**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

 

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**FORM 10-Q**

 
| **(Mark One)**                             |
|--------------------------------------------|
|                                       |   |
| **ý**                                 | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                       |   |
|                                       | **For the quarterly period ended  March 31, 2003** |
|                                       |   |
| **or**                                     |
|                                       |   |
| **o**                                      | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES  EXCHANGE ACT OF 1934** |
|                                       |   |
|                                       | **For the transition period  from                  to                ** |
|                                       |   |
| **Commission  File Number:  0-27246** |

 

**ZORAN CORPORATION**

(Exact name of registrantas specified in its charter)

 

| **Delaware**                                                     |   | **94-2794449**                        |
|------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of  incorporation or organization) |   | (I.R.S. Employer  Identification No.) |
|                                                             |   |                                  |
| **3112 Scott Boulevard, Santa Clara,  California 95054**         |
| (Address of principal  executive offices)                        |   | (Zip Code)                            |
|                                                             |   |                                  |
| Registrant’s telephone  number, including area code:        |   | **(408) 919-4111**                    |

 

Indicate by check mark whether the registrant (1) has filed all reportsrequired to be filed by Section 13 or 15(d) of the Securities Exchange Act of1934 during the preceding 12 months (or for such shorter period that theregistrant was required to file such reports), and (2) has been subject to suchfiling requirements for the past 90 days. Yes ýNo o

 

Indicate bycheck mark whether registrant is an accelerated filer (as defined by Rule 12b-2of the Act). Yes ý No o

 

The number of outstanding shares of the registrant’s Common Stock,$.001 par value, as of May 2, 2003 was 27,461,054.

 

 

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**ZORAN CORPORATION**

 

**INDEX**

 
| **PART I.    FINANCIAL INFORMATION**                                                                        |
|-----------------------------------------------------------------------------------------------------------------------|
|                                                                                                                  |
| Item 1.   Financial Statements                                                                         |
|                                                                                                                  |   |
|                                                                                                                  | Condensed  Consolidated Balance Sheets  March 31, 2003 and December 31, 2002 |
|                                                                                                                  |   |
|                                                                                                                  | Condensed  Consolidated Statements of Operations  Three Months Ended March 31, 2003 and 2002 |
|                                                                                                                  |   |
|                                                                                                                  | Condensed  Consolidated Statements of Cash Flows  Three Months Ended March 31, 2003 and 2002 |
|                                                                                                                  |   |
|                                                                                                                  | Notes  to Condensed Consolidated Financial Statements |
|                                                                                                                  |
| Item 2.   Management’s Discussion  and Analysis of  Financial Condition and Results of Operations |
|                                                                                                                  |
| Item 3.    Quantitative and  Qualitative Disclosures  About Market Risk                                |
|                                                                                                                  |
| Item  4.    Controls and Procedures                                                                    |
|                                                                                                                  |
| **PART II. OTHER  INFORMATION**                                                                                       |
|                                                                                                                  |
| Item  6.    Exhibits and Reports on Form 8-K                                                           |
|                                                                                                                  |
| SIGNATURES                                                                                                            |

 

2

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**ZORAN CORPORATION**

**CONDENSED CONSOLIDATED BALANCESHEETS**

**(in thousands, except share data)**

**(unaudited)**

 
|                                                                                                                    |   | **March 31,  2003** |    | **December  31,  2002** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|---------------------|---------|-------------------------|--------|
|                                                                                                                    |   |                |    |                    |   |
| ASSETS                                                                                                                  |   |                |    |                    |   |
| Current assets:                                                                                                         |   |                |    |                    |   |
| Cash and cash  equivalents                                                                                              |   | $                   | 27,449  |                    | $      | 31,607 |   |
| Short-term  investments                                                                                                 |   | 109,448             |    | 105,468                 |   |
| Accounts  receivable, net                                                                                               |   | 46,082              |    | 34,652                  |   |
| Inventory                                                                                                               |   | 7,703               |    | 12,686                  |   |
| Prepaid expenses  and other current assets                                                                              |   | 7,759               |    | 6,479                   |   |
| Total current  assets                                                                                                   |   | 198,441             |    | 190,892                 |   |
|                                                                                                                    |   |                |    |                    |   |
| Property and  equipment, net                                                                                            |   | 5,945               |    | 5,848                   |   |
| Other  investments                                                                                                      |   | 73,860              |    | 78,334                  |   |
| Goodwill                                                                                                                |   | 59,131              |    | 59,131                  |   |
| Intangible  assets                                                                                                      |   | 7,217               |    | 8,411                   |   |
|                                                                                                                    |   |                |    |                    |   |
|                                                                                                                    |   | $                   | 344,594 |                    | $      | 342,616 |   |
|                                                                                                                    |   |                |    |                    |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                              |   |                |    |                    |   |
| Current liabilities:                                                                                                    |   |                |    |                    |   |
| Accounts payable                                                                                                        |   | $                   | 13,222  |                    | $      | 9,639 |   |
| Accrued expenses  and other liabilities                                                                                 |   | 19,924              |    | 21,965                  |   |
| Total current  liabilities                                                                                              |   | 33,146              |    | 31,604                  |   |
|                                                                                                                    |   |                |    |                    |   |
| Stockholders’  equity:                                                                                             |   |                |    |                    |   |
| Common Stock,  $0.001 par value; 55,000,000 shares authorized; 27,399,578 and 27,395,117  shares issued and outstanding |   | 27                  |    | 27                      |   |
| Additional  paid-in capital                                                                                             |   | 399,160             |    | 399,052                 |   |
| Deferred  stock-based compensation                                                                                      |   | (73                 | )       | (83                     | )      |
| Accumulated  other comprehensive income                                                                                 |   | 633                 |    | 508                     |   |
| Accumulated  deficit                                                                                                    |   | (88,299             | )       | (88,492                 | )      |
| Total  stockholders’ equity                                                                                        |   | 311,448             |    | 311,012                 |   |
|                                                                                                                    |   |                |    |                    |   |
|                                                                                                                    |   | $                   | 344,594 |                    | $      | 342,616 |   |

 

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

 

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**ZORAN CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTSOF OPERATIONS**

**(in thousands, except per share data)**

**(unaudited)**

 
|                                                        |   | **Three  Months Ended  March 31,** |   |
|-------------------------------------------------------------|--------|------------------------------------|--------|
|                                                        |   | **2003**                           |   | **2002** |   |
|                                                        |   |                               |   |   |   |
| Revenues:                                                   |   |                               |   |   |   |
| Product sales                                               |   | $                                  | 37,097 |   | $ | 29,105 |   |
| Software, licensing and development                         |   | 736                                |   | 1,985 |   |
| Total revenues                                              |   | 37,833                             |   | 31,090 |   |
|                                                        |   |                               |   |   |   |
| Costs and expenses:                                         |   |                               |   |   |   |
| Cost of product sales                                       |   | 26,710                             |   | 18,832 |   |
| Research and development                                    |   | 4,479                              |   | 5,521 |   |
| Selling, general and administrative                         |   | 6,942                              |   | 5,740 |   |
| Amortization of other intangibles                           |   | 953                                |   | 2,445 |   |
| Total costs and expenses                                    |   | 39,084                             |   | 32,538 |   |
|                                                        |   |                               |   |   |   |
| Operating loss                                              |   | (1,251                             | )      | (1,448 | ) |
| Interest income                                             |   | 1,593                              |   | 2,057 |   |
| Other income (loss), net                                    |   | (22                                | )      | (598 | ) |
| Income before income taxes                                  |   | 320                                |   | 11 |   |
|                                                        |   |                               |   |   |   |
| Provision for income taxes                                  |   | 127                                |   | 246 |   |
|                                                        |   |                               |   |   |   |
| Net income (loss)                                           |   | $                                  | 193    |   | $ | (235 | ) |
|                                                        |   |                               |   |   |   |
| Basic net income  (loss) per share                          |   | $                                  | 0.01   |   | $ | (0.01 | ) |
|                                                        |   |                               |   |   |   |
| Diluted net  income (loss) per share                        |   | $                                  | 0.01   |   | $ | (0.01 | ) |
|                                                        |   |                               |   |   |   |
| Shares used to  compute basic net income (loss) per share   |   | 27,396                             |   | 26,774 |   |
|                                                        |   |                               |   |   |   |
| Shares used to  compute diluted net income (loss) per share |   | 28,096                             |   | 26,774 |   |

 

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

 

