**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

 

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### **FORM 10-Q**

 

**ý****                    ****QUARTERLY REPORT PURSUANT TOSECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**

 

**For theQuarterly Period Ended September 30, 2004**

 

**OR**

 

**o****                    ****TRANSITION REPORT PURSUANT TO SECTION13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF 1934**

 

**For thetransition period from                              to                              **

 

**CommissionFile No. 0-27246**

 
| **ZORAN  CORPORATION**                                           |
|------------------------------------------------------------------|
| (Exact name of  registrant as specified in its charter)          |
|                                                             |   |   |
| **Delaware**                                                     | ** ** | **94-2794449** |
| (State or other  jurisdiction  of incorporation or organization) |   | (I.R.S. Employer  Identification Number) |
|                                                             |   |   |
| **1390  Kifer Road**                                             |
| **Sunnyvale,  California 94086**                                 |
| (Address of  principal executive offices, including zip code)    |
|                                                             |   |   |
| **(408)  523-6500**                                              |
| (Registrant’s  telephone number, including area code)       |

 

----

 

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

 

Indicate by checkmark whether the registrant is an accelerated filer (as defined in Rule 12b-2of the Exchange Act).

Yes   ý    No   o

 

As of November 5, 2004,there were outstanding 43,160,155 shares of the registrant’s Common Stock, parvalue $0.001 per share.

 

 

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**ZORANCORPORATION AND SUBSIDIARIES**

**FORM 10-Q**

**INDEX**

 

**For theQuarter Ended September 30, 2004**

** **

** **
| **PART I.  FINANCIAL INFORMATION** | ** **                                                                                                               |
|------------------------------------|--------------------------------------------------------------------------------------------------------------------------|
|                               |                                                                                                                     |   |
| **Item 1.**                        | Financial Statements  (Unaudited):                                                                                       |   |
|                               |                                                                                                                     |   |
|                               | Condensed  Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003                                    |   |
|                               |                                                                                                                     |   |
|                               | Condensed  Consolidated Statements of Operations for the Three Months and Nine Months  Ended September 30, 2004 and 2003 |   |
|                               |                                                                                                                     |   |
|                               | Condensed  Consolidated Statements of Cash Flows for the Nine Months Ended September 30,  2004 and 2003                  |   |
|                               |                                                                                                                     |   |
|                               | Notes  to Condensed Consolidated Financial Statements                                                                    |   |
|                               |                                                                                                                     |   |
| **Item  2.**                       | Management’s  Discussion and Analysis of Financial Condition and Results of Operations                              |   |
|                               |                                                                                                                     |   |
| **Item  3.**                       | Quantitative  and Qualitative Disclosures About Market Risk                                                              |   |
|                               |                                                                                                                     |   |
| **Item 4.**                        | Controls and Procedures                                                                                                  |   |
|                               |                                                                                                                     |   |
|                               |                                                                                                                     |   |
| **PART II. OTHER INFORMATION**     | ** **                                                                                                               |
|                               |                                                                                                                     |   |
| **Item 1.**                        | Legal Proceedings                                                                                                        |   |
|                               |                                                                                                                     |   |
| **Item 6.**                        | Exhibits                                                                                                                 |   |
|                               |                                                                                                                     |   |
| Signatures                         |                                                                                                                     |   |

 

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**ZORANCORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                             | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|
|                                                                                                                                                                                                                                                   |       |                    |       |                   |       |
| ASSETS                                                                                                                                                                                                                                                 |       |                    |       |                   |       |
| Current assets:                                                                                                                                                                                                                                        |       |                    |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                                                                                             |       | $                       | 41,640     |                   | $          | 47,994 |   |
| Short-term  investments                                                                                                                                                                                                                                |       | 31,763                  |       | 78,372                 |       |
| Accounts  receivable, net                                                                                                                                                                                                                              |       | 83,729                  |       | 65,224                 |       |
| Inventories                                                                                                                                                                                                                                            |       | 62,340                  |       | 16,805                 |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                             |       | 12,282                  |       | 12,151                 |       |
| Total current  assets                                                                                                                                                                                                                                  |       | 231,754                 |       | 220,546                |       |
|                                                                                                                                                                                                                                                   |       |                    |       |                   |       |
| Property and equipment,  net                                                                                                                                                                                                                           |       | 19,650                  |       | 20,029                 |       |
| Other assets and  investments                                                                                                                                                                                                                          |       | 81,665                  |       | 69,311                 |       |
| Goodwill                                                                                                                                                                                                                                               |       | 150,151                 |       | 119,091                |       |
| Intangible  assets, net                                                                                                                                                                                                                                |       | 180,657                 |       | 188,885                |       |
|                                                                                                                                                                                                                                                   |       |                    |       |                   |       |
|                                                                                                                                                                                                                                                   |       | $                       | 663,877    |                   | $          | 617,862 |   |
|                                                                                                                                                                                                                                                   |       |                    |       |                   |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                             |       |                    |       |                   |       |
| Current  liabilities:                                                                                                                                                                                                                                  |       |                    |       |                   |       |
| Accounts payable                                                                                                                                                                                                                                       |       | $                       | 71,355     |                   | $          | 29,038 |   |
| Accrued expenses  and other liabilities                                                                                                                                                                                                                |       | 57,673                  |       | 45,182                 |       |
| Total current  liabilities                                                                                                                                                                                                                             |       | 129,028                 |       | 74,220                 |       |
|                                                                                                                                                                                                                                                   |       |                    |       |                   |       |
| Long-term  liabilities                                                                                                                                                                                                                                 |       | 7,690                   |       | 9,363                  |       |
|                                                                                                                                                                                                                                                   |       |                    |       |                   |       |
| Stockholders’  equity:                                                                                                                                                                                                                            |       |                    |       |                   |       |
| Common stock,  $0.001 par value; 105,000,000 shares authorized at September 30, 2004 and  December 31, 2003; 42,902,278 shares issued and outstanding as of September  30, 2004; and 42,347,584 shares issued and outstanding as of December 31,  2003 |       | 43                      |       | 42                     |       |
| Additional  paid-in capital                                                                                                                                                                                                                            |       | 709,556                 |       | 703,812                |       |
| Deferred  stock-based compensation                                                                                                                                                                                                                     |       | (6,576                  | )          | (13,014                | )          |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                                         |       | 959                     |       | (91                    | )          |
| Accumulated  deficit                                                                                                                                                                                                                                   |       | (176,823                | )          | (156,470               | )          |
| Total  stockholders’ equity                                                                                                                                                                                                                       |       | 527,159                 |       | 534,279                |       |
|                                                                                                                                                                                                                                                   |       |                    |       |                   |       |
|                                                                                                                                                                                                                                                   |       | $                       | 663,877    |                   | $          | 617,862 |   |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financialstatements.

