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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549


Amendment No. 1

to

FORM 10-K

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

For The Fiscal Year Ended December 31, 2007

For the Fiscal Year Ended December 31, 2008

Or


Or

o¨


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

For the transition period from              to             

Commission File No. 0-27246

ZORAN CORPORATION

Commission File Number: 0-27246


ZORAN CORPORATION
(Exact Namename of registrant as specified in its charter)

Delaware 94-2794449

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)


1390 Kifer Road, Sunnyvale, CaliforniaNumber)


94086
(Address of principal executive offices)(Zip Code)

Registrant's1390 Kifer Road

Sunnyvale, California 94086

(Address of principal executive offices, including zip code)

(408) 523-6500

(Registrant’s telephone number, including area code:(408) 523-6500code)

Securities registered pursuant to Section 12(b) of the Act:None

Securities registered pursuant to Section 12(g) of the Act:

Title of each class


Name of Exchange on which registered


None None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $.001 par value
(Title of Class)

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $.001 par value
(Title of Class)

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  ýx

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

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  ýx    No  o¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  ¨    No  ¨

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'sregistrant’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.  ýx

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“large accelerated filer," "accelerated filer"” “accelerated filer” and "smaller“smaller reporting company"company” in Rule 12b-2 of the Exchange Act. (Check one)

Large accelerated filerýx Accelerated filero¨

Non-accelerated filero¨

(Do not check if a smaller reporting company)

 Smaller reporting companyo¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)    Yeso¨    Noýx

The aggregate market value of registrant'sregistrant’s voting stock held by non-affiliates of registrant based upon the closing sale price of the Common Stock on June 30, 2007,2008, as reported on the Nasdaq Global Select Market, was approximately $993,620,300.$603,984,600.

         OutstandingAs of April 27, 2009, there were 51,183,007 shares of registrant'sthe registrant’s Common Stock, $0.001 par value as of February 15, 2008: 51,459,513.$0.001 per share, outstanding.


DOCUMENTS INCORPORATED BY REFERENCEEXPLANATORY NOTE

         Portions of registrant's definitive proxy statement for registrant's 2007 Annual Meeting of Stockholders, to be filed withThis Amendment No. 1 on Form 10-K/A (this “Amendment”) amends 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 Statements1

PART I

Item 1.


Business


1
Item 1A.Risk Factors17
Item 1B.Unresolved Staff Comments32
Item 2.Properties32
Item 3.Legal Proceedings33
Item 4.Submission of Matters to a Vote of Security Holders34

PART II

Item 5.


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


35
Item 6.Selected Financial Data35
Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations37
Item 7A.Quantitative and Qualitative Disclosures About Market Risk48
Item 8.Financial Statements and Supplementary Data50
Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure87
Item 9A.Controls and Procedures87
Item 9B.Other Information88

PART III

Item 10.


Directors, Executive Officers and Corporate Governance


89
Item 11.Executive Compensation89
Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters89
Item 13.Certain Relationships and Related Transactions, and Director Independence89
Item 14.Principal Accounting Fees and Services90

PART IV

Item 15.


Exhibits and Financial Statement Schedules


90
Signatures93

i



Special Note Regarding Forward-Looking Statements

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.


PART I

Item 1—Business

Company Overview

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(“Zoran”) 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 infiscal year ended 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 atwww.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 are31, 2008, originally filed with the Securities and Exchange Commission. Additionally, these filings may be obtainedCommission (the “SEC”) on February 26, 2009 (the “Original Filing”). We are filing this Amendment to include the information required by visitingItems 10, 11, 12, 13 and 14 to Part III within the Public Reference Roomperiod required by General Instruction G(3) to Form 10-K. Further, in connection with the filing of this Amendment and pursuant to the rules 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 atpublicinfo@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, andwe are including certain currently dated certifications with this Amendment. Except as described above, we are not amending any other information regarding issuers that file electronically.


Industry Background

        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.

        Onepart 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.Original Filing.

        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.PART III

        Standard DefinitionItem 10. Directors, Executive Officers and High Definition Televisions and Set Top BoxesCorporate Governance.    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

Our Board 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 capableDirectors (the “Board”) consists 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 productseight directors who 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.

Zoran 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.

Strategy

        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.

Markets and Applications

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

Consumer Video Playback Systems

        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.

Digital Television

        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 overserve until the next several years.

Mobile Products

        Digital cameras enable the captureannual meeting of high resolution images, the viewing, editingstockholders and storage of images on a computer systemuntil their respective successors are duly elected 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.

Digital Imaging Print Products

        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.

Products

        Our product offerings consist of four principal product families:


qualified. 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
Initial Commercial
Shipment

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


Mobile



Digital camera processor—COACH 5 (ZR36430)


June 2002


Digital cameras, security
Digital camera processor—COACH 6 (ZR36440)October 2003Digital cameras, security
Digital camera processor—COACH 7 (ZR36450)July 2004Digital cameras, security
APPROACH® multimedia application coprocessor- (ER4521)July 2004Cellular multimedia applications
APPROACH® multimedia application accelerator- (ER4525 and ER 4527)July 2004Cellular multimedia applications
Digital camera processor—COACH 8 (ZR36460)May 2005Digital cameras, security
Digital camera processor—COACH 9 (ZR36470)October 2006Digital cameras, security
Digital camera processor—COACH 9S (ZR36473)January 2007Digital cameras, security
APPROACH® 5C multimedia application coprocessorJune 2007Cellular multimedia camera phones
Digital camera processor—COACH 10 (ZR36480)July 2007Digital 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 2005All-in-one inkjet and laser printers
Quatro® 4230 Full feature, highly integrated SOC for printer manufacturersSeptember 2006Color laser MFPs & high-speed scanners
Quatro® 4060 Ultra-low-cost SOC for all-in-one printers and direct-connect photo printers.February 2007All-in-one inkjet printers
Integrated Print System (IPS/XPS) 8.0 Embedded SoftwareMarch 2007Print devices connected to a network
IPS/Conductor (IPS DDK 2.7)March 2007Print devices connected to Microsoft operating systems

        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 shippingnarrative set forth certain information regarding our highly integrated SupraHD® product line that addresses the mainstream market segment as well as high-enddirectors 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.executive officers.

 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.

Name

  

Principal Occupation

  Age  Director
Since

Levy Gerzberg, Ph.D.

  Our President and Chief Executive Officer  64  1981

Uzia Galil

  Chairman and Chief Executive Officer of Uzia Initiative and Management Ltd.; our Chairman of Board  84  1983

Raymond A. Burgess

  Consultant  50  2005

James D. Meindl, Ph.D.

  Professor of Microelectronics, Georgia Institute of Technology  76  1986

James B. Owens, Jr.

  Consultant  59  2003

David Rynne

  Retired Senior Financial Executive  68  2003

Karl Schneider

  Our Vice President, Finance and Chief Financial Officer  54  

Isaac Shenberg

  Our Senior Vice President, Business Development  59  

Arthur B. Stabenow

  Private Investor  70  1990

Philip M. Young

  Managing Member, USVP Management Company LLC  69  1986

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.


Customers

        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
DVDAlco 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.

        In 2007, one customer accounted for 13% of our total revenues.

Research and Development

        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.

Sales and Marketing

        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.

Backlog

        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.

Manufacturing

        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.

Competition

        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:

        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.

        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.

Proprietary Rights and Licenses

        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.

Employees

        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.

Executive Officers

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

NAME

AGE
POSITION
Levy Gerzberg, Ph.D62President, Chief Executive Officer and Director
Karl Schneider53Senior Vice President, Finance and Chief Financial Officer
Isaac Shenberg, Ph.D57Senior Vice President, Business and Strategic Development

Levy Gerzbergwas aour co-founder of Zoran in 1981 and has served as our President and Chief Executive Officer since December 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 our co-founding, Zoran, Dr. Gerzberg was Associate Director of Stanford University'sUniversity’s Electronics Laboratory. Dr. Gerzberg has over 25 years of experience in the high technology industry in the areas related to integrated circuits, software and systems utilizing digital signal processing in communication, consumer electronics and PC markets. Dr. Gerzberg holds a Ph.DPh.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.Israel (“Technion”).

Uzia Galilhas been one of our directors since 1983 and has served as Chairman of the Board since October 1993. Mr. Galil currently serves as Chairman and Chief Executive Officer of Uzia Initiative and Management Ltd., a company specializing in the promotion and nurturing of new businesses associated with mobile communication, electronic commerce and medical informatics, which he founded in November 1999. From 1962 until November 1999, Mr. Galil served as President and Chief Executive Officer of Elron Electronic Industries Ltd. (“Elron”), an Israeli high technology holding company, where he also served as Chairman of the Board of Directors. From January 1981 until leaving Elron, Mr. Galil also served as Chairman of the Board of Directors of Elbit Ltd., an electronic communication affiliate of Elron, and as a member of the Board of Directors of Elbit Systems Ltd., a defense electronics affiliate of Elron and all other private companies held in the Elron portfolio. Mr. Galil currently serves as a director of Orbotech Ltd. and Partner Communications Ltd. From 1980 to 1990, Mr. Galil served as Chairman of the International Board of Governors of the Technion. Mr. Galil holds an M.S. in Electrical Engineering from Purdue University and a B.S. from the Technion. Mr. Galil has also been awarded an honorary doctorate in technical sciences by the Technion in recognition of his contribution to the development of science-based industries in Israel, an honorary doctorate in philosophy by the Weizmann Institute of Science, an honorary doctorate in engineering by Polytechnic University, New York, an honorary doctorate from the Ben-Gurion University of the Negev in Israel and the Solomon Bublick Prize Laureate from the Hebrew University of Jerusalem. Mr. Galil is also a recipient of the Israel Prize.

Raymond A. Burgesshas been one of our directors since April 2005. Since February 2008, he has been a business consultant. From November 2006 to February 2008, Mr. Burgess served as President and Chief Executive Officer of TeraVicta Technologies Inc. (“TeraVicta”), a provider of broadband MEMS switches and


modules. On February 25, 2008, TeraVicta filed a petition for bankruptcy under Chapter 7 of Title 11 of the United States Code. From November 2005 to September 2006, Mr. Burgess was Chief Executive Officer of Tao Group, a private software company engaged in the development and sale of embedded software to enable multimedia in consumer and mobile communications devices. From July 2004 to November 2005, Mr. Burgess was engaged as a consultant to companies in the semiconductor industry and related fields. From April 2004 to July 2004, Mr. Burgess served as Senior Vice President, Strategy, Marketing and Communications of Freescale Semiconductor, Inc. From September 2000 to March 2004, Mr. Burgess served as Corporate Vice President, Strategy, Marketing and Communications for the Semiconductor Products Sector of Motorola, Inc. (“Motorola”) and he held a variety of other executive positions during a 20 year career at Motorola.

James D. Meindlhas been one of our directors since March 1986. Dr. Meindl has been the Joseph M. Pettit Chair Professor in microelectronics at Georgia Institute of Technology since November 1993. From September 1986 to November 1993, Dr. Meindl served as Provost and Senior Vice President of Academic Affairs at Renssalaer Polytechnic Institute. Prior to September 1986, Dr. Meindl was a professor of electrical engineering and Director of the Stanford Electronics Laboratory and Center for Integrated Systems at Stanford University. Dr. Meindl is also a director of SanDisk Corporation.

James B. Owens, Jr.has been one of our directors since May 2003. Since January 2005, Mr. Owens has been principally engaged as a consultant to companies in the semiconductor industry. From January 2002 to January 2005, Mr. Owens served as President and Chief Executive Officer and a director of Strasbaugh, a provider of semiconductor manufacturing equipment. From December 1999 to August 2001, Mr. Owens served as President and Chief Executive Officer of Surface Interface, a supplier of high-end metrology equipment to the semiconductor and hard disk markets. From August 1998 to December 1999, Mr. Owens served as President of Verdant Technologies, a division of Ultratech Stepper. Mr. Owens holds a B.S. in Physics from Stetson University, an M.S. in Management from the University of Arkansas and an M.S.E.E. from Georgia Institute of Technology.

