Check one)

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

The aggregate market value of registrant's voting stock held by non-affiliates of registrant based upon the closing sale price of the Common Stock on June 30, 2007, as reported on the Nasdaq Global Select Market, was approximately $993,620,300.

Outstanding shares of registrant's Common Stock, $0.001 par value, as of February 15, 2008: 51,459,513.

Portions of registrant's definitive proxy statement for registrant's 2007 Annual Meeting of Stockholders, to be filed with the Commission pursuant to Regulation 14A, are incorporated by reference into Part III of this report where indicated.

ZORAN CORPORATION
INDEX TO
ANNUAL REPORT ON FORM 10-K
FOR YEAR ENDED DECEMBER 31, 2007

		Page
	Special Note Regarding Forward-Looking Statements	1
PART I
Item 1.	Business	1
Item 1A.	Risk Factors	17
Item 1B.	Unresolved Staff Comments	32
Item 2.	Properties	32
Item 3.	Legal Proceedings	33
Item 4.	Submission of Matters to a Vote of Security Holders	34
PART II
Item 5.	Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities	35
Item 6.	Selected Financial Data	35
Item 7.	Management's Discussion and Analysis of Financial Condition and Results of Operations	37
Item 7A.	Quantitative and Qualitative Disclosures About Market Risk	48
Item 8.	Financial Statements and Supplementary Data	50
Item 9.	Changes in and Disagreements with Accountants on Accounting and Financial Disclosure	87
Item 9A.	Controls and Procedures	87
Item 9B.	Other Information	88
PART III
Item 10.	Directors, Executive Officers and Corporate Governance	89
Item 11.	Executive Compensation	89
Item 12.	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters	89
Item 13.	Certain Relationships and Related Transactions, and Director Independence	89
Item 14.	Principal Accounting Fees and Services	90
PART IV
Item 15.	Exhibits and Financial Statement Schedules	90
Signatures	93

The Business section and other parts of this Annual Report on Form 10-K ("Form 10-K") contain forward-looking statements that involve risks and uncertainties. Many of the forward-looking statements are located in Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations. Forward-looking statements provide current expectations of future events based on certain assumptions and include any statement that does not directly relate to any historical or current fact. Forward-looking statements can also be identified by words such as "anticipates," "believes," "estimates," "expects," "intends," "plans," "predicts," and similar terms. Forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in "Item 1A—Risk Factors" of this Annual Report on Form 10-K. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Zoran Corporation is a leading provider of digital solutions in the digital entertainment and digital imaging market. Zoran has pioneered high-performance digital audio and video, imaging applications, and Connect Share Entertain™ technologies for the digital home.

Our products consist of integrated circuits and related products used in digital versatile disc, or DVD, players, movie and home theater systems, digital cameras and video editing systems. We provide integrated circuits, software and platforms for digital television applications that enable the delivery and display of digital video content through a set-top box or television as well as digital imaging products consisting of semiconductor hardware and software that enable users to print, scan, process and transmit documents to computer peripherals that perform printing functions. We also provide high performance, low-power application processors, technology and products for the multimedia mobile phone market. We sell our products to original equipment manufacturers, or OEMs that incorporate them into products for consumer and commercial applications.

We were incorporated in California in December 1981 and reincorporated in Delaware in November 1986. Our corporate headquarters are located at 1390 Kifer Road, Sunnyvale, California 94086, and our telephone number is (408) 523-6500. Our website can be found at www.zoran.com. In August 2003, we acquired Oak Technology, Inc., which provided us MPEG-2 technologies required for high definition television applications including set-top boxes and televisions and software used in multi-function digital print devices. In August 2004, we acquired Emblaze Semiconductor Ltd., which provided us technologies for extending our capabilities into the multimedia mobile phone market. In June 2005, we acquired Oren Semiconductor, Inc. which provided us demodulator IC technology for the global high definition television market.

Our Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and any amendments to those reports, are available free of charge on our website under "Investors / SEC Filings" as soon as reasonably practicable after they are filed with the Securities and Exchange Commission. Additionally, these filings may be obtained by visiting the Public Reference Room of the SEC at 100 F Street, NE, Washington, DC 20549 or by calling the SEC at 1-800-SEC-0330, by sending an electronic message to the SEC at publicinfo@sec.gov or by sending a fax to the SEC at 1-202-777-1027. In addition, the SEC maintains a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that file electronically.

Until the mid-1990s, video images and audio soundtracks were transmitted, edited and stored almost exclusively using analog formats. Since then, advances in technology have allowed audio and video to be processed and stored in digital form. Unlike analog formats, which are inherently unstable and difficult to edit and enhance, digital formats permit the manipulation of audio and video signals through digital signal processing and offer a number of fundamental advantages over analog technologies. Through complex digital signal processing operations, digital audio and video signals may be compressed, providing significant storage and transmission efficiencies. They also may be filtered, allowing for noise reduction, and they may be transmitted and reproduced without perceptible image or sound degradation. Digital formats provide users with additional benefits, including higher quality audio and video, random access to data and superior editing capabilities. Enhanced security features such as protection against unauthorized copying and controlled and secure access also encourages content owners to release their content in digital forms.

One of the most significant barriers to the widespread adoption of digital technology had been the huge amount of data required to represent images and sounds in a digital format, making cost-effective storage or transmission impractical. Through digital compression techniques, a substantial number of the redundancies inherent in audio and video data can be identified and eliminated, significantly reducing the overall amount of data which needs to be retained. Compression techniques introduced in the early 1990s allowed a two-hour movie to be compressed and stored on only two video CDs with video resolution comparable to that of a standard VHS tape. More recent techniques allow the storage of a full-length movie of more than three hours on a single DVD, with substantially improved audio and video quality and the incorporation of additional data, such as additional languages, scenes and director and actor commentary. Even more recently, further advancements in compression technology now allow, for example, a complete high definition movie to be stored in even less space. Additionally, digital compression of video data allows previously unmanageable amounts of data to be stored in the memory of a disk drive, thereby permitting the data to be accessed and edited easily. It also allows for easier transmission of sharper resolution pictures through a standard definition or high definition television or set-top box. Digital audio compression allows efficient storage and delivery of multi-channel audio, making possible high-quality special effects such as multi-channel surround sound, virtual surround sound and wireless audio delivery via two speakers or headphones. In the field of still photography, digital compression allows hundreds or even thousands of digital pictures to be stored on a single memory card, depending on the resolution desired.

To drive the implementation and speed the adoption of products based on digital formats, industry participants organized committees to define international compression standards. The principal standards in use today include the following:

These industry standard techniques have enabled the dramatic growth in the following digital multimedia markets:

DVD Players and Recorders DVD players and recorders primarily use MPEG 2 video compression and Dolby Digital audio technology to provide significantly higher quality playback or recording than is possible with VCR or video CD technology. According to industry analysts, sales of red-laser DVD players are estimated to be over 150 million units in 2007 and are expected to increase slightly in 2008, while high definition DVD players are expected to become a major growth market, increasing from 5 million units in 2008 to over 45 million units in 2011.

Standard Definition and High Definition Televisions and Set Top Boxes Digital televisions receive digital content and process it to display a picture which has far greater resolution and sharper, more clearly defined images than televisions based on the older analog technology. Standard definition televisions generally contain 480 lines with 720 pixels per line. High definition television, or HDTV, television sets contain 1280 to 1920 pixels per line and up to 1080 lines. The aspect ratio of standard definition sets is 4:3, compared to 16:9 for HDTV. The lines may be displayed using different techniques, often referred to as interlacing or alternatively progressive scan. The capability to receive and process digital television signals can be contained in a set-top box, which then drives a television that is capable of displaying digital content. Alternatively, this functionality can be integrated into a digital television that does not require a set-top box. Digital content is broadcast via satellite, cable networks or over the air (terrestrial broadcast) in various markets throughout the world. Industry analysts estimate that over 50 million digital televisions and 70 million set-top boxes were shipped worldwide in 2007 and that over 70 million digital televisions and 120 million set-top box products will be shipped in 2008.

Mobile Products Digital cameras use JPEG compression technology to capture high resolution still images that can be viewed, edited and stored on a computer system, on a recordable DVD, and or transmitted over telephone lines and computer networks. Some digital cameras are capable of capturing and playing back quality video, using the MPEG 4 algorithm. According to IDC, sales of digital cameras exceeded 120 million units in 2007 and are expected to exceed 130 million units during 2008. According to Techno Systems Research, the market for higher quality camera phones with at least 5-megapixel resolution is expected to grow from 15 million units in 2007 to more than 256 million units in 2011.

Products and markets are developed based on established compression standards and additional compression technologies such as Meridian Lossless PCM, or MLP, a new standard for DVD audio, Super Audio, or SACD, Microsoft Windows Media Audio, or WMA, Advanced Audio Codec (AAC) used in conjunction with the MPEG-4 video standard and MP3, a compression standard for the download of audio recordings from the Internet.

These established and emerging compression standards specify data formats which enable products from different vendors to interact and permit the capture, transmission, storage and display of audio

and video data in digital format. These standards do not specify the compression methodologies to be employed or additional functionality that may be used to enhance or manipulate digital signals. These standards, therefore, do not determine image or sound quality or compression efficiency. For example, data compression may comply with relevant standards despite being poorly processed and containing artifacts that result in image degradation in video applications or poor sound quality in audio applications. As a result, there can be significant differences in overall image or sound quality between two solutions based on the same standard. Therefore, integrated circuit manufacturers can differentiate their products on the basis of the quality of their compression solution.

Historically, as system vendors sought compression solutions, the cost, complexity and time required to compress and decompress data imposed significant limitations on the use of digital compression. Over the last several years, as cost-effective compression solutions have emerged, product manufacturers have increasingly sought to design and market lower-cost digital audio and video systems and products to address an increasing number of high volume consumer applications. In addition, product manufacturers are facing competitive pressure to introduce their products more rapidly. To address these issues, OEMs continually seek to integrate more and more functions on individual chips in order to reduce their costs, time-to-market and power consumption. They also seek solutions that can easily be integrated into their commercial and consumer products. The challenge to manufacturers of compression integrated circuits is, therefore, to provide product manufacturers with high-quality, cost-effective, standards-based solutions that enable flexible control, image enhancement, audio effects and other functions in addition to high quality compression solutions.

We provide feature-rich, cost-effective, standards-based solutions for a broad range of digital video, audio and imaging applications. We were a pioneer in the development of high performance digital signal processor (DSP) products, and have developed expertise in integrated mixed signal circuit design, mathematical algorithms and software development, as well as proprietary digital signal processing, and video and audio compression technologies. We apply our multi-disciplinary expertise and proprietary technologies to the development of fully-integrated solutions for high-growth multimedia markets. The key elements of our solutions are:

Standards-Plus Methodology We leverage our multi-disciplinary expertise and proprietary digital signal processing and compression technologies to develop what we refer to as "standards-plus" solutions. We enable OEMs to improve image and sound quality and deliver superior products to end users by adding more features around compression standards, such as more efficient use of memory, processing and communication resources, as well as audio and image enhancement algorithms. We also provide OEMs the ability to include OEM-programmable effects and features, as well as variable compression ratios for video. These "standards-plus" features allow our customers to differentiate their products from those of their competitors.

Expandable and Programmable Architectures We design our integrated circuits to enable easy adaptation for a broad range of specific applications. We can vary the architecture of our chips by adding or deleting modules, and we can also modify the software embedded in the chips themselves to address specific applications. We also license ready-to-manufacture "cores"—building blocks of integrated circuits—that can be integrated into our customers' chips. Combined with the enhanced functionality of our "standards-plus" technology, our expandable and programmable architecture facilitates product design, upgrades and customization, substantially accelerating our customers' time to market with differentiated products.

Integrated System Solutions We help our customers meet their total system requirements by providing integrated products that combine hardware and software to address required system functions and features on a single integrated circuit or chip set, reducing the number of integrated circuits, and

in some cases providing a complete solution on a single chip. As a result, our customers' total system cost is reduced and they can concentrate on differentiating their products from those of their competitors. For example, our COACH IC includes most of the electronics of a digital camera on a single chip.

Cost-Effective Products We focus on reducing the size, power requirements and number of integrated circuits necessary to perform required system functions, including compression. This reduces our customers' manufacturing costs for products which incorporate our integrated circuits, and also reduces the costs of operating those products so that our products can be used in a broader range of high volume applications. The modular nature of our architecture reduces our new product development costs, and enables our design engineers to meet our customers' new product specifications and cost parameters.

Near Production-Ready System Reference Designs We provide our customers with a broad range of engineering reference boards and products complete with device driver software, embedded software and detailed schematics. These products substantially shorten our customers' product design time.

We provide cost-effective, high-performance digital video, television, imaging and mobile solutions addressing selected high-growth applications in evolving multimedia markets. Key elements of our strategy include the following:

Focus on High-Growth and High Volume Applications Our strategy is to focus on providing digital video, television, imaging and mobile solutions for high-growth consumer electronics and printing applications. The markets we currently focus on include: DVD players, digital cameras, digital televisions and set-top boxes, multimedia mobile phones, and multifunction printing devices. In these markets we strive to introduce increasingly feature-rich products with reduced costs for our customers.

Leverage Existing Technology and Expertise We intend to identify and actively pursue markets that we believe have the highest growth potential for our products. Our proprietary digital signal processing and compression technologies can be used in many emerging markets where there is demand for high-quality digital video products.

Further Penetrate Key International Markets Between 1998 and 2007, we expanded offices in Canada, China, England, Germany, Hong Kong, India, Israel, Japan, Korea and Taiwan. At the end of 2007, we had over 1,400 full-time, part-time and contract employees working in various offices. We believe that by opening and expanding our presence in foreign offices we are better able to provide local marketing and application support for our customers in these growing consumer electronics markets.

Extend Technological Leadership Our years of experience in the fields of digital signal processing, integrated circuit design, algorithms and software development have enabled us to become a leader in the development of digital audio and video solutions. Using our multi-disciplinary expertise, we have developed new technologies for compression of digital audio, video and imaging. We acquired important technologies for extending our capabilities into the growing multimedia mobile phone market and the global high definition television market. We intend to continue to invest in our research and development, and to evaluate opportunities to acquire additional technologies in order to maintain and extend our technological leadership.

Expand Strategic Partnerships We work closely in the product development process with leading manufacturers of products that incorporate our integrated circuits. We also work closely with key customers and provide them early access to our technologies. Potential products are designed to meet customer-driven product requirements defined by us with our partners providing technological input

and, in selected cases, a portion of the development funding. This strategy has enabled us to develop products with financial and other assistance while retaining ownership of the technology and ensuring an established customer for the product once development is completed. In some cases, our strategic partners also provide sales and marketing support. We have also established long-term relationships with strategic partners that provide manufacturing capacity and we continually seek to develop additional strategic relationships with manufacturers.

Our products are currently used in a variety of consumer multimedia applications, including the following:

DVD players primarily use MPEG 2 video compression and Dolby Digital or similar audio technology to provide significantly higher quality playback than is possible with earlier generation products such as VCRs, Video CD or Super Video CD players. DVD players are sold as stand-alone products and are also bundled with other functions including DVD+VCRs, DVD-receivers and DVD+TV combinations. In addition, the DVD player can act as a platform for playback and editing of digital still images from digital cameras through integrated memory card slots or via direct connection to digital cameras.

The digital television market represents the most significant technological shift in the consumer electronics market since color televisions were introduced in the late 1950s. Today, digital content providers broadcast programming via satellite, cable or terrestrial (over-the-air) networks. The mix of broadcast networks varies by geographic region. For example, most digital television content in Japan and Korea is broadcast via terrestrial networks, while cable networks currently predominate in the United States. Satellite networks offer an alternative source of content to consumers and are continuing to grow in various regions. Each geographic market is subject to regulations that require compliance with different governmental standards applicable to broadcast technology and content format. In each region, individual broadcasters also have developed their own proprietary standards for content, security and conditional access. This market requires television products, set-top boxes, personal video recorders and other digital consumer appliances to include sophisticated integrated circuits and embedded software that address the emerging requirements of multiple broadcast networks throughout the world. The requirement by the U.S. Federal Communications Commission, or FCC, that all new televisions contain a built-in digital receiver, has accelerated the growth of the digital television market in the U.S. We expect this growth to continue over the next several years.

Digital cameras enable the capture of high resolution images, the viewing, editing and storage of images on a computer system and their transmission over telephone lines and computer networks. High quality copies of these images can be printed using color printers. Digital cameras have added audio-video capture and compression capabilities enabling them to function as digital video cameras (up to and including high-definition). Digital cameras can be connected directly to a PC for downloading of pictures or movies and to a television for display. The original digital cameras were developed for the professional market, and sold at prices of $1,000 to $3,000. As technology has advanced and manufacturing costs have decreased, digital cameras for the consumer market today are more likely to be in the $49 to $299 price range, with even entry level Digital SLR cameras now selling for less than $500.

