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 2006:

In 2006, one customer accounted for 14% of our total revenues, and sales to our four largest customers accounted for 36% of our total revenues. In 2005, no single customer accounted for more than 10% of our total revenues, and sales to our four largest customers accounted for 29% of our total revenues.

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. In 2004, we earned grants totaling $1.5 million. There were no grant receipts in 2005 and 2006. 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.

Research and development expenses that qualify for the grants and the related grants are as follows (in thousands):

As of December 31, 2006, we had 645 research and development personnel, of which 523 were employed full-time, and 122 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 138-person direct sales staff, of whom 11 are located in the United States and 127 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 marketing staff in China, Japan, Korea and Taiwan are responsible for marketing in their respective regions. In addition, we sell our products indirectly primarily through selected resellers. We typically warrant our products for a 12-month period. 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 better 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 an office in Taipei, Taiwan in an effort to better address the digital camera market. As of December 31, 2006, we had a staff of 305 employees and 19 contractors in our China office and 66 employees in our Taiwan office, including sales support, applications and customer support employees. In addition, we opened offices in Hong Kong and Korea, which had staff of 4 employees and 25 employees, respectively, as of December 31, 2006. These offices also 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. At December 31, 2006, we had 38 employees and 19 contractors in our Tokyo office.

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 sell our DivX and DTS Technology-based products under a non-exclusive license from DivX Inc. and DTS Technology LLC to sell products that incorporate their algorithm. We are not required to pay royalties under this agreement. Our customers enter into license agreements directly with DivX and DTS, pursuant to which they pay royalties. Under our agreement, we may sell our DivX or DTS-based products only to customers who are licensees of DivX or DTS. The failure or refusal of potential customers to enter into license agreements with DivX or DTS in the future could harm our sales.

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, Philips and Tower Semiconductor Ltd. are currently manufacturing our DVD, JPEG, DTV imaging and some of our mobile products. Fujitsu manufactures our USB multimedia controller chips. Our independent foundries fabricate products for other companies and may also produce products of their own design.

Most of our devices are currently fabricated using standard complementary metal oxide semiconductor process technology with 0.13 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, LSI Logic, Magnum Semiconductor, Matsushita, MediaTek, Renesas Technology, Samsung and Sunplus. In the markets for JPEG-based products for use in digital cameras, our principal competitors are in-house solutions developed and used by major Japanese OEMs, as well as products sold by Sunplus and Texas Instruments. In the market for JPEG-based products for desktop video editing applications, our principal competitor is Sunplus. Cirrus Logic (Crystal Semiconductor), Fujitsu, Freescale Semiconductor, STMicroelectronics and Yamaha are currently shipping Dolby Digital-based audio compression products. Our principal competitors for digital semiconductor devices in the digital television market include Advanced Micro Devices, Broadcom, Renesas Technology, M-Star, Mediatek and ST Microelectronics. Others who also participate in this market are ALi Corporation, Cheertek, Fujitsu, Genesis Microchip, NEC, Pixelworks and Trident Microsystems. Competitors in the Printer and Multifunction peripheral space include Sigmatel

Inc, Marvell semiconductor, TAK Imaging, Peerless Systems, Global Graphics and in-house captive suppliers.

We believe that 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:

·price, quality, performance and features of our products;

·the timing and success of new product introductions by itself, our customers and our competitors;

·the emergence of new industry standards;

·its ability to obtain adequate foundry capacity;

·the number and nature of our competitors in a given market; and

·general market and economic conditions.

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. We believe that the DVD recorder market will continue to grow and that as technology barriers become higher, fewer competitors will enter this market.

Historically, average unit selling prices 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 average unit selling prices of our products will continue to be subject to significant pricing pressures. In order to offset expected declines in the average unit selling prices of our products, we will need 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 approximately 300 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.

We sell our Dolby Digital-based products under a perpetual non-exclusive license from Dolby which permits us to incorporate the Dolby Digital algorithm into our products. Our customers enter into license agreements with Dolby pursuant to which they pay royalties directly 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 business. We sell our DTS Technology-based products under a non-exclusive license from DTS Technology LLC to sell products that incorporate the DTS algorithm. We are not required to pay royalties to DTS under this agreement. Our customers enter into license agreements directly with DTS, pursuant to which they pay royalties to DTS. Under our agreement with DTS, we may sell our DTS-based products only to customers who are licensees of DTS. The failure or refusal of potential customers to enter into license agreements with Dolby in the future could harm our sales.

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.