David Rynnehas been one of our directors since August 2003. Mr. Rynne is a retired senior financial executive with more than 35 years of experience in growing technology companies. Most recently, Mr. Rynne served as Chief Executive Officer of Receipt.com from July to December 1999 and as Vice President of Nortel Networks from August 1998 to June 1999. He served as Chief Financial Officer of Bay Networks from January 1997 to August 1998. Prior to joining Bay Networks, Mr. Rynne served as Chief Financial Officer at Tandem Computers from June 1983 to December 1996 and held a variety of financial management positions during an 18 year career at Burroughs Corporation. He is currently Chairman of the Board of Directors of Netfuel, Inc., a programmable network company, and serves on the Board of Directors of PD-LD, Inc., a fiber optic component company, and Synnex Corporation, an IT product distribution company.

Karl Schneider joined Zoran has served as Corporate Controller in 1998 and was electedour Vice President, Finance and Chief Financial Officer since July 1998, having joined us as Corporate Controller in 1998 and Senior Vice President, Finance and Chief Financial Officer in July 2003. From 1996 through 1997,January of that year. Prior to joining us, Mr. Schneider served as Controller for the Film Measurement and Robotics and Integrated Technologies divisions of KLA-Tencor a semiconductor equipment company. Mr. Schneider servedand as the Corporate Controller for SCM Microsystems, Inc. from 1995Prior to 1996,those positions, he served as 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.Flextronics. Mr. Schneider holds a B.S. in Business Administration from San Diego State University.

Isaac Shenberghas served as our Senior Vice President, Business and Strategic Development since 1998October 1998. Dr. Shenberg also served as Product Line Business Manager when he first joined us in August 1990 and previously as Vice President, Sales and Marketing from January 1995 throughuntil his promotion to his current position in 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.DPh.D. in Electrical Engineering from Stanford University and a B.S. and M.S. in Electrical Engineering from Technion, the Technion-IsraelIsrael Institute of Technology in Haifa, Israel.


Technology.


Item 1A—Risk Factors
Arthur B. Stabenowhas been one of our directors since November 1990. Mr. Stabenow has been principally engaged as a private investor since January 1999. From March 1986 to January 1999, Mr. Stabenow was Chief Executive Officer of Micro Linear Corporation, a semiconductor company. Mr. Stabenow also serves as a director of Applied Micro Circuits Corporation.

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

2


The independent investigationPhilip M. Younghas been one of our historical stock option practices and resulting restatements and derivative lawsuitsdirectors since January 1986. Mr. Young has been time consuminga managing member of USVP Management Company LLC, a venture capital management company, since April 1990, 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 outcomegeneral partner or managing member of the inquiry or whether we will face additional government inquiries, investigations or other actions related togeneral partners of various venture capital funds managed by that company. Mr. Young is also a director of several private companies.

Section 16(a) Beneficial Ownership Reporting Compliance

Section 16(a) of the Securities Exchange Act of 1934 requires our historical stock option practices. This inquiry may require us to continue to expend significant management timeexecutive officers and incur significant legaldirectors 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 resalespersons who beneficially own more than 10% of our common stock may become less liquid. If this happens,to file initial reports of beneficial ownership and reports of changes in beneficial ownership with the priceSEC. Such persons are required by SEC regulations to furnish us with copies of all Section 16(a) forms filed by such person.

Based solely on our review of such forms furnished to us and written representations from certain reporting persons, we believe that our executive officers, directors and greater-than-10% stockholders complied with all applicable filing requirements.

Audit Committees

We have a separately-designated standing audit committee. The members of the Audit Committee are Messrs. Burgess, Owens, Rynne and Stabenow. Mr. Stabenow is Chairman of the committee. The Board has determined that Messrs. Burgess, Owens and Stabenow qualify as audit committee financial experts, as defined in the rules of the SEC, and are independent for purposes of the applicable rules of the Nasdaq Stock Market (“Nasdaq”) and the SEC.

Code of Business Conduct and Ethics

We have in place a Code of Business Conduct and Ethics that applies to all of our stockofficers, directors and employees, including our Chief Executive Officer, Chief Financial Officer and Controller. This code is available on our website at http://www.zoran.com/Corporate-Governance.If we make any substantive amendments to the code or grant any waiver from a provision of the code to any executive officer or director, we will promptly disclose the nature of the amendment or waiver on our website, as well as via any other means then required by Nasdaq listing standards or applicable law.

Item 11. Executive Compensation.

Compensation Discussion and Analysis

This section contains our discussion and analysis of the principles underlying our executive compensation program, and the abilitypolicies and decisions resulting in the amounts shown in the executive compensation tables that follow. This discussion is focused on our most senior and highly-compensated executives, sometimes referred to as named executive officers, who are identified in the Summary Compensation Table that follows. As used in this discussion, “Committee” or “Compensation Committee” means the Compensation Committee of the Board.

Objectives of Our Executive Compensation Program

Our compensation program for executive officers is designed to achieve the following objectives:

Attract and Retain Talent. Attract and retain individual executives we need to achieve our business plan.

Pay for Performance. Align executive compensation with company, business unit and individual performance measured annually through a cash incentive plan and over the longer term through an equity incentive plan.

Reinforce Culture of Ownership. Develop and reinforce a culture of ownership and entrepreneurial spirit among executive officers by linking compensation to our equity interests.

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Design of our stockholdersExecutive Compensation Program

Our executive compensation program has four primary components, serving different purposes, as follows:

Component

Objective

Form

Base Salary

Provide generally competitive base compensation by reference to established benchmarksCash

Annual Cash-based Incentives

Incentivize and reward performance and achievements in a particular fiscal yearCash

Equity Awards

Provide long-term incentives that focus executives on increasing long-term value for stockholders; retain executives through multi-year vesting periodsStock options and restricted
stock units

General Benefits

Provide generally competitive benefits package to employees generallyEmployee stock purchase plan
and other broad-based employee
benefits

We view the primary components of executive compensation as related, and believe that compensation should not be derived entirely from one component, nor should compensation from one component necessarily reduce compensation from other components. Base salary is baseline cash compensation that is paid to tradeexecutives throughout the year, regardless of our financial performance or stockholder returns. The Committee believes that base salary should provide executives with a predictable income sufficient to attract and retain strong talent in a competitive marketplace. We generally set executive base salaries at levels that we believe enable us to hire and retain individuals in a competitive environment and to compensate executives for satisfactory performance, regardless of performance relative to incentive compensation targets.

We use cash bonuses to reward performance achievements with a time horizon of one year or less, and stock options and other equity-based awards to reward our long-term performance. The Compensation Committee believes that these incentive awards serve to align the interests of executives with stockholder interests. We designed our executive cash incentive plan to reward our executive management for our achievement of key financial objectives and individual achievement of executive-specific objectives. We believe that, as is common among technology companies, stock options are a major element of compensation used to attract and retain senior executives. We have in the past granted restricted stock units as part of our executive compensation program, but have not done so since 2005.

Overview of the Executive Compensation Process

Our Compensation Committee makes all decisions regarding compensation (including salary and bonus levels and specific bonus and equity awards) for our executive officers, including our named executive officers.

Compensation Decision Timeline: Generally in the first quarter of each fiscal year, the Compensation Committee determines base salaries, incentive plan design and incentive plan performance goals for that fiscal year. The Committee also makes final determinations of whether our named executive officers earned incentive cash bonuses for the preceding fiscal year, based on the Committee’s review of our results for the year.

Decision Framework: Because the Committee considers the competitiveness of its executive compensation program a key objective of the program, it evaluates market information about the compensation of executive officers at similar-sized companies facing similarly complex business challenges. For 2008, the Committee reviewed compensation data for the following group of peer companies: Atheros Communications, Inc., Broadcom Corporation, Conexant Systems, Inc., Dolby Laboratories, Inc., DSP Group, Inc., Electronics for

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Imaging, Inc., Marvell Technology Group LTD., Microsemi Corporation, Newport Corporation, nVidia Corporation, Omnivision Technologies, Inc., Sigma Designs, Inc., Silicon Image, Inc., Sirf Technology Holdings, Inc., Trident Microsystems, Inc., and Triquint Semiconductor, Inc. In addition, the Committee reviewed data from the Radford Semiconductor Companies survey (for companies with $200 million—$1 billion revenue), and the Radford All Companies survey to the extent the semiconductor industry survey does not have data for a particular position.

In setting compensation levels for our named executive officers, the Committee does not “benchmark” compensation against the market data described above. Rather, the Committee considers a number of factors in making its decisions, including the executive’s scope of responsibility, domain expertise, business knowledge and significance to our corporate objectives among other factors, and uses this market data simply as a general reference point. In general, we believe that our executives’ base salaries should be near the 50th percentile and that cash incentive target amounts should be near the 75th percentile, as compared with the base salaries or target bonuses for similar positions at our peer companies. The Committee may approve compensation of individual executives above or below this general guideline based upon the executive’s performance, position and experience, as well as external factors affecting our business and the market generally.

Decision Support.The Committee did not retain outside compensation consultants for 2008. Instead, the Committee reviewed the compensation data described above, which was collected and presented by our human resources group. At the Committee’s request, Committee meetings often include other directors and typically include, for all or a portion of each meeting, our Chief Executive Officer, Chief Financial Officer, Vice President, Human Resources, our Vice President, Legal, and our external counsel. The Committee evaluates the performance of the Chief Executive Officer each year and makes all decisions regarding salary adjustments, bonus payments and equity awards. For compensation decisions relating to executive officers other than our Chief Executive Officer, the Chief Executive Officer annually evaluates the performance of each member of the senior executive team other than himself. He makes recommendations to the Committee regarding salary adjustments for the current year, performance bonus payments and equity awards based on the Company’s performance and individual performance of each executive during the preceding year. The Committee, in its sole discretion, determines whether to accept, modify or reject any recommended adjustments or awards to the senior executives.

Our Compensation Committee has adopted no formal or informal policies or guidelines (except as described below) for allocating compensation between long-term and current compensation, between cash and non-cash compensation, or among different forms of non-cash compensation. However, our Compensation Committee’s philosophy is to make a greater percentage of an employee’s compensation performance-based as he or she becomes more senior and to keep cash compensation to the minimum competitive level while providing the opportunity to be well rewarded through equity if we perform well over time.

Analysis of Compensation Program Components

Base Salary. In August 2008, our Compensation Committee determined that the base salary level for Mr. Gerzberg would be reduced by approximately 12.5 percent, and the base salary levels for each of our other named executive officers would be reduced by approximately 10 percent. In making this decision, the Compensation Committee considered the overall decline of the consumer electronics market, the general market environment and our year to date performance relative to our goals.

Annual Cash-Based Incentives. We use incentive bonuses to reward performance and achievements with a time horizon of approximately one year. The Committee generally establishes both target financial objectives and individual objectives each year so that the relative difficulty of achieving the objectives is roughly consistent from year to year. Over the past several years, the Company’s performance has exceeded the target level corporate objectives in some years and failed to achieve the objectives in others. The level of achievement of individual performance objectives has varied by individual in any given year, as well as by the named executive officers as a group from year to year.