4

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**ZORAN CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTSOF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
|                                                                                             |   | **Three Months Ended  March 31,** |   |
|--------------------------------------------------------------------------------------------------|--------|-----------------------------------|--------|
|                                                                                             |   | **2002**                          |   | **2001** |   |
| Cash flows from  operating activities:                                                           |   |                              |   |   |   |
| Net income  (loss)                                                                               |   | $                                 | 193    |   | $ | (235 | ) |
| Adjustments to  reconcile net income (loss) to net cash   provided by (used in) operations: |   |                              |   |   |   |
| Depreciation,  amortization and other                                                            |   | 886                               |   | 630 |   |
| Allowance for  doubtful accounts                                                                 |   | 315                               |   | — |   |
| Amortization of  intangible assets                                                               |   | 1,194                             |   | 2,445 |   |
| Realized loss on  marketable securities                                                          |   | —                            |   | 696 |   |
| Changes in  current assets and liabilities:                                                      |   |                              |   |   |   |
| Accounts  receivable                                                                             |   | (11,928                           | )      | 3,382 |   |
| Inventory                                                                                        |   | 4,983                             |   | 2,807 |   |
| Prepaid expenses  and other current assets                                                       |   | (1,280                            | )      | (31 | ) |
| Accounts payable                                                                                 |   | 4,333                             |   | (2,109 | ) |
| Accrued expenses  and other liabilities                                                          |   | (1,122                            | )      | (111 | ) |
| Net cash  provided by (used in) operating activities                                             |   | (2,426                            | )      | 7,474 |   |
|                                                                                             |   |                              |   |   |   |
| Cash flows from  investing activities:                                                           |   |                              |   |   |   |
| Capital  expenditures for property and equipment                                                 |   | (973                              | )      | (386 | ) |
| Purchases of  investments                                                                        |   | (31,855                           | )      | (18,149 | ) |
| Sales of  investments                                                                            |   | 1,005                             |   | 15,079 |   |
| Maturities of  investments                                                                       |   | 31,483                            |   | 1,001 |   |
| Net cash used in  investing activities                                                           |   | (340                              | )      | (2,455 | ) |
|                                                                                             |   |                              |   |   |   |
| Cash flows from  financing activities:                                                           |   |                              |   |   |   |
| Proceeds from  issuance of Common Stock, net                                                     |   | 108                               |   | 2,154 |   |
| Installment  payment on purchased core technology                                                |   | (1,500                            | )      | — |   |
| Net cash  provided by (used in) financing activities                                             |   | (1,392                            | )      | 2,154 |   |
|                                                                                             |   |                              |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                                            |   | (4,158                            | )      | 7,173 |   |
|                                                                                             |   |                              |   |   |   |
| Cash and cash  equivalents at beginning of period                                                |   | 31,607                            |   | 20,287 |   |
|                                                                                             |   |                              |   |   |   |
| Cash and cash  equivalents at end of period                                                      |   | $                                 | 27,449 |   | $ | 27,460 |   |

 

The accompanying notesare an integral part of these condensed consolidated financial statements.

 

5

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**ZORAN CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.             Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementscontain all adjustments (consisting only of normal recurring adjustments)which, in the opinion of management, are necessary to present fairly thefinancial information included therein. While the Company believes that the disclosures are adequate to make theinformation not misleading, it is suggested that these financial statements beread in conjunction with the audited consolidated financial statements andaccompanying notes included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2002.  Resultsfor the interim periods presented are not necessarily indicative of the resultsto be expected for the full year.

 

**2.             Fair Value Disclosures**

 

In December 2002, the Financial AccountingStandards Board ("FASB") issued Statement of Financial AccountStandards No. 148, “Accounting for Stock-Based Compensation – Transition andDisclosure an Amendment of FASB Statement No. 123” (SFAS No. 148). SFAS No. 148provides alternative methods of transition for companies making a voluntarychange to fair value based accounting for stock-based employee compensation.The Company continues to account for stock-based compensation using theintrinsic value method prescribed in Accounting Principles Board Opinion No. 25(“APB 25”), “Accounting for Stock Issued to Employees” and relatedinterpretations. Under APB 25, compensation expense is recognized based on thedifference, if any, on the date of grant between the fair value of theCompany’s stock and the amount an employee must pay to acquire the stock.  The compensation expense is recognized overthe periods the employee performs the related services, generally the vestingperiod of four years, consistent with the multiple option method described inFASB Interpretation No. 28 (“FIN 28”). Except for options assumed in connectionwith the Company’s acquisition of Nogatech, Inc. in 2000, no stock-basedemployee compensation cost is reflected in net income as all other optionsgranted under the Company’s plans had an exercise price equal to the marketvalue of the underlying common stock on the date of grant. Effective forinterim periods beginning after December 15, 2002, SFAS No. 148 also requiresdisclosure of pro-forma results on a quarterly basis as if the Company hadapplied the fair value recognition provisions of SFAS No. 123.

 

6

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Had compensation cost forthe Company’s option and stock purchase plans been determined based on the fairvalue at the grant dates, as prescribed in SFAS 123, the Company’s net income(loss) and net income (loss) per share for each of the quarters ended March 31,2003 and 2002, would have been as follows (in thousands, except per sharedata):

 
|                                                                                                                                          |   | **Three Months Ended March 31,** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------------|--------|
|                                                                                                                                          |   | **2003**                         |   | **2002** |   |
|                                                                                                                                          |   |                             |   |   |   |
| Net income (loss) as reported                                                                                                                 |   | $                                | 193    |   | $ | (235 | ) |
| Add: Stock-based employee compensation  expense included in reported net income net of related tax effects                                    |   |                             | 10     |   |   | 136 |   |
| Deduct: Total stock-based employee  compensation expense determined under fair value based methods for all awards  net of related tax effects |   |                             | (6,284 | ) |   | (5,568 | ) |
| Pro forma loss                                                                                                                                |   | $                                | (6,081 | ) | $ | (5,667 | ) |
|                                                                                                                                          |   |                             |   |   |   |
| Net income (loss) per share:                                                                                                                  |   |                             |   |   |   |
| As reported                                                                                                                                   |   |                             |   |   |   |
| Basic                                                                                                                                         |   | $                                | 0.01   |   | $ | (0.01 | ) |
| Diluted                                                                                                                                       |   | $                                | 0.01   |   | $ | (0.01 | ) |
| Pro forma                                                                                                                                     |   |                             |   |   |   |
| Basic                                                                                                                                         |   | $                                | (0.22  | ) | $ | (0.21 | ) |
| Diluted                                                                                                                                       |   | $                                | (0.22  | ) | $ | (0.21 | ) |

 

For purposes of the disclosure required under SFAS123 the fair value of each option grant is estimated on the date of grant usingthe Black-Scholes model with the following assumptions used for options andpurchase grants during the applicable period.

 
|                     |   | **Three Months Ended March 31,** |   |
|--------------------------|--------|----------------------------------|--------|
|                     |   | **2003**                         |   | **2002** |   |
|                     |   |                             |   |   |   |
| Dividend rate            |   | 0.0                              | %      | 0.0 | % |
| Risk-free interest rates |   | 2.8 to 4.7                       | %      | 2.9 to 4.7 | % |
| Volatility               |   | 93.0                             | %      | 92.0 | % |
| Expected life            |   |                             |   |   |   |
| Option plans             |   | 5 years                          |   | 5 years |   |
| Purchase plan            |   | 0.5 years                        |   | 0.5 years |   |

 

TheBlack-Scholes option pricing model was developed for use in estimating thevalue of traded options that have no vesting restrictions and are fullytransferable.  In addition, optionpricing models require the input of highly subjective assumptions including theexpected stock price volatility.  TheCompany uses projected data for expected volatility and expected life of itsstock options based upon historical and other economic data trended into futureyears.  Because the Company’s employeestock options have characteristics significantly different from those of tradedoptions, and because changes in the subjective input assumptions can materiallyaffect the estimate, in management’s opinion, existing valuation models,including the Black-Scholes model, do not provide a reliable measure of thefair value of the Company’s stock options.

 

7

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**3.             Comprehensive Income**

 

The Company applies Statement of Financial Accounting Standards No.130, “Reporting Comprehensive Income.”

 

The following are the components ofcomprehensive income (loss), (in thousands):

 
|                                             |   | **Three  Months Ended March 31,** |   |
|--------------------------------------------------|--------|-----------------------------------|--------|
|                                             |   | **2003**                          |   | **2002** |   |
|                                             |   |                              |   |   |   |
| Net income  (loss)                               |   | $                                 | 193    |   | $ | (235 | ) |
| Unrealized gain  (loss) on short-term investment |   | 125                               |   | (487 | ) |
| Comprehensive  income (loss)                     |   | $                                 | 318    |   | $ | (722 | ) |

 

The components of accumulated other comprehensive income (loss) are netunrealized gains (losses) on short-term investments and long-term marketablesecurities.

 

8

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**4.             Balance Sheet Components**(in thousands):

** **
|            |   | **March 31,  2002** |   | **December 31****,****2002** |   |
|-----------------|--------|---------------------|--------|------------------------------|--------|
| **Inventory:**  |   |                |   |                         |   |
| Work-in-process |   | $                   | 3,614  |                         | $      | 6,365 |   |
| Finished goods  |   | 4,089               |   | 6,321                        |   |
|            |   |                |   |                         |   |
|            |   | $                   | 7,703  |                         | $      | 12,686 |   |

 

**5.             Goodwill and Intangible Assets**

 

The Company adopted SFAS No.142 “Goodwill and Other Intangible Assets” (“SFAS 142”) as of January 1, 2002.SFAS 142 changed the accounting for goodwill from an amortization method to animpairment only approach. Under SFAS 142, goodwill is required to be testedannually and whenever events or circumstances occur indicating that goodwillmight be impaired. Inconnection with the adoption of SFAS 142, the Company performed a transitionalgoodwill impairment assessment based on its structure as one reporting unit anddetermined that no impairment existed at January 1, 2002. The Company alsoconducted its annual impairment assessment in 2002, and again determined thatno impairment existed. The Company has not yet conducted its annual assessmentfor 2003 but does not currently anticipate that the completion of theassessment will have a material impact on its financial position, results ofoperations or cash flows.