 

3

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**ZORANCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

**(inthousands, except per share data)**

**(unaudited)**

 
| ** **                                         | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                         | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                               |       |                                  |       |                                 |       |   |   |   |   |
| Revenues:                                          |       |                                  |       |                                 |       |   |   |   |   |
| Hardware product  revenues                         |       | $                                     | 99,427     |                                 | $          | 64,654 |   | $ | 257,137 |   | $ | 143,261 |   |
| Software and  other revenues                       |       | 20,320                                |       | 2,766                                |       | 46,963 |   | 6,723 |   |
| Total revenues                                     |       | 119,747                               |       | 67,420                               |       | 304,100 |   | 149,984 |   |
|                                               |       |                                  |       |                                 |       |   |   |   |   |
| Costs and  expenses:                               |       |                                  |       |                                 |       |   |   |   |   |
| Cost of hardware  product revenues                 |       | 66,557                                |       | 40,394                               |       | 170,723 |   | 93,331 |   |
| Research and  development                          |       | 21,620                                |       | 12,179                               |       | 61,402 |   | 22,889 |   |
| Selling, general  and administrative               |       | 18,819                                |       | 11,293                               |       | 50,121 |   | 26,031 |   |
| Amortization of  intangible assets                 |       | 12,342                                |       | 6,516                                |       | 33,028 |   | 8,403 |   |
| Deferred stock  compensation                       |       | 1,790                                 |       | 2,426                                |       | 6,438 |   | 2,446 |   |
| In-process  research and development               |       | —                                |       | 50,100                               |       | — |   | 50,100 |   |
| Total costs and  expenses                          |       | 121,128                               |       | 122,908                              |       | 321,712 |   | 203,200 |   |
|                                               |       |                                  |       |                                 |       |   |   |   |   |
| Operating loss                                     |       | (1,381                                | )          | (55,488                              | )          | (17,612 | ) | (53,216 | ) |
|                                               |       |                                  |       |                                 |       |   |   |   |   |
| Interest income                                    |       | 14                                    |       | 1,297                                |       | 797 |   | 4,325 |   |
|                                               |       |                                  |       |                                 |       |   |   |   |   |
| Other income  (loss), net                          |       | (279                                  | )          | 212                                  |       | (165 | ) | 41 |   |
|                                               |       |                                  |       |                                 |       |   |   |   |   |
| Loss before  income taxes                          |       | (1,646                                | )          | (53,979                              | )          | (16,980 | ) | (48,850 | ) |
|                                               |       |                                  |       |                                 |       |   |   |   |   |
| Provision for  income taxes                        |       | 1,873                                 |       | 505                                  |       | 3,373 |   | 1,208 |   |
|                                               |       |                                  |       |                                 |       |   |   |   |   |
| Net loss                                           |       | $                                     | (3,519     | )                                    | $          | (54,484 | ) | $ | (20,353 | ) | $ | (50,058 | ) |
|                                               |       |                                  |       |                                 |       |   |   |   |   |
| Basic net loss  per share                          |       | $                                     | (0.08      | )                                    | $          | (1.53 | ) | $ | (0.48 | ) | $ | (1.66 | ) |
|                                               |       |                                  |       |                                 |       |   |   |   |   |
| Diluted net loss  per share                        |       | $                                     | (0.08      | )                                    | $          | (1.53 | ) | $ | (0.48 | ) | $ | (1.66 | ) |
|                                               |       |                                  |       |                                 |       |   |   |   |   |
| Shares used to compute  basic net loss per share   |       | 42,969                                |       | 35,718                               |       | 42,688 |   | 30,188 |   |
|                                               |       |                                  |       |                                 |       |   |   |   |   |
| Shares used to  compute diluted net loss per share |       | 42,969                                |       | 35,718                               |       | 42,688 |   | 30,188 |   |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financialstatements.

 

4

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**ZORANCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                                  | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                  | ** ** | **2004**                             | ** ** | **2003** | ** ** |
| Cash flows from  operating activities:                                      |       |                                 |       |   |   |
| Net loss                                                                    |       | $                                    | (20,353    | ) | $ | (50,058 | ) |
| Adjustments to  reconcile net loss to net cash provided by operations:      |       |                                 |       |   |   |
| Depreciation,  amortization and other                                       |       | 7,660                                |       | 3,642 |   |
| Amortization of  intangible assets                                          |       | 33,028                               |       | 8,403 |   |
| Amortization of  deferred stock compensation                                |       | 6,438                                |       | 2,446 |   |
| In-process  research and development                                        |       | —                               |       | 50,100 |   |
| Changes in  current assets and liabilities:                                 |       |                                 |       |   |   |
| Accounts  receivable                                                        |       | (18,503                              | )          | (28,534 | ) |
| Inventory                                                                   |       | (44,649                              | )          | 5,304 |   |
| Prepaid expenses  and other current assets and other assets and investments |       | (3,525                               | )          | (1,165 | ) |
| Accounts payable                                                            |       | 41,933                               |       | 12,786 |   |
| Accrued expenses  and other liabilities and long-term liabilities           |       | 7,236                                |       | 5,669 |   |
| Net cash  provided by operating activities                                  |       | 9,265                                |       | 8,593 |   |
|                                                                        |       |                                 |       |   |   |
| Cash flows from  investing activities:                                      |       |                                 |       |   |   |
| Capital  expenditures for property and equipment                            |       | (7,208                               | )          | (6,717 | ) |
| Purchases of  investments                                                   |       | (132,835                             | )          | (114,909 | ) |
| Proceeds from  sales and maturities of investments                          |       | 172,840                              |       | 163,217 |   |
| Acquisition of  Oak Technology, Inc., net of cash acquired                  |       | —                               |       | (44,404 | ) |
| Acquisition of  Emblaze Semiconductor, net of cash acquired                 |       | (54,161                              | )          | — |   |
| Net cash used in  investing activities                                      |       | (21,364                              | )          | (2,813 | ) |
|                                                                        |       |                                 |       |   |   |
| Cash flows from  financing activities:                                      |       |                                 |       |   |   |
| Proceeds from  issuance of common stock                                     |       | 5,745                                |       | 17,775 |   |
| Installment  payment on purchased core technology                           |       | —                               |       | (2,700 | ) |
| Net cash  provided by financing activities                                  |       | 5,745                                |       | 15,075 |   |
|                                                                        |       |                                 |       |   |   |
| Net increase  (decrease) in cash and cash equivalents                       |       | (6,354                               | )          | 20,855 |   |
|                                                                        |       |                                 |       |   |   |
| Cash and cash  equivalents at beginning of period                           |       | 47,994                               |       | 31,607 |   |
|                                                                        |       |                                 |       |   |   |
| Cash and cash  equivalents at end of period                                 |       | $                                    | 41,640     |   | $ | 52,462 |   |

 

The accompanying notesare an integral part of these unaudited condensed consolidated financialstatements.

 

5

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**ZORANCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.****              Basisof Presentation**

 

The accompanyingunaudited condensed consolidated financial statements of Zoran Corporation andsubsidiaries (“Zoran” or the “Company”) have been prepared in conformity withaccounting principles generally accepted in the United States of America.  However, certain information or footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission (the “Commission”).  In the opinion of management, the condensedconsolidated financial statements reflect all adjustments considered necessary,consisting only of normally occurring adjustments, for a fair presentation ofthe consolidated financial position, operating results and cash flows for theperiods presented.  The results ofoperations for the interim periods presented are not necessarily indicative ofthe results that may be expected for the full fiscal year or in any futureperiod.  This quarterly report on Form10-Q should be read in conjunction with the audited consolidated financialstatements and notes thereto for the year ended December 31, 2003,included in the Zoran Corporation 2003 Annual Report on Form 10-K filed withthe Commission.

 

***Reclassifications***

 

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

 

**2.     StockBased Compensation**

 

Zoran applies AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees,”and related interpretations in accounting for its stock plans.  Stock options are generally granted withexercise prices equivalent to fair market value of the underlying common stockon the date of grant, and no compensation cost is recognized.  In connection with stock options grantedthrough the acquisition of Nogatech, Inc. during 2000 and Oak Technology, Inc.during 2003, the Company recorded deferred stock-based compensation which isbeing amortized over the vesting period of the options.  Amortization of deferred stock compensationexpense recognized as a result of the amortization of these options during thequarter ended September 30, 2004 and 2003 was approximately $1,790,000 and $2,426,000,respectively.  Deferred stockcompensation expense of these options for the nine months ended September 30,2004 and 2003 was approximately $6,438,000 and $2,446,000, respectively.