Many mobile phones now incorporate digital still camera and camcorder functionality. Photos and video clip files can be immediately sent to another mobile phone or PC via email; downloaded to a printer or PC for printing or storing via wired or wireless technology. With the spread of new technology and decreased manufacturing costs, mobile phones are including high-resolution digital camera capabilities at increasingly economic price points.

The market for printers, in the home and in the office or enterprise, is undergoing a shift from print only or copy only devices to multi-function devices which copy, scan and fax as well as print. In the enterprise and business markets the use of color, as opposed to monochrome laser printers and copiers is becoming commonplace. According to IDC, controllers for multifunction printing devices, including ink jet for personal as well as monochrome and color laser applications in the office, are addressing a market estimated at over 80 million units in 2007 and growing to more than 100 million units in 2010.

The market for embedded software for page description languages, or PDLs, is somewhat more mature than other areas of the imaging market. It is characterized by a small number of suppliers selling to very large OEM customers designing print devices that need to be connected to a network, typically in a larger enterprise. The page description language, or PDL, enables the printer to receive a file or job from a PC and translate that file into a set of instructions that the printer can understand and lay down on paper with a great deal of precision. In general, applications are designed to send jobs to printers using one or all of a number of protocols or language families. Print Control Language, or PCL, originated as a Hewlett-Packard developed protocol for page printers and has become an industry standard in office environments. Both PCL 5 and PCL XL, or PCL 6, are supported in office printers today. The application may also use the PostScript language originally developed by Adobe, which tends to be focused more on graphic arts and Apple operating system environments. More recently, printers have also offered support for portable digital document formats that are designed to be widely viewed and shared, such as PDF, originally developed by Adobe. XML Paper Specification, or XPS, a new format, introduced by Microsoft in Windows Vista, is also being deployed as a format in printers.

The following table lists our principal integrated circuits currently in production, including the months in which initial production units were first made available to customers, as well as the most recent versions of our printer software products:

Product Family	Products
DVD	•	Vaddis® 5R video playback chip (ZR36750)	July 2003	DVD recorders
	•	Activa® 100—MPEG 2 encoder (ZR35100)	February 2004	DVD recorders
	•	Vaddis® 7 integrated DVD decoder (ZR36776)	March 2004	DVD players
	•	HDXtreme® (ZR36721)	March 2004	DVD players and recorders
	•	Vaddis® 8 integrated DVD decoder (ZR36868)	August 2004	DVD players
	•	Vaddis® 9 integrated DVD processor (ZR36962/ZR36966)	December 2005	DVD players
	•	Activa® 200—DVD Recorder Backend SoC (ZR35220)	December 2006	DVD recorders
	•	HDXtreme® II (ZR36722)	February 2007	DVD players and recorders
	•	Vaddis®9 128-pin integrated DVD processor (ZR36966XE/F)	July 2007	DVD players
DTV	•	Generation 9® integrated HD decoder with 64 Bit CPU and Audio DSP Core (TL 955)	June 2002	HDTV and HD set-top boxes
	•	Generation 9® integrated HD decoder with 64 bit CPU and audio DSP core (TL 945)	July 2002	HDTV and HD set-top boxes
	•	SupraTV® integrated SD decoder with 32-bit CPU and audio DSP core (ZR39140)	September 2003	SDTV and SD set-top boxes
	•	Generation 9® Elite integrated HD decoder with dual 32 bit CPU and audio DSP core (ZR 391055)	October 2004	HDTV and HD set-top boxes
	•	Cascade Demodulator (CAS-220)	June 2005	ATSC Demodulator for HDTV and set-top boxes
	•	SupraHD® 660 integrated decoder (ZR39660)	August 2005	ATSC decoder for LCDs and PDPs
	•	SupraHD® 640 integrated decoder (ZR39640)	August 2005	ATSC decoder for CRTs
	•	Supra TV® 160 SDTV integrated processors (ZR39160)	May 2006	Set-top boxes
	•	Supra TV® 130 SDTV integrated processors (ZR39130)	December 2006	Set-top boxes
	•	SupraHD® 740 HDTV Integrated processor (ZR 39740)	December 2006	ATSC decoder for CRTs
	•	SupraHD® 741 Integrated processor (ZR 39741)	October 2007	ATSC decoder for converter boxes
	•	SupraHD® 760 HDTV Integrated decoder (ZR 39760)	January 2007	ATSC decoder for LCDs and PDPs
	•	SupraHD® 770 HDTV Integrated processor (ZR 39770)	September 2007	ATSC decoder for LCDs and PDPs
	•	SupraHD® 780 HDTV Integrated processor (ZR 39780)	August 2007	ATSC decoder for LCDs and PDPs
	•	SupraHD® 880 HDTV Integrated processor (ZR 39880)	November 2007	ARIB decoder for Japan

Zoran, the Zoran logo, Activa, APPROACH, Generation 9, HDXtreme, Quatro, SupraHD, SupraTV and Vaddis are trademarks or registered trademarks of Zoran Corporation and its subsidiaries in the United States and/or other countries. All other names and brands may be claimed as property of others.

DVD Our Vaddis® processors perform all the audio and video decoding and display requirements of the DVD specification, including MPEG 2 audio and video decoding, Dolby Digital, DivX and MLP audio decoding, on-screen display, decryption required for copyright protection and presentation of graphic information. The Vaddis® processor has additional computational power that can be utilized for customer differentiation features. For example, it can incorporate virtual surround-sound algorithms without the addition of hardware. This allows the user to enjoy the theater-like sound obtained from six speakers using a system that includes only two speakers. The Vaddis® 7 processor incorporates all the functions of previous generations with the addition of MPEG 4 decoding and an interface that can support high definition television. The Vaddis® 8 processor adds Super Audio CD, or SACD, upscaler and HDMI transmitter functionality. In 2007, Zoran introduced Vaddis® 9, a family of multimedia processors that is available also in a new 128-pin packaging that simplifies the design and cuts on time

to market and costs. The Vaddis® 9 fully digital end-to-end solution targets a wide range of new applications such as Digital Picture Frames, Portable DVD players and Car multimedia systems. The Vaddis® 9 processors have integrated support for directly interfacing flash memory cards and USB devices, allowing playback of content from different media sources. Integrated support for LCD controller for Digital and Analog LCD panels makes the Vaddis® 9 a perfect solution for portable devices. We also introduced in 2007 the HDXtreme® II technology that allows DVD playback and viewing of JPEG pictures on an HDTV with an HDMI interface in a resolution of up to 1080p. The Activa® 200 product, delivers the entire DVD recorder capability on a single system-on-a-chip, integrating the front-end and back-end functions to greatly reduce system costs and chip count in DVD recorders. We also provide DVD player and DVD recorder reference designs based on our Vaddis® and Activa® product families that help our customers accelerate the time to market for their products.

DTV Our DTV Division offers integrated circuit products for both high definition and standard definition formats for digital televisions, set top boxes and related applications, including personal video recorders. In 2004, we introduced the Generation 9® Elite system-on-a-chip which utilizes dual CPUs resulting in higher performance with lower power consumption compared to its forerunner, the Generation 9® product family. During 2005, we began shipping our highly integrated SupraHD® product line that addresses the mainstream market segment as well as high-end and entry-level segments of the flat panel display and analog-to-digital broadcast transition markets. We also shipped production volumes of our SupraTV® 150 ICs for use in the worldwide standard definition digital terrestrial, satellite and cable broadcast markets. As a result of the Oren acquisition in June 2005, we offer the Cascade 2 TV demodulator with our SupraHD® and Generation 9® back-end decoder and end-to-end solution for the US Advanced Television Systems Committee (ATSC) market. The Cascade 2 product is also sold to TV tuner suppliers as an integrated tuner and demodulator solution. In 2007, we introduced a new family of TV SoC based on SupraHD® 770 and SupraHD® 780 that integrates all the digital and analog functionality for a US ATSC HDTV. In the Set-top boxes domain we are shipping the new Supra TV® 160 and Supra TV® 130 SoC to the China cable and Europe Free-to-Air market.

Mobile Our COACH processors are integrated system-on-a-chip solutions that include most of the electronics of a digital camera, which can be connected directly to a high-resolution CCD or CMOS sensor. The COACH IC processes the video information in real time, compresses the captured image in real time, while interfacing to an LCD, TV or micro display and to all types of flash memory. Among the unique capabilities of the COACH product is the ability to transfer in real time, over a USB bus, high quality video to the PC and function as a PC video camera. The COACH products also allow for direct connection to a printer, including color correction and special effects, for the non-PC consumer environment. The COACH product is supplemented by digital camera reference designs, "CamON" and "CamMini," products which shorten the time to market for Zoran's customers. The newest COACH processors utilize MPEG-4 and H.264 Codecs to incorporate basic digital camcorder capabilities for displaying video clips on a PC or TV. Our Mobile Products Division also offers mobile multimedia telephone products. Our APPROACH® media processors support a variety of multimedia functions, including best-in-class ISP image quality, enhanced video play and record capabilities, multi-standard end-to-end Mobile TV decoding, integrated TV-out, and High Speed USB 2.0. The APPROACH® multimedia processor complements the mobile phone baseband targeting the full-featured mobile phone market.

Digital Imaging Our Quatro® products address both the consumer market for personal printers and the business market for A4 laser printers and MFPs. The Quatro® product is a programmable SOC solution for imaging and printing appliances, including multifunction color inkjet and laser devices that feature print, copy, scan and fax. Quatro® ASICs are designed for mid-range and entry level inkjet printers, as well as more business oriented laser printers. IPS 8.0 is a modular, scalable embedded software product that provides processing and control functions for document imaging peripheral devices supporting all common page description languages.

The following table lists representative customers, as well as other OEMs who purchase our products through us or from our resellers. Each of these customers and OEMs purchased, directly or indirectly, at least $500,000 of Zoran products during 2007:

Product Family	Direct Customers and resellers	Other OEMs
DVD	Alco Electronics Ltd. Anam Electronics Co. Ltd. Everbest Industrial (H.K.) Ltd. Fly Ring Digital Technology Ltd. Jabil Circuit LG Electronic Inc. Marubun Corporation Samsung Electronics	TCL Electronics (HK) Ltd. Tecobest Digital Ltd. Thomson Hong Kong Holdings Ltd. Tomei Shoji Ltd. Tonic Trading Development Ltd. Universal Pacific Co. Ltd. Victory Industry Development Co. Ltd.	Orion Sanyo Sharp Toshiba
DTV	3S Digital Dae Jin Semiconductor Co. Ltd. Daewoo Electronics Co. Ltd. Digital Stream Technology DVN Technology Ltd. Everbest Industrial (H.K.) Ltd. Homecast Co. Ltd. Lacewood International Corp.	Marubun Corporation Mico Electric (HK) Ltd. Paramit Corporation Samsung Electronics Shenzhen MTC Multi-Media Co. Ltd. Tonic Trading Development Ltd. TPV Technology Group	Funai JVC Mitsubishi Mitsumi Panasonic Philips Sanyo Sony
Mobile	ASD Technology Ltd. Chicony Electronics Co. Ltd. Flextronics Foxlink Image Technology Co. Ltd. Grandtech Industrial Ltd. Kyoshin Technosonic (Asia) Ltd. Lacewood International Corp. LG Electronic Inc. Maxtek Technology Co. Ltd. Newell Hong Kong Ltd.	OMG Electronic Ltd. Pentax Corporation Primary Technologies Samsung Electronics Seung Jun Sang SA, Ltd. TCL Electronics (HK) Ltd. Tomen Electronics Corp. Willlink Technologies Ltd. Zenitron Corporation	Funai Nikon
Digital Imaging	Avision Inc. BenQ IT Co. Ltd. Celestica Inc. Canon Inc. Foxlink Image Technology Co. Ltd. Hewlett Packard Kanematsu Corporation Lite-On Technology Co. Mag-Tek Inc.	OkiData Corporation Primax Electronics Ltd. Ricoh Company Ltd. Samsung Electronics Seiko Epson Corporation Sharp Electronics Corporation Toshiba Corporation Xerox Corporation Kodak	Funai Panasonic Kyocera Corp.

We believe that our future success depends on our ability to continue to enhance our existing products and to develop new products that maintain technological competitiveness and compliance with new standards in rapidly evolving consumer-oriented digital audio and video markets. We attempt to leverage our expertise in the fields of digital signal processing, integrated circuit design, algorithms and software development to maintain our position as a leader in the development of digital audio, video and imaging solutions. Accordingly, we devote a significant portion of our resources to maintaining and upgrading our products to reduce integrated circuit cost, feature size, power consumption and the

number of integrated circuits required to perform compression and other functions necessary for the evolving digital audio, video and imaging application markets. In addition, we seek to design integrated circuits and cores, as well as near production-ready reference designs which reduce the time needed by manufacturers to integrate our ICs into their own products.

We have historically generated a portion of our revenues from development contracts with our strategic partners. These development contracts provide that we will receive payments upon reaching certain development milestones and that we will retain ownership of the intellectual property developed. Development contracts have enabled us to fund portions of our product development efforts, to respond to the feature requirements of our customers, to accelerate the incorporation of our products into our customers' products and to accelerate the time-to-market of our customers' products. We anticipate, however, that in the future development contracts with strategic partners will fund a smaller portion of our development efforts than in the past.

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 Bi-national Industrial Research and Development Foundation. These organizations fund up to 50% of incurred costs for approved projects up to contract maximums. The agreements require us to use our best efforts to achieve specified results and 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 the total funding received. Reported research and development expenses are net of these grants, which fluctuate from period to period. We received $27,000 as grants in 2007. There were no grant receipts in 2006 and 2005. The terms of Israeli Government participation include restrictions on the location of research and development activities, and the terms of the grants from the Chief Scientist prohibit the transfer of technology developed pursuant to these grants to any person without the prior written consent of the Chief Scientist.

As of December 31, 2007, we had 659 research and development personnel, of which 567 were employed full-time, and 92 were part-time or contract employees.

Our sales and marketing strategy is to focus on providing solutions to manufacturers seeking to design audio, video and imaging products for existing and emerging high volume consumer applications. In cooperation with leading manufacturers of audio, video and imaging equipment in the commercial and consumer markets, we attempt to identify market segments which have the potential for substantial growth. To implement our strategy, we have established a worldwide direct sales force in offices located near our key customers and strategic partners, and a worldwide network of independent sales representatives and resellers. In some cases, our strategic partners also provide sales and marketing support.

Our sales are generally made pursuant to purchase orders received between one and six months prior to the scheduled delivery date. We sell our products primarily through our 114-person direct sales staff, of whom 12 are located in the United States and 102 are located internationally. Our United States sales staff is primarily responsible for sales in North America, Europe and South America. Sales management and sales operations staff also reside in the United States. Our sales staff in China, Japan, Korea and Taiwan is responsible for marketing in their respective regions. In addition, we sell our products indirectly primarily through selected resellers and commissioned sales representatives. To date, we have not experienced material product returns or warranty expense.

We have opened offices in other parts of the world in order to address specific markets. We opened an office in Shenzhen, China as part of our effort to capture a leadership position in the Chinese digital audio and video markets and offices in Taipei and Hsinchu Taiwan in an effort to better address the video, imaging and digital camera market. As of December 31, 2007, we had a staff of 312 full-time employees and 16 part-time or contract employees in our Shenzhen office. In addition, we

operate sales support offices in Hong Kong, India, Korea and Taiwan which provide sales, applications and customer support.

We distribute our products in Japan primarily through resellers. We also operate an office in Tokyo to help promote our products in Japan, assist with the marketing of products not sold through resellers, such as integrated circuit cores and certain digital camera, digital video, digital television, imaging and JPEG products, and provide applications support for some of our customers.

Sales of our products are made pursuant to firm purchase orders. However, sometimes we allow customers to cancel or reschedule deliveries. In addition, purchase orders are subject to price renegotiations and to changes in quantities of products ordered as a result of changes in customers' requirements and manufacturing availability. Our ability to order products can carry lead times of between four and sixteen weeks; however, most of our business is characterized by short lead times and quick delivery schedules. As a result of these factors, we do not believe that backlog at any given time is a meaningful indicator of future sales.

We contract our wafer fabrication, assembly and testing to independent foundries and contractors, which enables us to focus on our design strengths, minimize fixed costs and capital expenditures and gain access to advanced manufacturing facilities. Our engineers work closely with our foundry partners and subcontractors to increase yields, lower manufacturing costs and assure quality.