 

**Componentsof Acquired Intangible Assets** (in thousands):

 
|                        |   |                           |   | **March 31, 2003**         |   | **December 31, 2002**         |   |
|-----------------------------|--------|--------------------------------|--------|----------------------------|--------|-------------------------------|--------|
|                        |   | **Weighted Avg  Life (Years)** |   | **Gross carrying  Amount** |   | **Accumulated  Amortization** |   | **Gross carrying  Amount** |   | **Accumulated  Amortization** |   |
| Amortized intangible assets |   |                           |   |                       |   |                          |   |   |   |   |   |
| Covenant not to compete     |   | 3                              |   | $                          | 800    |                          | $      | 733 |   | $ | 800 |   | $ | 667 |   |
| Patents                     |   | 3                              |   | 900                        |   | 825                           |   | 900 |   | 750 |   |
| Core technology             |   | 3                              |   | 8,060                      |   | 6,546                         |   | 8,060 |   | 5,874 |   |
| Completed technology        |   | 2                              |   | 10,760                     |   | 10,760                        |   | 10,760 |   | 10,760 |   |
| Customer base               |   | 3                              |   | 1,560                      |   | 1,267                         |   | 1,560 |   | 1,137 |   |
| Purchased core technology   |   | 4                              |   | 5,582                      |   | 314                           |   | 5,582 |   | 63 |   |
|                        |   |                           |   |                       |   |                          |   |   |   |   |   |
| Total                       |   |                           |   | $                          | 27,662 |                          | $      | 20,445 |   | $ | 27,662 |   | $ | 19,251 |   |

 

During the quarters endedMarch 31, 2003 and March 31, 2002, the Company incurred $1.2 million and $2.4million, respectively, in charges related to the amortization of acquiredintangible assets associated with the acquisitions of PixelCam Inc. andNogatech Inc. and purchased core technologies. Amortization of purchased coretechnologies is included in cost of product sales. The Company will incuradditional amortization charges of approximately $4.2 million for the balance of2003.

 

**6.            Other Income (Loss), net**

 

During the quarter ended March 31, 2002, Roxio Inc. (“Roxio”) acquiredMGI Software Inc (“MGI”). As of the date of acquisition, the Company heldapproximately 373,000 shares of MGI common stock. Upon consummation of theacquisition, the Company’s MGI common stock was exchanged for 18,843 shares ofRoxio common stock. In connection with the exchange, the Company recorded arealized loss of $696,000 included as other loss for the quarter ended March31, 2002, and established a new cost basis of its Roxio common stock equal tothe fair value of the stock on the date of the exchange.

 

9

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**7.             Income Taxes**

 

The provision for income taxes reflects the estimated annualizedeffective tax rate applied to earnings excluding charges for amortization ofgoodwill and other intangibles for the interim periods.  The effective tax rate differs from the U.S.statutory rate due to utilization of net operating losses, adjustments for thenondeductible amortization of goodwill and other intangibles and income taxrate differences on foreign earnings. The Company has provided for tax on income in excess of net operatingloss carryforwards for U.S. Federal and State earnings.  The Company has also provided for tax on itsforeign earnings.

 

**8.             Earnings Per Share**

 

Computation of basic and diluted earnings per share is as follows (inthousands, except per share data):

 
|                                        |   | **Three Months Ended March 31,** |   |
|---------------------------------------------|--------|----------------------------------|--------|
|                                        |   | **2003**                         |   | **2002** |   |
|                                        |   | **Income  (Numerator)**          |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   | **(Loss)  (Numerator)** |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|                                        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Basic EPS:                                  |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Net income available to common stockholders |   | $                                | 193    |   | 27,396 |   | $ | 0.01 |   | $ | (235 | ) | 26,774 |   | $ | (0.01 | ) |
|                                        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Effects of dilutive securities:             |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Stock options                               |   | —                           |   | 700 |   |   |   | — |   | — |   |   |   |
|                                        |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Diluted EPS:                                |   |                             |   |   |   |   |   |   |   |   |   |   |   |
| Income available to common stockholders     |   | $                                | 193    |   | 28,096 |   | $ | 0.01 |   | $ | (235 | ) | 26,774 |   | $ | (0.01 | ) |

 

**9.             StockSplit**

 

On April 21, 2002, the Company’s Board of Directors approved athree-for-two split of our common stock which was effected in the form of a 50percent stock dividend, paid on May 22, 2002 to stockholders of record on May7, 2002. All share and per share information for all periods presented in thisreport are on a post-split basis.

 

**10.          Recently Issued Accounting Standard**

 

In November 2002, the Emerging Issues TaskForce (“EITF”) reached a consensus on Issue No. 00-21, “Revenue Arrangementswith Multiple Deliverables.” EITF Issue No. 00-21 provides guidance on how toaccount for arrangements that involve the delivery or performance of multipleproducts, services and/or rights to use assets. The provisions of EITF IssueNo. 00-21 will apply to revenue arrangements entered into in fiscal periodsbeginning after June 15, 2003. The Company does not expect that this will havea material impact on its financial position, results of operations, or cashflows.

 

In January 2003, the FASB issued FASBInterpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities,an Interpretation of ARB No. 51.”  FIN 46 requires certain variableinterest entities to be consolidated by the primary beneficiary of the entityif the equity investors in the entity do not have the characteristics of acontrolling financial interest or do not have sufficient equity at risk for theentity to finance its activities without additional subordinated financialsupport from other parties. FIN 46 is effective immediately for all newvariable interest entities created or acquired after January 31, 2003. Forvariable interest entities created or acquired prior to February 1, 2003, theprovisions of FIN 46 must be applied for the first interim or annual periodbeginning after June 15, 2003. The Company does not expect that the adoption ofFIN 46 will have a material impact on its financial position, results ofoperations, or cash flows.

 

10

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**11.          SubsequentEvents**

 

On May 4, 2003, the Companyentered into an agreement to acquire Oak Technology, Inc. (“Oak”) apublicly-held company that provides integrated circuit solutions for the HDTVand digital imaging markets. Under the agreement, Oak will merge with awholly-owned subsidiary of the Company, and each outstanding share of Oak’scommon stock will be converted into the right to receive 0.2323 of a share ofZoran common stock and $1.78 in cash. As of the date of the agreement, thetotal merger consideration was valued at $358 million. The transaction isexpected to be completed in the third quarter of 2003, and is subject toapproval by the stockholders of both companies as well as regulatory approval.If the merger is consummated, it will be accounted for as a purchase and,accordingly, the results of operations of Oak (beginning with the closing dateof the acquisition) and the estimated fair value of assets acquired andliabilities assumed will be included in the Company’s consolidated financialstatements beginning with the quarter in which the closing takes place.

 

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**Item 2****.   Management’s Discussion and Analysis ofFinancial Condition and Results of Operations**

 

***The following discussion includesforward-looking statements with respect to the Company’s future financialperformance.  Actual results may differmaterially from those currently anticipated depending upon a variety offactors, including those described below under the sub-heading, “FuturePerformance and Risk Factors” and discussed more fully in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2002.***

 

**Overview**

 

From our inception in 1981 through 1991, wederived the substantial majority of our revenue from digital filter processorsand vector signal processors used principally in military, industrial andmedical applications. In 1989, we repositioned our business to develop andmarket data compression products for the evolving multimedia markets anddiscontinued development of digital filter processor and vector signalprocessor products. In 1994, we discontinued production of these products. Ourcurrent lines of digital audio and video products include integrated circuitsand related products used in digital versatile disc, or DVD, players andrecorders, movie and home theater systems, filmless digital cameras and videoediting systems.

 

We derive most of our revenues from the saleof our integrated circuit products. Historically, average selling prices in thesemiconductor industry in general, and for our products in particular, havedecreased over the life of a particular product. Average selling prices for ourhardware products have fluctuated substantially from period to period,primarily as a result of changes in our customer mix of original equipment manufacturer,or OEM, sales versus sales to resellers and the transition from low-volume tohigh-volume production. In the past, we have reduced the prices of some of ourproducts in order to better penetrate the consumer market. We believe that, asour product lines continue to mature and competitive markets evolve, we arelikely to experience further declines in the average selling prices of ourproducts, although we cannot predict the timing and amount of such futurechanges with any certainty.

 

Our cost of product sales consists primarilyof fabrication costs, assembly and test costs, and the cost of materials andoverhead from operations. If we are unable to reduce our cost of product salesto offset anticipated decreases in average selling prices, our product grossmargins will decrease. Our product gross margin is also dependent on productmix and on the percentage of products sold directly to our OEM customers versusindirectly through our marketing partners who purchase our products at lowerprices but absorb most of the associated marketing and sales support expenses,maintain inventories and provide customer support and training. Lower grossmargins on sales to resellers are partially offset by reduced selling andmarketing expenses related to such sales. Product sales in Japan are primarilymade through Fujifilm, our strategic partner and reseller in Japan. Fujifilmprovides more sales and marketing support than our other resellers. We expectboth product and customer mix to continue to fluctuate in future periods,causing further fluctuations in margins.

 

We also derive revenue from licensing oursoftware and other intellectual property. Licensing revenue includes one-timelicense fees and royalties based on the number of units distributed by the licensee.In addition, we have historically generated a significant percentage of ourtotal revenues from development contracts, primarily with key customers,although development revenue has declined substantially as a percentage oftotal revenues over the past several years. These development contracts haveprovided us with partial funding for the development of some of our products.These development contracts provide for license and milestone payments whichare recorded as development revenue. We classify all development costs,including costs related to these development contracts, as research anddevelopment expenses. We retain ownership of the intellectual propertydeveloped by us under these development contracts. While we intend to continueto enter into development contracts with certain strategic partners, we expectdevelopment revenue to continue to decline as a percentage of total revenues.