 

6

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Had compensation cost forthe Company’s option and stock purchase plans been determined based on the fairvalue of the options at the grant date, as prescribed in Statement of FinancialAccounting Standards No. 123 “Accounting for Stock Based Compensation” (“SFAS123”), the Company’s net loss and net loss per share for the three month and ninemonth periods ended September 30, 2004 and 2003 would have been as follows (inthousands, except per share data):

 
| ** **                                                                                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                           | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Net loss  attributable to common stockholders, as reported                                           |       | $                                     | (3,519     | )                                    | $          | (54,484 | ) | $ | (20,353 | ) | $ | (50,058 | ) |
|                                                                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Add:                                                                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Employee  stock-based compensation expense included in net loss, net of tax                          |       | 1,790                                 |       | 2,426                                |       | 6,438 |   | 2,446 |   |
|                                                                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Total employee  stock-based compensation expense determined under the fair value method, net  of tax |       | (10,371                               | )          | (15,692                              | )          | (33,735 | ) | (28,770 | ) |
|                                                                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Pro forma net  loss attributable to common stockholders                                              |       | $                                     | (12,100    | )                                    | $          | (67,750 | ) | $ | (47,650 | ) | $ | (76,382 | ) |
|                                                                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Pro forma net  loss per share attributable to common stockholders:                                   |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                                                |       | $                                     | (0.28      | )                                    | $          | (1.90 | ) | $ | (1.12 | ) | $ | (2.53 | ) |
| Diluted                                                                                              |       | $                                     | (0.28      | )                                    | $          | (1.90 | ) | $ | (1.12 | ) | $ | (2.53 | ) |
|                                                                                                 |       |                                  |       |                                 |       |   |   |   |   |
| Net loss per  share as reported attributable to common stockholders:                                 |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                                                                                |       | $                                     | (0.08      | )                                    | $          | (1.53 | ) | $ | (0.48 | ) | $ | (1.66 | ) |
| Diluted                                                                                              |       | $                                     | (0.08      | )                                    | $          | (1.53 | ) | $ | (0.48 | ) | $ | (1.66 | ) |

 

For purposes of thedisclosure required under SFAS 123, the fair value of each option grant isestimated on the date of grant using the Black-Scholes option pricing modelwith the following assumptions used for options and purchase grants during theapplicable periods.

 
| ** **              | ** ** | **Stock Option Plans**                        | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|
| ** **              | ** ** | **Three Months  Ended****September 30, 2004** | ** ** | **Three Months****Ended  September 30, 2003** | ** ** | **Nine Months****Ended  September 30, 2004** | ** ** | **Nine Months****Ended  September 30, 2003** | ** ** |
|                    |       |                                          |       |   |   |   |   |   |   |
| Expected life (years)   |       | 5.2                                           |       | 5.0 |   | 5.2 |   | 5.0 |   |
| Expected volatility     |       | 81                                            | %          | 92 | % | 83 | % | 92 | % |
| Risk-free interest rate |       | 3.5                                           | %          | 3.4 | % | 3.4 | % | 3.4 | % |

 
| ** **              | ** ** | **Employee Stock Purchase Plans**             | ** ** |
|-------------------------|------------|-----------------------------------------------|------------|
| ** **              | ** ** | **Three Months****Ended  September 30, 2004** | ** ** | **Three Months****Ended  September 30, 2003** | ** ** | **Nine Months****Ended  September 30, 2004** | ** ** | **Nine Months****Ended  September 30, 2003** | ** ** |
|                    |       |                                          |       |   |   |   |   |   |   |
| Expected life (years)   |       | 0.5                                           |       | 0.5 |   | 0.5 |   | 0.5 |   |
| Expected volatility     |       | 64                                            | %          | 92 | % | 75 | % | 92 | % |
| Risk-free interest rate |       | 1.8                                           | %          | 2.3 | % | 1.4 | % | 2.3 | % |

 

7

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TheBlack-Scholes option pricing model was developed for use in estimating thevalue of traded options that have no vesting restrictions and are fullytransferable. In addition, option pricing models require the input of highlysubjective assumptions including the expected stock price volatility. TheCompany uses projected data for expected volatility and expected life of itsstock options based upon historical and other economic data trended into futureyears. Because the Company’s employee stock options have characteristicssignificantly different from those of traded options, and because changes inthe subjective input assumptions can materially affect the estimate, inmanagement’s opinion, existing valuation models, including the Black-Scholesmodel, do not necessarily provide a reliable measure of the fair value of theCompany’s stock options.

 

**3.****              ComprehensiveLoss**

 

The following tablepresents the calculation of comprehensive loss as required by SFAS 130 (“ReportingComprehensive Income”).  The componentsof comprehensive loss, net of tax, are as follows (in thousands):

 
| ** **                                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                                   | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Net loss                                                     |       | $                                     | (3,519     | )                                    | $          | (54,484 | ) | $ | (20,353 | ) | $ | (50,058 | ) |
| Change in  unrealized gain (loss) on investments, net of tax |       | 265                                   |       | (589                                 | )          | 1,050 |   | (805 | ) |
|                                                         |       |                                  |       |                                 |       |   |   |   |   |
| Total  comprehensive loss                                    |       | $                                     | (3,254     | )                                    | $          | (55,073 | ) | $ | (19,303 | ) | $ | (50,863 | ) |
|                                                              |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The components of accumulated othercomprehensive loss are unrealized gain (loss) on short-term and long-termmarketable securities.

 

**4.****              Inventories**

 

Inventories are stated atthe lower of cost (first in, first out) or market and consisted of thefollowing (in thousands):

 
| ** **                           | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------|------------|-------------------------|------------|------------------------|------------|
|                                 |       |                    |       |                   |       |
| Purchased parts  and work in process |       | $                       | 31,192     |                   | $          | 5,701 |   |
| Finished goods                       |       | 31,148                  |       | 11,104                 |       |
|                                 |       |                    |       |                   |       |
|                                 |       | $                       | 62,340     |                   | $          | 16,805 |   |

 

**5.****              Goodwilland Other Intangible Assets**

 

The Company adoptedStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets”, or SFAS 142, as of January 1, 2002. In accordance with SFAS142, goodwill is not amortized, but is required to be reviewed periodically forimpairment on at least an annual basis.  TheCompany performed the annual analysis as of September 30, 2004 and concludedthat goodwill was not impaired, as the fair value of each reporting unitexceeded its carrying value, including goodwill.

 

8

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***Components of Acquired Intangible Assets****(in thousands):*

* *
| ** **                    | ** ** | ** **  | ** ** | **September 30, 2004**      | ** ** | **December 31, 2003**         | ** ** |
|-------------------------------|------------|-------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Life**    | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Balance** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Balance** | ** ** |
| ** **                    | ** ** | **(Years)** | ** ** | ** **                  | ** ** | ** **                    | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Amortized  intangible assets: |       |        |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Purchased  technology         |       | 2-3         |       | $                           | 188,505    |                          | $          | (57,826 | ) | $ | 130,679 |   | $ | 176,720 |   | $ | (31,792 | ) | $ | 144,928 |   |
| Patents                       |       | 3-5         |       | 40,265                      |       | (8,076                        | )          | 32,189 |   | 27,900 |   | (2,996 | ) | 24,904 |   |
| Customer base                 |       | 3-5         |       | 13,010                      |       | (4,166                        | )          | 8,844 |   | 13,010 |   | (2,450 | ) | 10,560 |   |
| Tradename and  others         |       | 3-5         |       | 2,100                       |       | (1,096                        | )          | 1,004 |   | 2,100 |   | (900 | ) | 1,200 |   |
| Purchased core  technology *  |       | 4-5         |       | 10,035                      |       | (2,094                        | )          | 7,941 |   | 8,799 |   | (1,506 | ) | 7,293 |   |
| Total                         |       |        |       | $                           | 253,915    |                          | $          | (73,258 | ) | $ | 180,657 |   | $ | 228,529 |   | $ | (39,644 | ) | $ | 188,885 |   |
|                               |            |             |            |                             |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

 (*) The Company records the amortization ofpurchased core technology as cost of hardware product revenues.