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For 2008, the Compensation Committee approved a performance-based cash bonus policy (“2008 Bonus Policy”) for our named executive officers. The 2008 Bonus Policy was designed to reward executives for our achievement of key financial objectives and individual achievement of more specific goals. The Compensation Committee set each executive’s target bonus, expressed as a percentage of base salary, and selected the financial targets, which were revenue and non-GAAP earnings per share. Under the 2008 Bonus Policy, the bonus for our Chief Executive Officer was based entirely on our performance, while the bonuses for our other named executive officers were to be determined 67% based on our performance and 33% based on the achievement of individual goals established by the Chief Executive Officer and approved by the Compensation Committee. Mr. Schneider’s individual goals for 2008 centered on improving and maintaining internal controls and financial reporting, ensuring effective management of legal matters and enhancing IT infrastructure and business processes. Dr. Shenberg’s individual goals for 2008 included identifying and supporting acquisition targets that would eventually result in non-linear growth, entry into new or related markets as well as collaboration across the organization on other infrastructure activities. The Compensation Committee also retained discretion to increase or decrease the final bonus amount awarded to the executive. In addition, the aggregate amount of the bonuses paid to our executive officers, general managers and vice presidents may not exceed 25% of the total bonuses paid for all of our employees. In all cases, the bonuses were contingent upon delivering positive non-GAAP net income for 2008.

The Compensation Committee believes that the largest portion of each bonus should be based on our executive officers’ success as a team and thus based on corporate financial goals. The Compensation Committee chose revenue and non-GAAP earnings per share as the performance measures because it believed that, as a “growth company,” we should reward revenue growth, but only if that revenue growth is achieved cost effectively. Likewise, the Compensation Committee believed a “profitable company” with little or no growth was not acceptable. Thus, the Compensation Committee considered the chosen performance metrics to be the best indicators of financial success and stockholder value creation. We define non-GAAP earnings per share, for bonus purposes, to mean our GAAP pre-tax earnings per share, adjusted to eliminate share-based compensation expenses, amortization of acquired intangible assets and income tax expense.

For 2008, the component of each executive’s bonus related to our performance was weighted 75% for non-GAAP earnings per share and 25% for revenue. For each performance metric, the executive could receive up to 120% of the target bonus amount attributable to that metric if we achieved 120% or more of the 2008 goal for that metric. The executive could receive between 80% and 120% of the bonus amount for each metric if we achieved between 80% and 120% of the performance goal. No bonus would be adversely affected.paid with respect to that metric if we did not achieve at least 80% of the performance goal for that metric.

Under the 2008 Bonus Policy, Dr. Gerzberg’s target bonus was 100% of base salary, Mr. Schneider’s target bonus was 70% of base salary, and Dr. Shenberg’s target bonus was 60% of base salary. In 2008, the financial targets for bonus purposes were a revenue target of $576.3 million and a non-GAAP earnings-per-share target of $1.06. Our actual performance for 2008 was less than 80% of the revenue and non-GAAP earnings per share targets. In addition, we would be subjectdid not achieve positive non-GAAP net income for 2008. Accordingly, no bonuses were paid to restrictions regarding the registrationnamed executive officers for 2008.

Equity Awards. The Compensation Committee uses equity awards primarily to motivate our named executive officers to focus on longer-term strategies to increase stockholder value, and secondarily to retain executive officers. We believe that in the technology sector equity awards are a major factor in attracting and retaining executive officers, while salary and bonus levels are generally secondary considerations. Equity awards foster attention to stock ownership and focus executives on increasing long-term stockholder value, aligning the interests of executives with those of our stockholders. Stock options in particular are performance-based, since their value depends entirely on an increase in the stock under federal securities laws, and we would not be able to issueprice above the option exercise price. As described below, our stock options or other equity awards to our employees or allow them toare granted with an 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 relatedprice equal 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 delistingclosing price of our common stock fromon the NASDAQ Global Select Market.

It may be difficult or costly to obtain director and officer liability insurance coverage as a result of ourgrant date. The vesting period for stock options issues.granted to executives is four years, which encourages executive retention.

 We expect

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Our 2005 Equity Incentive Plan was approved by our stockholders and gives the Compensation Committee flexibility in structuring award grants for our executives that it believes will help promote high levels of performance and achievement of corporate goals, as well as encouraging the issues arising fromgrowth of stockholder value. Although we have granted awards of restricted stock units to 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 thanexecutives in the past, which would



the Compensation Committee concluded in 2007 that stock options provide greater incentive value than restricted stock units, and we have an adverse effect onused stock options as the sole form of equity incentive compensation in our financial results2007 and cash flow. As a result2008 grant cycles. We expect to reassess the use of thisstock option grants, restricted stock units and related factors, our directors and officers could face increased risksother forms of personal liability in connectionequity incentives annually, seeking to balance the long-term incentive value with the performance of their duties. As a result, we may have difficultly attracting and retaining qualified directors and officers, which could adversely affectdilution to our business.stockholders.

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:

        Our operating results could also be harmed by:


        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.

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


        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 bydetermining the number of good integrated circuits as a proportionoptions to be granted to executive officers, the Compensation Committee takes into account: the individual’s position and scope of responsibility; the vesting period (and thus, retention value) remaining on the executive’s existing options; the executive’s ability to affect profitability and stockholder value; the individual’s historic and recent job performance; equity compensation for similar positions at comparable companies; and the value of stock options in relation to other elements of total compensation.

In April 2008, the Compensation Committee awarded stock options to each of our named executive officers. The Compensation Committee determined that the face value of each option grant (determined by multiplying 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 areshares 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 are not protected by long-term contracts with our customers.

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

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

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

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

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

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

        The market price of our common stock has fluctuated significantly since our initial public offering in 1995. Between January 1, 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.


Item 1B—Unresolved Staff Comments

        None


Item 2—Properties

        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.


Item 3—Legal Proceedings

        Matters Related to Historical Stock Option Practices:    As discussed further below, certain persons and entities identifying themselves as shareholders of Zoran have filed derivative actions purporting to assert claims on behalf of and in the name of the Company against various of the Company's current and former directors and officers relating to the Company's historical accounting for stock options. 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.

        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.

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

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


Item 4—Submission of Matters to a Vote of Security Holders

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



PART II

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

        As of December 31, 2007, there were 285 holders of record of our common stock.

        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.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

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


Item 6—Selected Financial Data

        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 

 
 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 


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.

Overview

        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.

Revenues

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

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

        We recognize software license revenues in accordance with the provisions of Statement of Position (SOP) 97-2,Software Revenue Recognition, as amended by SOP 98-9,Modification of SOP 97-2,Software



Revenue Recognition, With Respect to Certain Transactions. Our software license agreements typically include obligations to provide maintenance and other support over a fixed term and allow for renewal of maintenance services on an annual basis. We determine the fair value of our maintenance obligations with reference to substantive renewal rates within the agreement or objective evidence of fair value as required under SOP 97-2. Maintenance and support revenue is recognized ratably over the term of the arrangement. We also receive royalty revenues based on per unit shipments of products embedding our software, which we recognize upon receipt of a royalty report from the customer, typically one quarter in arrears.

Cost of Hardware Product Revenues

        Our cost of hardware product revenues consists primarily of fabrication costs, assembly and test costs, and the cost of materials and overhead from operations. If we are unable to reduce our cost of hardware product revenues to offset anticipated decreases in average selling prices, our product gross margins will decrease. We expect both product and customer mix to continue to fluctuate in future periods, causing fluctuations in margins.

Research and Development

        Our research and development expenses consist of salaries and related costs of employees engaged in ongoing research, design and development activities and costs of engineering materials and supplies. We believe that significant investments in research and development are required for us to remain competitive, and we expect to continue to devote significant resources to product development, although such expenses as a percentage of total revenues may fluctuate.

Selling, General and Administrative

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

Income Taxes

        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.

Acquisition

Oren Semiconductor, Inc.

        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.

Segments

        Our products are based on highly integrated application-specific integrated circuits and system-on-a-chip solutions. We also license software and other intellectual property. We operate in two reportable segments—Consumer group and Imaging group. The Consumer group provides products for use in DVD players, recordable DVD players, standard and high definition digital television products, digital camera products and multimedia mobile phone products. The Imaging group provides products used in digital copiers, laser and inkjet printers as well as multifunction peripherals.

Critical Accounting Policies and Estimates

        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:




Results of Operations

        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:

 
  
  
  
 Percentage change
 
 
 Years ended December 31,
 
 
 2007 to
2006

 2006 to
2005

 
 
 2007
 2006
 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%

(*)
not meaningful

Year Ended December 31, 2007 Compared to Year Ended December 31, 2006

Revenues

        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

        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 fromcontrol, potential acquirors would otherwise have an incentive to constructively terminate 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

        Research and development expenses increasedexecutive’s employment 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

        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 slowavoid paying accounts.

Amortization of Intangible Assets

        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,severance, we had approximately $25.9 million in net intangible assets that we will continue to amortize on a straight line basis through 2010.

Interest and Other Income (Loss)

        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.


Provision (Benefit) for Income Taxes

        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 utilizedappropriate to provide severance benefits in these circumstances.

In general, the future, and accordingly, we releasedseverance benefits provided under 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.

Year Ended December 31, 2006 Compared to Year Ended December 31, 2005

Revenues

        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

        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

        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

        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

        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.

Amortization of Stock Compensation Resulting from Business Combinations

        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.

In-Process Research and Development

        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

        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.

Provision for Income Taxes

        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.

Liquidity and Capital Resources

        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.


Contractual Obligations

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

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
  
 
 
 
 
 
 

        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.


Item 7A—Quantitative and Qualitative Disclosures about Market Risks

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

Interest Rate Risk

        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 valueRetention Plan are determined as if the executive continued 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 impactedremain employed by either a 10% increase or decrease in interest rates.

Exchange Rate Risk

        We consider our direct exposure to foreign exchange rate fluctuations to be minimal. Currently, sales and arrangements with third-party manufacturers provideus 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.



Item 8—Financial Statements and Supplemental Data

Index to Consolidated Financial Statements

Report of Independent Registered Public Accounting Firm51
Consolidated Balance Sheets as of December 31, 2007 and 200652
Consolidated Statements of Operations for each of the three years ended December 31, 200753
Consolidated Statements of Stockholders' Equity for the three years ended December 31, 200754
Consolidated Statements of Cash Flows for each of the three years ended December 31, 200755
Notes to Consolidated Financial Statements56


Report of Independent Registered Public Accounting Firm

To the Board of Directors and Stockholders of Zoran Corporation:

        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 the18 months (or three years, in the period ended December 31, 2007case of the Chief Executive Officer) following their actual termination date. We believe the benefits provided under the Retention Plan provide an appropriate level of protection for our named executive officers and are consistent with those benefits offered by other companies with whom we compete for executive talent. For a detailed description of the benefits provided under the Retention Plan, please see the discussion under “Potential Payments upon Termination or Change in conformity with accounting principles generally acceptedControl” below. Absent a change in control event, no executive officer is entitled upon termination to either equity vesting acceleration or cash severance payments. The Compensation Committee does not consider potential payments under the United StatesRetention Plan in determining other components of America. Also in our opinion, the Company maintained,executive compensation program.

Other Benefits

Executive officers are also eligible to participate in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria establishedour respective local employee benefit plans, which may include medical, dental, vision, group life, employee assistance program, short term and long term disability, and accidental death and dismemberment insurance, our 401(k) plan or other such benefit plans, inInternal 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 inManagement's Report on Internal Control over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements and each case on the Company's internal control over financial reporting based on our integrated audits. We conducted our auditssame basis as other employees in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the auditslocation. There were no special benefits or perquisites provided to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintainedany executive officer 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.

