**SECURITIES AND EXCHANGE COMMISSION**

**Washington, D.C. 20549**

** **

----

 

**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 June 30, 2002** |
|            |
| **or**          |
|            |
| **o**           | **TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE  SECURITIES EXCHANGE ACT OF 1934** |
|            |
|            | **For  the transition period  from          to          ** |

 

**CommissionFile Number:**  **0-27246**

 

**ZORAN CORPORATION**

(Exactname of registrant as 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 ý                    No o

 

The number of outstanding shares of the registrant’s Common Stock,$.001 par value, as of July 31, 2002 was 27,174,402

 

 

----

 

**ZORAN CORPORATION**

 

**INDEX**

 
| **PART I.  FINANCIAL INFORMATION** |
|-----------------------------------------|
|                                    |   |
| Item 1.                                 | Financial Statements |
|                                    |   |
|                                    | Condensed  Consolidated Balance Sheets June 30, 2002 and December 31, 2001 |
|                                    |   |
|                                    | Condensed  Consolidated Statements of Operations Three and Six Months Ended June 30,  2002 and 2001 |
|                                    |   |
|                                    | Condensed  Consolidated Statements of Cash Flows Six Months Ended June 30, 2002 and 2001 |
|                                    |   |
|                                    | 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 |
|                                    |   |
| **PART  II. OTHER INFORMATION**         |
|                                    |   |
| Item  4.                                | Submission  of Matters to a Vote of Security Holders |
|                                    |   |
| Item  6.                                | Exhibits and Reports on Form 8-K |
|                                    |   |
|                                    |   |
| SIGNATURES                              |

 

2

----

 

**ZORAN CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**

 
|                                                                                                                    |   | **June 30,2002** |    | **December  31,2001** |   |
|-------------------------------------------------------------------------------------------------------------------------|--------|------------------|---------|-----------------------|--------|
|                                                                                                                    |   |             |    |                  |   |
| ASSETS                                                                                                                  |   |             |    |                  |   |
| Current assets:                                                                                                         |   |             |    |                  |   |
| Cash and cash  equivalents                                                                                              |   | $                | 26,934  |                  | $      | 20,287 |   |
| Short-term  investments                                                                                                 |   | 96,330           |    | 89,818                |   |
| Accounts  receivable, net                                                                                               |   | 36,291           |    | 33,367                |   |
| Inventory                                                                                                               |   | 17,193           |    | 15,681                |   |
| Prepaid expenses  and other current assets                                                                              |   | 4,795            |    | 5,130                 |   |
| Total current  assets                                                                                                   |   | 181,543          |    | 164,283               |   |
|                                                                                                                    |   |             |    |                  |   |
| Property and  equipment, net                                                                                            |   | 6,457            |    | 7,159                 |   |
| Other  investments                                                                                                      |   | 81,536           |    | 89,727                |   |
| Goodwill                                                                                                                |   | 59,131           |    | 59,131                |   |
| Intangible  assets                                                                                                      |   | 6,426            |    | 11,044                |   |
|                                                                                                                    |   |             |    |                  |   |
|                                                                                                                    |   | $                | 335,093 |                  | $      | 331,344 |   |
|                                                                                                                    |   |             |    |                  |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                              |   |             |    |                  |   |
| Current  liabilities:                                                                                                   |   |             |    |                  |   |
| Accounts payable                                                                                                        |   | $                | 17,523  |                  | $      | 16,705 |   |
| Accrued expenses  and other liabilities                                                                                 |   | 16,479           |    | 16,801                |   |
| Total current  liabilities                                                                                              |   | 34,002           |    | 33,506                |   |
|                                                                                                                    |   |             |    |                  |   |
| Stockholders’  equity:                                                                                             |   |             |    |                  |   |
| Common Stock,  $0.001 par value; 55,000,000 shares authorized; 27,128,792 and 26,702,781  shares issued and outstanding |   | 27               |    | 27                    |   |
| Additional  paid-in capital                                                                                             |   | 395,521          |    | 391,665               |   |
| Warrants                                                                                                                |   | 717              |    | 717                   |   |
| Deferred  stock-based compensation                                                                                      |   | (103             | )       | (375                  | )      |
| Accumulated  other comprehensive loss                                                                                   |   | (1,676           | )       | (6                    | )      |
| Accumulated  deficit                                                                                                    |   | (93,395          | )       | (94,190               | )      |
| Total  stockholders’ equity                                                                                        |   | 301,091          |    | 297,838               |   |
|                                                                                                                    |   |             |    |                  |   |
|                                                                                                                    |   | $                | 335,093 |                  | $      | 331,344 |   |

 

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

 

3

----

 

**ZORAN CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

** **
|                                                        |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|-------------------------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                                        |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                                        |   |                              |   |                            |   |   |   |   |   |
| Revenues:                                                   |   |                              |   |                            |   |   |   |   |   |
| Product sales                                               |   | $                                 | 32,199 |                            | $      | 20,622 |   | $ | 61,304 |   | $ | 37,937 |   |
| Software,  licensing and development                        |   | 1,795                             |   | 1,302                           |   | 3,780 |   | 3,580 |   |
| Total revenues                                              |   | 33,994                            |   | 21,924                          |   | 65,084 |   | 41,517 |   |
|                                                        |   |                              |   |                            |   |   |   |   |   |
| Costs and  expenses:                                        |   |                              |   |                            |   |   |   |   |   |
| Cost of product  sales                                      |   | 20,559                            |   | 13,228                          |   | 39,391 |   | 24,104 |   |
| Research and  development                                   |   | 5,521                             |   | 5,922                           |   | 11,042 |   | 11,890 |   |
| Selling, general  and administrative                        |   | 5,905                             |   | 5,160                           |   | 11,645 |   | 10,403 |   |
| Amortization of  goodwill and other intangibles             |   | 2,445                             |   | 10,809                          |   | 4,890 |   | 21,617 |   |
| Total costs and  expenses                                   |   | 34,430                            |   | 35,119                          |   | 66,968 |   | 68,014 |   |
|                                                        |   |                              |   |                            |   |   |   |   |   |
| Operating loss                                              |   | (436                              | )      | (13,195                         | )      | (1,884 | ) | (26,497 | ) |
|                                                        |   |                              |   |                            |   |   |   |   |   |
| Interest and  other income, net                             |   | 1,852                             |   | 2,606                           |   | 3,311 |   | 5,351 |   |
|                                                        |   |                              |   |                            |   |   |   |   |   |
| Income (loss)  before income taxes                          |   | 1,416                             |   | (10,589                         | )      | 1,427 |   | (21,146 | ) |
|                                                        |   |                              |   |                            |   |   |   |   |   |
| Provision for  income taxes                                 |   | 386                               |   | 28                              |   | 632 |   | 71 |   |
|                                                        |   |                              |   |                            |   |   |   |   |   |
| Net income  (loss)                                          |   | $                                 | 1,030  |                            | $      | (10,617 | ) | $ | 795 |   | $ | (21,217 | ) |
|                                                        |   |                              |   |                            |   |   |   |   |   |
| Basic net income  (loss) per share                          |   | $                                 | 0.04   |                            | $      | (0.41 | ) | $ | 0.03 |   | $ | (0.82 | ) |
|                                                        |   |                              |   |                            |   |   |   |   |   |
| Diluted net  income (loss) per share                        |   | $                                 | 0.04   |                            | $      | (0.41 | ) | $ | 0.03 |   | $ | (0.82 | ) |
|                                                        |   |                              |   |                            |   |   |   |   |   |
| Shares used to  compute basic net income (loss) per share   |   | 27,054                            |   | 25,895                          |   | 26,949 |   | 25,922 |   |
|                                                        |   |                              |   |                            |   |   |   |   |   |
| Shares used to compute  diluted net income (loss) per share |   | 28,923                            |   | 25,895                          |   | 28,862 |   | 25,922 |   |

 

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

 

4

----

 