 

Our research and development expensesconsist of salaries and related costs of employees engaged in ongoing research,design and development activities and costs of engineering materials andsupplies. We

 

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are also a party to research and developmentagreements with the Chief Scientist in Israel’s Ministry of Industry and Tradeand the Israel-United States Binational Industrial Research and DevelopmentFoundation, which fund up to 50% of incurred project costs for approvedproducts up to specified contract maximums. These agreements require us to useour best efforts to achieve specified results and require us to pay royaltiesat rates of 3% to 5% of resulting product sales, and up to 30% of resultinglicense revenues, up to a maximum of 100% to 150% of total funding received.Reported research and development expenses are net of these grants, whichfluctuate from period to period. We believe that significant investments inresearch and development are required for us to remain competitive and weexpect to continue to devote significant resources to product development,although such expenses as a percentage of total revenues may fluctuate.

 

Our selling, general and administrativeexpenses consist primarily of employee-related expenses, royalties, salescommissions, product promotion and other professional services. We expect thatselling, general and administrative expenses will continue to increase tosupport our anticipated growth.

 

We conduct most of our research anddevelopment and certain sales and marketing and administrative operations inIsrael through our wholly-owned Israeli subsidiary. As a result, some of ourexpenses are incurred in New Israeli Shekels. To date, substantially all of ourproduct sales and our development and licensing revenue have been denominatedin U.S. dollars and most costs of product sales have been incurred in U.S.dollars. We expect that most of our sales and costs of sales will continue tobe denominated and incurred in U.S. dollars for the foreseeable future. We havenot experienced material losses or gains as a result of currency exchange ratefluctuations and have not engaged in hedging transactions to reduce ourexposure to such fluctuations. We may in the future elect to take action toreduce our foreign exchange risk.

 

Our effective income tax rate has benefitedfrom the availability of net operating losses which we have utilized to reducetaxable income for U.S. federal income tax purposes and by our Israelisubsidiary’s status as an “Approved Enterprise” under Israeli law, whichprovides a ten-year tax holiday for income attributable to a portion of ouroperations in Israel. Our U.S. federal net operating losses expire at varioustimes between 2003 and 2020, and the benefits from our subsidiary’s ApprovedEnterprise status expire at various times beginning in 2003.

 

On April 21, 2002, our Board of Directorsapproved a three-for-two split of our common stock which was effected in theform of a fifty percent stock dividend, paid on May 22, 2002 to stockholders ofrecord on May 7, 2002. All share and per share information for all periodspresented in this report are on a post-split basis.

 

*Pending Acquisition*

 

On May 4, 2003, we entered into an agreement to acquire Oak Technology,Inc. (“Oak”) a publicly-held company thatprovides integrated circuit solutions for the HDTV and digital imagingmarkets.  Under the agreement, Oak willmerge with a wholly-owned subsidiary of Zoran, and each outstanding share ofOak’s common stock will be converted into the right to receive 0.2323 of ashare of Zoran common stock and $1.78 in cash. As of the date of the agreement, the total merger consideration wasvalued at $358 million.  The transactionis expected to be completed in the third quarter of 2003, and is subject toapproval by the stockholders of both companies as well as regulatory approval.  If the merger is consummated, it will beaccounted for as a purchase and, accordingly, the results of operations of Oak(beginning with the closing date of the acquisition) and the estimated fairvalue of assets acquired and liabilities assumed will be included in ourconsolidated financial statements beginning with the quarter in which theclosing takes place.  If the acquisitionis consummated, our future results of operations will be substantiallyinfluenced by the operations of Oak. Our management currently expects the acquisition to be accretive to ourearnings (before amortization of intangible assets) in the first half of2004.  However, the operating results ofthe combined company will be affected by our success in achieving our strategicobjectives and realizing potential operating benefits, including costsavings.  We will face a number ofsignificant challenges in integrating the technologies, operations andpersonnel of the two companies in a timely and efficient manner, and ourfailure to do so effectively could have a material adverse effect on thebusiness and operating results of the combined company.

 

**Resultsof Operations**

 

*Revenues*

 

Total revenues increased by21.7% to $37.8 million for the quarter ended March 31, 2003 from $31.1 millionfor the same period in 2002.  Productsales increased by 27.5% to $37.1 million from $29.1 million for first quarterof 2002.  The increase in product saleswas primarily driven by increased sales in our digital camera and DVD productlines of $5.0 million and $2.5 million, respectively. The increased sales forboth product lines were due to increased unit shipments partially offset byreduced average selling prices. DVD products continued to account for themajority of our total product sales, representing approximately 78% of thetotal for the quarter. We expect DVD sales to continue to comprise the majorityof our product sales for the balance of 2003. Software, licensing and development revenues decreased by 62.9% to$736,000 for the first quarter of 2003, compared to $2.0 million for the firstquarter of 2002. The decrease reflected the fact that we did not enter into anynew licensing agreements during the quarter ended March 31, 2003. This declineis not necessarily indicative of a developing trend as revenue from licensingactivities tends to fluctuate significantly from quarter to quarter.

 

*ProductGross Margin*

 

Product gross margindecreased to 28.0% for the quarter ended March 31, 2003 from 35.3% for the sameperiod in 2002.  The decrease was due tocontinued erosion of the average selling prices for our older multi-chip DVDsolutions. We anticipate that our product gross margin will improve over thebalance of 2003 as we have substantially depleted the inventory of these olderproducts and transitioned most of our customer base

 

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to our newer DVD productsthat do not require our DVD CPU companion chips which, historically, were soldat low margins.

 

*Researchand Development*

 

Research and development(“R&D”) expenses decreased by 18.9% to $4.5 million for the quarter endedMarch 31, 2003 from $5.5 million for the same period in 2002. The reduction wasdue to development grants of $1.5 million related to R&D expenditures inprevious periods that were received and recorded as offsets to R&D expenseduring the quarter ended March 31, 2003. R&D expenses decreased as apercentage of total revenues from 17.8% for the first quarter of 2002 to 11.8%for the first quarter of 2003 with approximately half of the percentagedecrease due to increased revenues and the other half resulting from the grantoffset.  We expect that R&D expensewill increase over the balance of 2003.

 

*Selling,General and Administrative*

 

Selling, general andadministrative (“SG&A”) expenses increased by 20.9% to $6.9 million for thequarter ended March 31, 2003 from $5.7 million for the same period in2002.  The increase was due to increasedsales and marketing expenses to support planned revenue growth in the AsiaPacific markets.  SG&A expenses were18.3% of total revenues for the three months ended March 31, 2003, compared to18.5% for the same period in 2002. We anticipate that SG&A expenses willcontinue to increase for the remainder of 2003 as we continue to expand ourpresence in the Asia Pacific region.

 

*Amortizationof Intangibles Assets*

 

During the quarter ended March 31, 2003, weincurred charges of $953,000 related to the amortization of intangible assetscompared to $2.4 million for the same period in 2002. The reduction was due tothe full amortization of the completed technology acquired as part of theNogatech Inc. acquisition by the end of 2002.

 

*InterestIncome*

 

Interest income decreasedby  $464,000 to $1.6 million for thequarter ended March 31, 2003 compared with $2.1 million for the same period in2002. The reduction was due to a decline in market interest rates.

 

*OtherIncome (Loss), Net*

 

Other loss decreased by 96.3% to 22,000 forthe quarter ended March 31, 2003 compared with $598,000 for the same period in2002. The reduction was primarily the result of a non-cash loss of $696,000realized in the first quarter of 2002, upon the exchange of shares of MGISoftware Inc. (“MGI”) common stock held by us for shares of Roxio Inc.(“Roxio”) common stock in conjunction with Roxio’s acquisition of MGI.

 

*Provisionfor Income Taxes*

 

Excluding charges related to the amortization of goodwill and otherintangibles our estimated effective tax rate was 10% for the first quarter of2003, consistent with the effective tax rate for first quarter of 2002. TheCompany has booked a tax rate commensurate with the jurisdictional distributionof profits between the U.S. and Israel and the underlying tax positions as aresult of the approved enterprise status in Israel. We anticipate utilizing the10% tax rate for the foreseeable future.

 

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**Liquidityand Capital Resources**

 

At March 31, 2003, we had $27.4 million ofcash and cash equivalents, $109.4 million of short-term investments and $165.3million of working capital. In addition, we had $72.7 million of long-terminvestments in marketable securities.

 

Our operating activities used cash of $2.4million during the three months ended March 31, 2003, primarily due to our netincome of $193,000 adjusted for the cash impact associated with an increase of$11.9 million in accounts receivable. Partially offsetting the increase inaccounts receivable was the cash impact of a $5.0 million decrease in inventoryand a $4.3 million increase in accounts payable. The decrease in inventory wasprimarily associated with a reduction in DVD inventory. The increase inaccounts payable was due to normal timing differences in our payment patterns.

 

Cash used in investing activities was$340,000 during the three months ended March 31, 2003, principally reflectingcapital expenditures for property and equipment.

 

Cash used by financing activities was $1.4million for the three months ended March 31, 2003, and principally reflectedinstallment payments on core technology.

 

At March31, 2003 and 2002, we did not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. Accordingly, we are not exposed to the type of financing,liquidity, market or credit risk that could arise if we had engaged in suchrelationships.

 

We believe that our current balances ofcash, cash equivalents and short-term investments, and anticipated cash flowfrom operations, will satisfy our anticipated working capital and capitalexpenditure requirements at least through the next 12 months. Nonetheless, ourfuture capital requirements may vary materially from those now planned and willdepend on many factors including, but not limited to:

 

•                  the levels at which we maintain inventoryand accounts receivable;

 

•                  the market acceptance of our products;

 

•                  the levels of promotion and advertisingrequired to launch our new products or to enter markets and attain acompetitive position in the marketplace;

 

•                  our business, product, capital expenditureand research and development plans and technology roadmap;

 

•                  volume pricing concessions;

 

•                  capital improvements to new and existingfacilities;

 

•                  technological advances;

 

•                  the response of competitors to our products;and

 

•                  our relationships with our suppliers andcustomers.