/s/ PricewaterhouseCoopers LLP

PricewaterhouseCoopers LLP
San Jose, CA
February 29, 2008



ZORAN CORPORATION

CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

 
 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 
  
 
 

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



ZORAN CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

 
 Year Ended December 31,
 
 
 2007
 2006
 2005
 
Revenues:          
 Hardware product revenues $445,370 $403,744 $339,539 
 Software and other revenues  61,991  56,269  56,219 
 License revenues related to litigation settlement    35,792   
  
 
 
 
  Total revenues  507,361  495,805  395,758 
  
 
 
 
Costs and expenses:          
 Cost of hardware product revenues  236,282  226,260  186,172 
 Research and development  113,140  99,102  89,809 
 Selling, general and administrative  112,422  109,825  95,206 
 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 costs and expenses  505,068  485,249  425,637 
  
 
 
 
Operating income (loss)  2,293  10,556  (29,879)
Interest income  16,511  11,057  2,593 
Other income (loss), net  (2,453) 477  (630)
  
 
 
 
Income (loss) before income taxes  16,351  22,090  (27,916)
Provision (benefit) for income taxes  (49,835) 5,762  2,356 
  
 
 
 
Net income (loss) $66,186 $16,328 $(30,272)
  
 
 
 
Basic net income (loss) per share $1.32 $0.34 $(0.68)
  
 
 
 
Diluted net income (loss) per share $1.29 $0.33 $(0.68)
  
 
 
 
Shares used to compute basic net income (loss) per share  49,981  48,353  44,267 
  
 
 
 
Shares used to compute diluted net income (loss) per share  51,404  50,099  44,267 
  
 
 
 

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



ZORAN CORPORATION

CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

(in thousands)

 
 Common Stock
  
  
 Accumulated
Other
Comprehensive
Income (Loss)

  
  
 
 
 Additional
Paid-In
Capital

 Deferred
Stock-Based
Compensation

 Accumulated
Deficit

  
 
 
 Shares
 Amount
 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 
  
 
 
 
 
 
 
 

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



ZORAN CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

 
 Year Ended December 31,
 
 
 2007
 2006
 2005
 
Cash flows from operating activities:          
 Net income (loss) $66,186 $16,328 $(30,272)
 Adjustments to reconcile net income (loss) to net cash provided by operations:          
  Depreciation  7,898  9,382  10,329 
  Amortization  43,224  50,062  50,369 
  Stock based compensation expense  13,931  17,294  4,455 
  In-process research and development      2,650 
  Provision (recoveries) for doubtful accounts  (72) 3,085  4,771 
  Deferred income taxes  (51,883)    
  Loss (gain) on sale of short-term investments  (727) (2,398) 144 
  Write down of other assets and long-term investments  2,000  942   
  Changes in assets and liabilities, net of effect of acquisition:          
   Accounts receivable  (15,508) 24,449  (14,706)
   Inventory  (3,948) (12,428) 17,630 
   Prepaid expenses and other current assets and other assets and long-term investments  (8,144) (2,013) 461 
   Accounts payable  34,069  (5,233) 4,437 
   Accrued expenses and other liabilities  7,833  562  1,029 
  
 
 
 
    Net cash provided by operating activities  94,859  100,032  51,297 
  
 
 
 
Cash flows from investing activities:          
 Purchases of property and equipment  (9,861) (8,997) (8,492)
 Purchases of investments  (467,802) (357,520) (45,132)
 Sales and maturities of investments  353,699  235,393  61,827 
 Acquisition of Oren Semiconductor, Inc., net of cash acquired      (27,567)
  
 
 
 
    Net cash used in investing activities  (123,964) (131,124) (19,364)
  
 
 
 
Cash flows from financing activities:          
 Proceeds from issuance of common stock  26,448  52,270  9,488 
  
 
 
 
    Net cash provided by financing activities  26,448  52,270  9,488 
  
 
 
 
Net increase (decrease) in cash and cash equivalents  (2,657) 21,178  41,421 
Cash and cash equivalents at beginning of period  100,034  78,856  37,435 
  
 
 
 
Cash and cash equivalents at end of period $97,377 $100,034 $78,856 
  
 
 
 

Supplemental information:

 

 

 

 

 

 

 

 

 

 
Fair value of stock issued in Oren acquisition, net of issuance costs of $89 $ $ $12,816 
  
 
 
 

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


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1—THE COMPANY

        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.2008.

RiskTax and UncertaintiesAccounting Considerations

        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, exceptWe record cash compensation 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


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 1—THE COMPANY (Continued)


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.

Principles of consolidation and basis of presentation

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

Reclassifications

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

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES

        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.

Use of estimates

        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.

Translation of foreign currencies

        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.

Revenue recognition

        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


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)


future returns and potential warranty liability is recordedexpense at the time revenuethe obligation is recognized. Warranty expensesincurred. Historically, all cash compensation we have paid has been tax deductible for us. Under Section 162(m) of the Internal Revenue Code, compensation in 2007, 2006excess of $1.0 million per year to our chief executive officer and 2005, were immaterial. Development revenue under development contractscertain other executive officers is recognizednot tax deductible to us unless certain requirements are met. Our intent generally is to design and administer executive compensation programs in a manner that will preserve the deductibility of compensation paid to our executive officers, and we believe that a substantial portion of our current executive compensation program (including the stock options granted to our named executive officers as described above) satisfies the services are performed based onrequirements for exemption from the specific deliverables outlined in each contract. Amounts received in advance$1.0 million deduction limitation. However, we reserve the right to design programs that recognize a full range of performance criteria important to our success, even where the compensation paid 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.

Research and development costs

        Research and development expenses are charged to operations as incurred.

Cash equivalents and investments

        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.


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

        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.

Concentration of credit risk of financial instruments

        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.

Inventory

        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

        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.


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

Goodwill

        In accordance with SFAS 142Goodwill 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 amountprograms may not be recoverable.deductible. The Company has three reporting units.Compensation Committee believes that no part of the Company’s tax deduction for compensation paid to the named executive officers for 2008 will be disallowed under Section 162(m). We account for equity compensation paid to our executives and employees under the rules of SFAS No. 123R, which requires us to estimate and record a non-cash expense over the vesting period of the equity compensation award.

8


Executive Compensation Tables

Other intangiblesSummary Compensation Table - Fiscal 2006-2008

        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.

Long-lived assets

        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.

Fair value of financial instruments

        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.

Income taxes

        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.


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

Earnings per share

        In accordance with SFAS 128, Zoran reportsEarnings 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.

Stock- based compensation

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

Periods Prior to the Adoption of SFAS 123(R)

        Prior to the adoption of SFAS 123(R), the Company provided the disclosures required under SFAS 123, as amended by SFAS 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)
  
 

ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

        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.

Impact of SFAS 123(R)

        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
  
 

Segment reporting

        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.


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

        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)

        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.

        The following are the components of comprehensive income (loss) (in thousands):

 
 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.

Recent accounting pronouncements

        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.


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 2—SIGNIFICANT ACCOUNTING POLICIES (Continued)

        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.

NOTE 3—MARKETABLE SECURITIES

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

 
 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 
  
 
 
 
 

ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3—MARKETABLE SECURITIES (Continued)

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

 
 Cost
 Unrealized
Gains

 Unrealized
Losses

 Estimated
Fair Value

Corporate 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
  
 
 
 

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.


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 3—MARKETABLE SECURITIES (Continued)

        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.

NOTE 4—BALANCE SHEET COMPONENTS (in thousands)

 
 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
  
 

ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE5—GOODWILL AND OTHER INTANGIBLE ASSETS

        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.

Components of Acquired Intangible Assets (in thousands):

 
  
 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
    
 
 
 
 
 

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

Year ending December 31,

 Amount
2008 $23,315
2009  1,820
2010  810
  
Total $25,945
  

        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 
  
 

ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE5—GOODWILL AND OTHER INTANGIBLE ASSETS (Continued)

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

 
 December 31,
2007

 December 31,
2006

Consumer $164,494 $169,060
Imaging  4,197  5,199
  
 
  $168,691 $174,259
  
 

NOTE 6—RESEARCH AND DEVELOPMENT ARRANGEMENTS

        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.

NOTE 7—DEVELOPMENT CONTRACTS

        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.

NOTE 8—COMMITMENTS AND CONTINGENCIES

        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.


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8—COMMITMENTS AND CONTINGENCIES (Continued)

Lease and license commitments

        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
  

Legal proceedings

        Matters Related to Historical Stock Option Practices:    As discussed further below, certain persons and entities identifying themselves as shareholders of Zoran have filed derivative actions purporting to assert claims on behalf of and in the name of the Company against various of the Company's current and former directors and officers relating to the Company's historical accounting for stock options. It is not possible for the Company to quantify the extent of the 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


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 8—COMMITMENTS AND CONTINGENCIES (Continued)


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.

        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.

        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.


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—STOCKHOLDERS' EQUITY

1993 Stock Option Plan

        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.

2000 Nonstatutory Stock Option Plan

        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.

1995 Outside Directors Stock Option 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


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—STOCKHOLDERS' EQUITY (Continued)


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.

2005 Equity Incentive 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.

2005 Outside Directors Equity Plan

        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


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—STOCKHOLDERS' EQUITY (Continued)


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.


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—STOCKHOLDERS' EQUITY (Continued)

        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:

 
 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
  
      
 
      

        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.


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—STOCKHOLDERS' EQUITY (Continued)

        The weighted average grant date fair value of options, as determined under SFAS 123(R), grantedcompensation earned during the years ended December 31, 2006, 2007 and 2006 was $11.70 and $11.46 per share, respectively. 2008, by our named executive officers.

Name and Principal
Position

  Year  Salary
($)
  Bonus
($)
  Stock
Awards
($)

(1)
  Option
Awards ($)
(1)
  Non-Equity
Incentive Plan
Compensation
($)
  All Other
Compensation
($)
  Total
($)

Levy Gerzberg, Ph.D.
President and Chief Executive Officer

  2008  431,292  —    46,987  780,072  —    2,528(2) 1,260,879
  2007  455,000  —    106,038  1,269,240  522,100  2,594  2,354,972
  2006  437,500  —    216,291  2,238,193  398,600  2,594  3,293,178

Karl Schneider
Senior Vice President, Finance and Chief Financial Officer

  2008  274,083  —    15,662  292,641  —    2,494(2) 584,880
  2007  286,000  —    35,345  436,007  209,800  2,522  969,674
  2006  275,000  —    72,095  737,398  167,500  2,522  1,254,515

Isaac Shenberg, Ph.D.
Senior Vice President, Business Development

  2008  261,916  —    14,096  251,063  —    46,698(3) 573,773
  2007  262,100  —    31,812  405,709  164,200  44,154  907,975
  2006  210,000  —    64,887  752,359  109,300  36,953  1,173,499

(1)These amounts reflect the dollar amount recognized for financial statement reporting purposes for the year ended December 31, 2008 in accordance with FAS 123(R), with the exception that estimated forfeitures related to service-based vesting were disregarded in these amounts. No equity awards granted to our named executive officers were forfeited during 2008. Assumptions used in the calculation of these amounts for purposes of our financial statements for the years ended December 31, 2006, 2007 and 2008 are included in Note 10 of Notes to Consolidated Financial Statements for the year ended December 31, 2008 included in our Annual Report on Form 10-K filed with the SEC.
(2)Represents matching contributions to the named executive officer’s 401(k) plan, and premiums paid by us with respect to term life insurance for the benefit of the named executive officer.
(3)Consists of premiums paid under an Israeli insurance/pension policy that covers certain severance and other benefits totaling $30,982, payments towards the lease of an automobile totaling $11,757 and continuing education contributions totaling $3,959. For a description of the Israeli insurance/pension policy and continuing education contributions, please see the discussion under “Managers’ Insurance and Education Fund” below.