**ZORAN CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
|                                                                            |   | **Six Months  Ended  June 30,** |   |
|---------------------------------------------------------------------------------|--------|---------------------------------|--------|
|                                                                            |   | **2002**                        |   | **2001** |   |
| Cash flows from  operating activities:                                          |   |                            |   |   |   |
| Net income  (loss)                                                              |   | $                               | 795    |   | $ | (21,217 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operations: |   |                            |   |   |   |
| Depreciation,  amortization and other                                           |   | 1,371                           |   | 1,963 |   |
| Amortization of  goodwill and other intangibles                                 |   | 4,890                           |   | 21,345 |   |
| Realized loss on  exchange of marketable securities                             |   | 696                             |   | — |   |
| Changes in  current assets and liabilities:                                     |   |                            |   |   |   |
| Accounts  receivable                                                            |   | (2,740                          | )      | (421 | ) |
| Inventory                                                                       |   | (1,512                          | )      | 1,214 |   |
| Prepaid expenses  and other current assets                                      |   | 335                             |   | 1,490 |   |
| Accounts payable                                                                |   | 818                             |   | (823 | ) |
| Accrued expenses  and other liabilities                                         |   | (220                            | )      | (1,167 | ) |
| Net cash  provided by operating activities                                      |   | 4,433                           |   | 2,384 |   |
|                                                                            |   |                            |   |   |   |
| Cash flows from  investing activities:                                          |   |                            |   |   |   |
| Capital  expenditures for property and equipment                                |   | (663                            | )      | (1,390 | ) |
| Purchases of  investments                                                       |   | (75,728                         | )      | (123,220 | ) |
| Sales and  maturities of investments                                            |   | 74,749                          |   | 131,314 |   |
| Purchases of  long-term equity investments                                      |   | —                          |   | (1,171 | ) |
| Net cash  provided by (used in) investing activities                            |   | (1,642                          | )      | 5,533 |   |
|                                                                            |   |                            |   |   |   |
| Cash flows from  financing activities:                                          |   |                            |   |   |   |
| Proceeds from  issuance of Common Stock, net                                    |   | 3,856                           |   | 536 |   |
| Repurchases of  Common Stock                                                    |   | —                          |   | (3,867 | ) |
| Net cash  provided by (used in) investing activities                            |   | 3,856                           |   | (3,331 | ) |
|                                                                            |   |                            |   |   |   |
| Net increase in  cash and cash equivalents                                      |   | 6,647                           |   | 4,586 |   |
|                                                                            |   |                            |   |   |   |
| Cash and cash  equivalents at beginning of period                               |   | 20,287                          |   | 16,099 |   |
|                                                                            |   |                            |   |   |   |
| Cash and cash  equivalents at end of period                                     |   | $                               | 26,934 |   | $ | 20,685 |   |

 

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

 

5

----

 

**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, 2001.  Resultsfor the interim periods presented are not necessarily indicative of the resultsto be expected for the full year.

 

**2.             Comprehensive Income**

 

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

 

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

 
|                                       |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|--------------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                       |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
|                                       |   |                              |   |                            |   |   |   |   |   |
| Net  income (loss)                         |   | $                                 | 1,030  |                            | $      |  (10,617 | ) | $ | 795 |   | $ |  (21,217 | ) |
| Unrealized  loss on short-term investments |   | (1,183                            | )      | (272                            | )      | (1,670 | ) | (1,793 | ) |
| Comprehensive  loss                        |   | $                                 | (153   | )                               | $      |  (10,889 | ) | $ |  (875 | ) | $ |  (23,010 | ) |

 

Thecomponents of accumulated other comprehensive loss are unrealized gain (loss)on short-term investments and long-term marketable securities.

 

**3.             Balance Sheet Components**(inthousands):

** **
|            |   | **June 30,  2002** |        | **December  31,  2001** |   |
|-----------------|--------|--------------------|-------------|-------------------------|--------|
| **Inventory:**  |   |               |        |                    |   |
| Work-in-process |   | $                  |  4,227 |                    | $      |  3,119 |   |
| Finished goods  |   | 12,966             |        | 12,562                  |   |
|            |   |               |        |                    |   |
|            |   | $                  | 17,193      |                    | $      | 15,681 |   |

 

**4.             Goodwill and Other IntangibleAssets**

 

The Company adopted Financial Accounting StandardsBoard (“FASB”) Statement No. 142 “Goodwill and Other Intangible Assets” (“SFAS142”) as of January 1, 2002. SFAS 142 changes the accounting for goodwill froman amortization method to an impairment only approach. Under SFAS 142, goodwillwill be tested annually and whenever events or circumstances occur indicatingthat goodwill might be impaired. In connection with the adoption of SFAS 142,the Company has performed a transitional goodwill impairment assessment basedon its structure as one reporting unit and determined that no impairmentexisted at January 1, 2002.

 

6

----

 

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

 
|                         |   |                             |   | **June 30,  2002**          |   | **December  31, 2001**        |   |
|------------------------------|--------|----------------------------------|--------|-----------------------------|--------|-------------------------------|--------|
|                         |   | **Weighted  Avg.  Life (Years)** |   | **Gross  carrying  Amount** |   | **Accumulated  Amortization** |   | **Gross  carrying  Amount** |   | **Accumulated  Amortization** |   |
| Amortized  intangible assets |   |                             |   |                        |   |                          |   |   |   |   |   |
| Covenant not to  compete     |   | 3                                |   | $                           | 800    |                          | $      | 534 |   | $ | 800 |   | $ | 400 |   |
| Patents                      |   | 3                                |   | 900                         |   | 600                           |   | 900 |   | 450 |   |
| Core technology              |   | 3                                |   | 8,060                       |   | 4,531                         |   | 8,060 |   | 3,187 |   |
| Completed  technology        |   | 2                                |   | 10,760                      |   | 9,112                         |   | 10,760 |   | 6,382 |   |
| Customer base                |   | 3                                |   | 1,560                       |   | 877                           |   | 1,560 |   | 617 |   |
|                         |   |                             |   |                        |   |                          |   |   |   |   |   |
| Total                        |   |                             |   | $                           | 22,080 |                          | $      | 15,654 |   | $ |  22,080 |   | $ | 11,036 |   |

 

During the quarter ended June 30, 2002, the Companyincurred $2.3 million in charges related to the amortization of acquiredintangible assets associated with the acquisitions of PixelCam Inc. andNogatech Inc. in June and October 2000, respectively. The Company will incurcharges of $3.5 million for the balance of 2002 and $2.9 million for 2003related to the amortization of these acquired intangible assets.

 

**Reconciliationof Net Loss Excluding Goodwill Amortization**(in thousandsexcept per share data):

 
|                                  |   | **Three  Months Ended  June 30,** |   | **Six Months  Ended  June 30,** |   |
|---------------------------------------|--------|-----------------------------------|--------|---------------------------------|--------|
|                                  |   | **2002**                          |   | **2001**                        |   | **2002** |   | **2001** |   |
| Net loss:                             |   |                              |   |                            |   |   |   |   |   |
| Net income  (loss), as reported       |   | $                                 | 1,030  |                            | $      | (10,617 | ) | $ | 795 |   | $ | (21,217 | ) |
| Add back  goodwill amortization       |   | —                            |   | 8,383                           |   | — |   | 16,766 |   |
| Adjusted net  income (loss)           |   | $                                 | 1,030  |                            | $      | (2,234 | ) | $ | 795 |   | $ | (4,451 | ) |
|                                  |   |                              |   |                            |   |   |   |   |   |
| Basic net income  (loss) per share:   |   |                              |   |                            |   |   |   |   |   |
| Net income  (loss), as reported       |   | $                                 | 0.04   |                            | $      | (0.41 | ) | $ | 0.03 |   | $ | (0.82 | ) |
| Add back  goodwill amortization       |   | —                            |   | 0.32                            |   | — |   | 0.65 |   |
| Adjusted net  income (loss)           |   | $                                 | 0.04   |                            | $      | (0.09 | ) | $ | 0.03 |   | $ | (0.17 | ) |
|                                  |   |                              |   |                            |   |   |   |   |   |
| Diluted net  income (loss) per share: |   |                              |   |                            |   |   |   |   |   |
| Net income  (loss), as reported       |   | $                                 | 0.04   |                            | $      | (0.41 | ) | $ | 0.03 |   | $ | (0.82 | ) |
| Add back  goodwill amortization       |   | —                            |   | 0.32                            |   | — |   | 0.65 |   |
| Adjusted net  income (loss)           |   | $                                 | 0.04   |                            | $      | (0.09 | ) | $ | 0.03 |   | $ | (0.17 | ) |

 

**5.             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.

 

7

----

 

**6.             Earnings Per Share**

 