 

In addition, we may require an increase inthe level of working capital to accommodate planned growth, hiring andinfrastructure needs. Additional capital may also be required for consummationof any acquisitions of businesses, products or technologies.

 

To the extent that our existing resourcesand cash generated from operations, are insufficient to fund our futureactivities, we may need to raise additional funds through public or privatefinancings or borrowings. If additional funds are raised through the issuanceof debt securities, these securities could have rights, preferences andprivileges senior to holders of common stock, and the terms of this debt couldimpose restrictions on our operations. The sale of additional equity orconvertible debt securities could result in additional dilution to our stockholders.We cannot be certain that additional financing will be available in amounts oron terms acceptable to us, if at all. If we are unable to obtain thisadditional financing, we may be

 

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required to reduce the scope of our plannedproduct development and sales and marketing efforts, which could harm ourbusiness, financial condition and operating results.

 

**Future Performance and Risk Factors**

 

Ourfuture business, operating results and financial condition are subject tovarious risks and uncertainties, including those described below.

 

**Our quarterly revenues and operating results fluctuatedue to a variety of factors, which may result in volatility or a decline in theprice of our stock**.

 

Our quarterly operatingresults have varied significantly due to a number of factors, including:

 

•                  fluctuation in demand for our products;

 

•                  the timing of new product introductions byus and our competitors;

 

•                  the level of market acceptance of new andenhanced versions of our products and our customers’ products;

 

•                  the timing of large customer orders;

 

•                  the length and variability of the salescycle for our products;

 

•                  the cyclical nature of the semiconductorindustry;

 

•                  the availability of development funding andthe timing of development revenue;

 

•                  changes in the mix of products sold;

 

•                  seasonality in demand for our products;

 

•                  competitive pricing pressures; and

 

•                  the evolving and unpredictable nature of themarkets for products incorporating our integrated circuits and embeddedsoftware.

 

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

 

•                   the cost and availability of adequatefoundry capacity;

 

•                  fluctuations in manufacturing yields;

 

•                  the emergence of new industry standards;

 

•                  product obsolescence; and

 

•                  the amount of research and developmentexpenses associated with new product introductions.

 

Our operating results couldalso be harmed by:

 

•                  economic conditions generally or in variousgeographic areas where we or our customers do business;

 

•                  other conditions affecting the timing ofcustomer orders; or

 

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•                  a downturn in the markets for our customers’products, particularly the consumer electronics market.

 

These factors are difficultor impossible to forecast. We place orders to purchase our products fromindependent foundries several months in advance of the scheduled delivery date,often in advance of receiving non-cancelable orders from our customers. Ifanticipated shipments in any quarter are canceled or do not occur as quickly asexpected, expense and inventory levels could be disproportionately high. Ifanticipated license revenues in any quarter are canceled or do not occur, grossmargins may be reduced. A significant portion of our expenses are relativelyfixed, and the timing of increases in expenses is based in large part on ourforecast of future revenues. As a result, if revenues do not meet our expectationswe may be unable to quickly adjust expenses to levels appropriate to actualrevenues, which could harm our operating results.

 

As a result of thesefactors, our operating results may vary significantly from quarter to quarter.Any shortfall in revenues or net income from levels expected by securitiesanalysts could cause a decline in the trading price of our stock.

 

**We are subject to a number of specialrisks as a result of our planned acquisition of Oak Technology, Inc.**

 

On May 4, 2003, we entered into an agreement toacquire Oak Technology, Inc. (“Oak”), a publicly-held company that providesintegrated circuit solutions for the HDTV and digital imaging markets.  As a result of our entering into the agreement,we are subject to a number of risks and uncertainties, including the following:

 

•                       Immediatelyfollowing the completion of the merger, former Oak securityholders will ownapproximately 33.4% of the capital stock of Zoran.  The issuance of these shares in connection with the merger willcause a significant reduction in the relative percentage interests of currentZoran stockholders.

 

•                       Wewill face a number of significant challenges in integrating the technologies,operations and personnel of Zoran and Oak in a timely and efficient manner, andour failure to do so effectively could have a material adverse effect on thebusiness and operating results of the combined company.

 

•                       Wemay not achieve the strategic objectives, cost savings and other anticipatedpotential benefits of the merger, and our failure to achieve these strategicobjectives could have a material adverse effect on our revenues, expenses andoperating results.

 

•                       Transactionscosts associated with the merger will be included as part of the total purchasecost for accounting purposes.  Inaddition, the combined company may incur charges to operations, which amountsare not currently estimable, in the quarter in which the merger is completed orfollowing quarters, to reflect costs associated with integrating the twocompanies.  These costs could adverselyaffect our future liquidity and operating results.

 

**Oursuccess for the foreseeable future will be dependent on growth in demand forintegrated circuits for DVD and filmless digital camera applications and ourability to market and sell our products to manufacturers who incorporate thosetypes of integrated circuits into their products.**

 

In 2002 and the firstquarter of 2003, we derived a substantial majority of our product revenues fromthe sale of integrated circuits for DVD applications. We expect that sales ofour products for DVD applications will continue to account for a majority ofour revenues for the near future. Our ability to sell our products for filmlessdigital camera applications will also have an impact on our financialperformance for the foreseeable future. If the markets for these products andapplications decline or fail to develop as expected, or we are not successfulin our efforts to market and sell our products to manufacturers who incorporateintegrated circuits into these products, our financial results will be harmed.

 

**Ourcustomers experience fluctuating product cycles and seasonality, which causesour sales to fluctuate.**

 

Because the markets ourcustomers serve are characterized by numerous new product introductions andrapid product enhancements, our operating results may vary significantly fromquarter to quarter. During the final production of a mature product, ourcustomers typically exhaust their existing inventory of our products.Consequently, orders for our products may decline in those circumstances, evenif our products are incorporated into both mature products and replacementproducts. A delay in the customer’s transition to commercial production of areplacement product would delay our ability to recover the lost sales from thediscontinuation of the related mature product. Our customers also experiencesignificant seasonality in the sales of their consumer products, which affectstheir orders of our products. Typically, the second half of the calendar yearrepresents a disproportionate percentage of sales for our customers due to theholiday period, and therefore a disproportionate percentage of our sales. Weexpect these sales fluctuations to continue for the foreseeable future.

** **

**Productsupply and demand in the semiconductor industry is subject to cyclicalvariations.**

 

The semiconductor industryis subject to cyclical variations in product supply and demand. Downturns inthe industry often occur in connection with, or anticipation of, maturing productcycles for both semiconductor companies and their customers and declines ingeneral economic conditions. These downturns have been characterized by abruptfluctuations in product demand, production over-capacity and accelerateddecline of average selling prices. In some cases, these downturns have lastedmore than one year. A downturn in the semiconductor industry could harm oursales and revenues if demand drops or our gross margins if average sellingprices decline.

 

**Thedevelopment and evolution of markets for our integrated circuits is dependenton factors such as industry standards, over which we have no control; forexample, if manufacturers adopt new or competing industry standards with whichour products are not compatible, our existing products would become lessdesirable to the manufacturers and our sales would suffer.**

 

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The emergence of marketsfor our products is affected by a variety of factors beyond our control. Inparticular, our products are designed to conform to current specific industrystandards. Manufacturers may not continue to follow these standards, whichwould make our products less desirable to manufacturers and reduce our sales.Also, competing standards may emerge that are preferred by manufacturers, whichcould also reduce our sales and require us to make significant expenditures todevelop new products. The emergence of new markets for our products is alsodependent in part upon third parties developing and marketing content in aformat compatible with commercial and consumer products that incorporate ourproducts. If content compatible with commercial and consumer products thatincorporate our products is not available, manufacturers may not be able tosell products incorporating our integrated circuits, and our sales tomanufacturers would suffer.

 

**Werely on independent foundries and contractors for the manufacture, assembly andtesting of our integrated circuits, and the failure of any of these thirdparties to deliver products or otherwise perform as requested could damage ourrelationships with our customers and harm our sales and financial results.**

 

We do not operate anymanufacturing facilities, and we rely on independent foundries to manufacturesubstantially all of our products. These independent foundries fabricateproducts for other companies and may also produce products of their own design.From time to time there are manufacturing capacity shortages in thesemiconductor industry. We do not have long-term supply contracts with any ofour suppliers, including our principal supplier, Taiwan SemiconductorManufacturing Company, or TSMC. Therefore, TSMC and these other suppliers arenot obligated to manufacture products for us for any specific period, in anyspecific quantity or at any specified price, except as may be provided in aparticular purchase order.

 

Our reliance on independentfoundries involves a number of risks, including:

 

•                  the inability to obtain adequatemanufacturing capacity;

 

•                  the unavailability of or interruption inaccess to certain process technologies necessary for manufacture of ourproducts;

 

•                  lack of control over delivery schedules;

 

•                  lack of control over quality assurance;

 

•                  lack of control over manufacturing yieldsand cost; and

 

•                  potential misappropriation of ourintellectual property.

 

In addition, TSMC and someof our other foundries are located in areas of the world which are subject tonatural disasters such as earthquakes. While the 1999 earthquake in Taiwan didnot have a material impact on our independent foundries, a similar eventcentered near TSMC’s facility could severely reduce TSMC’s ability tomanufacture our integrated circuits. The loss of any of our manufacturers as asupplier, our inability to expand the supply of our products in response toincreased demand, or our inability to obtain timely and adequate deliveriesfrom our current or future suppliers due to a natural disaster or any otherreason could delay or reduce shipments of our products. Any of thesecircumstances could damage our relationships with current and prospectivecustomers and harm our sales and financial results.