 

Estimated futureintangible amortization expense, based on current balances, as of September 30,2004 is as follows (in thousands):

 
| ** **                      | ** ** | **Amount** | ** ** |
|---------------------------------|------------|------------|------------|
|                            |       |       |       |
| Remaining three  months of 2004 |       | $          | 12,965     |   |
| Year ending  December 31, 2005  |       | 52,081     |       |
| Year ending  December 31, 2006  |       | 50,316     |       |
| Year ending  December 31, 2007  |       | 42,866     |       |
| Year ending  December 31, 2008  |       | 22,429     |       |
| Total                           |       | $          | 180,657    |   |
|                                 |            |            |            |  |  |

 

Changes in the carrying amountof goodwill for the nine months ended September 30, 2004 were as follows (inthousands):

 
| ** **                                             | ** ** | **Amount** | ** ** |
|--------------------------------------------------------|------------|------------|------------|
|                                                   |       |       |       |
| Balance at  December 31, 2003                          |       | $          | 119,091    |   |
| Adjustment to  goodwill related to acquisition of Oak. |       | 181        |       |
| Acquisition of  Emblaze Semiconductor                  |       | 30,879     |       |
| Balance at  September 30, 2004                         |       | $          | 150,151    |   |

 

Goodwill by reportingunit at September 30, 2004 and December 31, 2003 was as follows:

 
| ** ** | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|------------|------------|-------------------------|------------|------------------------|------------|
| ** ** | ** ** | ** **              | ** ** | ** **             | ** ** |
| DVD        |       | $                       | 63,855     |                   | $          | 63,855 |   |
| Imaging    |       | 6,177                   |       | 5,996                  |       |
| Mobile     |       | 62,131                  |       | 31,252                 |       |
| DTV        |       | 17,988                  |       | 17,988                 |       |
|       |       | $                       | 150,151    |                   | $          | 119,091 |   |

 

**6.****              IncomeTaxes**

 

The provision for incometaxes reflects the estimated annualized effective tax rate applied to earningsexcluding charges for amortization of goodwill and other intangibles for theinterim periods.  The effective tax ratediffers from the U.S. statutory rate due to utilization of net operatinglosses, adjustments for the nondeductible amortization of goodwill and otherintangibles and

 

9

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income tax ratedifferences on foreign earnings.  TheCompany has provided for tax on income in excess of net operating losscarryforwards for U.S. federal and state earnings.  The Company has also provided for tax on itsforeign earnings.

 

**7.****              SegmentReporting**

 

SFAS No. 131establishes standards for the reporting by public business enterprises ofinformation about operating segments, products and services, geographic areas,and major customers. The method for determining what information to report isbased on the way that management organizes the operating segments within theCompany for making operational decisions and assessments of financialperformance. The Company’s chief operating decision-maker is considered to bethe Chief Executive Officer (“CEO”).

 

Subsequent to theacquisition of Oak Technology, Inc. in 2003, the Company determined it hasfour reportable segments: Digital Versatile Disc (DVD), Imaging, Digital Camera(DC) and Digital Television (DTV). Subsequent to the Emblaze acquisition in July 2004, the Digital Cameragroup was combined with the Emblaze Mobile segment and was renamed the Mobilegroup.  Each segment’s primary productsare based on highly integrated application-specific integrated circuits, orASICs, and system-on-a-chip, or SOC, solutions. The DVD segment and Imaging segment also license certain software andother intellectual property.  The DVDgroup provides products for use in DVD players and recordable DVD players.  The Imaging group provides products used in digitalcopiers, laser and inkjet printers as well as multifunction peripherals. The Mobilegroup focuses on solutions for multimedia mobile phone products, digital cameraproducts as well as CMOS sensors.  TheDTV group provides products for standard and high definition digital televisionproducts including televisions, set top boxes and personal video recorders.

 

The Company evaluatesoperating segment performance based on net revenues and operating expenses ofthese segments. The accounting policies of the operating segments are the sameas those described in the summary of accounting policies. No reportablesegments have been aggregated.

 

Information aboutreported segment income or loss is as follows for the three months and ninemonths ended September 30, 2004 and 2003 (in thousands):

 
| ** **            | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|-----------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **            | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Total revenues:       |       |                                  |       |                                 |       |   |   |   |   |
| DVD                   |       | $                                     | 77,284     |                                 | $          | 48,341 |   | $ | 191,660 |   | $ | 117,935 |   |
| Imaging               |       | 23,841                                |       | 3,548                                |       | 63,723 |   | 3,548 |   |
| Mobile                |       | 10,420                                |       | 9,130                                |       | 25,559 |   | 22,084 |   |
| DTV                   |       | 8,202                                 |       | 6,401                                |       | 23,158 |   | 6,417 |   |
|                  |       | $                                     | 119,747    |                                 | $          | 67,420 |   | $ | 304,100 |   | $ | 149,984 |   |
|                  |       |                                  |       |                                 |       |   |   |   |   |
| Operating  expenses:  |       |                                  |       |                                 |       |   |   |   |   |
| DVD                   |       | $                                     | 67,704     |                                 | $          | 41,622 |   | $ | 176,976 |   | $ | 104,257 |   |
| Imaging               |       | 13,831                                |       | 6,761                                |       | 37,672 |   | 6,761 |   |
| Mobile                |       | 12,521                                |       | 6,766                                |       | 28,438 |   | 20,357 |   |
| DTV                   |       | 12,940                                |       | 8,717                                |       | 39,160 |   | 10,876 |   |
|                  |       | $                                     | 106,996    |                                 | $          | 63,866 |   | $ | 282,246 |   | $ | 142,251 |   |
|                  |       |                                  |       |                                 |       |   |   |   |   |
| Contribution  margin: |       |                                  |       |                                 |       |   |   |   |   |
| DVD                   |       | $                                     | 9,580      |                                 | $          | 6,719 |   | $ | 14,684 |   | $ | 13,678 |   |
| Imaging               |       | 10,010                                |       | (3,213                               | )          | 26,051 |   | (3,213 | ) |
| Mobile                |       | (2,101                                | )          | 2,364                                |       | (2,879 | ) | 1,727 |   |
| DTV                   |       | (4,738                                | )          | (2,316                               | )          | (16,002 | ) | (4,459 | ) |
|                  |       | $                                     | 12,751     |                                 | $          | 3,554 |   | $ | 21,854 |   | $ | 7,733 |   |

 

10

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A reconciliation of thetotals reported for the operating segments to the applicable line items in theconsolidated financial statements for the three months and nine months ended September30, 2004 and 2003 is as follows (in thousands):

 
| ** **                                   | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                   | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| Contribution  margin from operating segments |       | $                                     | 12,751     |                                 | $          | 3,554 |   | $ | 21,854 |   | $ | 7,733 |   |
| Amortization of  intangible assets           |       | 12,342                                |       | 6,516                                |       | 33,028 |   | 8,403 |   |
| Amortization of  deferred stock compensation |       | 1,790                                 |       | 2,426                                |       | 6,438 |   | 2,446 |   |
| In-process  research and development         |       | —                                |       | 50,100                               |       | — |   | 50,100 |   |
| Total operating  loss                        |       | $                                     | (1,381     | )                                    | $          | (55,488 | ) | $ | (17,612 | ) | $ | (53,216 | ) |

 

Zoran maintainsoperations in the United States, Canada, China, Germany, Israel, Japan, Korea, Taiwanand the United Kingdom. Activities in the United States and Israel consist ofcorporate administration, product development, logistics and worldwide salesmanagement. Other foreign operations consist of product development, technicalsupport and sales support.