Computation of basic and diluted earnings per share is as follows:

 
|                                                  |   | **Three Months Ended June 30,** |   |
|-------------------------------------------------------|--------|---------------------------------|--------|
|                                                  |   | **2002**                        |   | **2001** |   |
|                                                  |   | **Income  (Numerator)**         |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   | **(Loss)  (Numerator)** |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
|                                                  |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Basic and  Diluted EPS:                               |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Net income (loss)  available to common   stockholders |   | $                               | 1,030  |   | 27,054 |   | $ | 0.04 |   | $ | (10,617 | ) | 25,895 |   | $ | (0.41 | ) |
|                                                  |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Effects of  Dilutive Securities:                      |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Stock Options                                         |   | —                          |   | 1,834 |   |   |   | — |   | — |   |   |   |
| Warrants                                              |   | —                          |   | 35 |   |   |   | — |   | — |   |   |   |
|                                                  |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Diluted EPS:                                          |   |                            |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  available  to common   stockholders    |   | $                               | 1,030  |   | 28,923 |   | $ | 0.04 |   | $ | (10,617 | ) | 25,895 |   | $ | (0.41 | ) |

 
|                                                   |   | **Six Months Ended June 30,** |   |
|--------------------------------------------------------|--------|-------------------------------|--------|
|                                                   |   | **2002**                      |   | **2001** |   |
|                                                   |   | **Income  (Numerator)**       |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   | **(Loss)  (Numerator)** |   | **Shares  (Denominator)** |   | **Per Share  Amount** | ** ** |
|                                                   |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Basic and  Diluted EPS:                                |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Net Income  (loss)  available to common   stockholders |   | $                             | 795    |   | 26,949 |   | $ | 0.03 |   | $ | (21,217 | ) | 25,922 |   | $ | (0.82 | ) |
|                                                   |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Effects of  Dilutive Securities:                       |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Stock Options                                          |   | —                        |   | 1,879 |   |   |   | — |   | — |   |   |   |
| Warrants                                               |   | —                        |   | 34 |   |   |   | — |   | — |   |   |   |
|                                                   |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Diluted EPS:                                           |   |                          |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  available  to common  stockholders      |   | $                             | 795    |   | 28,862 |   | $ | 0.03 |   | $ | (21,217 | ) | 25,922 |   | $ | (0.82 | ) |

 

**7.             Repurchase of Common Stock**

 

**Duringthe six months ended June 30, 2001, the Company repurchased 382,500 shares ofits common stock for $3.9 million.**

** **

**8.             Stock Split**

 

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.

 

**9.             Recently Issued Accounting Standard**

 

In August 2001, the Financial Accounting Standards Board (“FASB”)issued SFAS No. 143 (“SFAS 143”), “Accounting for Asset RetirementObligations”. SFAS 143 addresses financial accounting and reporting forobligations associated with the retirement of tangible long-lived assets andthe associated asset retirement costs. SFAS 143 applies to all entities. Itapplies to legal obligations associated with the retirement of long-livedassets that result from the acquisition, construction, development and/or thenormal operation of a long-lived asset, except for certain obligations oflessees. SFAS 143 is effective for financial statements issued for fiscal yearsbeginning after June 25, 2002. The Company expects that the initial applicationof SFAS 143 will not have a material impact on its financial statements.

 

In April 2002, the FASB issued SFAS No. 145 (“SFAS 145”) “Rescission ofSFAS Nos. 4, 44 and 64, Amendment of SFAS 13, and Technical Corrections.” SFAS145 rescinds SFAS Statement No. 4, “Reporting Gains and Losses fromExtinguishment of Debt,” and an amendment of that statement, SFAS No. 64,“Extinguishments of Debt Made to Satisfy Sinking-Fund Requirements,” as well asSFAS Statement No. 44, “Accounting for Intangible Assets of Motor Carriers.”SFAS 145 amends SFAS No. 13, “Accounting for Leases,” to eliminate aninconsistency between the required accounting for sale-leaseback transactionsand the required accounting for certain lease modifications that have economiceffects that are similar to sale-

 

8

----

 

leaseback transactions. SFAS 145 also amends other existingauthoritative pronouncements to make various technical corrections, clarifymeanings, or describe their applicability under changed conditions. Theprovisions of SFAS 145 will be adopted during fiscal year 2003. We do notexpect that the adoption of SFAS 145 will have a material impact on ourfinancial position, results of operations, or cash flows.

 

In June 2002, the FASB issued SFAS No. 146, (“SFAS 146”), “Accountingfor Exit or Disposal Activities.” SFAS 146 addresses significant issuesregarding the recognition, measurement, and reporting of costs that areassociated with exit and disposal activities, including restructuringactivities that are currently accounted for under EITF No. 94-3, “LiabilityRecognition for Certain Employee Termination Benefits and Other Costs to Exitan Activity (including Certain costs Incurred in a Restructuring).” The scopeof SFAS 146 also includes costs related to terminating a contract that is not acapital lease and termination benefits that employees who are involuntarilyterminated receive under the terms of a one-time benefit arrangement that isnot an ongoing benefit arrangement or an individual deferred-compensationcontract. SFAS 146 will be effective for exit or disposal activities that areinitiated after December 31, 2002 and early application is encouraged. We willadopt SFAS 146 for our fiscal year beginning January 1, 2003 and do not expectthat the adoption will have a material impact on our financial position,results of operations, or cash flows.

 

9

----

 

**Item2.  Management’s Discussion and Analysisof Financial 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, 2001.***

 

**Overview**

 

From our inception in 1981 through 1991, we derived the substantialmajority of our revenue from digital filter processors and vector signalprocessors used principally in military, industrial and medical applications.In 1989, we repositioned our business to develop and market data compressionproducts for the evolving multimedia markets and discontinued development ofdigital filter processor and vector signal processor products. In 1994, wediscontinued production of these products. Our current lines of digital audioand video products include integrated circuits and related products used indigital versatile disc players, movie and home theater systems, filmlessdigital cameras and video editing systems.

 

We derive most of our revenues from the sale of our integrated circuitproducts. Historically, average selling prices in the semiconductor industry ingeneral, and for our products in particular, have decreased over the life of aparticular product. Average selling prices for our hardware products havefluctuated substantially from period to period, primarily as a result ofchanges in our customer mix of original equipment manufacturer, or OEM, salesversus sales to distributors and the transition from low-volume to high-volumeproduction. In the past, we have reduced the prices of some of our products inorder to better penetrate the consumer market. We believe that, as our productlines continue to mature and competitive markets evolve, we are likely toexperience further declines in the average selling prices of our products, althoughwe cannot predict the timing and amount of such future changes with anycertainty.

 

Our cost of product sales consists primarily of fabrication costs,assembly and test costs, and the cost of materials and overhead fromoperations. If we are unable to reduce our cost of product sales to offsetanticipated decreases in average selling prices, our product gross margins willdecrease. Our product gross margin is also dependent on product mix and on thepercentage of products sold directly to our OEM customers versus indirectlythrough our marketing partners who purchase our products at lower prices butabsorb most of the associated marketing and sales support expenses, maintaininventories and provide customer support and training. Lower gross margins onsales to distributors are partially offset by reduced selling and marketingexpenses related to such sales. Product sales in Japan are primarily madethrough Fujifilm, our strategic partner and distributor in Japan. Fujifilmprovides more sales and marketing support than our other distributors. Weexpect both product and customer mix to continue to fluctuate in futureperiods, causing further fluctuations in margins.

 

We also derive revenue from licensing our software and otherintellectual property. Licensing revenue includes one-time license fees androyalties based on the number of units distributed by the licensee. Inaddition, we have historically generated a significant percentage of our totalrevenues from development contracts, primarily with key customers, althoughdevelopment revenue has declined as a percentage of total revenues over thepast several years. These development contracts have provided us with partialfunding for the development of some of our products. These developmentcontracts provide for license and milestone payments which are recorded asdevelopment revenue. We classify all development costs, including costs relatedto these development contracts, as research and development expenses. We retainownership of the intellectual property developed by us under these developmentcontracts. While we intend to continue to enter into development contracts withcertain strategic partners, we expect development revenue to continue todecline as a percentage of total revenues.

 

Our research and development expenses consist of salaries and relatedcosts of employees engaged in ongoing research, design and developmentactivities and costs of engineering materials and supplies. We are also a partyto research and development agreements with the Chief Scientist in Israel’sMinistry of Industry

 

10

----

 

and Trade and the Israel-United States Binational Industrial Researchand Development Foundation, which fund up to 50% of incurred project costs forapproved products up to specified contract maximums. These agreements requireus to use our best efforts to achieve specified results and require us to payroyalties at rates of 3% to 5% of resulting product sales, and up to 30% ofresulting license revenues, up to a maximum of 100% to 150% of total fundingreceived. Reported research and development expenses are net of these grants,which fluctuate from period to period. We believe that significant investmentsin research 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 administrative expenses consist primarily ofemployee-related expenses, royalties, sales commissions, product promotion andother professional services. We expect that selling, general and administrativeexpenses will continue to increase to support our anticipated growth.