 

We also rely on independentcontractors for the assembly and testing of our products. At present, all ofour semiconductor products are assembled by one of seven independentcontractors: ASE, Amkor, ASAT, Kingpak, Kyocera, STATS or Vate. Oursemiconductor products are tested by these contractors or other independentcontractors. Our reliance on independent assembly and testing houses limits ourcontrol over delivery schedules, quality assurance and product cost.Disruptions in the services provided by our assembly or testing houses or othercircumstances that would require us to seek alternative sources of assembly ortesting could lead to supply constraints or delays in the delivery of ourproducts. These constraints or delays could damage our relationships withcurrent and prospective customers and harm our sales and financial results.

** **

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** **

**Becausefoundry capacity is limited from time to time we may be required to enter intocostly long-term supply arrangements to secure foundry capacity.**

 

If we are not able toobtain additional foundry capacity as required, our relationships with ourcustomers would be harmed and our sales would likely be reduced. In order tosecure additional foundry capacity, we have considered and will continue toconsider various arrangements with suppliers, which could include, amongothers:

 

•                  option payments or other prepayments to afoundry;

 

•                  nonrefundable deposits with or loans tofoundries in exchange for capacity commitments;

 

•                  contracts that commit us to purchasespecified 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 withfoundries.

 

We may not be able to makeany such arrangement in a timely fashion or at all, and such arrangements, ifany, may not be on terms favorable to us. Moreover, if we are able to securefoundry capacity, we may be obligated to utilize all of that capacity or incurpenalties. Such penalties may be expensive and could harm our financialresults.

 

**Ifour independent foundries do not achieve satisfactory yields, our relationshipswith our customers may be harmed.**

 

The fabrication of siliconwafers is a complex process. Minute levels of contaminants in the manufacturingenvironment, defects in photomasks used to print circuits on a wafer,difficulties in the fabrication process or other factors can cause asubstantial 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 themanufacturing process and may be time consuming and expensive to correct. As aresult, foundries often experience problems achieving acceptable yields, whichare represented by the number of good integrated circuits as a proportion ofthe number of total integrated circuits on any particular wafer.  Poor yields from our independent foundrieswould reduce our ability to deliver our products to customers, harm ourrelationships with our customers, and harm our business.

 

**Tobe successful, we must efficiently develop new and enhanced products to meetrapidly changing customer requirements and industry standards.**

 

The markets for ourproducts are characterized by:

 

•                  rapidly changing technologies;

 

•                  evolving industry standards;

 

•                  frequent new product introductions; and

 

•                  short product life cycles.

 

Over the long run, weexpect to increase our product development expenses, and our future successwill depend to a substantial degree upon our ability to develop and introduce,on a timely and cost-effective basis, new and enhanced products that meetrapidly changing customer requirements and industry standards. We may notsuccessfully develop, introduce or manage the transition to new products.Delays in the introduction or shipment of new or enhanced products, lack ofmarket acceptance for such products or problems associated with new producttransitions could harm our sales and financial results.

** **

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** **

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

 

Competition in thecompression technology market has historically been dominated by largecompanies, such as STMicroelectronics, and companies that develop and use theirown integrated circuits, such as Sony and Matsushita. As this market continuesto develop, we face competition from other large semiconductor vendors,including:

 

•                  ALi Corporation;

 

•                  Atmel Corporation;

 

•                  Cirrus Logic (Crystal Semiconductor);

 

•                  ESS Technology, Inc.;

 

•                  Fujitsu;

 

•                  LSI Logic;

 

•                  MediaTek Inc.;

 

•                  Motorola;

 

•                  Omnivision Technologies, Inc.;

 

•                  Sunplus Technology; and

 

•                  Texas Instruments.

 

We also face competitionfrom internally developed solutions developed and used by major Japaneseoriginal equipment manufacturers, who may also be our customers.

 

Many of our existing andpotential competitors have substantially greater resources than ours in manyareas, including:

 

•                  finances;

 

•                  manufacturing;

 

•                  technology;

 

•                  research and development;

 

•                  marketing; and

 

•                  distribution.

 

Many of our competitorshave broader product lines and longer standing relationships with customersthan we do. Moreover, our competitors may foresee the course of marketdevelopments more accurately than we do and could in the future develop newtechnologies that compete with our products or even render our productsobsolete. In addition, a number of private companies have announced plans fornew products to address the same digital multimedia problems that our productsaddress. If we are unable to compete successfully against our current andfuture competitors, we could experience price reductions, order cancellationsand reduced gross margins, any one of which could harm our business.

 

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The DVD market is growing, and additional competitors areexpected to enter the market for DVD players and software. Some of thesepotential competitors may develop captive implementations for use only withtheir own PC and consumer electronics products. It is also possible thatapplication software vendors, such as Microsoft, may attempt to enter the DVDapplication market in the future. This increased competition may result inprice reductions, reduced profit margins and loss of market share.

 

**Ourproducts are characterized by average selling prices that decline overrelatively short time periods; if we are unable to reduce our costs orintroduce new products with higher average selling prices, our financialresults would suffer.**

 

Average selling prices forour products decline over relatively short time periods. Many of ourmanufacturing costs are fixed. When our average selling prices decline, ourrevenues decline unless we sell more units, and our gross margins declineunless we are able to reduce our manufacturing costs by a commensurate amount.Our operating results suffer when gross margins decline. We have experiencedthese problems and may continue to experience them in the future and cannotpredict when they may occur or their severity.

 

**Wederive most of our revenue from sales to a small number of large customers, andif we are not able to retain these customers, or they reschedule, reduce orcancel orders, our revenues would be reduced and our financial results wouldsuffer.**

 

Our largest customersaccount for a substantial percentage of our revenues. In 2002, sales toFujifilm accounted for 36.6% of our total revenue. Our four largest customersin 2002 accounted for approximately 58.6% of our total revenues.  During 2001, our four largest customersaccounted for approximately 56.3% of our revenues with Fujifilm accounting for29.2%. Sales to these large customers have varied significantly from year toyear and will continue to fluctuate in the future.  These sales also may fluctuate significantly from quarter toquarter. We may not be able to retain our key customers or these customers maycancel purchase orders or reschedule or decrease their level of purchases fromus. Any substantial decrease or delay in sales to one or more of our keycustomers could harm our sales and financial results. In addition, anydifficulty in collecting amounts due from one or more key customers could harmour financial results.

 

**Weare dependent on our relationship with Fujifilm for a significant percentage ofour product sales, and if this relationship were terminated, our business couldbe harmed.**

 

Fujifilm has been ourlargest customer over each of the last five years. Fujifilm purchases ourproducts primarily as a reseller. Fujifilm acts as the primary reseller inJapan of products developed by us under development contracts with Fujifilm. Wemay sell these products directly in Japan only to specified customers withFujifilm’s consent. Fujifilm provides more sales and marketing support than ourother resellers. Fujifilm has provided wafer manufacturing services on amost-favored terms basis to us since 1993 and has also provided funding tosupport our development efforts. If our relationship with Fujifilm wereterminated, our business could be harmed.

 

**Ourproducts generally have long sales cycles and implementation periods, whichincreases our costs in obtaining orders and reduces the predictability of ourearnings.**

 

Our products aretechnologically complex. Prospective customers generally must make asignificant commitment of resources to test and evaluate our products and tointegrate them into larger systems. As a result, our sales process is oftensubject to delays associated with lengthy approval processes that typicallyaccompany the design and testing of new products. The sales cycles of ourproducts often last for many months or even years. Longer sales cycles requireus to invest significant resources in attempting to make sales and delay thegeneration of revenue.

 

Long sales cycles alsosubject us to other risks, including customers’ budgetary constraints, internalacceptance reviews and cancellations. In addition, orders expected in onequarter could shift to another because of the timing of customers’ purchasedecisions. The time required for our customers to incorporate our products intotheir own can vary significantly with the needs of our customers and generallyexceeds several months, which further complicates our planning processes andreduces the predictability of our operating results.

 

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**Weare not protected by long-term contracts with our customers.**

 

We generally do not enterinto long-term purchase contracts with our customers, and we cannot be certainas to future order levels from our customers. When we do enter into a long-termcontract, the contract is generally terminable at the convenience of thecustomer. In the event of an early termination by one of our major customers,it is unlikely that we will be able to rapidly replace that revenue source,which would harm our financial results.

 

**Weare dependent upon our international sales and operations; economic, politicalor military events in a country where we make significant sales or havesignificant operations could interfere with our success or operations there andharm our business.**

 

During 2002, 97% of ourtotal revenues were derived from international sales. We anticipate thatinternational sales will continue to represent a substantial majority of ourtotal revenues for the foreseeable future. In addition, substantially all ofour semiconductor products are manufactured, assembled and tested outside ofthe United States by independent foundries and subcontractors.

 

We are subject to the risksinherent in doing business internationally, including:

 

•                  unexpected changes in regulatoryrequirements;

 

•                  fluctuations in exchange rates;

 

•                  political and economic instability;

 

•                  imposition of tariffs and other barriers andrestrictions; and

 

•                  the burdens of complying with a variety offoreign laws.