Our primary foundry is Taiwan Semiconductor Manufacturing Company, or TSMC, which has manufactured integrated circuits for us since 1987. TSMC and Tower Semiconductor Ltd. are currently manufacturing our DVD, JPEG, DTV imaging and some of our mobile products. LSI Corporation is providing turn-key manufacturing for one high-end laser-printer product. Our independent foundries fabricate products for other companies and may also produce products of their own design. Our primary services company for assembly and testing is Advance Semiconductor Engineering Inc.

Most of our devices are currently fabricated using standard complementary metal oxide semiconductor process technology with 0.08 micron to 0.18 micron feature sizes. Most of our semiconductor products are currently being assembled by one of four independent contractors and tested by those contractors or other independent contractors.

We currently purchase products from all of our foundries under individually negotiated purchase orders. We do not currently have a long-term supply contract with TSMC, and therefore TSMC is 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 existing and potential competitors include many large domestic and international companies that have substantially greater finance, manufacturing, technology, marketing and distribution resources than we have.

Some of these competitors also have broader product lines and longer standing relationships with customers than we do. 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 Technology Inc., LSI Corporation, 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

Fujitsu, Mediatek, Novatech, 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), Freescale Semiconductor, Fujitsu, 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 Applied Micro Devices, Broadcom, M-Star, Mediatek, Renesas Technology and ST Microelectronics. Others who also participate in this market are ALi Corporation, Cheertek, Fujitsu, NEC, Pixelworks and Trident Microsystems. Competitors in the printer and multifunction peripheral space include Global Graphics, Marvell Semiconductor, Peerless Systems, Sigmatel Inc. and in-house captive suppliers.

We believe that our ability to compete successfully in the rapidly evolving markets for high performance audio, video and imaging technology depends on a number of factors, including the following:

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.

Historically, average unit selling prices (ASPs) in the semiconductor industry in general, and for our products in particular, have decreased over the life of a particular product. We expect that the ASPs of our products will continue to be subject to significant pricing pressures. In order to offset expected declines in the ASPs of our products, we seek to continually reduce the cost of our products and continue to integrate additional functions into our ICs. We intend to accomplish this by implementing design changes that integrate additional functionality, lower the cost of manufacturing, assembly and testing, by negotiating reduced charges by our foundries as, and if, volumes increase, and by successfully managing our manufacturing and subcontracting relationships. Since we do not operate our own manufacturing, assembly or testing facilities, we may not be able to reduce our costs as rapidly as companies that operate their own facilities. If we fail to introduce lower cost versions of our products in a timely manner or to successfully manage our manufacturing, assembly and testing relationships, our business would be harmed.

Our ability to compete successfully is dependent in part upon our ability to protect our proprietary technology and information. Although we rely on a combination of patents, copyrights, trademarks, trade secret laws and licensing arrangements to protect some of our intellectual property, we believe that factors such as the technological and creative skills of our personnel and the success of our ongoing product development efforts are more important in maintaining our competitive position. We

generally enter into confidentiality or license agreements with our employees, resellers, customers and potential customers and limit access to our proprietary information. We currently hold 311 issued patents worldwide, and have additional patent applications pending. Our intellectual property rights, if challenged, may not be upheld as valid, may not be adequate to prevent misappropriation of our technology, or may not prevent the development of competitive products. Additionally, we may not be able to obtain patents or other intellectual property protection in the future. In particular, the existence of several consortiums that license patents relating to the MPEG standard has created uncertainty with respect to the use and enforceability of patents implementing that standard. Furthermore, 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.

The semiconductor industry is characterized by vigorous protection and pursuit of intellectual property rights, which have resulted in significant and often protracted and expensive litigation. We or our foundries from time to time are notified of claims that we may be infringing patents or other intellectual property rights owned by third parties. We have been subject to intellectual property claims and litigation in the past. See Item 3—Legal Proceedings. We may be subject to additional claims and litigation in the future. In particular, given the uncertainty discussed above regarding patents relating to the MPEG standard, it is difficult for us to assess the possibility that our activities in the MPEG field may give rise to future patent infringement claims. Litigation by or against us relating to patent infringement or other intellectual property matters could result in significant expense to us and divert the efforts of our technical and management personnel, whether or not such litigation results in a determination favorable to us. In the event of an adverse result in any such litigation, we could be required to pay substantial damages, cease the manufacture, use and sale of infringing products, expend significant resources to develop non-infringing technology, discontinue the use of certain processes or obtain licenses to the infringing technology. Licenses may not be offered or the terms of any offered licenses may not be acceptable to us. If we fail to obtain a license from a third party for technology that it uses, we could incur substantial liabilities and be forced to suspend the manufacture of products, or the use by our foundries of certain processes.

We sell our Dolby technology enabled products under a perpetual, non-exclusive license from Dolby to sell products that incorporate the Dolby Digital algorithm. We are not required to pay license fees or royalties to Dolby under this agreement. Our customers enter into license agreements directly with Dolby, pursuant to which they pay royalties to Dolby. Under our agreement with Dolby, we may sell our Dolby Digital-based products only to customers who are licensees of Dolby. To date, most potential customers for our Dolby Digital-based products are licensees of Dolby. However, the failure or refusal of potential customers to enter into license agreements with Dolby in the future could harm our sales.

We have non-exclusive licenses from various third parties to sell our third party enabled products that incorporate the respective technologies. We are not required to pay royalties under the agreements. Under our agreements, we may sell such third party enabled products only to customers who are licensees of such third parties. We rely on our customers to enter into license agreements directly with the third parties pursuant to which they pay royalties and or license fees. The failure or refusal of potential customers to enter into license agreement with such third parties in the future could harm our sales.

As of December 31, 2007, we had 1,277 full-time and 144 part-time and contract employees, including 659 full-time, part-time and contract employees primarily involved in research and development activities, 588 in marketing and sales, 134 in finance, human resources, information

systems, legal and administration, and 40 in manufacturing control and quality assurance. We have 417 full-time employees and 80 part-time and contract employees based in Israel, primarily involved in engineering and research and development. We have 206 full-time employees and 14 part-time and contract employees at our facility in Sunnyvale, California, 140 full-time employees and 12 part-time and contract employees at our facility in Burlington Massachusetts. The remaining employees are located in our international offices in Canada, China, England, Germany, Hong Kong, India, Japan, Korea and Taiwan. We believe that our future success will depend in large part on our ability to attract and retain highly-skilled, engineering, managerial, sales and marketing personnel. Competition for such personnel is intense. Our employees are not represented by any collective bargaining unit, and we have never experienced a work stoppage. We believe that our employee relations are good.

The names of our executive officers and their ages as of December 31, 2007 are as follows:

NAME	AGE	POSITION
Levy Gerzberg, Ph.D	62	President, Chief Executive Officer and Director
Karl Schneider	53	Senior Vice President, Finance and Chief Financial Officer
Isaac Shenberg, Ph.D	57	Senior Vice President, Business and Strategic Development

Levy Gerzberg was a co-founder of Zoran in 1981 and has served as our President and Chief Executive Officer since 1988 and as a director since 1981. Dr. Gerzberg also served as our President from 1981 to 1984 and as our Executive Vice President and Chief Technical Officer from 1985 to 1988. Prior to co-founding Zoran, Dr. Gerzberg was Associate Director of Stanford University's Electronics Laboratory. Dr. Gerzberg holds a Ph.D in Electrical Engineering from Stanford University and an M.S. in Medical Electronics and a B.S. in Electrical Engineering from the Technion-Israel Institute of Technology in Haifa, Israel.

Karl Schneider joined Zoran as Corporate Controller in 1998 and was elected Vice President, Finance and Chief Financial Officer in 1998 and Senior Vice President, Finance and Chief Financial Officer in July 2003. From 1996 through 1997, Mr. Schneider served as Controller for the Film Measurement and Robotics and Integrated Technologies divisions of KLA-Tencor, a semiconductor equipment company. Mr. Schneider served as the Corporate Controller for SCM Microsystems, Inc. from 1995 to 1996, Controller for Reply Corporation from 1994 to 1995, Director of Finance for Digital F/X from 1992 to 1994 and Controller for Flextronics from 1987 through 1991. Mr. Schneider holds a B.S. in Business Administration from San Diego State University.

Isaac Shenberg has served as Senior Vice President, Business and Strategic Development since 1998 and previously as Vice President, Sales and Marketing from 1995 through 1998. From 1990 to 1995, Dr. Shenberg served as our Product Line Business Manager. Prior to joining Zoran, Dr. Shenberg was Images Processing Group manager and Electro Optics Department manager at Rafael, a leading Aerospace provider in Israel. Dr. Shenberg holds a Ph.D in Electrical Engineering from Stanford University and a B.S. and M.S. in Electrical Engineering from the Technion-Israel Institute of Technology in Haifa, Israel.

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 and derivative lawsuits 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 lawsuits have required us to expend significant management time and incur significant accounting, legal and other expenses totaling $7.9 million in 2007 and $5.8 million in 2006. 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 at the time of restatement. 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 inquiry by the United States Attorney's Office for the Northern District of California ("USAO") into our historical stock option practices is ongoing. We have cooperated with the USAO and intend to continue to do so. The period of time necessary to resolve this inquiry is uncertain, and we cannot predict the outcome of the inquiry or whether we will face additional government inquiries, investigations or other actions related to our historical stock option practices. This inquiry may require us to continue to expend significant management time and incur significant legal and other expenses, and could result in criminal actions against 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 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 has become time consuming and expensive and may 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 our 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 from 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. 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 December 31, 2007 there continued to be effective controls designed and in place to prevent or detect a material misstatement.

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:

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:

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. The recent emergence of a number of negative economic factors, including heightened fears of a recession, could lead to such a downturn. 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, 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 Technology Inc., LSI Corporation, 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 Fujitsu, Mediatek, Novatech, 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), Freescale Semiconductor, Fujitsu, 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 Applied Micro Devices, Broadcom, M-Star, Mediatek, Renesas Technology and ST Microelectronics. Others who also participate in this market are ALi Corporation, Cheertek, Fujitsu, NEC, Pixelworks and Trident Microsystems. Competitors in the printer and multifunction peripheral space include Global Graphics, Marvell Semiconductor, Peerless Systems, Sigmatel Inc. 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, and our principal assembly house. 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.

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:

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 2007, 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:

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 36 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 Canada, England, Germany, Hong Kong, India, Israel, Japan, Korea and Taiwan, 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 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 400 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.

In addition, 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 2007, one customer accounted for 13% of our total revenues, while sales to our ten largest customers accounted for 60% of our total revenues. In 2006, one customer accounted for 12% of our total revenues, and sales to our ten largest customers accounted for 58% 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, 2007 three customers accounted for approximately 11%, 11% 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 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, we have been subject to claims and litigation regarding alleged infringement of other parties' intellectual property rights, and we 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:

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 loss carryforwards, or NOLs, against taxable income in future periods. Our NOLs totaled approximately $141 million for federal and $32 million for state tax reporting purposes as of December 31, 2007. The Internal Revenue Code contains a number of provisions that limit the use of NOLs under certain circumstances. In 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:

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

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 are exposed to fluctuations in the market values of our portfolio investments and in interest rates.

At the end of fiscal 2007, we had $405.2 million in cash, cash equivalents and marketable securities. We invest our cash in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds, auction rate securities and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in U.S. dollars.

The Company's investments at December 31, 2007 include $85.4 million of high-grade auction rate securities primarily consisting of government guaranteed student loans. Auction rate securities are securities that are structured with short-term interest rates which periodically reset through auctions, typically within every 90 days. At the end of each reset period, investors can sell or continue to hold the securities at par. During February 2008, some of the auction rate securities failed to auction successfully due to market supply exceeding market demand. In the event of a failed auction, the notes continue to bear interest at a predetermined maximum rate based on the credit rating of notes as determined by one or more nationally recognized statistical rating organizations. The funds associated with failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the securities or the underlying securities have matured. As a result, the Company has classified all auction rate securities as long-term assets in the consolidated balance sheet as of December 31, 2007.

Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate debt securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or if the decline in fair value of our publicly traded equity investments and auction rate securities is judged to be other-than-temporary. We may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because any debt securities we hold are classified as "available-for-sale," no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity. Recent events in the subprime mortgage market and with auction rate securities could negatively impact our return on investment for these debt securities and thereby reduce the amount of cash and cash equivalents and long-term investments on our balance sheet.

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:

The market price of our common stock has fluctuated significantly since our initial public offering in 1995. Between January 1, 2007 and December 31, 2007, the closing sale price of our common stock, as reported on the Nasdaq Global Select Market, ranged from a low of $13.57 to a high of $26.46. The market price of our common stock is subject to significant fluctuations in the future in response to a variety of factors, including:

From time to time the stock market experiences 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.

Our executive offices and principal marketing, sales and product development operations are located in approximately 89,000 square feet of leased space in Sunnyvale, California, under a lease that expires in September 2016. A significant portion of our research and development and engineering facilities and our administration, marketing and sales operations are currently located in approximately

109,700 square feet of leased space in an industrial park in Haifa, Israel under a lease expiring in November 2016. We also lease facilities, primarily for sales, product development, and technical support, in Burlington, Massachusetts; Manchester, England; Dortmund, Germany; Tokyo, Japan; Seoul, Korea; Taipei, Taiwan and Shenzhen, Shanghai and Hong Kong, China. We believe that our current facilities are adequate for our needs for the foreseeable future and that, should it be needed, suitable additional space in each of the locations in which we operate will be available to accommodate expansion of our operations on commercially reasonable terms.

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. 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, among other things, 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, among other things, 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. On February 26, 2008, the parties reached an agreement in principle to settle the action. The settlement remains subject to court approval.

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, among other things, 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 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. Zoran intends to continue cooperating fully with investigations by the U.S. Attorney, or any other government regulator relating to historical stock option practices.

Company to ArcSoft in 2004. At that time, the Company also entered into a business arrangement with ArcSoft involving the licensing and grant of certain rights to ArcSoft related to a product then under development and related agreements regarding the continued development and commercialization of the product. On March 28, 2007, ArcSoft filed an answer denying liability under the notes and asserting various affirmative defenses. ArcSoft also filed a cross-complaint alleging fraud in the inducement of the business arrangement, fraudulent and negligent misrepresentation, breach of contract and of the implied covenant of good faith and fair dealing, and unjust enrichment and seeking monetary damages of more than $6,900,000. 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 various breach of contract claims against ArcSoft. On August 1, 2007, the Court denied the Company's application for a writ of attachment and its petition to compel arbitration of the dispute. On November 9, 2007, the parties held a mediation, which did not result in resolution of the litigation. Trial is currently scheduled to begin on 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.

We did not submit any matters to a vote of our security holders during the fourth quarter of the year ended December 31, 2007.

Item 5—Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded on the Nasdaq Global Select Market under the symbol "ZRAN".

The following table sets forth the high and low closing sales price of our common stock as reported on The Nasdaq Global Select Market for the periods indicated:

		High		Low
2006
	First Quarter	$	22.48	$	16.83
	Second Quarter	$	29.13	$	21.00
	Third Quarter	$	24.31	$	14.17
	Fourth Quarter	$	16.54	$	13.67
2007
	First Quarter	$	17.68	$	13.57
	Second Quarter	$	20.44	$	17.00
	Third Quarter	$	20.95	$	16.00
	Fourth Quarter	$	26.46	$	19.92

We have never paid cash dividends on our capital stock. It is our present policy to retain earnings to finance the growth and development of our business and, therefore, we do not anticipate paying any cash dividends in the foreseeable future.

Neither we nor any affiliated purchaser repurchased any of our equity securities in the fourth quarter of 2007.

The following selected consolidated financial data should be read in conjunction with the consolidated financial statements and the notes thereto included elsewhere herein.

	Year Ended December 31,
	2007		2006		2005	2004		2003
	(in thousands, except per share data)
STATEMENT OF OPERATIONS DATA:
Total revenues	$	507,361		$	495,805	$	395,758		$	378,864		$	216,962
Gross profit		271,079			269,545		209,586			152,403			85,797
Operating income (loss)		2,293			10,556		(29,879	)		(45,767	)		(75,729	)
Net income (loss)		66,186			16,328		(30,272	)		(48,108	)		(71,351	)
Basic net income (loss) per share	$	1.32		$	0.34	$	(0.68	)	$	(1.12	)	$	(2.15	)
Diluted net income (loss) per share	$	1.29		$	0.33	$	(0.68	)	$	(1.12	)	$	(2.15	)
Shares used in diluted per share calculations		51,404			50,099		44,267			42,788			33,231

Item 7—Management's Discussion and Analysis of Financial Condition and Results of Operations

This section and other parts of this Annual Report on Form 10-K contain forward-looking statements that involve risks and uncertainties. Forward-looking statements can also be identified by words such as "anticipates," "expects," "believes," "plans," "predicts," and similar terms. Forward-looking statements are not guarantees of future performance and the Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in "Item 1A—Risk Factors" above. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this report. The Company assumes no obligation to revise or update any forward-looking statements for any reason, except as required by law.