Employees

As of December 31, 2006, we had 1,191 full-time and 160 part-time and contract employees, including 645 full-time, part-time and contract employees primarily involved in research and development activities, 528 in marketing and sales, 128 in finance, human resources, information systems, legal and administration, and 50 in manufacturing control and quality assurance. We have 377 full-time employees and 84 part-time and contract employees based in Israel, of which 371 employees, including both full time and contract employees, are involved in engineering and research and development. We have 198 full-time employees and 29 part-time and contract employees at our facilities in Sunnyvale, California, 143 full-time employees and 6 part-time and contract employees at our facility in Woburn, Massachusetts, and 305 full-time employees and 19 part-time contract employees at our facilities in Shenzhen, China. The remaining

employees are located in our international offices in Canada, 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, 2006 are as follows:

Levy Gerzberg was a 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’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.

Karl SchneiderRaymond 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 joined Zoran

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 ControllerVice 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 was electedan 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 has served as our 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.

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Section 16(a) of the risksSecurities Exchange Act of additional lawsuits from former1934 requires our executive officers and employees in connection with our historical stock option practices, the resulting restatements, and the remedial measures we have taken.

In addition to the possibilities that there may be additional governmental actions and shareholder lawsuits against us, we may be sued or taken to arbitration by former officers and employees in connection with their stock options and other matters. These lawsuits may be time consuming and expensive, and cause

further distraction from the operation of our business. The adverse resolution of any specific lawsuit could have a material adverse effect on our business, financial condition and results of operations.

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

We are required to include a report of management on internal control over financial reporting in our Annual Report on Form 10-K that contains an assessment by management of the effectiveness of our internal control over financial reporting. In addition, our independent registered public accounting firm must attest to and report on management’s assessment of the effectiveness of the internal control over financial reporting. The restatement of financial statements in prior filings with the SEC is a strong indicator of the existence of a “material weakness” in the design or operation of internal control over financial reporting. However, we have concluded that the control deficiencies that resulted in the restatement of the previously issued consolidated financial statements did not constitute a material weakness as of December 31, 2006 because management determined that as of December 31, 2006 there were effective controls designed and in place to prevent or detect a material misstatement and therefore the likelihood of stock-based compensation, deferred compensation and deferred tax assets being materially misstated is not more than remote.

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

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

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

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

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

·fluctuation in demand for our products;

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

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

·the timing or cancellation of large customer orders;

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

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

·the cyclical nature of the semiconductor industry;

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

·changes in the mix of products sold;

·seasonality in demand for our products;

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

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

We expect that our operating results will continue to fluctuate in the future as a result of these factors and a variety of other factors, including:

·the cost and availability of adequate foundry capacity;

·fluctuations in manufacturing yields;

·changes in or the emergence of new industry standards;

·failure to anticipate changing customer product requirements;

·the loss or gain of important customers;

·product obsolescence; and

·the amount of research and development expenses associated with new product introductions.

Our operating results could also be harmed by:

·economic conditions generally or in various geographic areas where we or our customers do business;

·terrorism and international conflicts or other crises;

·other conditions affecting the timing of customer orders;

·changes in governmental regulations that could affect our products;

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

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

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

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

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

These factors are difficult or impossible to forecast. We place orders with independent foundries several months in advance of the scheduled delivery date, often in advance of receiving non-cancelable orders from our customers. This limits our ability to react to fluctuations in demand for their products. If

anticipated shipments in any quarter are canceled or do not occur as quickly as expected, or if we fail to foresee a technology change that could render a product obsolete, expense and inventory levels could be disproportionately high. If anticipated license revenues in any quarter are canceled or do not occur, gross margins may be reduced.

A significant portion of our expenses are relatively fixed, and the timing of increases in expenses is based in large part on our forecast of future revenues. As a result, if revenues do not meet our expectations, we may be unable to quickly adjust expenses to levels appropriate to actual revenues, which could harm our operating results.

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

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

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

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

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

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

The semiconductor industry is subject to cyclical variations in product supply and demand. Downturns in the industry often occur in connection with, or anticipation of, maturing product cycles for both semiconductor companies and their customers and declines in general economic conditions. These downturns have been characterized by abrupt fluctuations in product demand, production over-capacity and accelerated decline of average selling prices. In some cases, these downturns have lasted more than one year. We cannot predict whether we will achieve timely, cost-effective access to that capacity when

needed, or when there will be a capacity shortage again in the future. A downturn in the semiconductor industry could harm our sales and revenues if demand drops, or our gross margins if average selling prices decline.

Our success for the foreseeable future will depend on demand for integrated circuits for a limited number of applications.