 

We conduct most of our research and development and certain sales andmarketing and administrative operations in Israel through our wholly-ownedIsraeli subsidiary. As a result, some of our expenses are incurred in NewIsraeli Shekels. To date, substantially all of our product sales and our developmentand licensing revenue have been denominated in U.S. dollars and most costs ofproduct sales have been incurred in U.S. dollars. We expect that most of oursales and costs of sales will continue to be denominated and incurred in U.S.dollars for the foreseeable future. We have not experienced material losses orgains as a result of currency exchange rate fluctuations and have not engagedin hedging transactions to reduce our exposure to such fluctuations. We may inthe future elect to take action to reduce our foreign exchange risk.

 

Our effective income tax rate has benefited from the availability ofnet operating losses which we have utilized to reduce taxable income for U.S.federal income tax purposes and by our Israeli subsidiary’s status as an“Approved Enterprise” under Israeli law, which provides a ten-year tax holidayfor income attributable to a portion of our operations in Israel. Our U.S.federal net operating losses expire at various times between 2002 and 2020, andthe benefits from our subsidiary’s Approved Enterprise status expire at varioustimes beginning in 2003.

 

In June 2000, we acquired PixelCam, Inc., a manufacturer of megapixelCMOS image sensors, in exchange for 556,248 shares of our common stock andoptions to purchase 6,252 shares of our common stock with an aggregate value of$24.6 million. The acquisition was accounted for under the purchase method ofaccounting. Additional information regarding this acquisition is contained inour Annual Report on Form 10-K for the year ended December 31, 2001.

 

On October 26, 2000, we acquired Nogatech Inc., a provider of chipsthat compress digital video images and establish connections, or videoconnectivity, between video devices and computers, as well as between videodevices across a variety of networks, in exchange for 3,801,898 shares of ourcommon stock and options to purchase 252,708 shares of our common stock with anaggregate value of $163.6 million. The acquisition was accounted for under thepurchase method of accounting. Additional information regarding thisacquisition is contained in our Annual Report on Form 10-K for the year endedDecember 31, 2001.

 

On April 21, 2002, our Board of Directors approved a three-for-twosplit of our common stock which was effected in the form of a 50 percent stockdividend, paid on May 22, 2002 to stockholders of record on May 7, 2002. Allshare and per share information for all periods presented in this report are ona post-split basis.

 

**Results of Operations**

 

*Revenues*

 

Total revenues were $34.0 million and $65.1 million for the three andsix month periods ended June 30, 2002, compared to $21.9 million and $41.5million for the same periods of 2001, representing increases of 55.1% and 56.8%for the respective periods.  For thethree and six month periods ended June 30, 2002, product revenues were $32.2million and $61.3 million, compared to $20.6 million and $37.9 million for thesame periods in 2001, increases of 56.1% and 61.6%, respectively.  The increase in product sales was driven byincreased unit sales in our DVD product line, which accounted for 90% of ourproduct sales. We expect DVD sales to continue to comprise the majority of ourproduct sales for the balance of 2002. Software, licensing and developmentrevenues were $1.8 million and $3.8 million for the three and six month periodsended June

 

11

----

 

30, 2002, compared to $1.3 million and $3.6 million for the sameperiods of 2001, representing increases of 37.9% and 5.6% for the respective periods.These changes were primarily due to the number of significant new licensingcontracts.

* *

*ProductGross Margin*

 

Product gross margins were 36.2% and 35.7% of productrevenues for the three and six month periods ended June 30, 2002, compared to35.9% and 36.5% for the same periods of 2001. The decrease in product grossmargin for the six months ended June 30, 2002 was due to a substantial shift inproduct mix to a higher percentage of lower-margin DVD products, which includeCPU companion chips that are sold at low margin, and a shift in customer mix toa lower percentage of direct sales to OEM customers. We anticipate that productgross margins will continue to improve sequentially over the remainder of 2002.

 

*Researchand Development*

 

Research and development (“R&D”) expenses were$5.5 million and $11.0 million for the three and six month periods ended June30, 2002, compared to $5.9 million and $11.9 million for the same periods of2001. R&D expenses decreased as a result of the timing of major projectexpenses such as tape-outs. Gross R&D expenses may increase sequentiallyover the last half of 2002. As a percentage of revenues, R&D expensesdecreased to 16.2% and 17.0% for the three and six month periods ended June 30,2002, compared to 27.0% and 28.6% for the same periods of 2001 primarily as aresult of increased revenues.

 

*Selling,General and Administrative*

 

Selling, general and administrative (“SG&A”)expenses were $5.9 million and $11.6 million for the three and six monthperiods ended June 30, 2002, compared to $5.2 million and $10.4 million for thesame periods of 2001. The increases were due to marketing and applicationexpenses to support planned revenue growth in our Asia Pacific markets andproduct market development for our digital camera products. We anticipateSG&A spending to increase in the second half of 2002. As a percentage ofrevenues, SG&A expenses were 17.4% and 17.9% for the three and six monthperiods ended June 30, 2002, compared to 23.5% and 25.1% for the same periodsof 2001. SG&A expenses as a percent of total revenues decreased as a resultof increased revenues.

 

*Amortizationof Goodwill and Other Intangibles and the Write-Off of In-Process Research andDevelopment*

 

Based on the adoption of Financial Accounting Standards Board (FASB)Statements Nos. 141 and 142, “Business Combinations” and “Goodwill and OtherIntangible Assets” (“SFAS 141” and “SFAS 142”), we did not record charges forthe amortization of goodwill during the quarter or six months ended June 30,2002. For the same periods last year, we recorded charges of $8.4 million and$16.8 million, respectively, in connection with our acquisitions of PixelCamInc. and Nogatech Inc. SFAS 142 changes the accounting for goodwill from anamortization method to an impairment-only approach. Under SFAS 142, goodwillwill be tested annually and whenever events or circumstances occur indicatingthat goodwill might be impaired. In connection with the adoption of SFAS 142,the Company has performed a transitional goodwill impairment assessment basedon its structure as one reporting unit and determined that no impairmentexisted at January 1, 2002.

 

During the three and six months ended June 30, 2002, we incurredcharges of $2.3 million and $4.6 million, respectively, related to the amortizationof other intangible assets, the same as incurred for the equivalent periodslast year.

 

*Interestand Other Income, Net*

 

Net interest and other income for the three and sixmonth periods ended June 30, 2002 was $1.9 million and $3.3 million, respectively,a decrease of 28.9% and 38.1% compared to the same periods in 2001. Thedecrease was a reflection of the decrease in market interest rates.

 

*Provisionfor Income Taxes*

 

Excluding charges related to the amortization of goodwill and otherintangibles, our estimated effective tax rate was reduced from 15% for thethree and six months ended June 30, 2001 to 10% for the three and six

 

12

----

 

months ended June 30, 2002. The Company has booked a tax rate commensuratewith the jurisdictional distribution of profits between the U.S. and Israel andthe underlying tax positions as a result of the approved enterprise status inIsrael. We anticipate utilizing the 10% tax rate for the foreseeable future.

 

**Liquidityand Capital Resources**

 

At June 30, 2002, we had $26.9 million of cash and cash equivalents,$96.3 million of short-term investments and $147.5 million of working capital.In addition, we had $77.9 million of investments in long-term marketablesecurities at June 30, 2002.

 

Our operating activities provided cash of $4.4 million during the sixmonths ended June 30, 2002, primarily due to net income adjusted for thenon-cash impact of depreciation and amortization and an increase in accountspayable, partially offset by increases in accounts receivable and inventory.

 

Cash used in investing activities was $1.6 million during the sixmonths ended June 30, 2002, principally reflecting the purchases of investmentsand capital expenditures for property and equipment.

 

Cash provided by financing activities was $3.9 million for the sixmonths ended June 30, 2002, due to the proceeds from the issuance of commonstock.

 

We believe that our current balances of cash, cash equivalents andshort-term investments, and anticipated cash flow from operations, will satisfyour anticipated working capital and capital expenditure requirements at leastthrough the next 12 months. Nonetheless, our future capital requirements mayvary materially from those now planned and will depend on many factorsincluding, but not limited to:

 

•                  thelevels at which we maintain inventory and accounts receivable;

 

•                  themarket acceptance of our products;

 

•                  thelevels of promotion and advertising required to launch our new products or toenter markets and attain a competitive position in the marketplace;

 

•                  ourbusiness, product, capital expenditure and research and development plans andtechnology roadmap;

 

•                  volumepricing concessions;

 

•                  capitalimprovements to new and existing facilities;

 

•                  technologicaladvances;

 

•                  theresponse of competitors to our products; and

 

•                  ourrelationships with our suppliers and customers.