 

The distribution of totalrevenues for the three months and nine months ended September 30, 2004 and 2003was as follows (in thousands):

 
| ** **                                               | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|----------------------------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                                               | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
| **Revenue  from unaffiliated customers originating in:** |       |                                  |       |                                 |       |   |   |   |   |
| China                                                    |       | $                                     | 49,471     |                                 | $          | 24,157 |   | $ | 115,711 |   | $ | 54,534 |   |
| Japan                                                    |       | 31,180                                |       | 17,021                               |       | 83,544 |   | 34,856 |   |
| Taiwan                                                   |       | 9,006                                 |       | 7,943                                |       | 31,219 |   | 18,433 |   |
| Korea                                                    |       | 5,503                                 |       | 9,976                                |       | 27,412 |   | 28,552 |   |
| North America                                            |       | 10,874                                |       | 6,307                                |       | 25,436 |   | 9,367 |   |
| Other                                                    |       | 13,713                                |       | 2,016                                |       | 20,778 |   | 4,242 |   |
|                                                     |       | $                                     | 119,747    |                                 | $          | 67,420 |   | $ | 304,100 |   | $ | 149,984 |   |
|                                                          |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |

 

Forthe three months ended September 30, 2004, one customer accounted for 10% oftotal revenues.  For the same period of2003, two customers accounted for 16% and 13% of total revenues, respectively.  For the nine months ended September 30, 2004,no customer accounted for more than 10% of total revenues.  For the same period of 2003, two customersaccounted for 18% and 17% of total revenues, respectively.

 

As of September 30, 2004,one customer accounted for 11% of total net accounts receivable, and as ofDecember 31, 2003, two customers accounted for 14% and 10% of total netaccounts receivable, respectively.

 

11

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**8.****              Acquisitions**

 

**EmblazeSemiconductor Ltd.**

 

On July 8, 2004,Zoran acquired Emblaze Semiconductor Ltd. (“Emblaze”), a subsidiary of EmblazeLtd. and a provider of semiconductor-based solutions for high volume multimediamobile phones.  Under the terms of theagreement, Zoran’s wholly-owned Israel based subsidiary, Zoran MicroelectronicsLtd., acquired all of the outstanding common shares of Emblaze forapproximately $54.2 million in cash.

 

The primary purpose of this acquisitionwas to gain high performance, low-power application processors, technology andproducts for the fast growing multimedia mobile phone market.  This technology will be combined with Zoran’simage processing technology to deliver reliable, cost-effective systemsolutions for mobile phone makers.

 

The transaction wasaccounted for under SFAS No. 141, “Business Combinations,” using the purchasemethod of accounting.  We incurredapproximately $180,000 for acquisition-related expenses resulting from financialadvisory, legal and other consulting services. The Company completed a valuation analysis and purchase price allocationwith the assistance of a third party appraiser. The results of operations of Embaze have been included in the results ofZoran’s consolidated financial statements from the date of acquisition.  The historical operations of Emblaze are notmaterial to the financial position or results of operations of the Company;therefore, no pro forma information is presented.  The acquisition resulted in goodwill ofapproximately $30.9 million.  Inaccordance with SFAS 142, goodwill will not be amortized and will be tested forimpairment at least annually.

 

Allocation of thepurchase price is as follows (in thousands):

 
| Net liabilities  acquired |   | $      | (649   | )      |
|---------------------------|--------|--------|--------|--------|
| Intangible  assets        |   | 24,150 |   |
| Goodwill                  |   | 30,879 |   |
|                      |   | $      | 54,380 |   |
|                           |        |        |        |        |  |

 

The amounts allocated tointangible assets include developed technology totaling $11.8 million andpatents totaling $12.4 million which are being amortized over their usefullives of three years.

 

**OakTechnology, Inc.**

 

On August 11, 2003,pursuant to an Agreement and Plan of Reorganization dated as of May 4,2003 (the “Merger Agreement”) among Zoran, a wholly-owned subsidiary of Zoran (“MergerSub”), and Oak Technology, Inc., Oak was merged with and into Merger Sub.

 

The transaction wasaccounted for under SFAS No. 141, “Business Combinations,” using thepurchase method of accounting and accordingly the results of operations of Oakhave been included in the Company’s financial statements since the date ofacquisition.

 

Zoran’s primary objectivein acquiring Oak was based on the Company’s belief that the combined companywould benefit from the following:

 

•                  Oak’scomplementary technologies and products, especially in the digital TV and digitalimaging markets, and the ability of the combined company to expand its existingcustomer base and market share in the digital consumer electronics market byintegrating the product lines of each company;

 

•                  Oak’sintellectual property portfolio and related expertise, especially intellectualproperty relating to front-end optical recording;

 

•                  accessto Oak’s customer relationships, providing cross-selling opportunities toexisting customers as well as opportunities to build new relationships;

 

•                  theopportunity to achieve synergies and realize significant cost savings,including operational efficiencies, such as acceleration of various productdevelopment activities by leveraging Oak’s intellectual property, reducedoverhead and, in geographic areas where the two companies overlap, increasedefficiency in the combined company’s sales channels;

 

•                  Oak’sexisting market position as a leading supplier of HDTV integrated circuits,providing the combined company with access to this high-growth market segment;and

 

12

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•                  Oak’sexisting market position as a leading supplier of Digital Imaging relatedintegrated circuit and software products.

 

The purchase priceexceeded the net assets acquired resulting in the recognition of goodwill andother intangible assets.

 

The financial statementsreflect a purchase price of approximately $392.7 million, determined asfollows (in thousands):

 
| Cash payments                        |   | $       | 100,992 |   |
|--------------------------------------|--------|---------|---------|--------|
| Fair value of  common stock issued   |   | 227,462 |    |
| Fair value of  stock options granted |   | 57,446  |    |
| Acquisition  costs                   |   | 6,847   |    |
| Total  consideration                 |   | $       | 392,747 |   |
|                                      |        |         |         |        |  |

 

The cash payment and fairvalue of common stock issued represents the conversion of each outstandingshare of Oak common stock into $1.78 in cash and 0.2323 of a share of Zorancommon stock. As a result of the acquisition, 56,737,298 shares of Oak commonstock were converted into $101.0 million in cash and 13,180,074 shares ofZoran common with a fair value of $227.5 million based on the fair marketvalue of Zoran common stock for the period two days before and after the dateon which the terms of agreement were finalized and announced, May 5, 2003.

 

Non-qualified options topurchase approximately 4.5 million shares of Zoran common stock with aterm of ten years were granted to Oak employees as part of the acquisition. Thecorresponding fair value of these options of $57.4 million was estimatedbased on the fair value of the Zoran common stock as of the acquisition dateusing the Black-Scholes option pricing model applying the followingassumptions: expected life of 50 months, risk-free interest rate of 3.65%,expected volatility of 93% and no expected dividend yield. The intrinsic valueof the unvested options, totaling approximately $19.2 million, has beenrecorded as deferred stock compensation and will be amortized over the vestingperiod using the multiple option approach.

 

Acquisition costs include$3.3 million of investment banker fees, $1.7 million of insurancecosts, $1.1 million of legal and accounting fees and $0.7 million inother acquisition related expenses.