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

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

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

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

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

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

The markets in which we compete are intensely competitive and are characterized by rapid technological change, declining average unit selling prices and rapid product obsolescence. We expect competition to

increase in the future from existing competitors and from other companies that may enter our existing or future markets with solutions which may be less costly or provide higher performance or more desirable features than our products. Competition typically occurs at the design stage, when customers evaluate alternative design approaches requiring integrated circuits. Because of short product life cycles, there are frequent design win competitions for next-generation systems.

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

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

We believe that growth of the DVD player market will be modest in the foreseeable future, and that continued strong competition will lead to further price reductions, and reduced profit margins. We also face significant competition in the digital Imaging and digital camera markets. The future growth of both markets is highly dependent on OEMs continuing to outsource an increasing portion of their product development work. Many of our existing competitors, as well as OEM customers that are expected to compete with us in the future, have substantially greater financial, manufacturing, technical, marketing, distribution and other resources, broader product lines and longer standing relationships with customers than we have. In addition, much of our future success is dependent on the success of our OEM customers. If we or our OEM customers are unable to compete successfully against current and future competitors, we could experience price reductions, order cancellations and reduced gross margins, any one of which could harm our business.

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

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

Our success will also depend on the successful development of new markets and the application and acceptance of new technologies and products in those new markets. For example, our success will depend on the ability of our customers to develop new products and enhance existing products in the recordable DVD player market and products for the broadband digital television and HDTV markets and to introduce and promote those products successfully. These markets may not continue to develop to the extent or in the time periods that we currently anticipate due to factors outside our control, such as delays in implementation of FCC 02-320 requiring all new televisions to include a digital receiver by February 2009. If new markets do not develop as we anticipate, or if our products do not gain widespread acceptance in these markets, our business, financial condition and results of operations could be harmed. The emergence of new markets for our products is also dependent in part upon third parties developing and marketing content in a format compatible with commercial and consumer products that incorporate our products. If this content is not available, manufacturers may not be able to sell products incorporating our products, and our sales would suffer.

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

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

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

·the inability to obtain adequate manufacturing capacity;

·the unavailability of or interruption in access to certain process technologies necessary for manufacture of our products;

·lack of control over delivery schedules;

·lack of control over quality assurance;

·lack of control over manufacturing yields and cost; and

·potential misappropriation of our intellectual property.

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

We also rely on a limited number of independent contractors for the assembly and testing of our products. Our reliance on independent assembly and testing houses limits our control over delivery schedules,

quality assurance and product cost. Disruptions in the services provided by our assembly or testing houses or other circumstances that would require them to seek alternative sources of assembly or testing could lead to supply constraints or delays in the delivery of our products. These constraints or delays could damage our relationships with current and prospective customers and harm our financial results.

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

If we are not able to obtain additional foundry capacity as required, our relationships with our customers would be harmed and our sales would likely be reduced. In order to secure additional foundry capacity, we have considered, and may in the future need to consider, various arrangements with suppliers, which could include, among others:

·option payments or other prepayments to a foundry;

·nonrefundable deposits with or loans to foundries in exchange for capacity commitments;

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

·issuance of our equity securities to a foundry;

·investment in a foundry;

·joint ventures; or

·other partnership relationships with foundries.

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

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

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

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

During 2006, only 7% of our total revenues were derived from North America sales. We anticipate that international sales will continue to account for a substantial majority of our total revenues for the foreseeable future. In addition, substantially all of our semiconductor products are manufactured, assembled and tested outside of the United States by independent foundries and subcontractors.

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

·       unexpected changes in regulatory requirements;

·fluctuations in exchange rates;

·political and economic instability;

·imposition of tariffs and other barriers and restrictions;

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

·health risks in a particular region.

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

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

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

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

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

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

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

Haifa was a principal target in the recent armed conflict in Northern Israel, and, accordingly, our facility and personnel in Haifa were at significant risk during that conflict. Although we suffered no damage to our facilities or injury to our personnel during the recent conflicts, significant damage to our facilities in Israel,

injury of our employees working there, or damage to the Israeli business or transportation infrastructure as a result of future military conflict or terrorist activity could materially affect our operations in Israel and harm our business. In addition, some of our employees in Israel serve in the military reserve. Any prolonged absence of a substantial number of these employees could materially harm our business.