Our products consist of integrated circuits and related products used in DVD players, digital television, digital cameras and video editing systems. We 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 also provide high performance, low-power application processors, technology and products for the multimedia mobile phone market. We sell our products to original equipment manufacturers, or OEMs, that incorporate them into products for consumer and commercial applications.

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.

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.

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

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

In 2007, we had a one time tax benefit of $51.4 million recognized due to the release of the valuation allowance on deferred tax assets which we believe are more likely than not to be realized. 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 loss carryforwards 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.

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

employees holding Oren options. The acquisition was accounted for under the purchase method of accounting.

Following the completion of the acquisition, the results of operations of Oren have been included in our consolidated financial statements. In addition, we recorded retroactive losses under Accounting Principles Board Opinion 18 ("APB 18"), "The Equity Method of Accounting for Investments in Common Stock", to record the losses on investment of the prior 17% ownership of Oren Semiconductor, Inc. under the equity basis. Accordingly, our results of operations for the years ended December 31, 2007 and 2006 include Oren's operations for the full year; our results of operations for the year ended December 31, 2005 include Oren's operations between June 10, 2005 and December 31, 2005 and $218,000 representing our portion of the losses incurred by Oren between January 1, 2005 and June 10, 2005.

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.

This discussion and analysis of our financial condition and results of operations are based upon our consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America. The preparation of these financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses, and related disclosure of contingent assets and liabilities. On an on-going basis, we evaluate our estimates, including bad debt, inventories, investments, intangible assets and income taxes. We base these estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. The results of these estimates form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

We believe the following critical accounting policies require our most significant judgments and estimates used in the preparation of our consolidated financial statements:

The following table sets forth certain consolidated statement of operations data as a percentage of total revenues for the periods indicated and percentage changes from period to period:

Total revenues increased by $11.6 million, or 2.3%, to $507.4 million in 2007 from $495.8 million in 2006. Total revenues for the year ended December 31, 2006 included $35.8 million in revenues related to the litigation settlement that did not recur. Excluding the litigation settlement revenues, revenues for 2007 increased by $47.4 million compared to the same period in 2006. This increase was a result of a $29.4 million increase in the Consumer segment revenues and an $18.0 million increase in the Imaging segment revenues. The increase in Consumer segment revenues in 2007 was driven by an increase in revenues for Mobile products of $30.4 million or 19.9% offset by decreases in revenues of $0.6 million and $0.4 million for DVD and DTV products respectively. The increase in Imaging segment revenues in 2007 of $18.0 million or 24.0% was due to an increase in hardware product revenues of $12.2 million and an increase in software and other revenues of $5.8 million.

Hardware product revenues increased by $41.6 million, or 10.3%, to $445.4 million in 2007 from $403.7 million in 2006 reflecting increases of $29.4 million in the Consumer segment and $12.2 million

in the Imaging segment. The increase in both the Consumer and Imaging segment revenues were primarily driven by increased unit shipments. Within the Consumer segment, hardware product revenues increased $30.7 million for Mobile products and $0.8 million for DTV products, partially offset by a decrease of $2.1 million for DVD products. The increase in hardware product revenues for Mobile and DTV 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.

Software and other revenues increased by $5.7 million, or 10.2%, to $62.0 million in 2007 from $56.3 million in 2006 primarily due to a $5.8 million increase in Imaging segment revenues driven by a $4.8 million increase in royalty revenue.

Cost of hardware product revenues were $236.3 million in 2007 compared to $226.3 million in 2006. The increase in costs was primarily a result of the corresponding increase in hardware product revenues. As a percentage of hardware product revenues, hardware product costs were 53.1% in 2007 compared to 56.0% in 2006. The decrease in hardware product costs as a percentage of hardware product revenues in 2007 versus 2006 was associated with lower per unit product costs and a change in product mix as revenues from the lower margin DVD product line represented a smaller proportion of total hardware product revenue with a relative increase in revenue from the higher margin Mobile and Imaging product lines.

Research and development expenses increased to $113.1 million in 2007 from $99.1 million in 2006, an increase of $14.0 million or 14.2%. The increase in 2007 was primarily due to an increase from fluctuations based on the timing of tape-outs which include mask sets and engineering wafers and continued investments in research and development across all our segments.

Selling, general and administrative ("SG&A") expenses increased to $112.4 million in 2007 from $109.8 million in 2006, representing a 2.4% increase. This increase was primarily due to an increase in legal fees by $3.0 million incurred in connection with the ongoing stock option review and other litigation matters and continued increases in marketing and field application support expenses to support revenue growth in our Asia Pacific markets. SG&A expenses in 2006 included a $3.8 million provision for doubtful accounts to cover slow paying accounts.

Amortization expense decreased to $43.2 million in 2007 from $50.1 million in 2006, a decrease of $6.9 million or 13.7% as a portion of our intangible assets became fully amortized during the current year. At December 31, 2007, we had approximately $25.9 million in net intangible assets that we will continue to amortize on a straight line basis through 2010.

The increase in interest and other income in 2007 compared to 2006 reflect higher average cash and investment balances. Other income (loss) in 2007 included foreign currency remeasurement losses as a result of the decline in the value of the U.S. dollar in comparison to currencies in countries in which we operate as well as a write-down of a long-term equity investment in a private company by $2.0 million.

The tax benefit for the year ended December 31, 2007 of $49.8 million reflects a provision of $1.6 million and a benefit of $51.4 million from the release of the valuation allowance at December 31, 2007. We now believe that it is more likely than not that our deferred tax assets will be fully utilized in the future, and accordingly, we released the valuation allowance on those assets at year end. In the fourth quarter of 2007, we determined that the relative weight of positive and negative evidence now supports the conclusion that it is more likely than not that our deferred tax assets will be realized. As a result, the balance sheet now reflects $55.9 million of deferred tax assets. The offsetting benefit was allocated $4.1 million to decrease goodwill and $0.4 million to previously unbenefitted withholding taxes and $51.4 million to deferred tax benefit. The current provision of $1.6 million is primarily due to federal and foreign accrued liabilities. The tax provision for the year ended December 31, 2006 of $5.8 million included a one time charge of $4.3 million for tax expense related to litigation settlement. The remaining tax expense is related to the utilization of previously unbenefitted purchased NOLs which when utilized reduce goodwill and not tax expense along with statutory taxes in our non-U.S. subsidiaries.

Our effective income tax rate has benefited from the availability of previously unbenefitted NOLs 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. Our U.S. federal NOLs 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.

Total revenues increased by $100.0 million, or 25.3%, to $495.8 million in 2006 from $395.8 million in 2005. This increase was a result of a $110.2 million increase in Consumer segment revenues, partially offset by a $10.2 million decrease in the Imaging segment. Within the Consumer segment, license revenues related to the litigation settlement accounted for $35.8 million of the increase while the remaining increase was primarily a result of increase in hardware product revenues of $73.5 million. The decrease in Imaging segment revenues in 2006 was primarily due to a $9.3 million decrease in hardware product revenues due to decrease in unit shipments.

Hardware product revenues increased by $64.2 million, or 18.9%, to $403.7 million in 2006 from $339.5 million in 2005. The increase in hardware product revenues was driven by growth in Consumer segment product revenues. Within the Consumer segment, hardware product revenues increased primarily due to a $46.9 million increase in the Mobile product line and $31.0 million increase in the DTV product line, in each case driven by increased unit shipments offset by a reduction of $4.5 million in the DVD product line attributable to reductions in unit shipments and average selling prices.

Software and other revenues remained essentially unchanged at $56.3 million and $56.2 million in 2006 and 2005, respectively.

Cost of hardware product revenues were $226.3 million in 2006 compared to $186.2 million in 2005. The increase in costs was primarily a result of the corresponding increase in hardware product revenues. As a percentage of hardware product revenues, hardware product costs were 56.0% in 2006 compared to 54.8% in 2005. Hardware product costs for 2005 included adjustments resulting in a $9.4 million decrease in inventory. Excluding the benefit of the net reduction in the inventory allowance, hardware product costs as a percentage of hardware product revenues would have been

57.6% in 2005 with no significant change in 2006. The decrease in hardware product costs as a percentage of hardware product revenues in 2006 to 56.0% compared to the adjusted costs of 57.6% in 2005 reflected a change in product mix as revenues from the lower margin DVD product line represented a smaller proportion of total hardware product revenue with a relative increase in revenue from the higher margin Mobile and DTV product lines.

Research and development ("R&D") expenses increased to $99.1 million in 2006 from $89.8 million in 2005, an increase of 10.3%. The increase in 2006 was primarily due to stock-based compensation expenses of $5.5 million recorded in 2006 as a result of the adoption of SFAS 123(R), compared with stock-based compensation expense of $0.8 million in 2005 prior to the adoption of SFAS 123(R); the inclusion of the operations of Oren which was acquired in June 2005 for the full year in 2006 as well as continued investments in research and development across all of our segments.

Selling, general and administrative expenses increased to $109.8 million in 2006 from $95.2 million in 2005, representing a 15.4% increase. This increase was primarily due to stock-based compensation expenses of $11.3 million recorded in 2006 as a result of the adoption of SFAS 123(R), compared with stock-based compensation expense of $1.7 million in 2005 prior to the adoption of SFAS 123(R); $5.8 million of expenses in connection with the ongoing stock option review, continued increases in marketing and field application support expenses to support revenue growth in our Asia Pacific markets and the inclusion of the operations of Oren which was acquired in June 2005 for the full year in 2006. This increase was partially offset by the reduction of legal fees as a result of the completion of the Mediatek litigation.

Amortization of intangible assets decreased to $50.1 million in 2006 from $50.3 million in 2005. At December 31, 2006, we had approximately $69.2 million in net intangible assets acquired through the Oak, Emblaze and Oren acquisitions which we will continue to amortize on a straight line basis for various periods extending through 2010.

As a result of the adoption of SFAS 123(R) during the first quarter of 2006, we now record a charge for all stock-based compensation expenses as described in Note 2 to Notes to Consolidated Financial Statements and no longer record a separate charge for amortization of stock compensation resulting from business combinations. In 2005, we recorded charges of $1.5 million related to the amortization of stock compensation resulting from business combinations primarily as a result of stock options granted in connection with the Oak acquisition.

There were no charges recorded for in-process research and development during 2006. In 2005, approximately $2.7 million of the purchase price of Oren Semiconductor, Inc. was allocated to in-process research and development for projects which had not reached technical feasibility and had no alternative future use. Accordingly, this amount was immediately expensed upon the acquisition date. This amount was determined using management's estimates including consultation with an independent appraiser. At December 31, 2006, there have been no material variations from the underlying assumptions that were used in the original computation of the value of the acquired in-process research and development.

Interest income increased by $8.5 million to $11.1 million in 2006 compared to $2.6 million in 2005. The increase was a result of higher average cash and short term investment balances and the higher interest rates during 2006.

The effective tax rate differs from the U.S. statutory rate primarily due to utilization of previously unbenefitted net operating losses and State of Israel tax benefits on foreign earnings. The provision is primarily due to domestic income offset by previously unbenefitted purchased NOLs which when utilized reduce goodwill and not tax expense. For the year ended December 31, 2006, the Company reduced its income tax reserves by $2.1 million. This was due to an expiring statute of limitations and the settlement of a domestic income tax audit.

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 109, Accounting for Income Taxes ("SFAS 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 losses and continuing business uncertainty represent sufficient negative evidence which it was difficult for positive evidence to overcome under SFAS No. 109 and accordingly, a full valuation allowance was recorded. If the facts or estimates of future financial results were to change, increasing the likelihood of realizing the deferred tax assets, judgment would have to be applied to determine the amount of valuation allowance required in any given period.

At December 31, 2007, we had $97.4 million of cash and cash equivalents and $222.4 million of short-term investments. At December 31, 2007, we had $340.4 million of working capital.

Our operating activities generated cash of $94.9 million during 2007, primarily due to net income of $66.2 million and non-cash items such as amortization of $43.2 million, depreciation of $7.9 million and stock- based compensation expense of $13.9 million. Cash provided by operations also increased due to a $34.1 million increase in accounts payable; $7.8 million increase in accrued expenses and other liabilities due to timing of payments. These increases were partially offset by our deferred tax benefit of $51.9 million due to the release of the deferred tax valuation allowance, an increase in accounts receivable by $15.5 million due to increase in revenues; an increase in inventories by $3.9 million to meet the increasing demand for our products and an increase in prepaid expenses and other assets by $8.1 million.

Cash used in investing activities was $124.0 million during 2007, principally reflecting the net purchase of investments of $114.1 million. In addition we spent $9.9 million for the purchases of property and equipment.

Cash provided by financing activities was $26.4 million during 2007 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.

Our operating activities generated cash of $100.0 million during 2006, primarily due to net income of $16.3 million and non-cash items such as amortization of $50.1 million, depreciation of $9.4 million and stock-based compensation expense of $17.3 million. Cash provided by operations also increased due to a net decrease of $27.6 million in accounts receivable due to the timing of collections. These increases were partially offset by a $12.4 million increase in inventories to meet the increasing demand

for our products, net decrease in accounts payable, accrued expenses and other liabilities totaling $4.8 million and a $2.0 million increase in prepaid expenses and other assets.

Cash used in investing activities was $131.1 million during 2006, principally reflecting the net purchase of investments of $122.1 million. In addition we spent $9.0 million for purchases of property and equipment.

Cash provided by financing activities during 2006 was $52.3 million consisting 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 December 31, 2007 and 2006, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Accordingly, we are not exposed to the type of financing, liquidity, market or credit risk that could arise if we had engaged in such relationships.

We believe that our current balances of cash, cash equivalents and short-term investments, and anticipated cash flows 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:

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.

The following is a summary of fixed payments related to certain contractual obligations (in thousands):

The above table does not reflect unrecognized tax benefits of $26.5 million as a disallowance of these items would be primarily reflected as an adjustment to our deferred tax assets and would not result in a significant impact on our cash balance. Refer to Note 12 to the Consolidated Financial Statements for additional discussion on unrecognized tax benefits.

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

We invest in a variety of financial instruments, consisting principally of investments in commercial paper, money market funds, auction rate securities and highly liquid debt securities of corporations, municipalities and the United States government and its agencies. These investments are denominated in United States dollars. We do not maintain derivative financial instruments. We place our investments in instruments that meet high credit quality standards, as specified in our investment policy guidelines.

We account for our investment instruments in accordance with SFAS 115, Accounting for Certain Investments in Debt and Equity Securities. All of the cash equivalents and marketable securities are treated as "available-for-sale" under SFAS 115. Investments in both fixed rate and floating rate interest earning instruments carry a degree of interest rate risk. Fixed rate securities may have their market value adversely impacted due to a rise in interest rates, while floating rate securities may produce less income than expected if interest rates fall. Due in part to these factors, our future investment income may fall short of expectations due to changes in interest rates or we may suffer losses in principal if we are forced to sell securities that decline in market value due to changes in interest rates. However, because we classify our debt securities as "available-for-sale", no gains or losses are recognized due to changes in interest rates unless such securities are sold prior to maturity or declines in fair value are determined to be other than temporary. These securities are reported at fair value with the related unrealized gains and losses included in accumulated other comprehensive income, a component of stockholders' equity, net of tax.

Due mainly to the short-term nature of the major portion of our investment portfolio, 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.

We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales and arrangements with third-party manufacturers provide for pricing and payment in United States dollars, and, therefore, are not subject to exchange rate fluctuations. Increases in the value of the United States' dollar relative to other currencies would make our products more expensive, which could negatively impact our ability to compete. Conversely, decreases in the value of the United States'

dollar relative to other currencies could result in our suppliers raising their prices in order to continue doing business with us.

A portion of the cost of our operations, relating mainly to our personnel and facilities in Israel and in Asia are transacted in foreign currencies. To date, we have not engaged in any currency hedging activities, although we may do so in the future. Significant fluctuations in currency exchange rates could impact our business in the future.

In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of operations, of stockholders' equity and of cash flows present fairly, in all material respects, the financial position of Zoran Corporation and its subsidiaries at December 31, 2007 and December 31, 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company's management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and on the Company's internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.

As discussed in Note 2 to the consolidated financial statements, in fiscal 2006, the Company changed the manner in which it accounts for share-based compensation. As discussed in Note 12 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions.

A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

ZORAN CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

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

ZORAN CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

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

ZORAN CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

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

Zoran Corporation ("Zoran" or the "Company") was incorporated in California in December 1981 and reincorporated in Delaware in November 1986. Zoran develops and markets integrated circuits, integrated circuit cores and embedded software used by original equipment manufacturers, or OEMs, in digital audio and video products for commercial and consumer markets, digital television applications and digital imaging products. Current applications incorporating Zoran's products and IP include digital versatile disc, or DVD, players and recorders, digital cameras, professional and consumer video editing systems, digital speakers and audio systems, 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. The Company operates in two reportable segments, Consumer group and Imaging group.