 

In addition, we may require an increase in the levelof working capital to accommodate planned growth, hiring and infrastructure needs.Additional capital may also be required for acquisitions of businesses,products or technologies.

 

To the extent that ourexisting resources and cash generated from operations are insufficient to fundour future activities, we may need to raise additional funds through public orprivate financings or borrowings. If additional funds are raised through theissuance of debt securities, these securities could have rights, preferencesand privileges senior to holders of common stock, and the terms of this debtcould impose restrictions on our operations. The sale of additional equity orconvertible debt securities could result in additional dilution to ourstockholders. We cannot be certain that additional financing will be availablein amounts or on terms acceptable to us, if at all. If we are unable to obtainthis additional financing, we may be

 

13

----

 

required to reduce thescope of our planned product development and sales and marketing efforts, whichcould harm our business, financial condition and operating results.

** **

**Future Performance and Risk Factors**

 

The Company’s futurebusiness, operating results and financial condition are subject to variousrisks and uncertainties, including those described below.

 

**Ourquarterly revenues and operating results fluctuate due to a variety of factors,which may result in volatility or a decline in the price of our stock**.

 

Our quarterly operating results have variedsignificantly due to a number of factors, including:

 

•                  fluctuationin demand for our products;

 

•                  thetiming of new product introductions by us and our competitors;

 

•                  thelevel of market acceptance of new and enhanced versions of our products and ourcustomers’ products;

 

•                  thetiming of large customer orders;

 

•                  thelength and variability of the sales cycle for our products;

 

•                  thecyclical nature of the semiconductor industry;

 

•                  theavailability of development funding and the timing of development revenue;

 

•                  changesin the mix of products sold;

 

•                  seasonalityin demand for our products;

 

•                  competitivepricing pressures; and

 

•                  theevolving and unpredictable nature of the markets for products incorporating ourintegrated circuits and embedded software.

 

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

 

•                  the cost and availability of adequate foundry capacity;

 

•                  fluctuationsin manufacturing yields;

 

•                  theemergence of new industry standards;

 

•                  productobsolescence; and

 

•                  theamount of research and development expenses associated with new productintroductions.

 

Our operating results could also be harmed by:

 

•                  economicconditions generally or in various geographic areas where we or our customersdo business;

 

•                  otherconditions affecting the timing of customer orders; or

 

•                  adownturn in the markets for our customers’ products, particularly the consumerelectronics market.

 

14

----

 

These factors are difficult or impossible to forecast.We place orders to purchase our products from independent foundries severalmonths in advance of the scheduled delivery date, often in advance of receivingnon-cancelable orders from our customers. If anticipated shipments in any quarterare canceled or do not occur as quickly as expected, expense and inventorylevels could be disproportionately high. If anticipated license revenues in anyquarter are canceled or do not occur, gross margins may be reduced. Asignificant portion of our expenses are relatively fixed, and the timing ofincreases in expenses is based in large part on our forecast of futurerevenues. As a result, if revenues do not meet our expectations we may beunable to quickly adjust expenses to levels appropriate to actual revenues,which could harm our operating results.

 

As a result of these factors, our operating resultsmay vary significantly from quarter to quarter. Any shortfall in revenues ornet income from levels expected by securities analysts could cause a decline inthe trading price of our stock.

 

**Our success for theforeseeable future will be dependent on growth in demand for integratedcircuits for DVD, filmless digital camera applications and, to a lesser extent,digital audio and video editing applications and our ability to market and sellour products to manufacturers who incorporate those types of integratedcircuits into their products.**

 

In 2001 and the first six months of 2002, we derived asubstantial majority of our product revenues from the sale of integratedcircuits for DVD applications. We expect that sales of our products for DVDapplications will continue to account for a significant portion of our revenuesfor the near future. Our ability to sell our products for filmless digitalcamera applications and, to a lesser extent, digital audio and video editingapplications will also have an impact on our financial performance for theforeseeable future. If the markets for these products and applications declineor fail to develop as expected, or we are not successful in our efforts tomarket and sell our products to manufacturers who incorporate integratedcircuits into these products, our financial results will be harmed.

 

**Our customers experiencefluctuating product cycles and seasonality, which causes our sales tofluctuate.**

 

Because the markets our customers serve arecharacterized by numerous new product introductions and rapid productenhancements, our operating results may vary significantly from quarter toquarter. During the final production of a mature product, our customerstypically exhaust their existing inventory of our products. Consequently,orders for our products may decline in those circumstances, even if ourproducts are incorporated into both mature products and replacement products. Adelay in the customer’s transition to commercial production of a replacementproduct 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.

** **

**Product supply and demandin the semiconductor industry is subject to cyclical variations.**

 

The semiconductor industry is subject to cyclicalvariations in product supply and demand. Downturns in the industry often occurin connection with, or anticipation of, maturing product cycles for bothsemiconductor companies and their customers and declines in general economicconditions. These downturns have been characterized by abrupt fluctuations inproduct demand, production over-capacity and accelerated decline of averageselling prices. In some cases, these downturns have lasted more than one year.A downturn in the semiconductor industry could harm our sales and revenues ifdemand drops or our gross margins if average selling prices decline.

 

15

----

 

**The development andevolution of markets for our integrated circuits is dependent on factors suchas industry standards, over which we have no control; for example, ifmanufacturers adopt new or competing industry standards with which our productsare not compatible, our existing products would become less desirable to themanufacturers and our sales would suffer.**

 

The emergence of markets for our products is affectedby a variety of factors beyond our control. In particular, our products aredesigned to conform to current specific industry standards. Manufacturers maynot continue to follow these standards, which would make our products lessdesirable to manufacturers and reduce our sales. Also, competing standards mayemerge that are preferred by manufacturers, which could also reduce our salesand require us to make significant expenditures to develop new products. The emergenceof new markets for our products is also dependent in part upon third partiesdeveloping and marketing content in a format compatible with commercial andconsumer products that incorporate our products. If content compatible withcommercial and consumer products that incorporate our products is notavailable, manufacturers may not be able to sell products incorporating ourintegrated circuits, and our sales to manufacturers would suffer.

 

**We rely on independentfoundries and contractors for the manufacture, assembly and testing of ourintegrated circuits, and the failure of any of these third parties to deliverproducts or otherwise perform as requested could damage our relationships withour customers and harm our sales and financial results.**

 

We do not operate any manufacturing facilities, and werely on independent foundries to manufacture substantially all of our products.These independent foundries fabricate products for other companies and may alsoproduce products of their own design. From time to time there are manufacturingcapacity shortages in the semiconductor industry. We do not have long-termsupply contracts with any of our suppliers, including our principal supplier,Taiwan Semiconductor Manufacturing Company, or TSMC. Therefore, TSMC  and these other suppliers are not obligatedto manufacture products for us for any specific period, in any specificquantity or at any specified price, except as may be provided in a particularpurchase order.

 

Our reliance on independent foundries involves anumber of risks, including:

 

•                  theinability to obtain adequate manufacturing capacity;

 

•                  theunavailability of or interruption in access to certain process technologiesnecessary for manufacture of our products;

 

•                  reducedcontrol over delivery schedules;

 

•                  reducedcontrol over quality assurance;

 

•                  reducedcontrol over manufacturing yields and cost; and

 

•                  potentialmisappropriation of our intellectual property.

 

In addition, TSMC and some of our other foundries arelocated in areas of the world which are subject to natural disasters such asearthquakes. While the 1999 earthquake in Taiwan did not have a material impacton our independent foundries, a similar event centered near TSMC’s facilitycould severely reduce TSMC’s ability to manufacture our integrated circuits.The loss of any of our manufacturers as a supplier, our inability to expand thesupply of our products in response to increased demand, or our inability toobtain timely and adequate deliveries from our current or future suppliers dueto a natural disaster or any other reason could delay or reduce shipments ofour products. Any of these circumstances could damage our relationships withcurrent and prospective customers and harm our sales and financial results.

 

We also rely on independent contractors for theassembly and testing of our products. At present, all of our semiconductorproducts are assembled by one of five independent contractors: ASE, Amkor,ASAT, Kyocera, or Vate. Our semiconductor products are tested by thesecontractors or other independent contractors. Our reliance on independentassembly and testing houses limits our control over delivery schedules, qualityassurance and product cost. Disruptions in the services provided by ourassembly or testing houses or other

 

16

----

 

circumstances that would require us to seekalternative sources of assembly or testing could lead to supply constraints ordelays in the delivery of our products. These constraints or delays coulddamage our relationships with current and prospective customers and harm oursales and financial results.