 

The majority of ourresearch and development personnel and facilities and a significant portion ofour sales personnel are located in Israel. Political, economic and militaryconditions in Israel directly affect our operations. Some of our officers andemployees in Israel are obligated to perform up to 39 days of military reserveduty annually. The absence of these employees for significant periods duringthe work week may cause us to operate inefficiently during these periods.

 

Our operations in China aresubject to the economic and political uncertainties affecting that country. Forexample, the Chinese economy has experienced significant growth in the pastdecade, but such growth has been uneven across geographic and economic sectorsand has recently been slowing. This growth may continue to decrease and anyslowdown may have a negative effect on our business. During 2000 and 2001, wealso opened offices in Taipei, Taiwan, Hong Kong and Seoul, Korea. Ouroperations are subject to the economic and political uncertainties affectingthese countries as well.

 

**Ourbusiness and future operating results could be harmed by terrorist activity orarmed conflict.**

** **

**Our business and operatingresults are subject to uncertainties arising out of possible terrorist attackson the United States and other regions of the world including locations wherewe maintain operations and by armed conflict in the Middle East and relatedeconomic instability. Our operations could be harmed due to:**

** **

•                  disruption in commercial activitiesassociated with heightened security concerns affecting international travel andcommerce;

 

•                  reduced demand for consumer electronicproducts due to a potential extension of the global economic slowdown;

 

•                  tightened immigration controls that mayadversely affect the residence status of key non-U.S. managers and technicalemployees in our U.S. facilities or our ability to hire new non-U.S. employeesin such facilities; or

 

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•                  potential expansion of armed conflict in theMiddle East which could adversely affect our operations in Israel.

 

**Theprices of our products may become less competitive due to foreign exchangefluctuations.**

 

Foreign currencyfluctuations may affect the prices of our products. Prices for our products arecurrently denominated in U.S. dollars for sales to our customers throughout theworld. If there is a significant devaluation of the currency in a specificcountry, the prices of our products will increase relative to that country’scurrency and our products may be less competitive in that country. Also, wecannot be sure that our international customers will continue to be willing toplace orders denominated in U.S. dollars. If they do not, our revenue and operatingresults will be subject to foreign exchange fluctuations.

 

**Ourability to compete could be jeopardized if we are unable to protect ourintellectual property rights from challenges by third parties.**

 

Our success and ability tocompete depend in large part upon protecting our proprietary technology. Werely on a combination of patent, trade secret, copyright and trademark laws,non-disclosure and other contractual agreements and technical measures toprotect our proprietary rights. These agreements and measures may not besufficient to protect our technology from third-party infringement, or toprotect us from the claims of others. Monitoring unauthorized use of ourproducts is difficult and we cannot be certain that the steps we have takenwill prevent unauthorized use of our technology, particularly in foreigncountries where the laws may not protect our proprietary rights as fully as inthe United States. The laws of certain foreign countries in which our productsare or may be developed, manufactured or sold, including various countries inAsia, may not protect our products or intellectual property rights to the sameextent as do the laws of the United States and thus make the possibility ofpiracy of our technology and products more likely in these countries. Ifcompetitors are able to use our technology, our ability to compete effectivelycould be harmed.

 

**Wecould become subject to claims and litigation regarding intellectual propertyrights, which could seriously harm our business and require us to incursignificant costs.**

 

In recent years, there hasbeen significant litigation in the United States involving patents and otherintellectual property rights. In the past, we have been subject to claims andlitigation regarding alleged infringement of other parties’ intellectualproperty rights. We could become subject to litigation in the future either toprotect our intellectual property or as a result of allegations that weinfringe others’ intellectual property rights. Claims that our products infringeproprietary rights would force us to defend ourselves and possibly ourcustomers or manufacturers against the alleged infringement. These claims andany resulting lawsuit, if successful, could subject us to significant liabilityfor damages and invalidation of our proprietary rights. These lawsuits,regardless of their success, would likely be time-consuming and expensive toresolve and would divert management time and attention. Any potentialintellectual property litigation could force us to do one or more of thefollowing:

 

•                  stop selling our products that incorporatethe challenged intellectual property;

 

•                  obtain from the owner of the infringedintellectual property right a license to sell or use the relevant technology,which license may not be available on reasonable terms or at all;

 

•                  pay damages; or

 

•                  redesign those products that use suchtechnology.

 

If we are forced to takeany of the foregoing actions, our business could be severely harmed.

** **

**Ifnecessary licenses of third-party technology are not available to us or arevery expensive, our products could become obsolete.**

 

From time to time we may berequired to license technology from third parties to develop new products orproduct enhancements. Third party licenses may not be available to us oncommercially reasonable terms, if at all. If we are unable to obtain anythird-party license required to develop new products and product

 

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enhancements, we may haveto obtain substitute technology of lower quality or performance standards or atgreater cost, either of which could seriously harm the competitiveness of ourproducts.

 

**Ifwe are not able to apply our net operating losses against taxable income infuture periods, our financial results will be harmed.**

 

Our future net income andcash flow will be affected by our ability to apply our net operating losses,which totaled approximately $34.0 million for federal and $4.0 million forstate tax reporting purposes as of December 31, 2002, against taxable income infuture periods. Our net operating losses incurred prior to the consummation ofour initial public offering in 1995 that we can use to reduce future taxableincome for federal tax purposes are limited to approximately $3.0 million peryear. Changes in tax laws in the United States may further limit our ability toutilize our net operating losses. Any further limitation on our ability toutilize our net operating losses could harm our financial condition.

 

**Anyacquisitions or strategic investments we make could disrupt our business andseverely harm our financial condition.**

 

We have made investmentsin, and acquisitions of, complementary companies, products and technologies.During 2000, we acquired PixelCam and Nogatech, and in May 2003, we enteredinto an agreement to acquire Oak.  Wemay acquire additional businesses, products, or technologies in the future. Inthe event of any future acquisitions, we could:

 

•                  issue stock that would dilute our currentstockholders’ percentage ownership;

 

•                  incur debt;

 

•                  assume liabilities;

 

•                  incur expenses related to the futureimpairment of goodwill and the amortization of other intangible assets; or

 

•                  incur other large write-offs immediately orin the future.

 

Our operation of anyacquired business (including our potential operation of Oak) will also involvenumerous risks, including:

 

•                  problems combining the purchased operations,technologies or products;

 

•                  unanticipated costs;

 

•                  diversion of management’s attention from ourcore business;

 

•                  adverse effects on existing businessrelationships with customers;

 

•                  risks associated with entering markets inwhich we have no or limited prior experience; and

 

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

 

We may not be able tosuccessfully integrate any businesses, products or technologies or personnelthat we might acquire in the future and any failure to do so could disrupt ourbusiness and seriously harm our financial condition.

 

In addition, we have mademinority equity investments in early-stage companies, and we expect to continueto review opportunities to make additional investments in such companies wherewe believe such investments will provide us with opportunities to gain accessto important technologies or otherwise enhance important commercialrelationships. We have little or no influence over the early-stage companies inwhich we have made or may make strategic, minority equity investments. Each ofthese investments involves a high degree of risk. We may not be successful inachieving the technological or commercial advantage upon which any giveninvestment is premised, and failure by the early-stage company to achieve itsown business objectives could result in a loss of all or part of our investedcapital and require us to write-off all or a portion of such investments.

 

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**Ourproducts could contain defects, which could reduce sales of those products orresult in claims against us.**

 

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

 

**Ifwe do not maintain our current development contracts or are unable to enterinto new development contracts, our business could be harmed.**

 

We historically havegenerated a significant percentage of our total revenues from developmentcontracts, primarily with key customers. These development contracts haveprovided us with partial funding for the development of some of our products.Under these contracts, we receive payments upon reaching certain developmentmilestones. If we fail to achieve the milestones specified in our existingdevelopment contracts, if our existing contracts are terminated or we areunable to secure future development contracts, our ability to cost-effectivelydevelop new products would be reduced and our business would be harmed.

 

**Wemay need additional funds to execute our business plan, and if we are unable toobtain such funds, we will not be able to expand our business as planned.**

 

We may require substantialadditional capital to finance our future growth, secure additional foundrycapacity and fund our ongoing research and development activities beyond 2003.Our capital requirements will depend on many factors, including:

 

•                  acceptance of and demand for our products;

 

•                  the types of arrangements that we may enterinto with our independent foundries; and

 

•                  the extent to which we invest in newtechnology and research and development projects.

 

To the extent that ourexisting sources of liquidity and cash flow from operations are insufficient tofund our activities, we may need to raise additional funds. If we raise additionalfunds through the issuance of equity securities, the percentage ownership ofour existing stockholders would be reduced. Further, such equity securities mayhave rights, preferences or privileges senior to those of our common stock.Additional financing may not be available to us when needed or, if available,it may not be available on terms favorable to us.

 

**Ifwe fail to manage our future growth, if any, our business would be harmed.**

 

We anticipate that ourfuture growth, if any, will require us to recruit and hire a substantial numberof new engineering, managerial, sales and marketing personnel. Our ability tomanage our growth successfully will also require us to expand and improve ouradministrative, operational, management and financial systems and controls.Many of our key operations, including the major portion of our research anddevelopment operations and a significant portion of our sales andadministrative operations, are located in Israel. A majority of our sales andmarketing and certain of our research and development and administrativepersonnel, including our President and Chief Executive Officer and otherofficers, are based in the United States. The geographic separation of theseoperations places additional strain on our resources and our ability toeffectively manage our growth. If we are unable to manage growth effectively,our business would be harmed.