Because the markets that the Company's customers serve are characterized by numerous new product introductions and rapid product enhancements, its operating results may vary significantly from quarter to quarter. During the final production of a mature product, its customers typically exhaust their existing inventories of the Company's products. Consequently, orders for its 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 the Company's ability to recover the lost sales from the discontinuation of the related mature product. The Company's customers also experience significant seasonality in the sales of their consumer products, which affects their orders of the Company's products. Typically, the second half of the calendar year represents a disproportionate percentage of sales for the Company's customers due to the holiday shopping period for consumer electronics products, and therefore, a disproportionate percentage of the Company's sales.

Average selling prices for the Company's products decline over relatively short time periods, while many of its manufacturing costs are fixed. When the Company's average selling prices decline, its revenues decline unless the Company is able to sell more units, and its gross margins decline unless it is able to reduce its manufacturing costs by a commensurate amount. The Company's operating results suffer when gross margins decline. The Company has experienced these problems, and the Company expects to continue to experience them in the future.

The Company does not operate any manufacturing facilities, and it relies on independent foundries to manufacture substantially all of its 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. The Company does not have long-term supply contracts with any of its suppliers, including its principal supplier, Taiwan Semiconductor Manufacturing Company, or TSMC and its principal assembly and test service provider Advance Semiconductor Engineering Inc. Therefore, TSMC and the Company's other suppliers are not obligated to manufacture products for the Company for any specific period, in any specific quantity or at any specified price, except as may be provided in a particular purchase order.

The Company anticipates that international sales will continue to account for a substantial majority of its total revenues for the foreseeable future. In addition, substantially all of its semiconductor products are manufactured, assembled and tested outside of the United States by independent foundries and subcontractors. The Company is 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 and the burdens of complying with a variety of foreign laws.

Economic, political or military events in a country where the Company make significant sales or has significant operations could harm its business.

The consolidated financial statements include the accounts of Zoran and all of its subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.

Certain prior period amounts have been reclassified to conform to the current period presentation.

Zoran has adopted accounting policies which are generally accepted in the industry in which it operates. The following is a summary of the Company's significant accounting policies.

The preparation of these financial statements in conformity with generally accepted accounting principles in the Unites States of America requires management to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. Actual results could differ from those estimates, although such differences are not expected to be material to the consolidated financial statements.

The majority of the Company's purchasing and sales transactions are denominated in U.S. dollars, which is considered to be the functional currency of the Company and its subsidiaries. The Company has not experienced material losses or gains as a result of currency exchange rate fluctuations and has not engaged in hedging transactions to reduce its exposure to such fluctuations. The Company may take action in the future to reduce its foreign exchange risk. Monetary assets and liabilities of the Company's foreign subsidiaries are remeasured into U.S. dollars from the local currency at rates in effect at period-end and non-monetary assets and liabilities are remeasured at historical rates. Revenues and expenses are remeasured at average rates during the period. In accordance with SFAS 52, gains and losses arising from the remeasurement of local currency financial statements are included in other income (loss), net. The Company recorded foreign currency remeasurement losses of $1,029,000, $712,000 and $336,000 for each of the years ended December 31, 2007, 2006 and 2005, respectively.

The Company's policy is to recognize revenue from product sales upon shipment, provided that persuasive evidence of an arrangement exists, the price is fixed and determinable, collectibility is reasonably assured and legal title and risk of ownership has transferred. A provision for estimated

future returns and potential warranty liability is recorded at the time revenue is recognized. Warranty expenses in 2007, 2006 and 2005, were immaterial. Development revenue under development contracts is recognized as the services are performed based on the specific deliverables outlined in each contract. Amounts received in advance of performance under contracts are recorded as deferred revenue and are recognized when the Company's obligations have been met. Costs associated with development revenues are included primarily in research and development expenses. Revenue resulting from the licensing of the Company's technology is recognized when significant contractual obligations have been fulfilled and the customer has indicated acceptance. Periodic service and maintenance fees which provide customers access to technical support and minor enhancements to licensed releases are recognized ratably over the service or maintenance period. Royalty revenue is recognized in the period licensed sales are reported to the Company which typically ranges between one month to one quarter in arrears. Revenue from litigation settlement is recognized in accordance with the terms of the agreement when actual cash payments are received.

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 year ended December 31, 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.

All highly liquid investments purchased with an original maturity of 90 days or less are considered to be cash equivalents.

All of the Company's investments in marketable securities are classified as available-for-sale and, therefore, are reported at fair value with unrealized gains and losses, net of related tax, if any, included as accumulated other comprehensive income (loss), a component of stockholders' equity. Gains and losses realized upon sales of all such securities are reported in other income. See Note 3.

When the fair value of an investment declines below its amortized cost, the Company considers all available evidence to evaluate whether an other-than-temporary decline in value has occurred. Among other things, the Company considers the duration and extent to which the market value has declined relative to the cost basis, the economic factors influencing the markets, the relative performance of the investee and its near-term prospects.

At December 31, 2007 and 2006, the Company's marketable securities included corporate debt, U.S. government securities, auction rate securities, foreign bonds, municipal bonds and marketable equity securities. See Note 3.

Other assets and long-term investments also include notes receivable under convertible promissory notes and non marketable equity investments that totaled to $2,000,000 and $4,235,000 at December 31, 2007 and 2006, respectively. The Company records an impairment charge when the fair value declines below its cost basis. In making this determination the Company considers all available evidence including the historical and projected financial performance and recent funding events which are ascertained from an investee. The Company recorded an impairment charge of $2,000,000 in 2007 and $942,000 in 2006. There were no such charges in 2005.

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash and cash equivalents, investments in marketable debt securities and trade accounts receivable. The Company places its cash in banks and cash equivalents consist primarily of certificates of deposit and commercial paper. The Company, by policy, limits the amount of its credit exposure through diversification and restricting its investments to highly rated securities. Individual securities are limited to comprising no more than 10% of the portfolio value at the time of purchase. Highly rated securities are defined as having a minimum Moody or Standard & Poor's rating of A2 or A respectively. The average maturity of the portfolio shall not exceed 24 months. The Company has not experienced any significant losses on its cash equivalents or short-term investments.

The Company markets integrated circuits and technology to manufacturers and distributors of electronic equipment primarily in North America, Europe and the Pacific Rim. The Company performs ongoing credit evaluations of its customers' financial condition and limits the amount of credit extended when deemed necessary, but generally does not require collateral. Management believes that any risk of loss is significantly reduced due to the diversity of its customers and geographic sales areas. As of December 31, 2007, three customers accounted for approximately 11%, 11% and 10% of the net accounts receivable balance, respectively. As of December 31, 2006, four customers accounted for approximately 13%, 12%, 10% and 10% of the net accounts receivable balance, respectively.

Inventories are stated at the lower of standard cost (which approximates actual cost on a first-in, first-out basis) or market. Market is based on estimated net realizable value. The Company writes down inventories to net realizable value based on forecasted demand and market conditions. Inventory write-downs are not reversed and permanently reduce the cost basis of the affected inventory until such inventory is sold or scrapped.

Property and equipment are recorded at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets, which are generally three to five years for computer equipment, five years for furniture, machinery and equipment and three years for software. Leasehold improvements are amortized on a straight-line basis over the shorter of the estimated useful lives of the assets or the remaining term of the lease.

In accordance with SFAS 142 Goodwill and Other Intangible Assets ("SFAS 142") goodwill is not amortized. The Company monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable. The Company has three reporting units.

Other intangible assets were recorded in connection with the acquisitions of Oak Technology, Inc., Emblaze Semiconductor, Ltd. and Oren Semiconductor, Inc. and are amortized on a straight-line basis over the estimated periods of benefit, which range between two and five years.

The Company evaluates the recoverability of its long-lived assets, other than goodwill, whenever events or changes in circumstance indicate the carrying amounts of the assets may not be recoverable. The Company evaluates these assets by comparing expected undiscounted cash flows to the carrying value of the related assets. If the expected undiscounted cash flows are less than the carrying value of the assets, the Company recognizes an impairment charge based on the fair value of the assets. To date, the Company has not recorded any impairment charges against the value of its long-lived assets.

The fair value of a financial instrument is the amount at which the instrument could be exchanged in a current transaction between willing parties. The carrying amounts for cash and cash equivalents, short-term investments, accounts receivable, accounts payable and accrued liabilities approximate their respective fair values because of the short-term maturity of these items.

The Company follows the liability method of accounting for income taxes which requires recognition of deferred tax liabilities and assets for the expected future tax consequence of temporary differences between the financial statement carrying amounts and the tax basis of assets and liabilities.

The Company's effective income tax rate has benefited from the availability of previously unbenefitted net operating losses which the Company has utilized for U.S. federal income tax purposes and by the Company's 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 the Company's operations in Israel. The Company's U.S. federal net operating losses expire at various times between 2017 and 2024, and the benefits from the Company's subsidiary's Approved Enterprise status expire at various times beginning in 2008.

Realization of deferred tax assets is based on the Company's ability to generate sufficient future taxable income. As of December 31, 2007, historical operating income and projected future profits represent sufficient positive evidence that the Company's deferred tax assets will more likely than not be realized and accordingly, the valuation allowance has been released.

In accordance with SFAS 128, Zoran reports Earnings Per Share ("EPS"), both basic and diluted, on the consolidated statement of operations. Basic EPS is based upon the weighted average number of common shares outstanding. Diluted EPS is computed using the weighted average common shares outstanding plus any potential common stock, except when their effect is anti-dilutive. Potential common stock includes common stock issuable upon the exercise of stock options, employee stock purchase plan and restricted stock units. See Note 11.

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

Prior to the adoption of SFAS 123(R), the Company provided the disclosures required under SFAS 123, as amended by SFAS 148, Accounting for Stock-Based Compensation—Transition and Disclosures.

Had compensation cost for the Company's option and stock purchase plans been determined based on the fair value at the grant dates, as prescribed in SFAS 123, the Company's net loss and net loss per share for the year ended December 31, 2005 would have been as follows (in thousands, except per share data):

		Year Ended December 31, 2005
Net loss		$	(30,272	)
Adjustments:
	Stock-based compensation expense included in net loss		4,455
	Stock-based compensation expense determined under the fair value method		(28,262	)

Pro forma net loss		$	(54,079	)

Pro forma net loss per share:
	Basic	$	(1.22	)

	Diluted	$	(1.22	)

Net loss per share:
	Basic	$	(0.68	)

	Diluted	$	(0.68	)

For purposes of this pro forma disclosure, the value of the options were estimated using the accelerated amortization method under FASB issued Interpretation No. 28 ("FIN No. 28"), over the respective vesting periods of the awards. Due to the valuation allowance provided on the Company's deferred tax assets during the period presented, the Company has not recorded any tax benefits attributable to pro forma stock-based compensation.

The Company provides information regarding the methodology and assumptions used for the above pro forma disclosure in Note 9.

During the years ended December 31 2007 and 2006, the Company recorded stock-based compensation expense for awards granted prior to but not yet vested as of January 1, 2006 as if the fair value method required for pro forma disclosure under SFAS 123 were in effect for expense recognition purposes adjusted for estimated forfeitures. For these awards, the Company has continued to recognize compensation expense using the accelerated amortization method. For stock-based awards granted after January 1, 2006, the Company recognized compensation expense based on the grant date fair value required under SFAS 123(R). For these awards, the Company recognized compensation expense using a straight-line amortization method. As SFAS 123(R) requires that stock-based compensation expense be based on awards that are ultimately expected to vest, estimated stock-based compensation for the years ended December 31, 2007 and 2006 has been reduced for estimated forfeitures. The adoption of SFAS 123(R) resulted in a one-time cumulative benefit of $314,000 in 2006 related to unvested awards for which compensation expense had already been recorded.

The following table summarizes stock-based compensation expense related to employee stock options, employee stock purchases and restricted stock unit grants for the years ended December 31, 2007 and 2006 as recorded in accordance with SFAS 123(R) (in thousands):

		Year ended December 31,
		2007		2006
Cost of hardware product revenues		$	447	$	526
Research and development			4,913		5,509
Selling, general and administrative			8,571		11,259

	Total costs and expenses	$	13,931	$	17,294

SFAS 131, Disclosure about Segments of an Enterprise and Related Information ("SFAS 131"), establishes standards for the reporting by public business enterprises of information about reportable segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the manner in which management organizes the reportable segments within the Company for making operational decisions and assessments of financial performance. The Company's chief operating decision-maker is considered to be the Chief Executive Officer.

The Company's products are based on highly integrated application-specific integrated circuits 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.

Comprehensive income (loss) is defined as the change in equity of a business enterprise during a period from transactions and other events and circumstances from non-owner sources.

		Year ended December 31,
		2007			2006		2005
Net income (loss)		$	66,186		$	16,328	$	(30,272	)
	Change in unrealized gain (loss) on investments		(3,243	)		1,181		1,668

Total comprehensive income (loss)		$	62,943		$	17,509	$	(28,604	)

The components of accumulated other comprehensive income (loss) as of December 31, 2007, 2006 and 2005 consisted of the unrealized gain (loss) on marketable securities, net of related taxes.

In December 2007, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standard ("SFAS") 141 (revised 2007), Business Combinations, ("SFAS 141R"). SFAS 141R establishes principles and requirements for how the acquirer of a business recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non controlling interest in the acquiree. The statement also provides guidance for recognizing and measuring the goodwill acquired in the business combination and determines what information to disclose to enable users of the financial statement to evaluate the nature and financial effects of the business combination. The provisions of SFAS 141R are effective for the Company for fiscal years beginning January 1, 2009. 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 Emerging Issues Task Force 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.

In February 2007, FASB issued SFAS 159, The Fair Value Option for Financial Assets and Financial Liabilities ("SFAS 159"). This statement expands the standards under SFAS 157, Fair Value Measurements ("SFAS 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 157. The provisions of SFAS 159 are effective for the Company for fiscal years beginning January 1, 2008. The Company is evaluating the impact of the provisions of this statement on its consolidated financial position, results of operations and cash flows.

In September 2006, the FASB issued SFAS 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 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.

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

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

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

	Cost		Estimated Fair Value
Less than 1 year	$	80,499	$	80,408
Due in 1 to 2 years		87,321		87,686
Due in 2 to 5 years		52,224		52,488
Greater than 5 years*		85,350		85,350

Total fixed income securities	$	305,394	$	305,932

The Company's investments at December 31, 2007 also include high-grade auction rate securities primarily consisting of government guaranteed student loans. Auction rate securities are securities that are structured with short-term interest rates which periodically reset through auctions, typically within every 90 days. At the end of each reset period, investors can sell or continue to hold the securities at par. During February 2008, some of the auction rate securities failed to auction successfully due to market supply exceeding market demand. In the event of a failed auction, the notes continue to bear interest at a predetermined maximum rate based on the credit rating of notes as determined by one or more nationally recognized statistical rating organizations. The funds associated with failed auctions will not be accessible until a successful auction occurs, a buyer is found outside of the auction process, the issuers redeem the securities or the underlying securities have matured. As a result, the Company has classified all auction rate securities as long-term assets in the consolidated balance sheet as of December 31, 2007.

Gross realized gains on sales of marketable securities were $809,000; $2,398,000 and $143,000 in 2007, 2006 and 2005, respectively. Gross realized losses on sales of marketable securities were $82,000; $0 and $287,000 in 2007, 2006 and 2005, respectively.

Interest income on cash and marketable securities was $16,511,000; $11,057,000 and $2,593,000 for the years ended December 31, 2007, 2006 and 2005, respectively.

	December 31,
	2007			2006
Accounts receivable:
Trade	$	67,413		$	51,905
Less: allowance for doubtful accounts		(9,193	)		(9,265	)

	$	58,220		$	42,640

	December 31,
	2007		2006
Inventory:
Purchased parts and work in process	$	28,498	$	18,748
Finished goods		20,494		26,296

	$	48,992	$	45,044

	December 31,
	2007			2006
Property and equipment:
Computer equipment	$	15,467		$	13,992
Office equipment and furniture		4,257			4,079
Machinery and equipment		14,821			12,910
Software		28,252			29,397
Building and leasehold improvements		8,115			6,157

		70,912			66,535
Less: accumulated depreciation and amortization		(53,276	)		(50,862	)

	$	17,636		$	15,673

	December 31,
	2007		2006
Accrued expenses and other liabilities:
Accrued payroll and related expenses	$	25,979	$	19,873
Accrued royalties		2,367		3,134
Income taxes payable		3,105		7,579
Deferred revenue		4,217		4,360
Other accrued liabilities		8,300		11,136

	$	43,968	$	46,082

For each of the years ended December 31, 2007, 2006 and 2005, the Company performed the annual analysis and concluded that goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value, including goodwill.