 

The purchase priceallocation was as follows (in thousands):

 
| Net assets  acquired                 |   | $       | 65,644  |   |
|--------------------------------------|--------|---------|---------|--------|
| Deferred stock  compensation         |   | 19,212  |    |
| In-process  research and development |   | 50,100  |    |
| Intangible assets                    |   | 197,650 |    |
| Goodwill                             |   | 60,141  |    |
|                                 |   | $       | 392,747 |   |
|                                      |        |         |         |        |  |

 

The following tablesummarizes the estimated fair value of the tangible assets acquired andliabilities assumed at the date of acquisition (in thousands):

 
| Cash and short-term  investments |   | $       | 71,325 |   |
|----------------------------------|--------|---------|--------|--------|
| Accounts  receivable             |   | 8,086   |   |
| Other current  assets            |   | 17,090  |   |
| Inventory                        |   | 3,676   |   |
| Property, plant  and equipment   |   | 13,075  |   |
| Other assets                     |   | 816     |   |
| Current  liabilities             |   | (38,196 | )      |
| Non-current  liabilities         |   | (10,228 | )      |
| Net assets  acquired             |   | $       | 65,644 |   |

 

Tangible assets werevalued at estimates of their current fair values. The valuation of the acquiredintangible assets, which was based on management’s estimates and consideredvarious factors including appraisals, resulted in a value of purchasedtechnology of approximately $157.9 million, patents of $27.0 million,customer base of $11.5 million and trademarks and tradenames ofapproximately $1.3 million. Purchased technology is being amortized over aweighted average estimated life of 4.8 years, and patents, customer base,trademarks and tradenames are being amortized over their estimated useful livesof five years with no residual values.

 

13

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During the periodAugust 11, 2003 through March 31, 2004, we revised estimates related tocertain assets and liabilities, and as a result, we decreased the purchaseprice and goodwill by $3.4 million.

 

Approximately$60.0 million of the purchase price was allocated to goodwill. Goodwillrepresents the excess of the purchase price over the fair value of the nettangible and identifiable intangible assets acquired. In accordance withSFAS 142, “Goodwill and Other Intangible Assets”, goodwill will not beamortized and will be tested for impairment at least annually.  We do not expect goodwill to be deductible fortax purposes.

 

Approximately$50.1 million of the purchase price was allocated to in-process researchand development which had not yet reached technological feasibility and had noalternative future use. Accordingly, this amount was immediately expensed uponthe acquisition date. This amount was determined using management’s estimatesincluding consultation with an independent appraiser. The value of thein-process research and development was determined using a discounted cash flowmethod and factors including projected financial results, relative risk ofsuccessful development, time-value of money and level of completion.

 

The Company expects thatthe in-process technologies will be successfully completed by the secondquarter of calendar 2005 with approximately $5.4 million in remainingcosts as of September 30, 2004.  At thetime of acquisition, Oak had five material development projects in process asfollows:

 

•                  Quatro4100—a highly integrated, fully programmable system-on-a-chip (SOC) solutionfor the emerging class of appliance type printers. The Quatro-4100 incorporatesthe RISC CPU core and Quatro SIMD DSP core to provide an easy to programcontroller platform.

 

•                  Quatro4230—a programmable SOC solution that will complement the Quatro-4110 and Quatro-4100in the inkjet market. Quatro 4230 will provide a fully scalable solutionplatform to cover much of the performance and feature range of an OEM’s laserofferings.

 

•                  IntegratedPrint System—The Integrated Print System (“IPS”) is a dynamic embedded scalablearchitecture providing peripheral manufacturers with highly integrated modularcontroller and connectivity software for powering single and multifunctionaldevices.

 

•                  Generation9—an integrated SOC that integrates a previous generation of HDTV digital videotechnology with a new Audio-DSP Core as well as a MIPS 64 bit processor andcertain other video processing features.

 

•                  Anew lower cost highly integrated HDTV decoder—the first in a family of highlyintegrated HDTV decoders specifically designed for the FCC mandated digitaltelevision chassis market. This device includes all the required interfacing tosupport digital cable applications and is applicable to existing CRT and flatpanel display devices.

 

The value of in-processresearch and development was determined using the multi-period excess earningsmethod by estimating the expected net cash flows from the projects oncecommercially viable and discounting the net cash flows back to their presentvalue using a discount rate of 22%. This rate was based on the industry segmentfor the technology, nature of the products to be developed, length of time tocomplete the project and overall maturity and history of the development team.The net cash flows from the identified projects were based on estimates ofrevenue, cost of revenue, research and development expenses, selling generaland administrative expenses, and applicable income taxes. These estimates didnot take into account any potential synergies that could be realized as aresult of the acquisition. Revenues for the incremental core technologiesdeveloped are expected to commence in the fourth quarter of 2005 and extendthrough 2011. Revenue projections were based on estimates of market size andgrowth, expected trends in technology and the expected timing of new productintroductions.  As of September 30, 2004,there have been no material variations from the underlying assumptions thatwere used in the original computation of the value of the acquired in-processresearch and development.

 

14

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The following unauditedpro forma financial information presents the combined results of operations ofZoran and Oak as if the acquisition had occurred as of the beginning of fiscal2003 and 2002, after giving effect to certain adjustments, includingamortization of intangibles. The in-process research and development charge of$50.1 million is not reflected in the unaudited pro forma combinedcondensed statement of operations. The unaudited pro forma financialinformation does not necessarily reflect the results of operations that wouldhave occurred had the combined companies constituted a single entity duringsuch periods, and is not necessarily indicative of results which may be obtainedin the future.

 
| ** **                                   | ** ** | **Year Ended December 31,** | ** ** |
|----------------------------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **2003**                    | ** ** | **2002** | ** ** |
|                                         |       |                        |       |   |   |
| **In  thousands except for per share data:** |       |                        |       |   |   |
| Pro forma  revenues                          |       | $                           | 275,658    |   | $ | 284,770 |   |
|                                         |       |                        |       |   |   |
| Pro forma net  loss                          |       | $                           | (73,247    | ) | $ | (83,628 | ) |
|                                         |       |                        |       |   |   |
| Pro forma net  loss per share:               |       |                        |       |   |   |
| Basic                                        |       | $                           | (1.77      | ) | $ | (2.08 | ) |
|                                         |       |                        |       |   |   |
| Diluted                                      |       | $                           | (1.77      | ) | $ | (2.08 | ) |

 

**9.****              NetLoss Per Share**

 

Basic and diluted netloss per share have been computed using the weighted average number of sharesof common stock and dilutive common equivalent shares from stock options andwarrants outstanding during the period in accordance with Statement ofFinancial Accounting Standards (SFAS) No. 128, “Earnings per Share.”  The following table provides a reconciliationof the components of the basic and diluted net loss per share computations (inthousands, except per share data):

 
| ** **                           | ** ** | **Three Months Ended  September 30,** | ** ** | **Nine Months Ended  September 30,** | ** ** |
|--------------------------------------|------------|---------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **2004**                              | ** ** | **2003**                             | ** ** | **2004** | ** ** | **2003** | ** ** |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| Net loss from  continuing operations |       | $                                     | (3,519     | )                                    | $          | (54,484 | ) | $ | (20,353 | ) | $ | (50,058 | ) |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| Basic common  shares                 |       | 42,969                                |       | 35,718                               |       | 42,688 |   | 30,188 |   |
| Effect of  dilutive securities:      |       |                                  |       |                                 |       |   |   |   |   |
| Common stock  options                |       | —                                |       | —                               |       | — |   | — |   |
| Dilutive  weighted average shares    |       | 42,969                                |       | 35,718                               |       | 42,688 |   | 30,188 |   |
|                                 |       |                                  |       |                                 |       |   |   |   |   |
| Net loss per  share:                 |       |                                  |       |                                 |       |   |   |   |   |
| Basic                                |       | $                                     | (0.08      | )                                    | $          | (1.53 | ) | $ | (0.48 | ) | $ | (1.66 | ) |
| Diluted                              |       | $                                     | (0.08      | )                                    | $          | (1.53 | ) | $ | (0.48 | ) | $ | (1.66 | ) |
|                                      |            |                                       |            |                                      |            |  |  |  |  |  |  |  |  |  |  |