9


2008 Grants of Plan-Based Awards

The weighted average grant date fair valuefollowing table provides certain information concerning grants of options grantedto purchase our common stock made to the named executive officers during the year ended December 31, 2005 as defined by SFAS 123 was $6.62 per share.2008. The table also provides information with regard to cash bonuses awarded for 2008 under our performance-based, non-equity incentive plan to each named executive officer.

 

Name

  Grant
Date
  Approval
Date(1)
  Estimated Future Payouts Under
Non-Equity Incentive Plan

Awards(2)
  All Other
Stock
Awards:
Number of
Shares of
Stock

or Units ($)
  All Other
Option
Awards:
Number of
Securities
Underlying
Options ($)
  Exercise or
Base

Price of
Option
Awards ($/sh)
  Grant
Date Fair
Value of
Stock and
Option
Awards
      Threshold
($)
  Target ($)  Maximum
($)
        

Levy Gerzberg, Ph.D.

  N/A  N/A  $318,480  $398,100  $477,720  —    —     —     —  
  4/23/2008  4/15/2008   —     —     —    —    115,000  $14.21  $843,190

Karl Schneider

  N/A  N/A  $144,144  $180,180  $216,216  —    —     —     —  
  4/23/2008  4/15/2008   —     —     —    —    42,000  $14.21  $307,948

Isaac Shenberg, Ph.D.

  N/A  N/A  $111,339  $139,174  $167,008  —    —     —     —  
  4/23/2008  4/15/2008   —     —     —    —    40,000  $14.21  $293,284

(1)On April 15, 2008, the Compensation Committee approved option grants to our named executive officers, at an option exercise price per share equal to the closing price of our common stock on the second trading day after announcement of our final financial results for the quarter ended March 31, 2008 (which was April 23, 2008).
(2)These columns reflect the threshold, target and maximum amounts for each named executive officer’s bonus opportunity for 2008. As reflected in the Summary Compensation Table above, no bonuses were paid to our named executive officers for 2008.

Description of Plan-Based Awards

Non-Equity Incentive Plan Awards

The aggregate intrinsic valuematerial terms of the non-equity incentive plan awards reported in the above table are described in the Compensation Discussion and Analysis section above under the heading “Analysis of Compensation Program Components—Annual Cash-Based Incentives.”

Equity Incentive Plan Awards

Each of the equity incentive awards reported in the above table was granted under, and is subject to, the terms of the 2005 Equity Incentive Plan. The 2005 Equity Incentive Plan is administered by the Compensation Committee. The Compensation Committee has authority to interpret the plan provisions and make all required determinations under the plan. Awards granted under the plan are generally only transferable to a beneficiary of a named executive officer upon his death or, in certain cases, to family members for tax or estate planning purposes. However, the Compensation Committee may establish procedures for the transfer of awards to other persons or entities, provided that such transfers comply with applicable securities laws and, with limited exceptions set forth in the plan document, are not made for value.

Under the terms of the 2005 Equity Incentive Plan, if we undergo a change in control, outstanding awards granted under the plan will generally be assumed or otherwise continued by the successor entity or they will be cancelled in exchange for the right to receive a payment in connection with the change in control transaction. The Compensation Committee has discretion to provide for the vesting of outstanding awards to accelerate in connection with a change in control.

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In addition, each named executive officer may be entitled to accelerated vesting of his outstanding equity-based awards under the Retention Plan upon certain terminations of employment in connection with our change in control. The terms of this accelerated vesting are described in the “Potential Payments upon Termination or Change in Control” section below.

Each option reported 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 asgranted with 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.

Tender Offer to Amend Certain Options

        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 optionequal to the fair market value of a share of Zoranour common stock on the remeasuredgrant date. For these purposes, and in accordance with our 2005 Equity Incentive Plan and our option grant practices as described in the “Compensation Discussion and Analysis” above, the fair market value is equal to the closing price of a share of our common stock on the applicable grant date.

Each option granted to our named executive officers in 2008 is subject to a four-year vesting schedule, with 25% of the option vesting on the first anniversary of the grant date and the remaining 75% of the option vesting in monthly installments over the three-year period thereafter. Once vested, each option will generally remain exercisable until its normal expiration date. Each of the options granted to our named executive officers in 2008 has a term of ten years. However, vested options may terminate earlier in connection with a change in control transaction or a termination of the named executive officer’s employment. Subject to any accelerated vesting that may apply in the circumstances, the unvested portion of the option will immediately terminate upon a termination of the named executive officer’s employment. The named executive officer will generally have three months to exercise the vested portion of the option following a termination of his employment for any reason. This period is extended to 12 months if the termination is a result of the named executive officer’s death or disability. In the case of the option granted to Mr. Gerzberg, the vested portion of the option will remain exercisable for the remainder of its term (or, if earlier, the date Mr. Gerzberg accepts a senior executive position with another company) if Mr. Gerzberg retires from his service on the Board. (For these purposes, “retirement” is defined as either Mr. Gerzberg’s voluntary resignation from the Board or the expiration of his term as a director after he has declined to stand for reelection, in either case if he has served continuously on the Board for at least two years.)

The options granted to named executive officers during 2008 do not include any dividend rights.

11


Outstanding Equity Awards at December 31, 2008

The following table presents information regarding the outstanding equity awards held by each of our named executive officers as of December 31, 2008, including the vesting dates for the portions of these awards that had not vested as of that option. Underdate.

   Option Awards  Stock Awards 

Name

  Number of
Securities
Underlying
Unexercised
Options (#)
Exercisable
  Number of
Securities
Underlying
Unexercised
Options (#)
Unexercisable
  Option
Exercise
Price ($)
  Option
Expiration
Date
  Number
of
Shares or
Units of
Stock
That
Have Not
Vested (#)
  Market Value
of

Shares or
Units

of Stock That
Have Not
Vested

($)
 

Levy Gerzberg, Ph.D.

  42,375  —    $14.6900  8/9/2012(1) —     —   
  178,125  —    $14.6900  8/9/2012(1) —     —   
  15,572  —    $24.7800  7/15/2013(1) —     —   
  304,679  —    $24.7800  7/15/2013(2) —     —   
  150,000  30,000  $13.5900  8/19/2015(3) —     —   
  41,667  58,333  $19.7800  4/26/2017(3) —     —   
  —    115,000  $14.2100  4/23/2018(3) —     —   
  —    —     —    —    7,500  $51,225(4)

Karl Schneider

  45,000  —    $27.3333  7/28/2010(1) —     —   
  11,563  —    $15.4700  9/19/2011(1) —     —   
  8,437  —    $15.4700  9/19/2011(1) —     —   
  43,750  —    $14.6900  8/9/2012(1) —     —   
  31,250  —    $14.6900  8/9/2012(1) —     —   
  100,000  —    $24.7800  7/15/2013(1) —     —   
  100,000  —    $24.7800  7/15/2013(2) —     —   
  50,000  10,000  $13.5900  8/19/2015(3) —     —   
  16,667  23,333  $19.7800  4/26/2017(3) —     —   
  —    42,000  $14.2100  4/23/2018(3) —     —   
  —    —     —    —    2,500  $17,075(4)

Isaac Shenberg, Ph.D.

  60,000  —    $27.3333  7/28/2010(1) —     —   
  40,500  —    $10.3333  2/7/2011(1) —     —   
  49,719  —    $11.5200  9/19/2011(1) —     —   
  82,500  —    $12.3600  8/9/2012(1) —     —   
  100,000  —    $24.7800  7/15/2013(1) —     —   
  100,000  —    $24.7800  7/15/2013(2)     
  45,000  9,000  $13.5900  8/19/2015(3) —     —   
  12,750  17,850  $19.7800  4/26/2017(3) —     —   
  —    40,000  $14.2100  4/23/2018(3) —     —   
  —    —     —    —    2,250  $15,367(4)

(1)Option is immediately exercisable and vests over four years with 1/48th of the shares vesting each month.
(2)Option is immediately exercisable and vests over four years, 25% of the shares vesting after one year, and 1/48th of the shares vesting each month thereafter.
(3)Option vests over four years, with 25% vested and exercisable after one year, and 1/48th of the shares vesting each month thereafter.
(4)Restricted stock unit award, vesting over four years with 25% of the units vested after one year and 1/16th of the units vesting each quarter thereafter. Market value based on the closing price of our common stock on December 31, 2008, which was $6.83.

12


2008 Option Exercises and Stock Vested

The following table presents information regarding the tender offer, currentexercise of stock options by named executive officers during 2008, and on the vesting of other stock awards during 2008 that were previously granted to the named executive officers.

   Option Awards  Stock Awards
   Number of
Shares
Acquired on
Exercise (#)
  Value Realized
on

Exercise ($)(1)
  Number of
Shares
Acquired
on

Vesting (#)
  Value Realized on
Vesting ($)(2)

Levy Gerzberg, Ph.D.

  —    —    10,000  $105,875

Karl Schneider

  —    —    3,333  $35,287

Isaac Shenberg, Ph.D.

  —    —    3,000  $31,763

(1)The dollar amounts shown in this column are determined by multiplying (i) the number of shares of our common stock to which the exercise of the option related, by (ii) the difference between the per-share closing price of our common stock on the date of exercise and the exercise price of the options.
(2)The dollar amounts shown this column are determined by multiplying the number of shares or units, as applicable, that vested by the per-share closing price of our common stock on the vesting date.

Potential Payments upon Termination or Change in Control

Change-in-Control Agreements

We maintain an Executive Retention and Severance Plan (“Retention Plan”) that provides for certain benefits for our executive officers and certain key employees subject to taxationin connection with our change in control. The Retention Plan provides that if, in the United States hadevent of our change in control, the opportunity to increasecompany acquiring us does not assume, continue or substitute for the per-share exercise priceoutstanding stock options, stock appreciation rights or restricted stock units 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 eligibleRetention Plan, then the vesting, exercisability and settlement of such awards will be accelerated in full immediately prior to, but conditioned upon, the consummation of the change in control.

The Retention Plan also provides for cash bonusesthe payment of severance benefits to a participant who, within 18 months after a change in control, is terminated without cause or resigns as a result of good reason. Upon such termination, the participant would be entitled to a lump sum payment in an amount equal to the aggregate amount of $423,000 to compensate themhis base salary and annual bonus for a period of 36 months in the case of the chief executive officer, and 18 months in the case of other executive officers. For these purposes, the annual bonus amount will equal the greater of (i) the participant’s aggregate bonus for the higher per-sharefiscal year immediately preceding the fiscal year of the change in control, (ii) the participant’s aggregate bonus for the fiscal year immediately preceding the fiscal year of the participant’s termination of employment, or (iii) the participant’s aggregate target bonus (assuming attainment of 100% of all applicable performance goals) for the fiscal year of the participant’s termination. We will also provide health (including medical and dental) benefits to the participant and his or her dependents and life insurance benefits to the participant, for 36 months in the case of the chief executive officer and 18 months in the case of other executive officers, at the same premium cost to the participant and coverage levels in effect at the time of termination. In addition, the participant’s outstanding equity awards will become fully vested and, in the case of stock options and stock appreciation rights, will generally remain exercisable for a period of one year after such termination. We will also indemnify the participant for claims or actions arising out of the participant’s services to us and will maintain directors’ and officers’ liability insurance for six years following the date of the participant’s termination. Finally, if the benefits described above or otherwise received by a participant in connection with a change in control would cause the participant to be subject to any excise tax under Section 4999 of the Internal Revenue Code of 1986, as amended, the payments under the Retention Plan will be automatically reduced if such reduction would result in a greater after-tax benefits to the participant.

13


A change in control is defined generally under the Retention Plan as a person becoming the beneficial owner of a majority of our outstanding shares or voting power, a merger resulting in the stockholders prior to the merger owning less than half of our voting power after the merger, sale of substantially all our assets, or a change in the composition of the majority of the Board over a two-year period.