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

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

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

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

Our largest customers have accounted for a substantial percentage of our revenues. In 2006, one customer accounted for 14% of our total revenues, while sales to our four largest customers accounted for 36% of our total revenues. In 2005, no single customer accounted for more than 10% of our total revenues,common stock to file initial reports of beneficial ownership and salesreports of changes in beneficial ownership with the SEC. 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 officers, 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 policies 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:

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Design of our Executive Compensation Program

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

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 executives 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 four largest customers accountedcorporate 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 50^th percentile and that cash incentive target amounts should be near the 75^th percentile, as compared with the base salaries or target bonuses for 29%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 total revenues. Salesother 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 these large customers have varied significantlydate 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 yearyear. Over the past several years, the Company’s performance has exceeded the target level corporate objectives in some years and will continuefailed to fluctuateachieve the objectives 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 theirothers. The level of purchases from us. Any substantial decrease or delayachievement of individual performance objectives has varied by individual in sales to one or more of our key customers could harm our sales and financial results. In addition, any difficulty in collecting amounts due from one or more key customers could harm our financial results. As of December 31, 2006 four customers accounted for approximately 13%, 12%, 10% and 10% of the net accounts receivable balance, respectively.

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

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

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

generally exceeds several months, which further complicates our planning processes and reduces the predictability of our operating results.

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

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

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

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

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

The Federal Communications Commission, or FCC, has broad jurisdiction over our target markets in the digital television business. Various international entities or organizations may also regulate aspects of our business or the business of our customers. Although our products are not directly subject to regulation by any agency, the transmission pipes,given year, as well as muchby 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 equipment into whichbonuses paid to our products are incorporated, are subject to direct government regulation. For example, before they canexecutive 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 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 regulationbased on our customersexecutive 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 industries in whichCompensation 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 customers operate may in turn harmGAAP 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 business. FCC regulatory policies affectingperformance was weighted 75% for non-GAAP earnings per share and 25% for revenue. For each performance metric, the abilityexecutive could receive up to 120% of cable operators or telephone companiesthe target bonus amount attributable to offer certain services and other terms on which these companies conduct their business may impede sales of our products. In addition, our digital television business may also be adversely affected by the imposition of tariffs, duties and other import restrictions on our suppliers or by the imposition of export restrictions on products that we sell internationally. Changes in current laws or regulations or the imposition of new laws or regulations in the United States or elsewhere could harm our business. For example, any delays by the FCC in imposing its pending requirement that all new televisions have a digital receiver could have an adverse effect on our HDTV business.

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

Our success and ability to compete depend in large part upon protection of our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, non-disclosure and other contractual agreements and technical measures to protect our proprietary rights. These agreements and

measures may not be sufficient to protect our technology from third-party infringement, or to protect us from the claims of others. Monitoring unauthorized use of our products is difficult, and we cannot be certain that the steps we have taken will prevent unauthorized use of our technology, particularly in foreign countries where the laws may not protect our proprietary rights as fully as in the United States. The laws of certain foreign countries in which our products are or may be developed, manufactured or sold, including various countries in Asia, may not protect our products or intellectual property rights to the same extent as do the laws of the United States and thus make the possibility of piracy of our technology and products more likely in these countries. If competitors are able to use our technology, our ability to compete effectively could be harmed.

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

We have generally limited access to and distribution of the source and object code of our software and other proprietary information. With respect to our page description language software, SOC platform firmware and drivers for the digital office market and in limited circumstances with respect to firmware on SCS products, firmware and platforms for our DTV, DVDR products, we grant licenses that give our customers access to and restricted use of the source code of oursoftware. This access increases the likelihood of misappropriation or misuse of our technology.

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

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. In the past, Zoran has been subject to claims and litigation regarding alleged infringement of other parties’ intellectual property rights, and both Oak and Zoran have been parties to a number of patent-related lawsuits, both as plaintiff and defendant. We could become subject to additional litigation in the future, either to protect our intellectual property or as a result of allegations that we infringe others’ intellectual property rights. Claims that our products infringe proprietary rights would force us to defend ourselves and possibly our customers or manufacturers against the alleged infringement. Future litigation against us, if successful, could subject us to significant liability for damages or invalidation of our proprietary rights. These lawsuits, regardless of their success, are time-consuming and expensive to resolve and require significant management time and attention. Future intellectual property litigation could force us to do oneachieved 120% or more of the following:

·stop selling products2008 goal for that incorporate the challenged intellectual property;

·obtain from the ownermetric. The executive could receive between 80% and 120% of the infringed intellectual property rightbonus amount for each metric if we achieved between 80% and 120% of the performance goal. No bonus would be 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 license to sell or use the relevant technology, which license may not be available on reasonable terms or at all;

·pay damages; or

·redesign those products that use such technology.