** **

**Because foundry capacityis limited from time to time we may be required to enter into costly long-termsupply arrangements to secure foundry capacity.**

 

If we are not able to obtain additional foundrycapacity as required, our relationships with our customers would be harmed andour sales would likely be reduced. In order to secure additional foundrycapacity, we have considered and will continue to consider various arrangementswith suppliers, which could include, among others:

 

•                  optionpayments or other prepayments to a foundry;

 

•                  nonrefundabledeposits with or loans to foundries in exchange for capacity commitments;

 

•                  contractsthat commit us to purchase specified quantities of silicon wafers over extendedperiods;

 

•                  issuanceof our equity securities to a foundry;

 

•                  investmentin a foundry;

 

•                  jointventures; or

 

•                  otherpartnership relationships with foundries.

 

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

 

**If our independentfoundries do not achieve satisfactory yields, our relationships with ourcustomers may be harmed.**

 

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

 

**To be successful, we mustefficiently develop new and enhanced products to meet rapidly changing customerrequirements and industry standards.**

 

The markets for our products are characterized by:

 

•                  rapidlychanging technologies;

 

•                  evolvingindustry standards;

 

•                  frequentnew product introductions; and

 

•                  shortproduct life cycles.

 

Over the long run, we expect to increase our productdevelopment expenses, and our future success will depend to a substantialdegree upon our ability to develop and introduce, on a timely andcost-effective basis,

 

17

----

 

new and enhanced products that meet rapidly changingcustomer requirements and industry standards. We may not successfully develop,introduce or manage the transition to new products. Delays in the introductionor shipment of new or enhanced products, lack of market acceptance for suchproducts or problems associated with new product transitions could harm oursales and financial results.

** **

**We face competition orpotential competition from companies with greater resources than ours, and ifwe are unable to compete effectively with these companies, our market share maydecline and our business could be harmed.**

 

Competition in the compression technology market hashistorically been dominated by large companies, such as STMicroelectronics, andcompanies that develop and use their own integrated circuits, such as Sony. Asthis market continues to develop, we face competition from other largesemiconductor vendors, including:

 

•                  ALiCorporation;

 

•                  AtmelCorporation;

 

•                  CirrusLogic (Crystal Semiconductor);

 

•                  ESSTechnology, Inc.;

 

•                  Fujitsu;

 

•                  LSILogic (including C-Cube Microsystems Inc. acquired during 2001);

 

•                  MediaTekInc.

 

•                  Motorola;

 

•                  OmnivisionTechnologies, Inc.;

 

•                  SunplusTechnology; and

 

•                  TexasInstruments.

 

We also face competition from internally-developedsolutions developed and used by major Japanese original equipmentmanufacturers, who may also be our customers.

 

Many of our existing and potential competitors havesubstantially greater resources than ours in many areas, including:

 

•                  finances;

 

•                  manufacturing;

 

•                  technology;

 

•                  researchand development;

 

•                  marketing;and

 

•                  distribution.

 

Many of our competitors have broader product lines andlonger standing relationships with customers than we do. Moreover, ourcompetitors may foresee the course of market developments more accurately thanwe do and could in the future develop new technologies that compete with ourproducts or even render our products obsolete. In addition, a number of privatecompanies have announced plans for new products to address the same digitalmultimedia problems that our products address. If we are unable to competesuccessfully against our current and future competitors, we could experienceprice reductions, order cancellations and reduced gross margins, any one ofwhich could harm our business.

 

18

----

 

The DVD market is growing, and additional competitorsare expected 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.

 

**Our products arecharacterized by average selling prices that decline over relatively short timeperiods; if we are unable to reduce our costs or introduce new products withhigher average selling prices, our financial results would suffer.**

 

Average selling prices for our products decline overrelatively short time periods. Many of our manufacturing costs are fixed. Whenour average selling prices decline, our revenues decline unless we sell moreunits, and our gross margins decline unless we are able to reduce ourmanufacturing costs by a commensurate amount. Our operating results suffer whengross margins decline. We have experienced these problems and may continue toexperience them in the future and cannot predict when they may occur or theirseverity.

 

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

 

Our largest customers account for a substantialpercentage of our revenues. In 2001, sales to Fujifilm accounted for 29.2% ofour total revenue. Our four largest customers in 2001 accounted forapproximately 56.3% of our total revenues. During 2000, our four largest customers accounted for approximately 45.4%of our revenues with Fujifilm accounting for 25.2%. Sales to these largecustomers have varied significantly from year to year and will continue tofluctuate in the future.  These salesalso may fluctuate significantly from quarter to quarter. We may not be able toretain our key customers or these customers may cancel purchase orders orreschedule or decrease their level of purchases from us. Any substantialdecrease or delay in sales to one or more of our key customers could harm oursales and financial results. In addition, any difficulty in collecting amountsdue from one or more key customers could harm our financial results.

 

**We are dependent on ourrelationship with Fujifilm for a significant percentage of our product sales,and if this relationship were terminated, our business would be harmed.**

 

Fujifilm has been our largest customer in four of thelast five years. Fujifilm purchases our products primarily as a distributor.Under our arrangement with Fujifilm, Fujifilm acts as the primary distributorin Japan of products developed by us under development contracts with Fujifilm.Fujifilm also sells some of these products in Japan under its own name. We maysell these products directly in Japan only to specified customers and mustfirst buy the products from Fujifilm. Fujifilm provides more sales andmarketing support than our other distributors. Fujifilm also has a nonexclusivelicense to distribute most of our products outside of Japan. Fujifilm hasprovided wafer manufacturing services on a most-favored terms basis to us since1993 and has also provided funding to support our development efforts. If ourrelationship with Fujifilm were terminated, our business would be harmed.

 

**Our products generallyhave long sales cycles and implementation periods, which increases our costs inobtaining orders and reduces the predictability of our earnings.**

 

Our products are technologically complex. Prospectivecustomers generally must make a significant commitment of resources to test andevaluate our products and to integrate them into larger systems. As a result,our sales process is often subject to delays associated with lengthy approvalprocesses that typically accompany the design and testing of new products. Thesales cycles of our products often last for many months or even years. Longersales cycles require us to invest significant resources in attempting to makesales and delay the generation of revenue.

 

Long sales cycles also subject us to other risks,including customers’ budgetary constraints, internal acceptance reviews andcancellations. In addition, orders expected in one quarter could shift toanother because of the timing of customers’ purchase decisions. The timerequired for our customers to incorporate our products into their own can varysignificantly with the needs of our customers and generally exceeds severalmonths, which further complicates our planning processes and reduces thepredictability of our operating results.

 

19

----

 

**We are not protected bylong-term contracts with our customers.**

 

We generally do not enter into long-term purchasecontracts with our customers, and we cannot be certain as to future orderlevels from our customers. When we do enter into a long-term contract, thecontract is generally terminable at the convenience of the customer. In theevent of an early termination by one of our major customers, it is unlikelythat we will be able to rapidly replace that revenue source, which would harmour financial results.

 

**We are dependent upon ourinternational sales and operations; economic, political or military events in acountry where we make significant sales or have significant operations couldinterfere with our success or operations there and harm our business.**

 

During 2001, 93% of our total revenues were derivedfrom international sales. We anticipate that international sales will continueto represent a substantial majority of our total revenues for the foreseeablefuture. In addition, substantially all of our semiconductor products aremanufactured, assembled and tested outside of the United States by independentfoundries and subcontractors.

 

We are subject to the risks inherent in doing businessinternationally, including:

 

•                  unexpectedchanges in regulatory requirements;

 

•                  fluctuationsin exchange rates;

 

•                  politicaland economic instability;

 

•                  impositionof tariffs and other barriers and restrictions; and

 

•                  theburdens of complying with a variety of foreign laws.

 

The majority of our research and development personneland facilities and a significant portion of our sales personnel are located inIsrael. Political, economic and military conditions in Israel directly affectour operations. Some of our officers and employees in Israel are obligated toperform up to 39 days of military reserve duty annually. The absence of theseemployees for significant periods during the work week may cause us to operateinefficiently during these periods.