Cause for termination would include certain acts by the executive of fraud, embezzlement or dishonesty, unauthorized use or disclosure of confidential information or trade secrets, or intentional misconduct adversely affecting our business. Good reason for an executive’s resignation would generally include a reduction in duties, salary, target bonus or benefits, or a relocation of more than 30 miles, in each case without the executive’s consent.

Other Termination Agreements

In December 1997, we issued an offer letter to Karl Schneider, pursuant to which, if Mr. Schneider’s employment with us is terminated, either by us or Mr. Schneider, for a reason other than “cause,” as such term is defined in the offer letter, the other party to the letter is entitled to three months notice; provided, however, that if Mr. Schneider accepts an offer of employment from another company while still employed with us, Mr. Schneider must notify us within 12 hours of acceptance of such offer, and we may terminate Mr. Schneider’s employment without providing advance notice.

Managers’ Insurance and Education Fund

We offer to make contributions on behalf of all of our full time Israeli employees, including Dr. Shenberg who is resident in Israel, to a fund known as Managers’ Insurance. This fund provides a combination of retirement plan, insurance and severance pay benefits to the employee, giving the employee or his or her estate payments upon retirement, disability or death and securing the severance pay, if legally entitled, upon termination of employment. Each full-time employee is entitled to participate in the plan, and each employee who participates contributes an amount equal to 5% of his or her salary to the retirement plan and we contribute between 13.33% and 15.83% of his or her salary (consisting of 5% to the retirement plan, 8.33% to secure severance payments and up to 2.5% for disability insurance). Under the retirement plan component of the Managers’ Insurance, all of our contributions and the contributions made by the employee are immediately vested and non-forfeitable upon contribution to the Managers’ Insurance.

We also provide all of our full-time Israeli employees, including Dr. Shenberg, with an education fund benefit. We contribute to the education fund an amount equal to 7.5% of the employee’s monthly salary and the employee contributes an additional amount equal to 2.5% of his or her monthly salary. The amounts contributed up to the legally recognized limit are available to the employee on a tax-free basis after the lapse of six years from the initial contribution.

Payments upon Termination without Cause, or With Good Reason, After a Change in Control

The following table presents the dollar value of payments and benefits upon a termination of employment of our named executive officers in the event of their termination without cause or resignation with good reason within 18 months following a change in control, assuming that termination took place on December 31, 2008.

Name

  Cash
Severance
(Salary)
  Cash Severance
(Bonus)(1)
  Continued Health
Benefits
  Acceleration
of Equity Awards
(2)
  Total

Levy Gerzberg, Ph.D.

  $1,194,300  $1,566,300  $45,647  $51,225  $2,857,472

Karl Schneider

  $386,100  $314,700  $34,059  $17,075  $751,934

Isaac Shenberg, Ph.D.

  $347,934  $246,300  $314  $15,367  $609,915

(1)Bonus means the greater of (i) the aggregate of all bonuses earned by the participant (whether or not actually paid) for 2007, or (ii) the targeted bonus the participant would have earned (assuming attainment of 100% of all applicable performance goals) for 2008.

14


(2)Represents the intrinsic value of accelerated restricted stock units, based upon the closing price of our common stock on December 31, 2008, which was $6.83. On December 31, 2008, each of the outstanding options held by our named executive officers had an exercise price that was greater than the closing price of our common stock on that date and, accordingly, no value is reported in the table above with respect to the acceleration of these options. As noted above, the Retention Plan also provides that the executive would be entitled to accelerated vesting of all outstanding equity awards if the successor entity did not assume the awards following our change in control.

DIRECTOR COMPENSATION

Cash Compensation

For serving as a member of our Board, each of our directors that is not employed by us or one of our subsidiaries (a “non-employee director”) receives an annual retainer of $20,000 and a fee of $2,000 for each Board meeting attended. Board committee chairs receive $2,500 per quarter, and other committee members receive $1,500 per quarter, and all committee members receive $750 for each committee meeting attended.

Stock Options

Upon appointment or election to the Board, each non-employee director receives an option to purchase 30,000 shares of our common stock, vesting in four equal annual installments. Thereafter, on the date following each annual meeting of stockholders, each incumbent non-employee director who was not appointed or elected in the previous year receives an option to purchase 15,000 shares of our common stock, vesting in full on the day preceding the next annual meeting of stockholders, subject to the director’s continued service through that date. The exercise prices. price of each such option is the closing price of our common stock on the date of grant. These options expire after 10 years.

The following table provides information regarding all compensation for 2008 for each of our non-employee directors. The compensation paid to Dr. Gerzberg, who is also one of our employees, is presented below in the Summary Compensation Table and the related explanatory tables. Dr. Gerzberg is not entitled to receive additional compensation for his service as a director.

Name

  Fees
Earned
or Paid
in Cash
  Option
Awards(1)(2)
  All Other
Compensation
  Total

Uzia Galil

  $48,500  $149,705  —    $198,205

Raymond A. Burgess

  $47,500  $165,085  —    $212,585

James D. Meindl, Ph.D.

  $44,500  $149,705  —    $194,205

James B. Owens, Jr.

  $58,000  $149,705  —    $207,705

David Rynne

  $44,000  $149,705  —    $193,705

Arthur B. Stabenow

  $72,500  $149,705  —    $222,205

Philip M. Young

  $48,500  $149,705  —    $198,205

(1)These amounts reflect the dollar amount of expense recognized for financial statement reporting purposes for the year ended December 31, 2008 in accordance with FAS 123(R), with the exception that estimated forfeitures related to service-based vesting were disregarded in these amounts. No equity awards granted to our non-employee directors were forfeited during 2008. Assumptions used in the calculation of these amounts for purposes of our financial statements for the years ended December 31, 2006, 2007 and 2008 are included in Note 10 of Notes to Consolidated Financial Statements for the year ended December 31, 2008 included in our Annual Report on Form 10-K filed with the SEC.
(2)

As described above, we granted each of our non-employee directors an option to purchase 15,000 shares of our common stock on June 13, 2008. Each of these options had a per-share exercise price of $13.50 and a grant date fair value (as determined under FAS 123R) of $104,485. At December 31, 2008, the following

15


directors had outstanding options to purchase the number of shares of our common stock set forth following their respective names: Mr. Galil, 126,600 shares; Mr. Burgess, 75,000 shares; Dr. Meindl, 126,600 shares; Mr. Owens, 105,000 shares; Mr. Rynne, 131,733 shares; Mr. Stabenow, 152,850 shares; Mr. Young, 126,600 shares.

Director Stock Ownership Guidelines

The Board adopted stock ownership guidelines recommending minimum stock ownership levels for our non-employee directors. Holdings include our shares from all sources, including personal and trust holdings, restricted stock, restricted stock units, stock options and stock appreciation rights. The current members of the Board are each encouraged to own a number of shares of our common stock that have a value at least equal to three times the annual cash bonuses wereretainer paid on January 4, 2008 and were accruedfor Board service. We recommend that new members of the Board comply with this guideline within three years of their initial election or appointment.

COMPENSATION COMMITTEE INTERLOCKS AND INSIDER PARTICIPATION

The members of the Compensation Committee 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 excess2008 were Mr. Galil, Dr. Meindl and Mr. Stabenow. Mr. Galil is Chairman of the fair valuecommittee. The Board has determined that each of the replacement award and cash bonuses over the fair valuemembers of the cancelled award.

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

        ForCompensation Committee is independent for purposes of the disclosure requirementsapplicable rules 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%

ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—STOCKHOLDERS' EQUITY (Continued)

        Expected Term:    The expected term represents the period that the Company's stock-based awards are expected to be outstanding and was determined basedNasdaq. No one who served on the Company's historical experience with similar awards, giving consideration toCompensation Committee at any time during 2008 is or has been our executive officer or had any relationships requiring disclosure by us under the contractual termsSEC’s rules requiring disclosure of certain relationships and related-party transactions. None of our executive officers served as a director or a member of a compensation committee (or other committee serving an equivalent function) of any other entity, the executive officers of which served as a director or member 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 reflectsCompensation Committee during 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

        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
  
   

Employee Stock Purchase Plan

        The Company's 1995 Employee Stock Purchase Plan ("ESPP") was adopted by the Company's Board of Directors in October 1995, and approved by its stockholders in December 1995. The ESPP enables employees to purchase shares through payroll deductions at approximately 85% of the lesser of the fair value of common stock at the beginning of a 24-month offering period or the end of each six-month segment within such offering period. The ESPP is intended to qualify as an "employee stock


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 9—STOCKHOLDERS' EQUITY (Continued)


purchase plan" under Section 423 of the U.S. Internal Revenue Code. During the yearsfiscal year ended December 31, 2007 and 2006, 184,495 and 263,349 shares were purchased by employees under the terms2008.

COMPENSATION COMMITTEE REPORT*

The members of the plan agreements at a weighted average priceCompensation Committee have reviewed and discussed the Compensation Discussion and Analysis required by Item 402(b) of $16.75Regulation S-K with management and, $9.16 per share, respectively. As of December 31, 2007, 2,126,952 shares were reservedbased on such review and available for issuance under this plan.

NOTE 10—RETIREMENT AND EMPLOYEE BENEFIT PLANS

        The Company maintains a 401(k) Plan that covers substantially alldiscussion, the members 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.

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

 
 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 
  
 
 
 

ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 11—EARNINGS PER SHARE

        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.

NOTE 12—INCOME TAXES

        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)
  
 
 
 

ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12—INCOME TAXES (Continued)

        The components of the provision (benefit) for income taxes are as follows:

 
 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 
  
 
 
 

ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12—INCOME TAXES (Continued)

        Deferred income tax assets comprise the following:

 
 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


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12—INCOME TAXES (Continued)


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


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 12—INCOME TAXES (Continued)


$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.

NOTE 13—SEGMENT REPORTING

        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'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.

        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 
  
 
 
 

ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13—SEGMENT REPORTING (Continued)

        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
  
 
 

ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 13—SEGMENT REPORTING (Continued)

        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.

NOTE 14—ACQUISITION

Oren Semiconductor, Inc.

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


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14—ACQUISITION (Continued)


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.

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

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

Pro Forma Financial Information

        The following unaudited pro forma financial information presents the combined results of operations of Zoran and Oren as if the acquisition had occurred as of the beginning of 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


ZORAN CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)

NOTE 14—ACQUISITION (Continued)


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)
  
 


ZORAN CORPORATION

SELECTED QUARTERLY FINANCIAL INFORMATION

(Unaudited)

 
 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

(1)
Computed on the basis described in Note 2 of Notes to Consolidated Financial Statements.

(2)
During the fourth quarter of 2007, we recorded an income tax benefit of $51.4 million due to the release of the valuation allowance on deferred tax assets which we believe are more likely than not to be realized.


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

        Not applicable.


Item 9A—Controls and Procedures

Disclosure Controls and Procedures

        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.

Management's Report on Internal Control Over Financial Reporting.

        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:

        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.

        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 inInternal Control—Integrated Framework issued by theCompensation Committee of Sponsoring Organizations of the Treadway Commission. Based on our evaluation using criteria established inInternal 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.

Changes to Internal Control Over Financial Reporting

        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.


Item 9B—Other Information

        Not applicable.



PART III

        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.


Item 10—Directors, Executive Officers and Corporate Governance

        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 nomineesrecommended to the Board of Directors required bythat the Compensation Discussion and Analysis be included in this Item is incorporated by reference to the section in our Proxy Statement entitled "Director Nominations".Amendment.

 The

THE COMPENSATION COMMITTEE
Uzia Galil, Chairman
James Meindl, Ph.D.
Arthur B. Stabenow

*SEC filings sometimes “incorporate information concerning the audit committee of the Board of Directors required by reference.” This means the Company is referring you to information that has previously been filed with the SEC, and that this information should be considered as part of the filing you are reading. Unless the Company specifically states otherwise, this report shall not be deemed to be incorporated by reference and shall not constitute soliciting material or otherwise be considered filed under the Securities Act or the Securities Exchange Act.