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

Changes in the carrying amount of goodwill for the year ended December 31, 2007 are as follows (in thousands):

	Amount
Balance at December 31, 2005	$	182,662
Adjustment to goodwill*		(8,403	)

Balance at December 31, 2006		174,259
Adjustment to goodwill*		(5,568	)

Balance at December 31, 2007.	$	168,691

	December 31, 2007		December 31, 2006
Consumer	$	164,494	$	169,060
Imaging		4,197		5,199

	$	168,691	$	174,259

The Company is a party to certain research and development agreements with the Chief Scientist in Israel's Ministry of Industry and Trade Department (the "Chief Scientist") and the Israel-United States Binational Industrial Research and Development Foundation ("BIRDF"), which fund up to 50% of incurred project costs for approved products up to specified contract maximums. The Company is not obligated to repay funding regardless of the outcome of its development efforts; however, these agreements require the Company to use its best efforts to achieve specified results and require the Company to pay royalties at rates of 3% to 5% of resulting products sales, and up to 30% of resulting license revenues, up to a maximum of 100% to 150% of the total funding received. Reported research and development expenses incurred in Israel are net of these grants, which fluctuate from period to period. The Company received $27,000 as grants in 2007. There were no grant receipts in 2006 and 2005.

The Company has generated a portion of its total revenues from development contracts, primarily with key customers. The Company classifies costs related to these development contracts as research and development expenses. The Company is not obligated to repay funding regardless of the outcome of its development efforts; however, the agreements require the Company to use its best efforts to achieve specified results as per the agreements. The Company retains ownership of the intellectual property developed under the contracts; however, some contracts limit the product markets in which the Company may directly sell the developed product. Revenues generated under these contracts were $1,134,000 in 2007, $2,713,000 in 2006 and $3,193,000 in 2005. In addition, from time to time, the Company enters into non-refundable joint development projects in which the Company's customers reimburse the Company for a portion of our development costs. The Company records such reimbursement of development costs as an offset to research and development expenses as the Company retains ownership of the intellectual property developed by it under these development arrangements. During 2007, 2006 and 2005, the Company received approximately $1,800,000; $370,000 and $1,213,000 in such reimbursements.

From time to time, the Company may have certain contingent liabilities that arise in the ordinary course of its business activities. The Company accrues contingent liabilities when it is probable that future expenditures will be made and such expenditures can be reasonably estimated. In the opinion of management, there are no pending claims of which the outcome is expected to result in a material adverse effect in the financial position, results of operations or cash flows of the Company.

The Company rents facilities under various lease agreements expiring through 2017. Rent expense for 2007, 2006 and 2005 totaled approximately $6,771,000, $5,394,000 and $5,566,000, respectively. The Company also entered into a time based license agreement for the right to use certain intellectual property. Future minimum lease and license payments required under non-cancelable agreements at December 31, 2007 are as follows: (in thousands)

Year ending December 31,	Amount
2008	$	8,345
2009		6,558
2010		6,000
2011		6,097
2012		4,571
Thereafter		18,876

Total	$	50,447

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. It is not possible for the Company to quantify the extent of the potential liability, if any.

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.

Zoran Corporation v. ArcSoft, Inc. 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 $4,000,000 in principal under four separate convertible promissory notes, together with accrued interest thereon in the amount of approximately $528,000. The notes represent amounts loaned by the Company to ArcSoft in 2004. At that time, the Company also entered into a business arrangement with ArcSoft involving the licensing and grant of certain rights to ArcSoft related to a product then under development and related agreements regarding the continued development and commercialization of the product. On March 28, 2007, ArcSoft filed an answer denying liability under the notes and asserting various affirmative defenses. ArcSoft also filed a cross-complaint alleging fraud in the inducement of the business arrangement, fraudulent and negligent misrepresentation, breach of contract and of the implied covenant of good faith and fair dealing, and unjust enrichment and seeking monetary damages of more than $6,900,000. 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 various breach of contract claims against ArcSoft. On August 1, 2007, the Court denied the Company's application for a writ of attachment and its petition to compel arbitration of the dispute. On November 9, 2007, the parties held a mediation, which did not result in resolution of the litigation. Trial is currently scheduled to begin on July 7, 2008.

The Company's 1993 Stock Option Plan (the "1993 Option Plan") was adopted by the Board of Directors of the Company and approved by the stockholders of the Company in July 1993. A total of 7,755,000 shares of common stock were reserved for issuance under the 1993 Option Plan. The 1993 Option Plan provided for grants of options to employees, non-employee directors and consultants. The 1993 Stock Option Plan expired during 2003 and no future shares will be granted under this plan. The option price for shares granted under the 1993 Option Plan was typically equal to the fair market value of the common stock at the date of grant.

Generally, options granted under the 1993 Option Plan are fully exercisable on and after the date of grant, subject to the Company's right to repurchase from an optionee, at the optionee's original per share exercise price, any unvested shares which the optionee has purchased and holds in the event of the termination of the optionee's employment, with or without cause. The Company's right lapses as shares subject to the option become vested. Such shares generally vest in monthly installments over two or four years following the date of grant (as determined by the Compensation Committee of the Board of Directors), subject to the optionee's continuous service. Options expire ten years from the date of grant and an option shall generally terminate three months after termination of employment.

The Company's 2000 Nonstatutory Stock Option Plan (the "2000 Option Plan") was adopted by the Board of Directors of the Company in October 2000. A total of 450,000 shares of preferred stock were initially reserved for issuance under the 2000 Option Plan. The options to purchase preferred stock automatically converted to options to purchase common stock upon the amendment of the Company's certificate of incorporation to affect an increase in the number of authorized shares of common stock to 55,000,000 in October 2000. A total of 13,325,000 shares of common stock were reserved for issuance under the 2000 Option Plan. The 2000 Option Plan provided for grants of options to employees or consultants. The 2000 Option Plan was modified in 2001 to allow for exercisability of stock options ahead of vesting subject to the Company's right to repurchase the associated stock at the option exercise price lapsing during the course of original vesting schedule. The option price for shares granted under the 2000 Option Plan was typically equal to the fair market value of the common stock at the date of grant. Options expire ten years from the date of grant and the right to exercise an option generally terminates three months after termination of employment. The 2000 Stock Option Plan was terminated in 2005 and was replaced by the 2005 Equity Incentive Plan.

The Company's Outside Directors Stock Option Plan (the "1995 Directors Plan") was adopted by the Company's Board of Directors in October 1995, and was approved by its stockholders in December 1995. A total of 525,000 shares of Common Stock were reserved for issuance under the 1995 Directors Plan. The 1995 Directors Plan provided for the grant of nonstatutory stock options to nonemployee directors of the Company. The 1995 Directors Plan provided that each new nonemployee director would automatically be granted an option to purchase 30,000 shares on the date the optionee first became a nonemployee director (the "Initial Grant"). Thereafter, on the date immediately following each annual stockholders' meeting, each nonemployee director who was reelected at the meeting to an additional term was granted an additional option to purchase 15,000 shares of Common Stock if, on

such date, he or she had served on the Company's Board of Directors for at least six months (the "Annual Grant"). Initial Grants were exercisable in four equal annual installments, and each Annual Grant became exercisable in full one year after the date of grant, subject to the director's continuous service. The exercise price of all stock options granted under the 1995 Directors Plan was equal to the fair market value of the Company's Common Stock on the date of grant. Options granted under the 1995 Directors Plan have a term of ten years. This plan was terminated in July 2005 and was replaced by the 2005 Outside Directors Equity Plan.

The 2005 Equity Incentive Plan (the "2005 Plan") was adopted by the Board of Directors in May 2005 and replaced the 1993 Stock Option Plan, which expired in 2003, and the 2000 Nonstatutory Stock Option Plan, which was terminated by the Board of Directors upon stockholder approval of the 2005 Plan in July 2005. A total of 4,556,663 shares of the Company's common stock is authorized for issuance pursuant to awards granted under the 2005 Plan. Such awards may include stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, deferred stock units and other stock-based or cash-based awards. The 2005 Plan is generally administered by the Compensation Committee of the Board of Directors and has a term of 10 years. Participation in the 2005 Plan is limited to employees and consultants of Zoran and its subsidiaries and other affiliates.

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.

Except with respect to 5% of the number of shares authorized under the 2005 Plan, awards of restricted stock, restricted stock units, performance shares, performance units and other full value awards granted under the 2005 Plan generally must have service-based vesting schedules of at least three years or a performance period of at least 12 months. However, restricted stock or restricted stock units issued pursuant to a stockholder-approved option exchange program which vest based on service must have a vesting schedule of at least two years. Performance share and performance unit awards vest to the extent that pre-established performance goals based on one or more measures of business and financial performance authorized by the 2005 Plan are attained during a performance period established by the Compensation Committee. The grant or vesting of other types of awards under the 2005 Plan may similarly be based on the attainment of one or more such performance goals. The 2005 Plan provides that the number of shares remaining available for issuance will be reduced by 1.3 shares for each one share of Zoran common stock subject to a full value award granted under the 2005 Plan.

At December 31, 2007, 2,282,750 shares of the Company's common stock were available for the grant of the options and other awards under the 2005 Plan, subject to the provisions described above that reduce the number of shares available for full value awards.

The 2005 Outside Directors Equity Plan (the "2005 Directors Plan") was adopted by the Board of Directors in May 2005 and replaced the 1995 Outside Directors Stock Option Plan, which was terminated by the Board of Directors upon stockholder approval of the 2005 Directors Plan in July

2005. A total of 600,000 shares of the Company's common stock are reserved for issuance pursuant to awards granted under the 2005 Directors Plan. Such awards may include stock options, stock appreciation rights, restricted stock units and deferred stock units. The 2005 Directors Plan is generally administered by the Board of Directors and has a term of 10 years. Participation in the 2005 Directors Plan is limited to non-employee members of the Zoran Board of Directors ("outside directors"). The 2005 Directors Plan provides that the number of shares remaining available for issuance will be reduced by 1.3 shares for each one share of Zoran common stock subject to a full value award granted under the 2005 Directors Plan.

Awards under the 2005 Directors Plan are granted by the Board of Directors to all outside directors on a periodic, nondiscriminatory basis within limits prescribed by the 2005 Directors Plan. Subject to appropriate adjustment for any change in the Company's capital structure, awards granted to any outside director in any fiscal year may not exceed 20,000 shares, increased by one or more of the following: 40,000 shares upon an outside director's initial election, 10,000 shares for service as Chairman of the Board or Lead Director, 5,000 shares for service on a Board committee as chairman and 2,500 shares for service on a Board committee other than as chairman. Stock options, stock appreciation rights, restricted stock units and deferred stock units granted under the Directors Plan are generally subject to terms substantially similar to those applicable to the same type of award granted under the 2005 Plan.

At December 31, 2007, 300,000 shares of the Company's common stock were available for the grant of the options and other awards under the 2005 Directors Plan, subject to the provisions described above that reduce the number of shares available for full value awards.

The following table summarizes the Company's stock option activity for the years ended December 31, 2007, 2006 and 2005. The weighted average exercise price for each category presented is also shown in the table below:

	Shares Underlying Options Outstanding		Weighted Average Exercise Price
Balances, December 31, 2004	12,845,757		$	17.06
Granted	2,296,315		$	11.63
Exercised	(555,106	)	$	9.26
Canceled	(1,631,381	)	$	17.95

Balances, December 31, 2005	12,955,585		$	16.32
Granted	363,065		$	21.13
Exercised	(3,683,846	)	$	13.53
Canceled*	(1,538,460	)	$	22.75

Balances, December 31, 2006	8,096,344		$	16.58
Granted	1,467,890		$	20.33
Exercised	(1,688,257	)	$	13.84
Canceled	(172,906	)	$	15.41

Balances, December 31, 2007	7,703,071		$	17.92

Significant option groups outstanding as of December 31, 2007 and the related weighted average exercise price and contractual life information, are as follows:

As of December 31, 2007, the Company had 7,314,999 shares fully vested and expected to vest, after estimated forfeitures, with a remaining contractual life of 6.11 years, weighted average exercise price of $17.92 and aggregate intrinsic value of $39,144,000.

The weighted average grant date fair value of options, as determined under SFAS 123(R), granted during the years ended December 31, 2007 and 2006 was $11.70 and $11.46 per share, respectively. The weighted average grant date fair value of options granted during the year ended December 31, 2005 as defined by SFAS 123 was $6.62 per share.

The aggregate intrinsic value in the table above represents the total pretax intrinsic value, based on the Company's closing stock price of $22.51 as of December 31, 2007, which would have been received by the option holders had all option holders exercised their options as of that date. The total number of shares of common stock underlying in-the-money options exercisable as of December 31, 2007 was 4,062,000.

The total intrinsic value of options exercised during the year ended December 31, 2007 was $16,062,000. The total cash received from employees as a result of employee stock option exercises during the year ended December 31, 2007 was approximately $23,316,000. In connection with these exercises, the Company did not realize any tax benefit due to the valuation allowance on its deferred tax assets which was not released until the end of the year.

As of December 31, 2007, the Company had $14,805,000 of unrecognized stock-based compensation cost related to stock options after estimated forfeitures, which are expected to be recognized over an estimated period of 2.25 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 were eligible for cash bonuses in the aggregate amount of $423,000 to compensate them for the higher per-share exercise prices. The cash bonuses were paid on January 4, 2008 and were accrued as of December 31, 2007. The Company recorded $120,000 as expense in 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.

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

	Stock Option Plans		Stock Purchase Plan
	2007		2006		2005		2007		2006		2005
Average expected term (years)	5.4		5.7		3.9		1.27		1.25		1.25
Expected volatility	60	%	70	%	68	%	46	%	57	%	46	%
Risk-free interest rate	3.8% to 4.8	%	4.6% to 5.0	%	3.8% to 4.4	%	4.9	%	2.3	%	2.9% to 4.3	%
Dividend yield	0	%	0	%	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: The Company uses 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 voluntary termination behavior based on actual historical information.

Restricted shares and restricted stock units are granted under the 2005 Plan. As of December 31, 2007, there was $155,000 of total unrecognized stock-based compensation expense related to restricted shares and restricted stock units. This cost is expected to be recognized over the vesting period of two to four years.

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

	Outstanding Restricted Shares and Stock Units		Weighted-average grant-date fair value
Balances, December 31, 2005	65,333		$	13.59
Granted	197,433		$	21.56
Released	(64,986	)	$	19.56
Forfeited	(8,064	)	$	21.56

Balances, December 31, 2006	189,716		$	19.50
Granted	5,000		$	20.31
Released	(101,328	)	$	19.95
Forfeited	(16,043	)	$	21.56

Balances, December 31, 2007	77,345		$	18.53

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. During the years ended December 31, 2007 and 2006, 184,495 and 263,349 shares were purchased by employees under the terms of the plan agreements at a weighted average price of $16.75 and $9.16 per share, respectively. As of December 31, 2007, 2,126,952 shares were reserved and available for issuance under this plan.

The Company maintains a 401(k) Plan that covers substantially all of the Company's U.S. employees. Participants may elect to contribute a percentage of their compensation to this plan, up to the statutory maximum amount prescribed by the Internal Revenue Code. The Company has the ability to make a discretionary matching contribution to the 401(k) Plan based on a uniform percentage of the employee's eligible contribution up to a maximum employer match of $2,000 per year per employee. Approximately $519,000, $525,000 and $235,000 in matching contributions were recorded during 2007, 2006 and 2005, respectively.

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 long-term investments. The severance pay expenses (benefit) for the years ended December 31, 2007, 2006 and 2005 were $(3,000), $979,000 and $645,000, respectively.

	Year Ended December 31,
	2007			2006			2005
Accrued severance	$	13,251		$	11,052		$	7,690
Less: amount funded		(12,457	)		(9,702	)		(6,404	)

Unfunded portion, net accrued severance pay	$	794		$	1,350		$	1,286

The following is a reconciliation of the numerators and denominators of the basic and diluted net income (loss) per share computations for the periods presented (in thousands except per share amounts):

		Year ended December 31,
		2007		2006		2005
Net income (loss)		$	66,186	$	16,328	$	(30,272	)
Shares:
	Weighted average shares outstanding		49,981		48,353		44,267
	Effect of dilutive options, ESPP and restricted stock units		1,423		1,746		—

	Dilutive weighted average shares		51,404		50,099		44,267

Net income (loss) per share:
	Basic	$	1.32	$	0.34	$	(0.68	)

	Diluted	$	1.29	$	0.33	$	(0.68	)

For the years ended December 31, 2007, 2006 and 2005 outstanding options and restricted stock units totaling 3,356,000, 3,086,000 and 13,000,000 shares, respectively, were excluded from the calculation of diluted net income (loss) per share as the inclusion of such shares would have had an anti-dilutive effect.