 

Our operations in China are subject to the economicand political uncertainties affecting that country. For example, the Chineseeconomy has experienced significant growth in the past decade, but such growthhas been uneven across geographic and economic sectors and has recently beenslowing. This growth may continue to decrease and any slowdown may have anegative effect on our business. During 2000 and the beginning of 2001, we alsoopened offices in Taipei, Taiwan, Hong Kong and Seoul, Korea. Our operationsare subject to the economic and political uncertainties affecting thesecountries as well.

 

**Our business and futureoperating results could be harmed by terrorist activity or armed conflict.**

** **

**Our business and operating results are subject touncertainties arising out of possible terrorist attacks on the United Statesand other regions of the world including locations where we maintain operationsand by the potential expansion of armed conflict and potential instabilityassociated with terrorism. Our operations could be harmed due to:**

** **

•                  disruptionin commercial activities associated with heightened security concerns affectinginternational travel and commerce;

 

•                  reduceddemand for consumer electronic products due to a potential extension of theglobal economic slowdown;

 

20

----

 

•                  tightenedimmigration controls that may adversely affect the residence status of keynon-U.S. managers and technical employees in our U.S. facilities or our abilityto hire new non-U.S. employees in such facilities; or

 

•                  potentialexpansion of armed conflict in the Middle East which could adversely affect ouroperations in Israel.

 

**The prices of ourproducts may become less competitive due to foreign exchange fluctuations.**

 

Foreign currency fluctuations may affect the prices ofour products. Prices for our products are currently denominated in U.S. dollarsfor sales to our customers throughout the world. If there is a significantdevaluation of the currency in a specific country, the prices of our productswill increase relative to that country’s currency and our products may be lesscompetitive in that country. Also, we cannot be sure that our internationalcustomers will continue to be willing to place orders denominated in U.S.dollars. If they do not, our revenue and operating results will be subject toforeign exchange fluctuations.

 

**Our ability to competecould be jeopardized if we are unable to protect our intellectual propertyrights from challenges by third parties.**

 

Our success and ability to compete depend in largepart upon protecting our proprietary technology. We rely on a combination ofpatent, trade secret, copyright and trademark laws, non-disclosure and othercontractual agreements and technical measures to protect our proprietaryrights. These agreements and measures may not be sufficient to protect ourtechnology from third-party infringement, or to protect us from the claims ofothers. Monitoring unauthorized use of our products is difficult and we cannotbe certain that the steps we have taken will prevent unauthorized use of ourtechnology, particularly in foreign countries where the laws may not protectour proprietary rights as fully as in the United States. The laws of certainforeign countries in which our products are or may be developed, manufacturedor sold, including various countries in Asia, may not protect our products orintellectual property rights to the same extent as do the laws of the UnitedStates and thus make the possibility of piracy of our technology and productsmore likely in these countries. If competitors are able to use our technology,our ability to compete effectively could be harmed.

 

**We could become subjectto claims and litigation regarding intellectual property rights, which couldseriously harm our business and require us to incur significant costs.**

 

In recent years, there has been significant litigationin the United States involving patents and other intellectual property rights.In the past, we have been subject to claims and litigation regarding allegedinfringement of other parties’ intellectual property rights. We could becomesubject to litigation in the future either to protect our intellectual propertyor as a result of allegations that we infringe others’ intellectual propertyrights. Claims that our products infringe proprietary rights would force us todefend ourselves and possibly our customers or manufacturers against thealleged infringement. These claims and any resulting lawsuit, if successful,could subject us to significant liability for damages and invalidation of ourproprietary rights. These lawsuits, regardless of their success, would likelybe time-consuming and expensive to resolve and would divert management time andattention. Any potential intellectual property litigation could force us to doone or more of the following:

 

•                  stopselling our products that incorporate the challenged intellectual property;

 

•                  obtainfrom the owner of the infringed intellectual property right a license to sellor use the relevant technology, which license may not be available onreasonable terms or at all;

 

•                  paydamages; or

 

•                  redesignthose products that use such technology.

 

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

** **

21

----

 

**If necessary licenses ofthird-party technology are not available to us or are very expensive, ourproducts could become obsolete.**

 

From time to time we may be required to licensetechnology from third parties to develop new products or product enhancements.Third party licenses may not be available to us on commercially reasonableterms, if at all. If we are unable to obtain any third-party license requiredto develop new products and product enhancements, we may have to obtainsubstitute technology of lower quality or performance standards or at greatercost, either of which could seriously harm the competitiveness of our products.

 

**If we are not able toapply our net operating losses against taxable income in future periods, ourfinancial results will be harmed.**

 

Our future net income and cash flow will be affectedby our ability to apply our net operating losses, which totaled approximately$48.0 million for federal tax reporting purposes as of December 31, 2001,against taxable income in future periods. Our net operating losses incurredprior to the consummation of our initial public offering in 1995 that we canuse to reduce future taxable income for federal tax purposes are limited toapproximately $3.0 million per year. Changes in tax laws in the United Statesmay further limit our ability to utilize our net operating losses. Any furtherlimitation on our ability to utilize our net operating losses could harm ourfinancial condition.

 

**Any acquisitions we makecould disrupt our business and severely harm our financial condition.**

 

We have made investments in, and acquisitions of,complementary companies, products and technologies. During 2000, we acquiredPixelCam and Nogatech, and we may acquire additional businesses, products, ortechnologies in the future. In the event of any future acquisitions, we could:

 

•                  issuestock that would dilute our current stockholders’ percentage ownership;

 

•                  incurdebt;

 

•                  assumeliabilities;

 

•                  incuramortization expenses related to goodwill and other intangible assets; or

 

•                  incurlarge write-offs immediately or in the future.

 

Our operation of any acquired business will alsoinvolve numerous risks, including:

 

•                  problemscombining the purchased operations, technologies or products;

 

•                  unanticipatedcosts;

 

•                  diversionof management’s attention from our core business;

 

•                  adverseeffects on existing business relationships with customers;

 

•                  risksassociated with entering markets in which we have no or limited priorexperience; and

 

•                  potentialloss of key employees, particularly those of the purchased organizations.

 

We may not be able to successfully integrate anybusinesses, products or technologies or personnel that we might acquire in thefuture and any failure to do so could disrupt our business and seriously harmour financial condition.

 

In addition, we have made minority equity investmentsin early-stage companies, and we expect to continue to review opportunities tomake additional investments in such companies where we believe such investmentswill provide us with opportunities to gain access to important technologies orotherwise enhance important commercial relationships. We have little or noinfluence over the early-stage companies in which we have made or may makestrategic, minority equity investments. Each of these investments involves ahigh

 

22

----

 

degree of risk. We may not be successful in achievingthe technological or commercial advantage upon which any given investment ispremised, and failure by the early-stage company to achieve its own businessobjectives could result in a loss of all or part of our invested capital.

 

**Our products couldcontain defects, which could reduce sales of those products or result in claimsagainst us.**

 

We develop complex and evolving products. Despitetesting by us and our customers, errors may be found in existing or newproducts. This could result in, among other things, a delay in recognition orloss of revenues, loss of market share or failure to achieve market acceptance.These defects may cause us to incur significant warranty, support and repaircosts, divert the attention of our engineering personnel from our productdevelopment efforts and harm our relationships with our customers. Theoccurrence of these problems could result in the delay or loss of marketacceptance of our products and would likely harm our business. Defects,integration issues or other performance problems in our products could resultin 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.

 

**If we do not maintain ourcurrent development contracts or are unable to enter into new developmentcontracts, our business could be harmed.**

 

We historically have generated a significantpercentage of our total revenues from development contracts, primarily with keycustomers. These development contracts have provided us with partial fundingfor the development of some of our products. Under these contracts, we receivepayments upon reaching certain development milestones. If we fail to achievethe milestones specified in our existing development contracts, if our existingcontracts are terminated or we are unable to secure future developmentcontracts, our ability to cost-effectively develop new products would bereduced and our business would be harmed.

 

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

 

We may require substantial additional capital tofinance our future growth, secure additional foundry capacity and fund ourongoing research and development activities beyond 2002. Our capitalrequirements will depend on many factors, including:

 

•                  acceptanceof and demand for our products;

 

•                  thetypes of arrangements that we may enter into with our independent foundries;and

 

•                  theextent to which we invest in new technology and research and developmentprojects.

 

To the extent that our existing sources of liquidityand cash flow from operations are insufficient to fund our activities, we mayneed to raise additional funds. If we raise additional funds through theissuance of equity securities, the percentage ownership of our existingstockholders would be reduced. Further, such equity securities may have rights,preferences or privileges senior to those of our common stock. Additionalfinancing may not be available to us when needed or, if available, it may notbe available on terms favorable to us.