Item is incorporated by reference to the section in our Proxy Statement entitled "Board Meetings and Committees".


Item 11—Executive Compensation

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

Securities Authorized for Issuance under Equity Compensation Plans

We currently maintain three compensation plans that provide for the issuance of Zoran common stock to officers and other employees, directors or consultants. These plans are the 2005 Directors Plan, the 1995 Purchase Plan (the “Purchase Plan”) and the 2005 Equity Incentive Plan, all of which have been approved by the

16


stockholders. The Company previously maintained the 2000 Nonstatutory Stock Option Plan (“2000 Plan”), which was not approved by the stockholders and terminated in 2005, as well as other equity incentive plans under which the Company may no longer grant additional awards. The following table sets forth information regarding outstanding awards and shares reserved for future issuance under the foregoing plans as of December 31, 2008.

Equity Compensation Plan Information as of December 31, 2008

 

Plan Category

  Number of Shares
to

be Issued upon
Exercise of
Outstanding
Options, Warrants
and Rights

(a)
  Weighted-
Average
Exercise Price
of
Outstanding
Options,
Warrants and
Rights

(b)
  Number of Shares
Remaining
Available

for Future
Issuance

under Equity
Compensation
Plans

(Excluding Shares
Reflected in

Column (a))
(c)
 

Equity compensation plans approved by stockholders

  5,796,022(1) $17.93(2) 5,107,687(3)

Equity compensation plans not approved by stockholders(4)

  2,539,428  $14.90  —   
        

Total

  8,335,450  $17.00  5,107,687 
        

(1)Of these shares, 3,115,523 were subject to outstanding options under the 2005 Equity Incentive Plan, 405,000 were subject to outstanding options under the 2005 Directors Plan, 2,240,099 were subject to outstanding options under prior plans no longer available for future award grants, and 35,400 were subject to outstanding and unvested restricted stock unit awards under the 2005 Equity Incentive Plan. This number of shares is presented after giving effect to the 452,122 shares purchased under the Purchase Plan for the purchase period that ended October 31, 2008.
(2)This weighted-average exercise price does not reflect the shares that will be issued upon the payment of outstanding restricted stock units.
(3)Of the aggregate number of shares that remained available for future issuance, 3,538,935 were available under the 2005 Equity Incentive Plan, 195,000 were available under the 2005 Directors Plan, and 1,373,752 were available under the Purchase Plan. Subject to certain express limits of the 2005 Equity Incentive Plan and the 2005 Directors Plan, shares available for award purposes under these plans generally may be used for any type of award authorized under the plans including options, stock appreciation rights, and other forms of awards granted or denominated in shares of our common stock including, without limitation, stock bonuses, restricted stock, restricted stock units and performance shares. This table does not reflect the 600,000 additional shares that will be available under the 2005 Directors Plan if stockholders approve the 2005 Directors Plan proposal or the 3,000,000 additional shares that will be available under the Purchase Plan if stockholders approve the Purchase Plan proposal.
(4)Consists of options outstanding under the 2000 Plan. We terminated the 2000 Plan effective July 29, 2005. However, outstanding options granted to employees and consultants pursuant to the 2000 Plan continue to be governed by the terms and conditions of the 2000 Plan. The material features of the 2000 Plan are described below.

Material Features of the 2000 Nonstatutory Stock Option Plan

The information required2000 Plan was terminated effective July 29, 2005. The 2000 Plan provided for the grant of nonstatutory stock options to employees or consultants with exercise prices typically equal to (but not less than 85% of) the fair market value of our common stock on the date of grant. No current officer or other person whose eligibility would require stockholder approval of the 2000 Plan under any law or stock exchange rules was granted an option under the plan, except as permitted under Nasdaq Rule 4350(i)(1)(A)(iii). Under that rule, a company that assumes a pre-existing, stockholder-approved plan in a merger is permitted to use the share reserve under the assumed plan (after appropriate adjustment to reflect the merger) to issue options to any persons, including officers or directors, who were not employed by this Item is incorporated by referencethe company at the effective time of the merger, so long as the options are granted on or prior to the sectionexpiration date of the assumed plan. Such options may be issued under the

17


assumed plan or any other plan maintained by the issuer. In our acquisition of Oak Technology, Inc. (“Oak”), we assumed the stockholder-approved stock option plans of Oak that were in effect immediately prior to the effective time of the merger with Oak. As a result, 2,832,210 shares that were available for issuance under those plans (as adjusted to reflect the merger) became available for issuance under the 2000 Plan until the termination of the 2000 Plan.

The 2000 Plan was administered by the Compensation Committee, which determined the optionees and the terms of the options granted, including exercise price and number of shares subject to the options granted. However, Dr. Gerzberg was authorized by the Board to grant options to non-executive officer employees to purchase up to 30,000 shares. Certain options granted under the 2000 Plan were fully exercisable from the date of grant, subject to our right to repurchase unvested shares at the original purchase price upon the optionee’s termination of service. Subject to the optionee’s continued service, the options generally vested at the rate of 1/4 of the shares on the first anniversary of the date of grant and at the rate of 1/48 of the shares on the last day of each of the next 36 calendar months thereafter. Options granted under the 2000 Plan had 10-year terms and terminate three months after the termination of service, except where service terminates due to the optionee’s death or permanent and total disability, in which case the option remains exercisable for one year after such termination but in no event beyond the expiration of the option’s term.

Security Ownership of Certain Beneficial Owners and Management

The following table sets forth, as of April 27, 2009, information with respect to the beneficial ownership of our Proxy Statement entitled "Principal Stockholderscommon stock by (i) each stockholder known by us to be the beneficial owner of more than 5% of our common stock, (ii) each of our directors and Stock Ownershipdirector-nominees, (iii) each of our executive officers and (iv) all of our directors and executive officers as a group. The number of shares beneficially owned by Management"each individual stockholder is calculated on the basis of 51,183,007 shares of common stock outstanding as of April 27, 2009, provided that any additional shares of common stock issuable upon exercise of options that a stockholder has the right to acquire within 60 days after April 27, 2009 and "Equity Compensation Plan Information".settlement of restricted stock units are deemed to be outstanding and beneficially owned for the purpose of calculating that stockholder’s percentage beneficial ownership. They are not, however, deemed to be outstanding and beneficially owned for the purpose of computing the percentage ownership of any other person.

Name of Beneficial Owner(1)

  Amount and Nature of
Beneficial Ownership
  Percent of
Class
 

FMR LLC and affiliated entities(2)

  6,625,844  12.95%

Dimensional Fund Advisors, Inc.(3)

  4,178,140  8.16%

BlackRock, Inc.(4)

  3,959,045  7.74%

AXA Financial, Inc. and affiliated entities(5)

  3,269,219  6.39%

Barclays Global Investors (Deutschland) AG(6)

  2,634,631  5.15%

Levy Gerzberg, Ph.D.(7)

  978,214  1.88%

Isaac Shenberg, Ph.D.(8)

  525,485  1.02%

Karl Schneider(9)

  453,000  * 

Arthur B. Stabenow(10)

  217,446  * 

Uzia Galil(11)

  158,173  * 

Philip M. Young(12)

  126,600  * 

David Rynne(13)

  131,733  * 

James D. Meindl, Ph.D.(14)

  128,620  * 

James B. Owens, Jr.(15)

  111,000  * 

Raymond A. Burgess(16)

  77,000  * 

All directors and executive officers as a group (10 persons)(17)

  2,907,271  5.41%

*Less than 1%.
(1)Except as otherwise indicated, the persons named in this table have sole voting and investment power with respect to all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and to the information contained in the footnotes to this table.

18


(2)Based on information contained in a Schedule 13G/A filed by FMR LLC and Edward C. Johnson 3d (together, “FMR LLC”) with the SEC on February 17, 2009. FMR LLC controls several entities that hold our common stock as investment advisors. Fidelity Management & Research Company (“FMRC”) is the beneficial owner of 5,813,644 shares. One investment company, Fidelity Small Cap Value Fund (collectively with FMR LLC and FMRC, “FMR”), is the beneficial owner of 2,716,311 shares. Pyramis Global Advisors, LLC (“PGALLC”) is the beneficial owner of 475,000 shares. Pyramis Global Advisors Trust Company (“PGATC”) is the beneficial owner of 332,600 shares. FIL Limited (“FIL”) is the beneficial owner of 4,600 shares. FMR LLC has sole voting power with respect to 814,700 shares and sole dispositive power with respect to 6,625,844 shares. The address of FMR is 82 Devonshire Street, Boston, Massachusetts, 02109.
(3)Based on information contained in a Schedule 13G/A filed by Dimensional Fund Advisors LP with the SEC on February 9, 2009. Dimensional Fund Advisors, Inc. disclaims beneficial ownership of all such securities. Dimensional Fund Advisors, Inc. acts as investment advisor or manager to certain investment companies, trusts and accounts, no one of which, to the knowledge of Dimensional Fund Advisors, Inc., owns more than 5% of the class. Dimensional Fund Advisors, Inc. has sole voting power with respect to 4,093,717 shares and sole dispositive power with respect to 4,178,140 shares. The address of Dimensional Fund Advisors, Inc. is Palisades West, Building One, 6300 Bee Cave Road, Austin, Texas, 78746.

(4)

Based on information contained in a Schedule 13G filed by BlackRock, Inc. with the SEC on February 10, 2009. BlackRock, Inc. disclaims beneficial ownership of all such securities. BlackRock, Inc. is a parent holding company for several entities that hold our common stock as investment advisors. BlackRock, Inc. has shared voting and dispositive power with respect to 3,959,045 shares. The address of BlackRock, Inc. is 40 East 52nd Street, New York, New York, 10022.

(5)Based on information contained in a Schedule 13G/A filed by AXA Financial, Inc., AXA Assurances I.A.R.D Mutuelle, AXA Assurances Vie Mutuelle and AXA (collectively, “AXA”) with the SEC on February 13, 2009. AXA disclaims beneficial ownership of all such securities. AXA, as a group, controls several entities that hold our common stock as investment advisors. AllianceBernstein L.P. has sole voting power with respect to 2,947,512 shares and sole dispositive power with respect to 3,266,512 shares. AXA Equitable Life Insurance Company has sole voting and dispositive power with respect to 2,707 shares. The address of AXA Financial, Inc. is 1290 Avenue of the Americas, New York, New York, 10104. The address of AXA Assurances I.A.R.D Mutuelle and AXA Assurances Vie Mutuelle is 26, rue Drouot, 75009 Paris, France. The address of AXA is 25, avenue Matignon, 75008 Paris, France.
(6)Based on information contained in a Schedule 13G filed by Barclays Global Investors (Deutschland) AG, Barclays Global Investors, NA., Barclays Global Fund Advisors, Barclays Global Investors, Ltd, Barclays Global Investors Japan Limited, Barclays Global Investors Canada Limited and Barclays Global Investors Australia Limited (collectively, “Barclays”) with the SEC on February 5, 2009. Barclays Global Investors (Deutschland) AG has sole voting power with respect to 2,439,995 shares and sole dispositive power with respect to 2,634,631 shares. Barclays Global Fund Advisors has sole voting power and sole dispositive power with respect to 1,337,086 shares. Barclays Global Investors, NA., has sole voting power with respect to 1,102,909 shares and sole dispositive power with respect to 1,297,545 shares. The address of Barclays Global Investors (Deutschland) AG is Apianstrasse 6, D-85774, Unterfohring, Germany. The address of Barclays Global Fund Advisors and Barclays Global Investors, NA., is 400 Howard Street, San Francisco, CA 94105.
(7)Consists of 177,045 shares held directly, 796,169 shares issuable upon exercise of options and 5,000 shares issuable upon settlement of restricted stock units.
(8)Consists of 11,273 shares held directly, 512,712 shares issuable upon exercise of options and 1,500 shares issuable upon settlement of restricted stock units.
(9)Consists of 21,665 shares held directly, 429,668 shares issuable upon exercise of options and 1,667 shares issuable upon settlement of restricted stock units.
(10)Consists of 64,596 shares held directly and 152,850 shares issuable upon exercise of options.
(11)Includes 27,063 shares held by Mr. Galil and 4,510 shares held by Mr. Galil’s spouse. Mr. Galil may be deemed to be a beneficial owner of the shares held by his spouse, although Mr. Galil disclaims such beneficial ownership. Also includes options to purchase 126,600 shares of common stock.