Although patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements, we may not be able in any or every instance to settle an alleged patent infringement claim through a cross-licensing arrangement. We have a more limited patent portfolio than manyrevenue target of our competitors. If a successful claim is made against us or any of our customers$576.3 million 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 resultsnon-GAAP earnings-per-share target 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$1.06. Our actual 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 termsfor 2008 was less than 80% of the licenses. Under the license agreements we must fulfill confidentiality obligationsrevenue 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.non-GAAP earnings per share targets. In addition, we dodid 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 futureachieve positive non-GAAP net income for 2008. Accordingly, no bonuses were paid to the named 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 cash flow will be affected by our abilitysecondarily to apply our net operating losses, or NOLs, against taxable income in future periods. Our NOLs totaled approximately $185 million for federal and $36 million for state tax reporting purposes as of December 31, 2006. The Internal Revenue Code contains a number of provisionsretain executive officers. We believe that limit the use of NOLs under certain circumstances. During 2006 we reduced the NOL deferred tax asset for amounts which we believe will expire before they become available for utilization. Changes in tax laws in the United States may further limit our abilitytechnology 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 utilize these NOLs. Any further limitationstock ownership and focus executives on our ability to utilize these respective NOLs could harm our financial condition.

Changes in, or interpretationsincreasing long-term stockholder value, aligning the interests 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 countriesexecutives with low statutory tax rates, or by changes in the valuationthose 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 auditsstockholders. Stock options in particular are uncertain, and we can give no assurance as to whether an adverse result from one or more of them will have a material effectperformance-based, since their value depends entirely on our operating results and financial position.

Any additional acquisitions we make could disrupt our business and severely harm our financial condition.

We have made investments in, and acquisitions of other complementary companies, products and technologies, and we may acquire additional businesses, products or technologies in the future. In the event of any future acquisitions, we could:

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

·incur debt;

·use a significant amount of our cash;

·assume liabilities;

·incur expenses related to the future impairment of goodwill and the amortization of other intangible assets; or

·incur other large write-offs immediately or in the future.

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

·problems combining the purchased operations, technologies or products;

·unanticipated costs;

·diversion of management’s attention from our core business;

·adverse effects on existing business relationships with customers;

·risks associated with entering markets in which we have no or limited prior experience; and

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

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

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

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

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

We may require substantial additional capital to finance our future growth, secure additional foundry capacity and fund our ongoing research and development activities during 2007 and beyond. Our capital requirements will depend on many factors, including:

·the levels at which we maintain inventory and accounts receivable;

·the market acceptance of our products;

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

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

·volume pricing concessions;

·capital improvements to new and existing facilities;

·technological advances;

·the response of competitors to our products; and

·our relationships with our suppliers and customers.

In addition, we may require an increase in the levelstock price above the option exercise price. As described below, our stock options are granted with an exercise price equal to the closing price of working capitalour common stock on the grant date. The vesting period for stock options granted to accommodate plannedexecutives is four years, which encourages executive retention.

6

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 growth hiringof stockholder value. Although we have granted awards of restricted stock units to our executives in the past, the Compensation Committee concluded in 2007 that stock options provide greater incentive value than restricted stock units, and infrastructure needs. Additional capital may also be required for additional acquisitionswe have used stock options as the sole form of businesses, products or technologies.equity incentive compensation in our 2007 and 2008 grant cycles. We expect to reassess the use of stock option grants, restricted stock units and other forms of equity incentives annually, seeking to balance the long-term incentive value with the dilution to our stockholders.

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 substantialIn determining the number of new engineering, managerial, salesoptions to be granted to executive officers, the Compensation Committee takes into account: the individual’s position and marketing personnel. Ourscope of responsibility; the vesting period (and thus, retention value) remaining on the executive’s existing options; the executive’s ability to manage growth successfully will also require usaffect 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 expand and improve administrative, operational, management and financial systems and controls. Manyother elements of total compensation.

In April 2008, the Compensation Committee awarded stock options to each of our key operations, including a material portionnamed executive officers. The Compensation Committee determined that the face value of our research and development operations and a significant portioneach option grant (determined by multiplying the number 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 inshares subject to the United States. The geographic separation of these operations places additional strain on our resources and our ability to manage growth effectively. If we are unable to manage growth effectively, our business will be harmed.