 

**Options to purchase 7,613,000 shares and 2,376,000 shares ofcommon stock were excluded from the computation of diluted net loss per sharefor the three months ended September 30, 2004 and 2003, respectively, as theseshares would have had an anti-dilutive effect.**

 

**Options to purchase 5,202,000 shares and 2,388,000 sharesof common stock were excluded from the computation of diluted net loss pershare for the nine months ended September 30, 2004 and 2003, respectively, asthese shares would have had an anti-dilutive effect.**

 

15

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

 

*This report includes a number of forward-looking statementswhich reflect the Company’s current views with respect to future events andfinancial performance. These forward-looking statements are subject to certainrisks and uncertainties, including those discussed below under the heading “FuturePerformance and Risk Factors” and in “Item 7—Management’s Discussion andAnalysis of Financial Condition and Results of Operations—Future Performanceand Risk Factors” included in the**Company’sAnnual Report on Form 10-K for the year ended December 31, 2003. In this report,the words “anticipates,” “believes,” “expects,” “intends,” “future” and similarexpressions identify forward-looking statements. Readers are cautioned not toplace undue reliance on these forward-looking statements, which speak only asof the date hereof.*

 

**Overview**

 

Prior to the acquisitionof Oak Technology, Inc. on August 11, 2003, our products consisted ofintegrated circuits and related products used in digital versatile discplayers, or DVDs, movie and home theater systems, digital cameras and videoediting systems.  As a result of theacquisition of Oak, we now also provide integrated circuits, software andplatforms for digital television applications that enable the delivery anddisplay of digital video content through a set-top box or television as well asdigital imaging products consisting of semiconductor hardware and software thatenable users to print, scan, process and transmit documents to computerperipherals that perform printing functions. Subsequent to the Emblaze acquisition on July 8, 2004, we now alsoprovide high performance, low-power applicationprocessors, technology and products for the multimedia mobile phone market.

 

We derive most of ourrevenues from the sale of our integrated circuit products. Historically,average selling prices in the semiconductor industry in general, and for ourproducts in particular, have decreased over the life of a particular product.Average selling prices for our hardware products have fluctuated substantiallyfrom period to period, primarily as a result of changes in our customer mix oforiginal equipment manufacturer, or OEM, sales versus sales to resellers andthe transition from low-volume to high-volume production. In the past, we haveperiodically reduced the prices of some of our products in order to betterpenetrate the consumer market. We believe that, as our product lines continueto mature and competitive markets evolve, we are likely to experience furtherdeclines in the average selling prices of our products, although we cannotpredict the timing and amount of such future changes with any certainty.

 

Our cost of hardwareproduct revenues consists primarily of fabrication costs, assembly and testcosts, and the cost of materials and overhead from operations. If we are unableto reduce our cost of hardware product revenues to offset anticipated decreasesin average selling prices, our product gross margins will decrease. Ourhardware product gross margin is also dependent on product mix and on theproportion of products sold directly to our OEM customers versus indirectlythrough our marketing partners.  Thesemarketing partners purchase our products at lower prices but absorb most of theassociated marketing and sales support expenses, maintain inventories andprovide customer support and training. As a result, lower gross margins onsales to these resellers are partially offset by reduced selling and marketingexpenses related to such sales.  Our DVDhardware product sales in Japan are primarily made through Fujifilm, ourstrategic partner and reseller in Japan. We expect both product and customer mix to continue to fluctuate infuture periods, causing further fluctuations in margins.

 

We also derive revenuefrom licensing our software and other intellectual property. Licensing revenueincludes one-time license fees and royalties based on the number of unitsdistributed by the licensee. Quarterly licensing revenue can be significantlyaffected by the timing of a small number of licensing transactions, eachaccounting for substantial revenues. Accordingly, licensing revenues havefluctuated, and will continue to fluctuate, on a quarterly basis. In addition,we have historically generated a portion of our total revenues from developmentcontracts, primarily with key customers, although development revenue hasdeclined substantially as a percentage of total revenues over the past severalyears. These development contracts have provided us with partial funding forthe development of some of our products. These development contracts providefor license and milestone payments which are recorded as development revenue.We classify all development costs, including costs related to these developmentcontracts, as research and development expenses. We retain ownership of theintellectual property developed by us under these development contracts. Whilewe intend to continue to enter into development contracts with certainstrategic partners, we expect development revenue to continue to decline as apercentage of total revenues.

 

Our research anddevelopment expenses consist of salaries and related costs of employees engagedin ongoing research, design and development activities and costs of engineeringmaterials and supplies. We are also a party to research and developmentagreements with the Chief Scientist in Israel’s Ministry of Industry and Tradeand the Israel-United States Binational Industrial Research and DevelopmentFoundation, which fund up to 50% of incurred project costs for approvedproducts up to specified contract maximums. These agreements require us to useour best efforts to achieve specified results and require us to pay royaltiesat rates of 3% to 5% of resulting product sales, and up to 30% of resultinglicense revenues, up to a maximum of 100% to 150% of total funding received.Reported research and development expenses are net of these grants, whichfluctuate from period to period.

 

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We believe thatsignificant investments in research and development are required for us toremain competitive, and we expect to continue to devote significant resourcesto product development, although such expenses as a percentage of totalrevenues may fluctuate.

 

Our selling, general andadministrative expenses consist primarily of employee-related expenses,royalties, sales commissions, product promotion and other professionalservices. We expect that selling, general and administrative expenses willcontinue to increase to support our anticipated growth.

 

We conduct a materialamount of our research and development and certain sales and marketing andadministrative operations in Israel through our wholly-owned Israel basedsubsidiary.  As a result, some of ourexpenses are incurred in New Israeli Shekels. To date, substantially all of ourhardware product revenues and our software and other revenues have beendenominated in U.S. dollars and most costs of hardware product revenues havebeen incurred in U.S. dollars. We expect that most of our revenues and costs ofrevenue will continue to be denominated and incurred in U.S. dollars for theforeseeable future. We have not experienced material losses or gains as aresult of currency exchange rate fluctuations and have not engaged in hedgingtransactions to reduce our exposure to such fluctuations. We may in the futureelect to take action to reduce our foreign exchange risk.

 

Our effective income taxrate has benefited from the availability of net operating losses which we haveutilized to reduce taxable income for U.S. federal income tax purposes and byour Israel based subsidiary’s status as an “Approved Enterprise” under Israelilaw, which provides a ten-year tax holiday for income attributable to a portionof our operations in Israel. Our U.S. federal net operating losses expire atvarious times between 2004 and 2020, and the benefits from our subsidiary’sApproved Enterprise status expire at various times beginning in 2004.

 

**Statement Regarding Use ofNon-GAAP Financial Measures**

 

To supplement theconsolidated financial results prepared under generally accepted accountingprinciples (“GAAP”) we include non-GAAP financial measures in our Management’sDiscussion and Analysis, our quarterly press releases regarding operatingresults and our presentations to investors. These non-GAAP financial measures consist of GAAP financial measuresadjusted to include or exclude certain revenues, costs, expenses and gainsassociated with acquisitions.  Thepurpose of such adjustment is to give an indication of our baseline performancebefore gains, losses or other charges that are considered by management to beoutside of our core operating results. In some instances, we use financial measures that exclude the effects ofthe Oak acquisition to provide a meaningful comparison of results in periodsoccurring before and after that acquisition. Management uses these non-GAAP measures as a basis for planning andforecasting future periods.  Thesenon-GAAP measures may differ materially from the non-GAAP measures used byother companies and should not be regarded as a replacement for correspondingGAAP measures.