 

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**Werely on the services of our executive officers and other key personnel, whoseknowledge of our business and industry would be extremely difficult to replace.**

 

Our success depends to asignificant degree upon the continuing contributions of our senior management.The loss of key management personnel could delay product development cycles orotherwise harm our business. We may not be able to retain the services of anyof our key employees. We believe that our future success will also depend inlarge part on our ability to attract, integrate and retain highly-skilledengineering, managerial, sales and marketing personnel, in the United States,Israel and the Asia Pacific region. Competition for such personnel is intense,and we may not be successful in attracting, integrating and retaining suchpersonnel. Failure to attract, integrate and retain key personnel could harmour ability to carry out our business strategy and compete with othercompanies.

 

**TheIsraeli rate of inflation may negatively impact our costs if it exceeds therate of devaluation of the New Israeli Shekel against the U.S. dollar.**

 

A portion of the cost ofour operations, relating mainly to our personnel and facilities in Israel, isincurred in New Israeli Shekels. As a result, we bear the risk that the rate ofinflation in Israel will exceed the rate of devaluation of the New IsraeliShekel in relation to the dollar, which will increase our costs as expressed indollars. To date, we have not engaged in hedging transactions. In the future,we may enter into currency hedging transactions to decrease the risk of financialexposure from fluctuations in the exchange rate of the U.S. dollar against theNew Israeli Shekel. These measures may not adequately protect us from theimpact of inflation in Israel.

 

**Thegovernment programs we participate in and tax benefits we receive require us tomeet several conditions and may be terminated or reduced in the future, whichwould increase our costs.**

 

Historically, we havefinanced a portion of our research and development activities with grants forresearch and development from the Chief Scientist in Israel’s Ministry ofIndustry and Trade. Although we did not receive proceeds from such grants in2001 or 2002, we did receive such proceeds in the first quarter of 2003, and weplan to continue to seek additional grants from the Chief Scientist in thefuture. To be eligible for these grants, our development projects must beapproved by the Chief Scientist on a case-by-case basis.  If our development projects are not approvedby the Chief Scientist, we will not receive grants to fund these projects,which would increase our research and development costs. We also receive taxbenefits, in particular exemptions and reductions as a result of the “ApprovedEnterprise” status of our existing operations in Israel. To be eligible forthese tax benefits, we must maintain our Approved Enterprise status by meetingconditions, including making specified investments in fixed assets located inIsrael and investing additional equity in our Israeli subsidiary. If we fail tomeet these conditions in the future, the tax benefits would be canceled and wecould be required to refund the tax benefits already received. These taxbenefits may not be continued in the future at their current levels or at anylevel. Israeli governmental authorities have indicated that the government mayreduce or eliminate these benefits in the future, which would harm ourbusiness.

 

**Wehave anti-takeover provisions in our charter documents and there are provisionsof Delaware law that could prevent or delay a change in control of our company.**

 

Our certificate ofincorporation, our bylaws and Delaware law contain provisions that could makeit more difficult for a third party to acquire us, even if doing so would bebeneficial to our stockholders. These include provisions:

 

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

 

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

 

•                  eliminating stockholders’ rights to call aspecial meeting of stockholders; and

 

•                  requiring advance notice of any stockholdernominations of candidates for election to our board of directors.

** **

**26**

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** **

**Ourstock price has fluctuated and may continue to fluctuate widely.**

 

The market price of ourcommon stock has fluctuated significantly since our initial public offering in1995. Between January 1, 2002 and December 31, 2002, the closing sale price ofour common stock, as reported on the Nasdaq National Market, ranged from a lowof $9.11 to a high of $31.81.  Themarket price of our common stock is subject to significant fluctuations in thefuture in response to a variety of factors, including:

 

•                  announcements concerning our business orthat of our competitors or customers;

 

•                  quarterly variations in operating results;

 

•                  changes in analysts’ earnings estimates;

 

•                  announcements of technological innovations;

 

•                  the introduction of new products or changesin product pricing policies by us or our competitors;

 

•                  proprietary rights or other litigation;

 

•                  general conditions in the semiconductorindustry; and

 

•                  developments in the financial markets.

 

In addition, the stock market has, from timeto time, experienced extreme price and volume fluctuations that haveparticularly affected the market prices for semiconductor companies ortechnology companies generally and which have been unrelated to the operatingperformance of the affected companies. Broad market fluctuations of this typemay reduce the future market price of our common stock.

 

**Item 3.****   Quantitative andQualitative Disclosures About Market Risk**

 

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

 

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

 

A majority of our revenue and capitalspending is transacted in U.S. dollars, although a portion of the cost of ouroperations, relating mainly to our personnel and facilities in Israel, isincurred in New Israeli Shekels. We have not engaged in hedging transactions toreduce our exposure to fluctuations that may arise from changes in foreignexchange rates. Based on our overall currency rate exposure at March 31, 2003,a near-term 10% appreciation or depreciation of the New Israeli Shekel wouldhave an immaterial affect on our financial condition.

 

**Item 4.  Controls and Procedures**

 

Under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer, we conducted an evaluationof our disclosure controls and procedures (as defined in Rule 13a-14(c) underthe Securities and Exchange Act of 1934, as amended) within 90 days prior tothe filing date of this report. Based on their evaluation, our Chief ExecutiveOfficer and Chief Financial Officer concluded that our disclosure controls andprocedures are effective.

 

There have been nosignificant changes (including corrective actions with regard to significantdeficiencies or material weaknesses) in our internal controls or in otherfactors that could significantly affect these controls subsequent to the dateof the evaluation referred to above.

 

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**PARTII.     OTHER INFORMATION**

 

Item 6.      Exhibits and Reports on Form 8-K

 

(a)                                Exhibits

 

99.1 Certification ofChief Executive Officer, pursuant to 18 U.S.C. Section 1350.

99.2 Certification ofChief Financial Officer, pursuant to 18 U.S.C. Section 1350.

 

(b)                                 Reportson Form 8-K

 

No reports on Form 8-Kwere filed during the three months ended March 31, 2003.

 

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**SIGNATURES**

 

 

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

 

 
|                      |   |   | **ZORAN  CORPORATION**                       |
|---------------------------|--------|--------|----------------------------------------------|
|                      |   |   |                                         |
|                      |   |   |                                         |
| Date:  May  15, 2003 |   |   | /s/  Karl  Schneider                    |   |
|                      |   |   | Karl Schneider                               |
|                      |   |   | Vice President Finance                       |
|                      |   |   | And Chief Financial Officer                  |
|                      |   |   | (Principal Financial and Accounting Officer) |

 

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CERTIFICATION OF

CHIEF EXECUTIVE  OFFICER

 

I, Levy Gerzberg, certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of Zoran Corporation;

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with a respect to the period covered by this quarterly report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)                                  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors:

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
|                       |   |   | /s/ Levy Gerzberg       |   |   |   |
|----------------------------|--------|--------|-------------------------|--------|--------|--------|
|                       |   |   | Levy Gerzberg           |   |   |
|                       |   |   | President and           |   |   |
|                       |   |   | Chief Executive Officer |   |   |
|                       |   |   |                    |   |   |
| Dated:  May  15, 2003 |   |   |                    |   |   |

 

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CERTIFICATION OF

CHIEF FINANCIAL OFFICER

 

I, Karl Schneider, certify that:

 

1.             I have reviewedthis quarterly report on Form 10-Q of Zoran Corporation;

 

2.             Based on myknowledge, this quarterly report does not contain any untrue statement of amaterial fact or omit to state a material fact necessary to make the statementsmade, in light of the circumstances under which such statements were made, notmisleading with a respect to the period covered by this quarterly report;

 

3.             Based on myknowledge, the financial statements, and other financial information includedin this quarterly report, fairly present in all material respects the financialcondition, results of operations and cash flows of the registrant as of, andfor, the periods presented in this quarterly report;

 

4.             The registrant’sother certifying officer and I are responsible for establishing and maintainingdisclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and15d-14) for the registrant and we have:

 

(a)                                  designedsuch disclosure controls and procedures to ensure that material informationrelating to the registrant, including its consolidated subsidiaries, is madeknown to us by others within those entities, particularly during the period inwhich this quarterly report is being prepared;

 

(b)                                 evaluatedthe effectiveness of the registrant’s disclosure controls and procedures as ofa date within 90 days prior to the filing date of this quarterly report (the“Evaluation Date”); and

 

(c)                                  presentedin this quarterly report our conclusions about the effectiveness of thedisclosure controls and procedures based on our evaluation as of the EvaluationDate;

 

5.             The registrant’sother certifying officer and I have disclosed, based on our most recentevaluation, to the registrant’s auditors and the audit committee of theregistrant’s board of directors:

 

(a)                                  allsignificant deficiencies in the design or operation of internal controls whichcould adversely affect the registrant’s ability to record, process, summarizeand report financial data and have identified for the registrant’s auditors anymaterial weaknesses in internal controls; and

 

(b)                                 anyfraud, whether or not material, that involves management or other employees whohave a significant role in the registrant’s internal controls; and

 

6.             The registrant’sother certifying officer and I have indicated in this quarterly report whetheror not there were significant changes in internal controls or in other factorsthat could significantly affect internal controls subsequent to the date of ourmost recent evaluation, including any corrective actions with regard tosignificant deficiencies and material weaknesses.

 

 
|                       |   | /s/ Karl Schneider          |   |   |   |
|----------------------------|--------|-----------------------------|--------|--------|--------|
|                       |   | Karl Schneider              |   |   |
|                       |   | Vice President, Finance and |   |   |
|                       |   | Chief Financial Officer     |   |   |
|                       |   |                        |   |   |
| Dated:  May  15, 2003 |   |                        |   |   |

 

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