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

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

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

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

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

·authorizing the issuance of up to 3,000,000 shares of “blank check” preferred stock;

·eliminating stockholders’ rights to call a special meeting of stockholders; and

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

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

The market price of our common stock has fluctuated significantly since our initial public offering in 1995. Between January 1, 2006 and December 31, 2006,at the closing sale pricetime of our common stock, as reported on the Nasdaq Global Select Market, ranged from a low of $13.67grant) would be equal to a high of $29.13. The market price of our common stock is subject to significant fluctuations in the future in response to a variety of factors, including:

·results of regulatory investigations;

·announcements concerning our business or that of our competitors or customers;

·annual and quarterly variations in our operating results;

·changes in analysts’ earnings estimates;

·announcements of technological innovations;

·the introduction of new products or changes in product pricing policies by Zoran or its competitors;

·loss of key personnel;

·proprietary rights or other litigation;

·general conditions in the semiconductor industry; and

·developments in the financial markets.

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 performancemultiple of the affected companies. Broad market fluctuationsexecutive’s base salary. After consideration 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 infactors identified above, the Compensation Committee determined that Mr. Gerzberg would be granted an option with a face value equal to 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 Woburn, 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 future3.5 times his base salary, and that should itthe other named executive officers would 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

U.S. Attorney and SEC Investigations:On July 3, 2006, Zoran disclosed in a press release that it received a grand jury subpoena from the office of the U.S. attorney for the Northern District of California requesting documents from 1995 through the present referring to, relating to or involving stockgranted options and also received an informal inquiry from the SEC requesting documents related to Zoran’s stock option grants. Zoran intends to cooperate fully in all government investigations. These inquiries likely will require the Company to expend significant management time and incur significant legal and other expenses, and could result in civil and criminal actions seeking, among other things, injunctions against the Company and its

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

Late SEC Filings and Nasdaq Delisting Proceedings Due to the Special Committee investigation and the resulting restatements, the Company did not file on time its Quarterly Reports on Form 10-Q for the quarters ended June 30, 2006 and September 30, 2006, or its Annual Report on Form 10-K for the year ended December 31, 2006. As a result, the Company received Nasdaq Staff Determination letters, dated August 14, 2006, November 15, 2006 and March 20, 2007 stating that the Company was not in compliance with the filing requirements of Marketplace Rule 4310(c)(14) and, therefore, that the Company’s stock was subject to delisting from the Nasdaq Global Select Market. A hearing before a Nasdaq Listing Qualifications Panel was held on September 27, 2006 and a decision to grant the Company’s request for continued listing on Nasdaq subject to certain conditions occurred on December 28, 2006. The Company has appealed this decision, and the Nasdaq Listing Council has determined to stay the December 28, 2006 Panel decision, and any future Panel determinations to suspend Zoran’s securities from trading, pending further action from the Listing Council. On March 2, 2007, the Company provided the Listing Council with an additional submission for its consideration regarding continued listing. The Listing Council will review the matter on the basis of the written record.

Shareholder Class Actions and Derivative Litigation Relating to Historical Stock Option Practices: As discussed further below, certain persons and entities identifying themselves as shareholders of Zoran have filed litigation purporting to assert claims arising out of the historical accounting for stock options.

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

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

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

Gerald del Rosario v. Aharon et al.On September 26, 2006, a purported shareholder derivative action was filed by Gerald del Rosario against Zoran as a nominal defendant and certain of its current and former officers and directors in the United States District Court, Northern District of California, alleging, inter alia, violations of federal securities laws and breaches of fiduciary duty. On December 8, 2006, the Court issued an order consolidating the Del Rosario action with the Pfeiffer action. The

Court selected del Rosario as lead plaintiff and approved lead plaintiff’s selection of counsel for the consolidated derivative action. Plaintiffs filed a consolidated amended complaint on March 14, 2007.

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

On February 20, 2007, the Company filed a complaint against ArcSoft Inc. in the California Superior Court for the County of Alameda, seeking payment of $4 million in principal, together with accrued interest then in the amount of approximately $525,000, under four separate convertible promissory notes.  On February 28, 2007, the Company filed an application with the Court seeking to attach assets of ArcSoft as security for the payment of its obligations under the notes.  The notes represent amounts loaned by the Company to ArcSoft in 2004 in connection with a transaction involving the transferface value equal to ArcSoft of rights related to a software 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 ofslightly more than $6.9 million.  The hearingtwo times the executive’s base salary. For more information on our application for an attachment is currently scheduled for May 14, 2007.

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

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

Item 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, 2006.

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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:

As of December 31, 2006, there were 287 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 2006.