The components of income (loss) before income taxes are as follows (in thousands):

		December 31,
		2007			2006			2005
Current:
	Domestic	$	17,941		$	(754	)	$	(49,313	)
	Foreign		(1,590	)		22,844			21,397

		$	16,351		$	22,090		$	(27,916	)

		December 31,
		2007			2006			2005
Current:
	Federal	$	802		$	4,463		$	896
	State		65			(623	)		(183	)
	Foreign		731			1,922			1,643

		$	1,598		$	5,762		$	2,356

Deferred:
	Federal	$	(44,055	)	$	—		$	—
	State		(4,583	)		—			—
	Foreign		(2,795	)		—			—

			(51,433	)		—			—

Total income tax expense (benefit)		$	(49,835	)	$	5,762		$	2,356

The tax provision differs from the amounts obtained by applying the statutory U.S. Federal Income Tax Rate to income taxes as shown below.

	December 31,
	2007			2006			2005
Tax provision (benefit) at U.S. statutory rate	$	5,559		$	7,511		$	(9,491	)
Foreign earnings		1,272			(6,016	)		(5,632	)
State taxes net of federal benefit		43			259			98
Other differences not benefited		—			5,234			16,145
Stock compensation and other permanent differences		1,074			(1,597	)		1,214
Alternative minimum tax		22			371			22
Deferred tax assets—release of valuation allowance		(57,805	)		—			—

Total income tax expense (benefit)	$	(49,835	)	$	5,762		$	2,356

		December 31,
		2007			2006			2005
Deferred tax assets:
	Federal, state and foreign net operating loss carryforwards	$	35,437		$	66,218		$	101,820
	Tax credits		8,744			43,102			30,859
	Nondeductible reserves and accruals		16,844			8,782			9,923

Total deferred tax assets			61,025			118,102			142,602
Deferred tax liabilities:
	Nondeductible intangible assets		(5,096	)		(17,964	)		(34,964	)

Deferred tax assets			55,929			100,138			107,638
Valuation allowance			—			(100,138	)		(107,638	)

Net deferred tax assets		$	55,929		$	—		$	—

At December 31 2007, the Company determined that the relative weight of positive and negative evidence supports that it is more likely than not that the Company's deferred tax assets will be realized and accordingly the Company released it's valuation allowance. The balance sheet currently reflects $55,929,000 of net deferred tax assets. The offsetting benefit was allocated $4,046,000 to decrease goodwill, $446,000 to withholding taxes not previously recognized and $51,437,000 to deferred tax benefit. As of December 31, 2007, the Company had net operating loss carryforwards or NOLs of approximately $141,277,000 for federal, $32,452,000 for state tax, and $77,012,000 in foreign jurisdictions. The federal NOLs expire on various dates between 2017 and 2024. The state NOLs expire beginning in 2012 and the foreign NOLs do not expire. As of December 31, 2007, the Company had tax credits of approximately $5,721,000 for federal and $4,156,000 for state tax purposes, which expire beginning in 2008.

The decrease in the deferred tax assets attributable to loss carryforwards in 2007 is attributable to these assets being utilized to offset income in 2007. As part of the valuation allowance release assessment, the Company determined that a significant amount of the credits associated with acquired companies were not realizable. In accordance with SFAS123R the Company has derecognized $18,666,000 of deferred tax assets associated with NOLs that are attributable to excess tax benefits from stock options. Upon realization, the benefit associated with these NOLs will increase additional paid-in capital.

The Company adopted the provisions of FASB Interpretation No. 48 "Accounting for Uncertainty in Income Taxes" ("FIN No. 48")—an interpretation of SFAS 109 on January 1, 2007. As a result of the implementation of FIN No. 48 the Company reduced its tax liability by $1,633,000 with an offsetting decrease of $453,000 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. As of December 31, 2007, the Company has $26,511,000 of unrecognized tax benefits. If fully recognized in the future, $22,878,000 would benefit the Company's effective tax rate and $3,633,000 would decrease goodwill. In addition, as part of our FIN No. 48 analysis, the Company

reviewed its historical R&D credits and determined that the tax return value of those credits should be reduced.

The following table summarizes the activity related to the Company's unrecognized tax benefits (in thousands):

Balance at January 1, 2007	$	27,500
Additions for tax positions in prior years		4,454
Decreases for tax positions in prior years		(6,957	)
Current period unrecognized tax positions		1,855
Expiration of the statute of limitations for assessment of taxes		(341	)

Balance at December 31, 2007	$	26,511

The calculation of the Company's tax liabilities involves dealing with uncertainties in the application of complex tax regulations. The Company records liabilities for anticipated tax audit issues based on its estimate of whether, and the extent to which, additional taxes may be due. Actual tax liabilities may be different than the recorded estimates and could result in an additional charge or benefit to the tax provision in the period when the ultimate tax assessment is determined. The tax years 2003 through 2006 remain open to examination by the majority of 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 the Company's unrecognized tax benefits within the next 12 months. The Company is unable to estimate the range of the benefit or detriment as of December 31, 2007. The Company continues to account for tax related interest and penalties as part of the income tax provision. At December 31, 2007, and 2006 accrued interest and penalties were immaterial. As part of the analysis completed to release the valuation allowance, the Company determined that there were various FIN No. 48 implications to the tax loss carryforwards and tax credits that resulted in the establishment of a FIN No. 48 reserve of $4.5 million on certain tax losses and the reversal of a previously established reserve of $6.9 million on certain tax credit carryforwards due to the reversal of the underlying asset in the deferred tax asset table above.

The Company has not provided for federal income tax on approximately $56.5 million of undistributed earnings of its foreign subsidiaries since the Company intends to reinvest this amount outside the U.S. indefinitely. If the Company did not intend to permanently reinvest this amount outside the U.S. it would calculate a deferred tax liability of approximately $19.8 million related to the U.S. taxes that would be due upon repatriation.

The Company's Israeli subsidiary has been granted the status of an Approved Enterprise pursuant to the Israeli Law for the Encouragement of Capital Investments, 1959, as amended. The Company has eight approved programs pursuant to this law; the first was approved in 1984 and the most recent was approved in 2004. Income subject to this program is exempt from tax for two/four years from the first year in which the Company has taxable income, net of NOLs, and is taxed at a rate of 10% for eight/six years thereafter. Benefits under the programs are granted for a period of ten years limited to the earlier of fourteen years from application or twelve years from commencement of production. Benefits for the eighth program will expire on 2014. The benefit of these Approved Enterprise programs was $1.8 million and $7.8 million to the Company's net income in 2007 and 2006 respectively and

$5.7 million to the Company's net loss in 2005. The impact of this benefit on basic and diluted net income (loss) per share was $0.04, $0.16 and $0.13 per share for 2007, 2006 and 2005, respectively.

SFAS 131 establishes standards for the reporting by public business enterprises of information about reportable segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the reportable segments within the Company for making operational decisions and assessments of financial performance. The Company's chief operating decision-maker is considered to be the Chief Executive Officer.

The Company evaluates reportable segment performance based on revenues and operating expenses of these segments. The accounting policies of the reportable segments are the same as those described in the summary of accounting policies. No reportable segments have been aggregated.

Information about reportable segment income or loss is as follows for the years ended December 31, 2007, 2006 and 2005 (in thousands):

		2007		2006		2005
Revenues:
	Consumer	$	414,557	$	420,990	$	310,695
	Imaging		92,804		74,815		85,063

		$	507,361	$	495,805	$	395,758

Operating expenses:
	Consumer	$	393,641	$	374,435	$	312,488
	Imaging		68,203		60,752		58,699

		$	461,844	$	435,187	$	371,187

Contribution Margin:
	Consumer	$	20,916	$	46,555	$	(1,793	)
	Imaging		24,601		14,063		26,364

		$	45,517	$	60,618	$	24,571

A reconciliation of the totals reported for the reportable segments to the applicable line items in the consolidated financial statements for the years ended December 31, 2007, 2006 and 2005 is as follows (in thousands):

	2007			2006			2005
Contribution margin from reportable segments	$	45,517		$	60,618		$	24,571
Amortization of intangible assets		(43,224	)		(50,062	)		(50,254	)
Amortization of stock compensation resulting from business combinations		—			—			(1,546	)
In-process research and development		—			—			(2,650	)

Total operating income (loss)	$	2,293		$	10,556		$	(29,879	)

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

The geographic distribution of net revenues for the years ended December 31, 2007, 2006 and 2005 was as follows (in thousands):

	Year ended December 31,
	2007		2006		2005
Revenue from unaffiliated customers originating from:
China	$	201,686	$	165,611	$	156,737
Japan		93,707		109,066		111,370
Korea		25,623		28,544		24,865
Taiwan		124,805		127,311		51,900
United States		33,207		35,949		24,201
Other		28,333		29,324		26,685

	$	507,361	$	495,805	$	395,758

The distribution of identifiable assets by geographic areas and property and equipment as of December 31, 2007 and 2006 was as follows (in thousands):

	December 31,
	2007		2006
Identifiable assets:
U.S.	$	642,276	$	506,885
Israel		167,579		162,473
China		3,934		2,744
Japan		1,834		1,867
Taiwan		1,442		271
Canada		839		274
Korea		772		578
United Kingdom		555		831
Other		1,101		707

	$	820,332	$	676,630

Property and equipment, net:
U.S.	$	6,751	$	6,080
Israel		6,531		6,219
China		2,041		1,367
Taiwan		944		611
Japan		397		548
United Kingdom		244		261
Canada		225		197
Korea		204		132
Other		299		258

	$	17,636	$	15,673

One customer accounted for 13%, 12% and 10% of total revenues in 2007, 2006 and 2005 and had accounts receivable balance of 11% and 10% as of the end of 2007 and 2006.

On June 10, 2005, Zoran completed the acquisition of Oren Semiconductor, Inc. ("Oren"), a privately-held provider of demodulator ICs for the global high definition television market. Prior to this acquisition, Zoran had made investments in Oren that represented a 17% ownership interest. Under the terms of the acquisition agreement, Zoran acquired the remaining 83% of Oren's outstanding stock by means of a merger of Oren with a wholly-owned subsidiary of Zoran, in consideration for which Zoran paid an aggregate of $28.4 million in cash and issued 1,188,061 shares of Zoran common stock valued at $12.9 million for total consideration of $41.3 million, to the other stockholders of Oren and to employees holding Oren options. The Company considered the requirements under Accounting Principles Board Opinion 18 ("APB 18"), The Equity Method of Accounting for Investments in Common

Stock, to retroactively record the gains or losses on investment of the prior 17% ownership under the equity basis.

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

The transaction was accounted for under SFAS 141, Business Combinations, using the purchase method of accounting. The Company incurred approximately $375,000 for acquisition-related costs consisting of financial advisory, legal and other consulting services. The Company completed a valuation analysis and purchase price allocation. The results of operations of Oren have been included in the consolidated financial statements from the date of acquisition. The acquisition resulted in goodwill of approximately $33,897,000. In accordance with SFAS 142, Goodwill and Other Intangible Assets, goodwill will not be amortized and will be tested for impairment at least annually. The Company does not expect goodwill to be deductible for tax purposes.

Net liabilities acquired	$	(941	)
In process research and development		2,650
Intangible assets		9,100
Goodwill		33,897

	$	44,706

Tangible assets were valued at estimates of their current fair values. The purchase price exceeded the net assets acquired resulting in the recognition of goodwill and other intangible assets. The amounts allocated to intangible assets include purchased technology totaling $7,000,000, trade name and other intangible assets totaling $1,250,000 and customer base totaling $850,000 which are being amortized over their estimated useful lives of five years.

Approximately $2,650,000 of the purchase price was allocated to in-process research and development which had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed upon the acquisition date. This amount was determined using management's estimates including consultation with an independent appraiser. The value of the in-process research and development was determined using a discounted cash flow method and factors including projected financial results, relative risk of successful development, time-value of money and level of completion. In 2007, goodwill was reduced by $1,653,000 due to tax adjustments as a result of releasing the valuation allowance for previously reserved deferred tax assets.

The following unaudited pro forma financial information presents the combined results of operations of Zoran and Oren as if the acquisition had occurred as of the beginning of each period presented, after giving effect to certain adjustments, including amortization of intangibles. The in-process research and development charge of $2,650,000 related to the Oren acquisition is not reflected in the unaudited pro forma financial information. The unaudited pro forma financial information does not necessarily reflect the results of operations that would have occurred had the

combined companies constituted a single entity during such periods, and is not necessarily indicative of results which may be obtained in the future.

		Year Ended December 31, 2005
In thousands except for per share data:
Pro forma revenues		$	396,737

Pro forma net loss		$	(33,024	)

Pro forma net loss per share:
	Basic	$	(0.75	)

	Diluted	$	(0.75	)

Item 9—Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Under the supervision and with the participation of the Company's management, including the Company's Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of its disclosure controls and procedures as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended ("Exchange Act"). Based on this evaluation, the Company's Chief Executive Officer and Chief Financial Officer concluded that the Company's disclosure controls and procedures were effective as of December 31, 2007. The Company's disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports we file under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC's rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely discussions regarding required disclosures.

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer, and effected by our board of directors, management and other personnel, to provide reasonable assurance regarding the reliability of

financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles ("GAAP"), and includes those policies and procedures that:

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we conducted an evaluation of the effectiveness of our internal control over financial reporting based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation using criteria established in Internal Control—Integrated Framework, our management concluded that our internal control over financial reporting was effective as of December 31, 2007.

The effectiveness of our internal control over financial reporting as of December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears herein.

There were no changes in the Company's internal control over financial reporting during the fourth quarter of fiscal 2007 that have materially affected, or are reasonably likely to materially affect, the Company's internal control over financial reporting.

Certain information required by Part III is omitted from this report in that the Company intends to file its definitive proxy statement pursuant to Regulation 14A (the "Proxy Statement") not later than 120 days after the end of the fiscal year covered by this report and certain information therein is incorporated herein by reference.

The information concerning our directors required by this Item is incorporated by reference to the section in our Proxy Statement entitled "Proposal No. 1—Election of Directors".

The information concerning our executive officers required by this Item is incorporated by reference to the section in our Proxy Statement entitled "Executive Officers".

The information concerning compliance with Section 16(a) of the Exchange Act required by this Item is incorporated by reference to the section in our Proxy Statement entitled "Section 16(a) Beneficial Ownership Reporting Compliance".

The information concerning whether we have adopted a code of ethics that applies to our principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions, is incorporated by reference to the section in our Proxy Statement entitled "Committee Charters and Other Corporate Governance Materials".

The information concerning material changes to the procedures by which stockholders may recommend nominees to the Board of Directors required by this Item is incorporated by reference to the section in our Proxy Statement entitled "Director Nominations".

The information concerning the audit committee of the Board of Directors required by this Item is incorporated by reference to the section in our Proxy Statement entitled "Board Meetings and Committees".

The information required by this Item is incorporated by reference to the section of our Proxy Statement entitled "Executive Compensation and Other Matter".

Item 12—Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

The information required by this Item is incorporated by reference to the section of our Proxy Statement entitled "Principal Stockholders and Stock Ownership by Management" and "Equity Compensation Plan Information".

Item 13—Certain Relationships and Related Transactions, and Director Independence

The information required by this Item with respect to certain relationships and related transactions is incorporated by reference to the section of our Proxy Statement entitled "Certain Relationships and Related Transactions."

The information required by this Item with respect to director independence is incorporated by reference to the section of our Proxy Statement entitled "Directors" "Independence of the Board of Directors and its Committee".

The information required by this Item is incorporated by reference to the section of our Proxy Statement entitled "Principal Auditor Fees and Services".

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant and in the capacities and on the dates indicated.