19


(12)Consists of 126,600 shares issuable upon exercise of options.
(13)Consists of options to purchase 131,733 shares.
(14)Includes 111 shares held jointly with Dr. Meindl’s spouse and 1,909 shares held by James and Frederica Meindl as trustees of the Meindl Trust dated February 4, 1972. Also includes options to purchase 126,600 shares.
(15)Consists of 6,000 shares held directly and 105,000 shares issuable upon exercise of options.
(16)Consists of 2,000 shares held directly and 75,000 shares issuable upon exercise of options.
(17)Includes an aggregate of 2,591,099 shares issuable upon exercise of options and settlement of restricted stock units.


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

Transactions with Related Persons

In 2008, we did not participate, and we are not currently participating, in any transaction or proposed transaction in which the amount involved exceeded $120,000 and in which any related person had or will have a direct or indirect material interest.

Review, Approval or Ratification of Transactions with Related Persons

The information required by this Audit Committee reviews and approves all related persons transactions.

Director Independence

The Board has determined that Dr. Meindl and Messrs. Galil, Burgess, Owens, Rynne, Stabenow and Young are “independent directors” as defined under the rules of Nasdaq, as currently in effect.

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".



Item 14—14. Principal Accounting Fees and Services
Services.

The information requiredfollowing table sets forth the aggregate fees billed to Zoran for the years ended December 31, 2007 and 2008 by this ItemPricewaterhouseCoopers LLP, our independent registered public accountant for the fiscal year ended December 31, 2008:

   2007  2008

Audit fees(1)

  $1,608,292  $1,145,000

Audit-Related Fees(2)

   —     —  

Tax fees(3)

   —     —  

All other fees(4)

   1,500   1,500
        

Total

  $1,609,792  $1,146,500
        

(1)Audit fees consist of fees billed for professional services rendered for the audit of our consolidated annual financial statements and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by PwC in connection with statutory and regulatory filings or engagements. Audit fees also include fees related to PwC’s audit of the effectiveness of our internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act.
(2)Audit-Related fees consist of fees not reported under the Audit fees section that are billed for professional services rendered for the audit or review of our consolidated annual financial statement and review of the interim consolidated financial statements included in quarterly reports and services that are normally provided by PwC in connection with statutory and regulatory filings or engagements.
(3)Tax fees consist of fees billed for professional services rendered for tax compliance, tax advice and tax planning (domestic and international). These services include assistance regarding federal, state and international tax compliance, acquisitions and international tax planning.
(4)Other fees include fees for accounting library software and other miscellaneous services.

Our policy requires the Audit Committee to pre-approve all audit and permissible non-audit services provided by our independent registered public accounting firm. Management is incorporated by referenceresponsible for reporting to the section of our Proxy Statement entitled "Principal Auditor Fees and Services".Audit Committee on a quarterly basis regarding expenditures for non-audit services made in accordance with this pre-approval.

20



PART IV

Item 15—15. Exhibits and Financial Statement Schedules

Exhibits

The following documents are filed as a part of this report:

    (1)
    Financial Statements:
    See Index to Consolidated Financial Statements at page 50 of this report.

    (2)
    Financial Statement Schedules:
    All financial statement schedules are omitted because they are not applicable or not required, or because the required information is included in the Consolidated Financial Statements and Notes thereto which are included herein.

    (3)
    Exhibits:

31.1Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a).
31.2Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a).

21



EXHIBIT LIST

 
  
 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

*10.12

 

Zoran Corporation 2005 Outside Directors Equity Plan with forms of equity award agreements attached

 

 

 

 

 

 

 

 

 

X

10.13

 

PC Optical Storage Technology Patent License Agreement dated as of January 25, 2006 among Zoran, Zoran's subsidiary Oak Technology, Inc., and MediaTek, Inc

 

10-Q

 

000-27246

 

10.54

 

05/10/2006

 

 

10.14

 

PC Optical Storage Patent Cross License Agreement dated as of January 25, 2006 among Zoran, Zoran's subsidiary Oak Technology, Inc. and MediaTek, Inc.

 

10-Q

 

000-27246

 

10.55

 

05/10/2006

 

 

*10.15

 

1993 Stock Option Plan, as amended

 

10-K

 

000-27246

 

10.17

 

4/20/2007

 

 

*10.16

 

1995 Outside Directors Stock Option Plan

 

10-K

 

000-27246

 

10.18

 

4/20/2007

 

 

*10.17

 

Form of Amendment of Nonstatutory Stock Option Agreement for Outside Directors

 

10-K

 

000-27246

 

10.19

 

4/20/2007

 

 

10.18

 

Lease Agreement dated as of February 8, 2007 by and between Arturo J. Gutierrez and John A. Cataldo, Trustees of Auburn-Oxford Trust, u/d/t dated October 19, 1983 and Zoran Corporation

 

10-K

 

000-27246

 

10.20

 

4/20/2007

 

 



10.19

 

Lease Agreement dated as of May 19, 2006 by and between WTA Kifer LLC and Zoran Corporation, as amended on May 19, 2006

 

10-K

 

000-27246

 

10.21

 

4/20/2007

 

 

*10.20

 

Description of 2007 Executive Officer Bonus Policy

 

 

 

 

 

 

 

 

 

X

*10.21

 

Description of 2008 Executive Officer Bonus Policy

 

 

 

 

 

 

 

 

 

X

*10.22

 

Amendments to Stock Option Agreements, between the Company and Levy Gerzberg, dated July 17, 2002 and February 11, 2008

 

 

 

 

 

 

 

 

 

X

*10.23

 

Amendment to Stock Option Agreements, between the Company and Karl Schneider, dated December 22, 2006

 

 

 

 

 

 

 

 

 

X

*10.24

 

Amendment of Stock Option Agreement, between the Company and Levy Gerzberg, dated December 22, 2006

 

 

 

 

 

 

 

 

 

X

21.1

 

List of Subsidiaries of the Registrant

 

10-K

 

000-27246

 

21.1

 

4/20/2007

 

 

23.1

 

Consent of Independent Registered Public Accounting Firm

 

 

 

 

 

 

 

 

 

X

31.1

 

Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act

 

 

 

 

 

 

 

 

 

X

31.2

 

Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act

 

 

 

 

 

 

 

 

 

X

32.1

 

Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

X

32.2

 

Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

X

*
Constitutes a management contract or compensatory plan, contract or arrangement.

SIGNATURES


SIGNATURES

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.

Dated: February 29, 2008
 ZORAN CORPORATION



By:

/s/  
LEVY GERZBERG      
Levy Gerzberg,
President and Chief Executive Officer

        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.

Signature

Title
Date





/s/  LEVY GERZBERG      
Levy GerzbergDated: April 30, 2009
 President, Chief Executive Officer and Director (Principal Executive Officer)

/s/    KARL SCHNEIDER

 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/  (Principal Financial and Accounting Officer)
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


EXHIBIT LIST

 
  
 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


*10.12

 

Zoran Corporation 2005 Outside Directors Equity Plan with forms of equity award agreements attached

 

 

 

 

 

 

 

 

 

X

10.13

 

PC Optical Storage Technology Patent License Agreement dated as of January 25, 2006 among Zoran, Zoran's subsidiary Oak Technology, Inc., and MediaTek, Inc

 

10-Q

 

000-27246

 

10.54

 

05/10/2006

 

 

10.14

 

PC Optical Storage Patent Cross License Agreement dated as of January 25, 2006 among Zoran, Zoran's subsidiary Oak Technology, Inc. and MediaTek, Inc.

 

10-Q

 

000-27246

 

10.55

 

05/10/2006

 

 

*10.15

 

1993 Stock Option Plan, as amended

 

10-K

 

000-27246

 

10.17

 

4/20/2007

 

 

*10.16

 

1995 Outside Directors Stock Option Plan

 

10-K

 

000-27246

 

10.18

 

4/20/2007

 

 

*10.17

 

Form of Amendment of Nonstatutory Stock Option Agreement for Outside Directors

 

10-K

 

000-27246

 

10.19

 

4/20/2007

 

 

10.18

 

Lease Agreement dated as of February 8, 2007 by and between Arturo J. Gutierrez and John A. Cataldo, Trustees of Auburn-Oxford Trust, u/d/t dated October 19, 1983 and Zoran Corporation

 

10-K

 

000-27246

 

10.20

 

4/20/2007

 

 

10.19

 

Lease Agreement dated as of May 19, 2006 by and between WTA Kifer LLC and Zoran Corporation, as amended on May 19, 2006

 

10-K

 

000-27246

 

10.21

 

4/20/2007

 

 

*10.20

 

Description of 2007 Executive Officer Bonus Policy

 

 

 

 

 

 

 

 

 

X

*10.21

 

Description of 2008 Executive Officer Bonus Policy

 

 

 

 

 

 

 

 

 

X

*10.22

 

Amendments to Stock Option Agreements, between the Company and Levy Gerzberg, dated July 17, 2002 and February 11, 2008

 

 

 

 

 

 

 

 

 

X

*10.23

 

Amendment to Stock Option Agreements, between the Company and Karl Schneider, dated December 22, 2006

 

 

 

 

 

 

 

 

 

X



*10.24

 

Amendment of Stock Option Agreement, between the Company and Levy Gerzberg, dated December 22, 2006

 

 

 

 

 

 

 

 

 

X

21.1

 

List of Subsidiaries of the Registrant

 

10-K

 

000-27246

 

21.1

 

4/20/2007

 

 

23.1

 

Consent of Independent Registered Public Accounting Firm

 

 

 

 

 

 

 

 

 

X

31.1

 

Certification of Chief Executive Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act

 

 

 

 

 

 

 

 

 

X

31.2

 

Certification of Chief Financial Officer, pursuant to Rule 13a-14(a) or 15d-14(a) of the Exchange Act

 

 

 

 

 

 

 

 

 

X

32.1

 

Certification of Chief Executive Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

X

32.2

 

Certification of Chief Financial Officer, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

 

 

 

 

 

 

 

 

X

*
Constitutes a management contract or compensatory plan, contract or arrangement.



QuickLinks

ZORAN CORPORATION INDEX TO ANNUAL REPORT ON FORM 10-K FOR YEAR ENDED DECEMBER 31, 2007
Special Note Regarding Forward-Looking Statements
PART I
PART II
Report of Independent Registered Public Accounting Firm
ZORAN CORPORATION CONSOLIDATED BALANCE SHEETS (in thousands, except share data)
ZORAN CORPORATION CONSOLIDATED STATEMENTS OF OPERATIONS (in thousands, except per share data)
ZORAN CORPORATION CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (in thousands)
ZORAN CORPORATION CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands)
ZORAN CORPORATION SELECTED QUARTERLY FINANCIAL INFORMATION (Unaudited)
PART III
PART IV
EXHIBIT LIST
SIGNATURES
EXHIBIT LIST