Item 6—Selected Financial Data

The consolidated balance sheet as of December 31, 2005, and the consolidated statements of operations for the years ended December 31, 2005 and 2004, have been restated as set forth in this Annual Report on Form 10-K. The data for the consolidated balance sheets as of December 31, 2004, 2003 and 2002 and the consolidated statements of operations for the fiscal years ended December 31, 2003 and 2002, have been restated to reflect the impact of the stock-based compensation adjustments, but such restated data have not been audited and is derived from the books and records of the Company. The information set forth below is not necessarily indicative of results of future operations, and should be read in conjunction with Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes thereto included in Item 8 of this Annual Report on Form 10-K to fully understand factors that may affect the comparability of the information presented below. The information presented in the following tables has been adjusted to reflect the restatement of the Company’s financial results, which is more fully described in the “Explanatory Note” immediately preceding Part I, Item 1 and in Note 2, “Restatement of Consolidated Financial Statements” in Notes to Consolidated Financial Statements of this Annual Report on Form 10-K.

The Company has not amended its previously-filed Annual Reports on Form 10-K or Quarterly Reports on Form 10-Q for the periods affected by this restatement, other than the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2006, which is being filed concurrently with this Annual

Report on Form 10-K. The financial information that has been previously filed or otherwise reported for these periods is superseded by the information in this Annual Report on Form 10-K, and the financial statements and related financial information contained in such previously-filed reports should no longer be relied upon.

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

Effective in fiscal year 2006, we implemented Statement of Financial Accounting Standards (“SFAS”) No. 123(R) “Share-Based Payment.” It requires us to measure all employee stock-based compensation awards using a fair value method and record such expense in our consolidated financial statements. In addition, to correct our past accounting for some stock options granted primarily from 1997 to 2003, we recorded an aggregate of $11.7 million of additional non-cash, stock-based compensation expense for the periods 1997 to 2005 under APB No. 25 and $0.4 million for 2006 under SFAS No. 123(R). There was no tax impact of these additional stock-based compensation expenses due to the full valuation allowance on our tax assets. Net income in fiscal year 2006 includes approximately $17.2 million of non-cash, stock-based compensation expense, compared to $4.5 million in fiscal year 2005, $2.6 million in fiscal year 2004, $10.2 million in fiscal year 2003 and $3.5 million in fiscal year 2002.

In connection with the restatement, the Company is recording additional non-cash adjustments that were previously considered to be immaterial relating to the timing of revenue recognition, accrued expenses, amortization of premiums and discounts on investments, additional expense related to options granted to a consultantour named executive officers in 2008, see the “Grants of Plan-Based Awards Table” and the calculation of amortization of stock-based compensation relating to a business combination in 2003. The Company is also recording losses under Accounting Principles Board Opinion 18 (“APB No. 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 method of accounting which was subsequently acquired by Zoran in 2005. These additional adjustments resulted in a cumulative expense of $1.3 million, including $0.2 million of tax expense, for the periods 2000 through 2005.accompanying narrative below.

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Item 7—Management’s Discussion and Analysis of Financial Condition and Results of OperationsStock Option Practices

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 the subsection entitled “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.

Restatements

On July 3, 2006, the Company announced that, at the recommendation of the Audit Committee, the Board of Directors had created a special committee of independent directors (“Special Committee”) to conduct a review of our historical stock option practices. As a result of its investigation, the Special Committee found, among other things, that some of the original measurement dates used by the Company for option grants were not adequately supported by contemporaneous records, and therefore the measurement dates used by us for accounting purposes required adjustment. The Special Committee concluded that the evidence did not establish that the errors which it identified resulted from fraud or intentional misconduct by our current senior management.

Based on the Special Committee’s findings and its own review of the facts, the Board of Directors concluded that there was no fraud or intentional misconduct by any current member of senior management. The Board also concluded that it has confidence in the integrity of the Company’s Chief Executive Officer, Dr. Levy Gerzberg, and the Company’s Chief Financial Officer, Mr. Karl Schneider.

Based on information obtained from the Special Committee’s review and additional work undertaken by the Company, management has concluded, and the Audit Committee has agreed, that the Company should restate certain previously filed financial statements, to reflect additional stock-based compensation expense with regard to certain past stock option grants. The corrections made in the restatements relate to options covering approximately 3.6 million shares. These adjustments amounted to an additional stock-based compensation expense of $0.4 million and $2.6 million in 2006 and 2005, respectively, and a benefit of $1.5 million in 2004. There was no tax impact of these additional stock-based compensation expenses due to the full valuation allowance on our tax assets.

In connection with the restatement, the Company is recording additional non-cash adjustments that were previously considered to be immaterial relating to the timing of revenue recognition, accrued expenses, amortization of premiums and discounts on investments, additional expense related to options granted to a consultant and the calculation of amortization of stock-based compensation relating to a business combination in 2003. The Company is also recording losses under Accounting Principles Board Opinion 18 (“APB No. 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 method of accounting which was subsequently acquired by Zoran in 2005. These additional adjustments resulted in a cumulative expense of $1.3 million, including $0.2 million of tax expense, for the periods 2000 through 2005.