ý		ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For The Fiscal Year Ended December 31, 2007
Or
o		TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

Delaware		94-2794449
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
1390 Kifer Road, Sunnyvale, California		94086
(Address of principal executive offices)		(Zip Code)

Mobile	•	Digital camera processor—COACH 5 (ZR36430)	June 2002	Digital cameras, security
	•	Digital camera processor—COACH 6 (ZR36440)	October 2003	Digital cameras, security
	•	Digital camera processor—COACH 7 (ZR36450)	July 2004	Digital cameras, security
	•	APPROACH® multimedia application coprocessor- (ER4521)	July 2004	Cellular multimedia applications
	•	APPROACH® multimedia application accelerator- (ER4525 and ER 4527)	July 2004	Cellular multimedia applications
	•	Digital camera processor—COACH 8 (ZR36460)	May 2005	Digital cameras, security
	•	Digital camera processor—COACH 9 (ZR36470)	October 2006	Digital cameras, security
	•	Digital camera processor—COACH 9S (ZR36473)	January 2007	Digital cameras, security
	•	APPROACH® 5C multimedia application coprocessor	June 2007	Cellular multimedia camera phones
	•	Digital camera processor—COACH 10 (ZR36480)	July 2007	Digital cameras, security
Digital Imaging	•	Quatro® 4200 Full feature, highly integrated SOC with high quality scanner analog front-end, USB high speed host and color LCD interface	April 2005	All-in-one inkjet and laser printers
	•	Quatro® 4050 Ultra-low-cost SOC for all-in-one printers and direct-connect photo printers.	May 2005	All-in-one inkjet and laser printers
	•	Quatro® 4230 Full feature, highly integrated SOC for printer manufacturers	September 2006	Color laser MFPs & high-speed scanners
	•	Quatro® 4060 Ultra-low-cost SOC for all-in-one printers and direct-connect photo printers.	February 2007	All-in-one inkjet printers
	•	Integrated Print System (IPS/XPS) 8.0 Embedded Software	March 2007	Print devices connected to a network
	•	IPS/Conductor (IPS DDK 2.7)	March 2007	Print devices connected to Microsoft operating systems

	As of December 31,
	2007			2006			2005			2004			2003
	(in thousands)
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments	$	319,809		$	296,229		$	149,346		$	70,413		$	126,366
Working capital		340,406			314,790			170,114			108,597			146,528
Total assets		820,332			676,630			602,631			598,016			621,847
Accumulated deficit		(160,871	)		(227,510	)		(243,838	)		(213,566	)		(165,458	)
Total stockholders' equity	$	687,772		$	583,997		$	496,924		$	498,769		$	533,607

				December 31, 2007			December 31, 2006
ASSETS
	Current assets:
		Cash and cash equivalents		$	97,377		$	100,034
		Short-term investments			222,432			196,195
		Accounts receivable, net of allowance for doubtful accounts of $9,193 and $9,265 respectively			58,220			42,640
		Inventory			48,992			45,044
		Prepaid expenses and other current assets			25,189			10,726

			Total current assets		452,210			394,639
	Property and equipment, net				17,636			15,673
	Deferred income taxes				43,218			—
	Other assets and long-term investments				112,632			22,890
	Goodwill				168,691			174,259
	Intangible assets, net				25,945			69,169

			Total assets	$	820,332		$	676,630

LIABILITIES AND STOCKHOLDERS' EQUITY
	Current liabilities:
		Accounts payable		$	67,836		$	33,767
		Accrued expenses and other current liabilities			43,968			46,082

			Total current liabilities		111,804			79,849

	Other long-term liabilities				20,756			12,784
	Commitments and contingencies (Note 8)
	Stockholders' equity:
		Common stock, $0.001 par value; 105,000,000 shares authorized at December 31, 2007 and December 31, 2006; 51,407,860 shares issued and outstanding as of December 31, 2007; and 49,433,780 shares issued and outstanding as of December 31, 2006			51			49
		Additional paid-in capital			847,597			807,220
		Accumulated other comprehensive income			995			4,238
		Accumulated deficit			(160,871	)		(227,510	)

			Total stockholders' equity		687,772			583,997

			Total liabilities and stockholders' equity	$	820,332		$	676,630

									Percentage change
			Years ended December 31,						Percentage change
			Years ended December 31,						2007 to 2006		2006 to 2005
			2007		2006		2005		2007 to 2006		2006 to 2005
Revenues:
	Hardware product revenues		87.8	%	81.5	%	85.8	%	10.3	%	18.9	%
	Software and other revenues		12.2	%	11.3	%	14.2	%	10.2	%	0.1	%
	License revenues related to litigation settlement		—		7.2	%	—		*		*

		Total revenues	100.0	%	100.0	%	100.0	%	2.3	%	25.3	%

Cost and expenses:
	Cost of hardware product revenues		46.6	%	45.6	%	47.0	%	4.4	%	21.5	%
	Research and development		22.2	%	20.0	%	22.7	%	14.2	%	10.3	%
	Selling, general and administrative		22.2	%	22.1	%	24.1	%	2.4	%	15.4	%
	Amortization of intangible assets		8.5	%	10.1	%	12.7	%	(13.7	)%	(0.4	)%
	Amortization of stock compensation resulting from business combinations		—		—		0.4	%	*		*
	In-process research and development		—		—		0.7	%	*		*

		Total costs and expenses	99.5	%	97.8	%	107.6	%	4.1	%	14.0	%

Operating income (loss)			0.5	%	2.2	%	(7.6	)%	*		*
Interest income			3.2	%	2.2	%	0.7	%	49.3	%	326.4	%
Other income (loss), net			(0.5	)%	0.1	%	(0.2	)%	*		*

Income (loss) before income taxes			3.2	%	4.5	%	(7.1	)%	*		*
Provision (benefit) for income taxes			(9.8	)%	1.2	%	0.6	%	*		*

Net income (loss)			13.0	%	3.3	%	(7.7	)%

Supplemental Operating Data:
	Product gross margin		46.9	%	44.0	%	45.2	%	17.8	%	15.7	%

Contractual Obligation	Total		2008		2009		2010		2011		2012		Thereafter
Operating leases and license commitments	$	50,447	$	8,345	$	6,558	$	6,000	$	6,097	$	4,571	$	18,876
Purchase commitments		69,864		69,864		—		—		—		—		—

Total	$	120,311	$	78,209	$	6,558	$	6,000	$	6,097	$	4,571	$	18,876

Report of Independent Registered Public Accounting Firm		51
Consolidated Balance Sheets as of December 31, 2007 and 2006		52
Consolidated Statements of Operations for each of the three years ended December 31, 2007		53
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 2007		54
Consolidated Statements of Cash Flows for each of the three years ended December 31, 2007		55
Notes to Consolidated Financial Statements		56

	Common Stock									Accumulated Other Comprehensive Income (Loss)
	Common Stock			Additional Paid-In Capital			Deferred Stock-Based Compensation						Accumulated Deficit
	Shares	Amount		Additional Paid-In Capital			Deferred Stock-Based Compensation						Accumulated Deficit			Total
Balance at December 31, 2004	43,195	$	43	$	716,317		$	(5,414	)	$	1,389		$	(213,566	)	$	498,769
Issuance of common stock under employee stock plans	1,044		1		9,487			—			—			—			9,488
Issuance of common stock in conjunction with the acquisition of Oren Semiconductor, Inc., net of issuance costs of $89	1,188		1		12,815			—			—			—			12,816
Amortization of deferred stock-based compensation	—		—		(366	)		4,821			—			—			4,455
Change in unrealized gain (loss) on securities available for sale	—		—		—			—			1,668			—			1,668
Net loss	—		—		—			—			—			(30,272	)		(30,272	)

Balance at December 31, 2005	45,427		45		738,253			(593	)		3,057			(243,838	)		496,924
Issuance of common stock under employee stock plans	4,007		4		52,266			—			—			—			52,270
Elimination of deferred stock-based compensation upon adoption of SFAS 123(R)	—		—		(593	)		593			—			—			—
Stock-based compensation	—		—		17,294			—			—			—			17,294
Change in unrealized gain (loss) on securities available for sale	—		—		—			—			1,181			—			1,181
Net income	—		—		—			—			—			16,328			16,328

Balance at December 31, 2006	49,434		49		807,220			—			4,238			(227,510	)		583,997
Cumulative effect of adopting FIN No. 48 (see Note 12)	—		—		—			—			—			453			453
Issuance of common stock under employee stock plans	1,974		2		26,446			—			—			—			26,448
Stock-based compensation	—		—		13,931			—			—			—			13,931
Change in unrealized gain (loss) on securities available for sale	—		—		—			—			(3,243	)		—			(3,243	)
Net income	—		—		—			—			—			66,186			66,186

Balance at December 31, 2007	51,408	$	51	$	847,597		$	—		$	995		$	(160,871	)	$	687,772

	Cost			Unrealized Gains		Unrealized Losses			Estimated Fair Value
Corporate notes and bonds	$	162,339		$	580	$	(305	)	$	162,614
Auction rate securities		85,350			—		—			85,350
U.S. government and agency securities		36,290			206		—			36,496
Foreign and municipal bonds		17,421			55		(1	)		17,475
Certificates of deposit		3,994			4		(1	)		3,997

Total fixed income securities		305,394			845		(307	)		305,932
Publicly traded equity securities		1,393			457		—			1,850

		306,787			1,302		(307	)		307,782
Less: Auction rate securities included in other assets and long-term investments		(85,350	)		—		—			(85,350	)

Total short-term investments	$	221,437		$	1,302	$	(307	)	$	222,432

	Cost		Unrealized Gains		Unrealized Losses			Estimated Fair Value
Corporate notes and bonds	$	93,186	$	10	$	(234	)	$	92,962
U.S. government and agency securities		42,822		7		(141	)		42,688
Auction rate securities		37,550		—		—			37,550
Foreign and municipal bonds		12,927		1		(13	)		12,915
Certificates of deposit		3,989		—		(11	)		3,978

Total fixed income securities		190,474		18		(399	)		190,093
Publicly traded equity securities		1,483		4,619		—			6,102

Total short-term investments	$	191,957	$	4,637	$	(399	)	$	196,195

			December 31, 2007							December 31, 2006
		Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Balance		Gross Carrying Amount		Accumulated Amortization			Net Balance
Amortized intangible assets:
	Purchased technology	2-3	$	195,505	$	(175,451	)	$	20,054	$	195,505	$	(142,658	)	$	52,847
	Patents	3-5		40,265		(36,961	)		3,304		40,265		(29,500	)		10,765
	Customer base	3-5		13,860		(12,043	)		1,817		13,860		(9,583	)		4,277
	Tradename and others	3-5		3,350		(2,580	)		770		3,350		(2,070	)		1,280

Total			$	252,980	$	(227,035	)	$	25,945	$	252,980	$	(183,811	)	$	69,169

	Options Outstanding						Options Exercisable
Exercise Prices	Shares Underlying Options at December 31, 2007	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Aggregate intrinsic value ('000)		Shares Underlying Options at December 31, 2007	Weighted Average Remaining Contractual Life (Years)	Weighted Average Exercise Price		Aggregate intrinsic value ('000)
$0.00 to $9.99	370,767	4.08	$	6.66	$	5,876	355,767	3.95	$	6.56	$	5,674
$10.00 to $11.99	937,015	6.36	$	10.55		11,208	937,015	6.39	$	10.55		11,208
$12.00 to $14.99	1,274,951	5.56	$	13.38		11,646	1,125,230	5.28	$	13.33		10,325
$15.00 to $19.99	2,753,072	7.45	$	18.21		11,826	1,525,742	6.02	$	17.11		8,232
$20.00 to $25.99	1,974,815	6.20	$	23.95		476	1,645,242	5.56	$	24.20		191
$26.00 to $46.53	392,451	2.76	$	28.56		—	388,322	2.70	$	28.57		—

Total	7,703,071	6.28	$	17.92	$	41,032	5,977,318	5.47	$	17.44	$	35,630

	Three Months Ended
	Dec. 31, 2007			Sep 30, 2007		Jun. 30, 2007			Mar. 31, 2007			Dec. 31, 2006			Sep 30, 2006			Jun. 30, 2006			Mar. 31, 2006
	(In thousands, except per share data)
Total revenues	$	129,373		$	146,426	$	129,903		$	101,659		$	96,251		$	129,379		$	127,929		$	142,246
Gross profit	$	67,343		$	76,550	$	69,725		$	57,461		$	50,806		$	62,569		$	67,574		$	88,596
Operating income (loss)	$	620		$	10,796	$	(834	)	$	(8,289	)	$	(14,644	)	$	(1,016	)	$	(496	)	$	26,712
Net income (loss)	$	58,730	(2)	$	13,142	$	198		$	(5,884	)	$	(10,986	)	$	1,852		$	4,779		$	20,683
Basic net income (loss) per share(1)	$	1.15		$	0.26	$	0.00		$	(0.12	)	$	(0.22	)	$	0.04		$	0.10		$	0.45
Diluted net income (loss) per share(1)	$	1.11		$	0.26	$	0.00		$	(0.12	)	$	(0.22	)	$	0.04		$	0.09		$	0.43
Shares used in basic per share calculations(1)		50,991			49,863		49,600			49,442			49,426			49,333			48,461			46,207
Shares used in diluted per share calculations(1)		52,728			51,284		51,187			49,442			49,426			50,712			51,311			48,487

		Incorporated by Reference
Exhibit Number	Exhibit Title	Form	File No.	Exhibit	Filing Date	Filed Herewith
3.1	Restated Certificate of Incorporation of the Registrant	10-K	000-27246	3.1	4/20/2007
3.2	Amended Bylaws of the Registrant	10-K	000-27246	3.2	4/20/2007
4.1	Form of Stock Certificate	10-K	000-27246	4.1	4/20/2007
*10.1	Form of Indemnity Agreement for officers and directors	SB-2	33-98630	10.4	12/14/1995
*10.2	2000 Nonstatutory Stock Option Plan	10-K	000-27246	10.39	03/31/2003
*10.3	Executive Retention and Severance Plan, as amended	8-K	000-27246	99.1	10/31/2005
*10.4	Oak Technology, Inc. 1994 Stock Option Plan (as amended and restated)	S-8	333-104498	99.1	04/14/2003
*10.5	Oak Technology, Inc. 1994 Outside Directors' Stock Option Plan (as Amended and Restated November 21, 2002)	10-Q/A	000-25298	10.1	06/27/2003
*10.6	Form of Oak Technology, Inc. Outside Directors' Non-Qualified Stock Option Agreement for the 1994 Stock Option Plan and 1994 Outside Director's Stock Option Plan entered into by David Rynne and Peter Simone	10-Q	000-27246	10.46	11/14/2003

Dated: February 29, 2008		ZORAN CORPORATION
		By:	/s/ LEVY GERZBERG Levy Gerzberg, President and Chief Executive Officer

Signature	Title	Date

/s/ LEVY GERZBERG Levy Gerzberg	President, Chief Executive Officer and Director (Principal Executive Officer)	February 29, 2008
/s/ KARL SCHNEIDER Karl Schneider	Senior Vice President, Finance and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)	February 29, 2008
/s/ UZIA GALIL Uzia Galil	Chairman of the Board of Directors	February 29, 2008
/s/ RAYMOND A. BURGESS Raymond A. Burgess	Director	February 29, 2008
/s/ JAMES D. MEINDL James D. Meindl	Director	February 29, 2008
/s/ JAMES B. OWENS, JR. James B. Owens, Jr.	Director	February 29, 2008
/s/ DAVID RYNNE David Rynne	Director	February 29, 2008
/s/ ARTHUR B. STABENOW Arthur B. Stabenow	Director	February 29, 2008
/s/ PHILIP M. YOUNG Philip M. Young	Director	February 29, 2008

		Incorporated by Reference
Exhibit Number	Exhibit Title	Form	File No.	Exhibit	Filing Date	Filed Herewith
3.1	Restated Certificate of Incorporation of the Registrant	10-K	000-27246	3.1	4/20/2007
3.2	Amended Bylaws of the Registrant	10-K	000-27246	3.2	4/20/2007
4.1	Form of Stock Certificate	10-K	000-27246	4.1	4/20/2007
*10.1	Form of Indemnity Agreement for officers and directors	SB-2	33-98630	10.4	12/14/1995
*10.2	2000 Nonstatutory Stock Option Plan	10-K	000-27246	10.39	03/31/2003
*10.3	Executive Retention and Severance Plan, as amended	8-K	000-27246	99.1	10/31/2005
*10.4	Oak Technology, Inc. 1994 Stock Option Plan (as amended and restated)	S-8	333-104498	99.1	04/14/2003
*10.5	Oak Technology, Inc. 1994 Outside Directors' Stock Option Plan (as Amended and Restated November 21, 2002)	10-Q/A	000-25298	10.1	06/27/2003
*10.6	Form of Oak Technology, Inc. Outside Directors' Non-Qualified Stock Option Agreement for the 1994 Stock Option Plan and 1994 Outside Director's Stock Option Plan entered into by David Rynne and Peter Simone	10-Q	000-27246	10.46	11/14/2003
*10.7	Outside Directors Compensation Policy					X
*10.8	Offer Letter to Karl Schneider dated December 15, 1997, as amended July 15, 1998	10-K/A	000-27246	10.49	05/02/2005
10.9	Lease Agreement dated February 2005 between ZML and Matam	POS-AM	333-125948	10.11	07/29/2005
10.10	Form of Employee Proprietary Information and Invention Agreement	10-K/A	000-27246	10.51	05/02/2005
*10.11	Zoran Corporation 2005 Equity Incentive Plan, as amended, with forms of equity award agreements attached					X