 

**If we fail to manage ourfuture growth, if any, our business would be harmed.**

 

We anticipate that our future growth, if any, willrequire us to recruit and hire a substantial number of new engineering,managerial, sales and marketing personnel. Our ability to manage our growthsuccessfully will also require us to expand and improve our administrative,operational, management and financial systems and controls. Many of our keyoperations, including the major portion of our research and developmentoperations and a significant portion of our sales and administrativeoperations, are located in Israel. A majority of our sales and marketing andcertain of our research and development and administrative personnel, includingour President and Chief Executive Officer and other officers, are based in theUnited States. The geographic separation of these operations places additionalstrain on our resources and our

 

23

----

 

ability to effectively manage our growth. If we areunable to manage growth effectively, our business would be harmed.

 

**We rely on the servicesof our executive officers and other key personnel, whose knowledge of ourbusiness and industry would be extremely difficult to replace.**

 

Our success depends to a significant degree upon thecontinuing contributions of our senior management. The loss of key managementpersonnel could delay product development cycles or otherwise harm ourbusiness. We may not be able to retain the services of any of our keyemployees. We believe that our future success will also depend in large part onour ability to attract, integrate and retain highly-skilled engineering,managerial, sales and marketing personnel, both in the United States and inIsrael. Competition for such personnel is intense, and we may not be successfulin attracting, integrating and retaining such personnel. Failure to attract,integrate and retain key personnel could harm our ability to carry out ourbusiness strategy and compete with other companies.

 

**The Israeli rate ofinflation may negatively impact our costs if it exceeds the rate of devaluationof the New Israeli Shekel against the U.S. dollar.**

 

A portion of the cost of our operations, relatingmainly to our personnel and facilities in Israel, is incurred in New IsraeliShekels. As a result, we bear the risk that the rate of inflation in Israelwill exceed the rate of devaluation of the New Israeli Shekel in relation tothe dollar, which will increase our costs as expressed in dollars. To date, wehave not engaged in hedging transactions. In the future, we may enter intocurrency hedging transactions to decrease the risk of financial exposure fromfluctuations in the exchange rate of the U.S. dollar against the New IsraeliShekel. These measures may not adequately protect us from the impact ofinflation in Israel.

 

**The government programswe participate in and tax benefits we receive require us to meet severalconditions and may be terminated or reduced in the future, which would increaseour costs.**

 

In the year ended December 31, 2001, we did notreceive proceeds from grants for research and development from the ChiefScientist in Israel’s Ministry of Industry and Trade. However, we did receivean aggregate of $333,000 in such grants during 2000. We plan to seek additional grants from the Chief Scientistin the future. To be eligible for these grants, our development projects mustbe approved 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.

 

**We have anti-takeoverprovisions in our charter documents and there are provisions of Delaware lawthat could prevent or delay a change in control of our company.**

 

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

 

•                  prohibitinga merger with a party that has acquired control of 15% or more of ouroutstanding common stock, such as a party that has completed a successfultender offer, until three years after that party acquired control of 15% of ouroutstanding common stock;

 

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

 

•                  eliminatingstockholders’ rights to call a special meeting of stockholders; and

 

24

----

 

•                  requiringadvance notice of any stockholder nominations of candidates for election to ourboard of directors.

** **

**Our stock price hasfluctuated and may continue to fluctuate widely.**

 

The market price of our common stock has fluctuatedsignificantly since our initial public offering in 1995. Between January 1,2001 and December 31, 2001, the closing sale price of our common stock, asreported on the Nasdaq National Market, ranged from a low of $8.67 to a high of$27.03.  The market price of our commonstock is subject to significant fluctuations in the future in response to avariety of factors, including:

 

•                  announcementsconcerning our business or that of our competitors or customers;

 

•                  quarterlyvariations in operating results;

 

•                  changesin analysts’ earnings estimates;

 

•                  announcementsof technological innovations;

 

•                  theintroduction of new products or changes in product pricing policies by us orour competitors;

 

•                  proprietaryrights or other litigation;

 

•                  generalconditions in the semiconductor industry; and

 

•                  developmentsin the financial markets.

 

In addition, the stock market has, from time to time, experiencedextreme price and volume fluctuations that have particularly affected themarket prices for semiconductor companies or technology companies generally andwhich have been unrelated to the operating performance of the affectedcompanies. Broad market fluctuations of this type may reduce the future marketprice of our common stock.

 

**Item3.  Quantitative and QualitativeDisclosures About Market Risk**

 

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

 

The fair value of our investment portfolio or related income would notbe significantly impacted by either a 10% increase or decrease in interestrates due mainly to the short-term nature of the major portion of ourinvestment portfolio.

 

A majority of our revenue and capital spending is transacted in U.S.dollars, although a portion of the cost of our operations, relating mainly toour personnel and facilities in Israel, is incurred in New Israeli Shekels. Wehave not engaged in hedging transactions to reduce our exposure to fluctuationsthat may arise from changes in foreign exchange rates. Based on our overallcurrency rate exposure at June 30, 2002, a near-term 10% appreciation ordepreciation of the New Israeli Shekel would have an immaterial affect on ourfinancial condition.

 

25

----

 

**PARTII. OTHER INFORMATION**

 

**Item4.  Submission of Matters to a vote ofSecurity Holders**

 

Our 2002 Annual Meeting of Stockholders was held on June 21, 2002.  At the meeting, the following five personsnominated by management were elected to serve as members of our Board ofDirectors:

 

|               |   | **Shares**    |   |
|--------------------|--------|---------------|--------|
| **Nominee**        |   | **Voted For** |   | **Withheld** |   |
| Levy Gerzberg      |   | 24,876,582    |   | 420,848 |   |
| Uzia Galil         |   | 24,876,582    |   | 420,848 |   |
| James D. Meindl    |   | 24,876,582    |   | 420,848 |   |
| Arthur B  Stabenow |   | 24,876,582    |   | 420,848 |   |
| Philip M. Young    |   | 24,876,582    |   | 420,848 |   |

 

The following additional items were voted upon at the meeting:

 

1.               A proposal to amendour 1993 Stock Option Plan to increase the number of shares of common stockreserved for issuance thereunder by 1,125,000 shares was approved by a vote of18,737,847 shares for; 6,538,656 shares against; and 20,925 shares abstaining.

 

2.               A proposal to amendour 1995 Employee Stock Purchase Plan to increase the number of shares ofcommon stock reserved for issuance thereunder by 75,000 shares was approved bya vote of 23,982,745 shares for; 1,299,111 shares against; and 15,572 sharesabstaining.

 

3.               Proposals to amendour 1995 Outside Directors Stock Option Plan (a) to increase the number ofshares of common stock reserved for issuance thereunder by 75,000 shares and(b) to increase the size of the option granted annually to each outsidedirector from 7,200 shares to 15,000 shares were approved by a vote of21,027,295 shares for; 4,248,035 shares against; and 22,098 shares abstaining.

 

4.               A proposal toratify the appointment of PricewaterhouseCoopers LLP as our independentaccountants for the fiscal year ending December 31, 2002 was approved by a voteof 23,551,857 shares for; 1,733,486 shares against; and 12,087 sharesabstaining.

 

26

----

 
| **Item 6****.** | **Exhibits and Reports on Form 8-K** |
|-----------------|--------------------------------------|
|            |                                 |   |
|            | (a)                                  | Exhibits: |
|            |                                 |   |   |   |
|            |                                 | 10.1 | 1993 Stock Option Plan, as amended to date. |
|            |                                 | 10.2 | 1995 Outside Directors Stock Option Plan, as amended  to date. |
|            |                                 | 10.3 | Amended and Restated 1995 Employee Stock Purchase  Plan, as amended to date. |
|            |                                 | 99.1 | Certification of Chief Executive Officer, pursuant  to 18 U.S.C. Section 1350. |
|            |                                 | 99.2 | Certification of Chief Financial Officer, pursuant  to 18 U.S.C. Section 1350. |
|            |                                 |   |   |   |
|            |                                 |   |   |   |
|            | (b)                                  | Reports on Form 8-K: |
|            |                                 |   |   |   |
|            |                                 | No reports on Form 8-K were filed during the quarter  ended June 30, 2002. |
|                 |                                      |  |  |  |  |

 

27

----

 

**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:  August  14, 2002 | /s/  Karl  Schneider                            |   |
|                         | Karl Schneider                                       |
|                         | Vice President, Finance  and Chief Financial Officer |
|                         | (Principal Financial and Accounting Officer)         |

 

28

----