Through 2005, we applied Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees,” and its related interpretations, and provided the required pro forma disclosures under Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based

Compensation,” and SFAS No. 148, “Accounting for Stock-Based Compensation—Transition and Disclosure.” Under APB Opinion No. 25 (“APB No. 25”), non-cash, stock-based compensation expense was recognized for any option for which the exercise price was below the market price on the actual grant date. Because each of the options identified below (other than those which we have determined should be accounted for variably) was deemed to have an exercise price below the market price on the appropriate measurement date, we should have recognized a charge for each of those options under APB No. 25, in an amount equal to the number of shares covered by such options, multiplied by the difference between the exercise price and the market price on the appropriate measurement date. That expense should have been amortized over the vesting periods of the options. Starting in 2006, we adopted SFAS No. 123(R), “Share-Based Payment.” As a result, for 2006, the additional stock-based compensation expense required to be recorded for each of the options identified below was equal to the incremental fair value of those options on the appropriate measurement date over the remaining vesting periods of those options. We did not record such stock-based compensation expenses under APB No. 25 or SFAS No. 123(R) in our previously issued financial statements, and that is the reason for the restatement in this report. To correct our past accounting for stock options, we recorded additional pre-tax, non-cash, stock-based compensation expense of (a) $11.7 million for the periods 1997 to 2005 under APB No. 25 and (b) the remaining $0.4 million for 2006 under SFAS No. 123(R). The fair value of the options is being recorded using the accelerated amortization method under FIN 28 over the respective vesting periods of the awards.

Consistent with the accounting literature and recent guidance from the Securities and Exchange Commission (“SEC”), the Company has organized the grants with respect to which an accounting adjustment is required into categories based on grant type and process by which the grant was finalized. Based on the relevant facts and circumstances, the Company applied the relevant accounting standards to determine the measurement date for every grant within each category. The Company recorded accounting adjustments as required, resulting in stock-based compensation expense and related tax effects. The Company organized the grants where adjustments were required as follows:

·Company-wide option grants where optionees were added or grant amounts were changed after the option list was complete, or where insufficient contemporaneous documentation of the grant date exists. For seven Company-wide refresh and retention grants made between 1998 and 2003, the Company determined that some employees who were omitted from the option grant list were added to the list after the stated grant date, and that the number of shares covered by option grants to some employees was not finally determined until after the stated grant date. Further, in 2001 and 2002, insufficient contemporaneous documentation of the stated grant date existed. As a result of these issues, the Company restated its historical financial statements to increase stock-based compensation expense by approximately $6.3 million, recognized over the vesting periods of the relevant options.

·Re-priced options. In August 2002, after consideration of relevant information, the Compensation Committee rescinded its April 2002 grant, and its June 2002 grant, to executives and other key employees. The Company thereafter reissued the grants in August 2002. At the time, in consultation with our external advisors, we determined that these transactions did not require variable accounting. As a result of the Special Committee review of our historical stock option practices, we have reassessed the circumstances surrounding these transactions with our external advisors and have determined that the grants should have been accounted for variably. As a result, the Company restated its historical financial statements to increase stock-based compensation expense by a cumulative net amount of approximately $3.8 million, recognized over the vesting periods of these options.

·Acquisition-related options. The Company determined a grant given to retain employees hired in connection with an acquisition in October 2000 should have been accounted for variably. As a result, the Company restated its historical financial statements to increase stock-based

compensation expense by approximately $0.3 million, recognized over the vesting periods of these options.

·Improper measurement dates for non-refresh stock option grants. The Company revised the measurement dates forcertain grants made to new hires and for promotional and other miscellaneous non-refresh grants made between 1997 and 2003 as a result of approvals that were obtained subsequent to the stated grant dates or as a result of administrative delays or errors and a small number ofpolicies governing stock option grants to non-executives that were determined to have been established retrospectively. As a result,and other equity awards, including the Company restated its historical financial statements to increase stock-based compensation expense by approximately $1.3 million, recognized over the vesting periods of these options.following:

In the aggregate, we have recorded additional stock-based compensation expense for the periods 1997 through 2005 of approximately $11.7 million on stock option grants made from 1997 through 2003.

The incremental impact from recognizing stock-based compensation expense resulting from the investigation of past stock option grants is as follows (dollars in thousands):

·       Option grants (including officer, vice president, rank and file, promotional and new hire grants)

·       Grants