 

**Acquisitions**

 

*EmblazeSemiconductor Ltd.*

 

On July 8, 2004, we completedour acquisition of Emblaze Semiconductor Ltd. (“Emblaze”), a wholly-ownedsubsidiary of Emblaze Ltd. for $54.2 million in cash.  The acquisition was accounted for under thepurchase method of accounting.

 

Following the completionof the acquisition, the results of operations of Emblaze have been included inour consolidated financial statements. Accordingly, our results of operations for the three month and ninemonth periods ended September 30, 2004 each include Emblaze’s operationsfrom July 8, 2004, while our results of operations for the three month and ninemonth periods ended September 30, 2003 reflect only Zoran’s historicaloperations.  The historical operations ofEmblaze are not material to the financial position or results of operations ofthe Company.

 

*Oak Technology, Inc.*

 

On August 11, 2003, wecompleted our acquisition of Oak through the merger of Oak with a wholly-ownedsubsidiary of Zoran.  The acquisition wasaccounted for under the purchase method of accounting.

 

Following the completionof the acquisition, the results of operations of Oak have been included in ourconsolidated financial statements. Accordingly, our results of operations for the three month and ninemonth periods ended September 30, 2004 each include Oak’s operations forthe full period, while our results of operations for the three month and ninemonth periods ended September 30, 2003 only reflect Oak’s results of operationsbetween August 12, 2003 and September 30, 2003.

 

Subsequent to theacquisition of Oak Technology, Inc. in 2003, we determined that Zoran hasfour reportable segments: Digital Versatile Disc (DVD), Imaging, Digital Camera(DC) and Digital Television (DTV). Subsequent to the Emblaze acquisition in July 2004, the Digital Cameragroup was combined with the Emblaze Mobile segment and was renamed the Mobilegroup.  Each

 

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segment’sprimary products are based on highly integrated application-specific integratedcircuits, or ASICs, and system-on-a-chip, or SOC, solutions.  The DVD segment and Imaging segment alsolicense certain software and other intellectual property.  The DVD group provides products for use inDVD players and recordable DVD players. The Imaging group provides products used in digital copiers, laser andinkjet printers as well as multifunction peripherals. The Mobile group focuseson solutions for multimedia mobile phone products, digital camera products aswell as CMOS sensors.  The DTV group providesproducts for standard and high definition digital television products includingtelevisions, set top boxes and personal video recorders.

 

**Results ofOperations**

** **

*Revenues*

 

Total revenues were$119.7 million and $304.1 million for the three and nine month periods endedSeptember 30, 2004, compared to $67.4 million and $150.0 million for the sameperiods of 2003, representing increases of 77.6% and 102.8% respectively.  The increase for the quarter was due toincreased sales of $28.9 million, $20.3 million, $1.8 million and $1.3 millionfor the DVD segment, Imaging segment, DTV segment and the Mobile segment,respectively.  The increase in quarterly revenuesfor the DVD segment and DTV segment were due to increased unit shipments,partially offset by a decline in average selling prices for our older DVDproducts.  The increased quarterly revenuesin the Imaging segment were due to increases in software and other revenues of$12.4 million and hardware product revenue of $7.9 million due to increasedunit shipments.  The increase in the Mobilesegment was associated with a $2.7 million increase in software and other revenues,partially offset by lower hardware product revenues of $1.4 million due tolower unit shipments.  The increase inyear-to-date revenues was due to the increased sales of $73.7 million, $60.2million, $16.7 million and $3.5 million for the DVD segment, Imaging segment,DTV segment and the Mobile segment, respectively.  The increase in DVD segment revenues was dueto increased unit shipments. The increases in both the Imaging segment and DTVsegment were due to the inclusion of revenues from the former Oak operationsfor the entire nine months in 2004 as compared to approximately half a quarterfor the comparable period in 2003. The increase in the Mobile segment revenuewas primarily due to an increase in software and other revenues of $2.5million.  Total revenues by segment forthe three months ended September 30, 2004 were 64% DVD, 20% Imaging, 9% Mobileand 7% DTV, compared to 72% DVD, 14% Mobile, 9% DTV and 5% Imaging for the sameperiod in 2003.  Total revenues bysegment for the nine months ended September 30, 2004 were 63% DVD, 21% Imaging,8% DTV and 8% Mobile, compared to 79% DVD, 15% Mobile, 4% DTV and 2% Imagingfor the same period in 2003.  Although weexpect the DVD segment to continue to represent a significant portion of ourrevenues for the quarter ending December 31, 2004 we currently expect revenuesin that segment to decline from the quarter ended September 30, 2004.  This anticipated reduction in DVD revenue isprimarily due to a build-up of inventory in the manufacturing channels whichwill take approximately three to six months for our customers to deplete.

 

Hardware product revenueswere $99.4 million and $257.1 million for the three and nine month periods endedSeptember 30, 2004, compared to $64.7 million and $143.3 million for the sameperiods of 2003, representing increases of 53.8% and 79.5% respectively.  The increase for the quarter was due to a$25.9 million increase in hardware product sales for the DVD segment, a $7.9million increase in hardware product revenue for the Imaging segment and a $2.3million increase in hardware product sales for the DTV segment, partiallyoffset by a $1.4 million decrease in hardware product revenues for the Mobilesegment. The increase in hardware product revenues for the DVD, Imaging and DTVsegments were due to increased unit shipments. Conversely, the reduction in hardwareproduct revenue for the Mobile segment was due to lower unit shipments.  The increase in year-to-date revenue was dueto a $72.0 million increase in hardware product revenues for the DVD segment, a$24.0 million increase in hardware product revenues for the Imaging segment, a $16.8million increase in hardware product revenues for the DTV segment and a $1.0million increase in hardware product revenues for the Mobile segment.  The increase in revenues for the DVD segmentwas due to increased unit shipments. The increases in hardware product revenuesin both the Imaging and DTV segments were due to increased unit shipmentsprimarily based on the inclusion of the former Oak operations for the entirenine months in 2004 as compared to half a quarter for the comparable period in2003.  Hardware product revenues bysegment for the three months ended September 30, 2004, were 73% DVD, 11%Imaging, 8% DTV and 8% Mobile, compared to 73% DVD, 14% Mobile, 9% DTV and 4%Imaging for the same period in 2003. Hardware product revenues by segment forthe nine months ended September 30, 2004, were 72% DVD, 10% Imaging, 9% DTV and9% Mobile, compared to 79% DVD, 15% Mobile, 4% DTV and 2% Imaging for the sameperiod in 2003.

 

Software and otherrevenues were $20.3 million and $47.0 million for the three and nine monthperiods ended September 30, 2004, compared to $2.8 million and $6.7 million forthe same periods of 2003, representing increases of 635% and 599%respectively.  The increase for thequarter was due to a $12.3 million increase in software and other revenues forthe Imaging segment, an increase in software and other revenues in the DVDsegment of $3.1 million, and an increase of $2.6 million in the Mobile segment,partially offset by a reduction of approximately $500,000 in the DTV segment.The increase in revenues for the Imaging segment was primarily due to increasedsoftware royalty revenues.  The revenueincrease in the DVD segment includes $2.8 million in royalties for legacyproduct that had previously not been reported by the licensee which is relatedto a previously discontinued product line.  For the nine months ended September 30, 2004,the increase in revenues was primarily due to an

 

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increaseof the Imaging segment revenues of $36.2 million, an increase in the Mobilesegment revenues of $2.5 million and an increase of $1.6 million in the DVDsegment. The increase in revenues for the Imaging segment was primarily due tothe inclusion of the former Oak operations for the entire nine months in 2004as compared to approximately half a quarter for the comparable period in 2003.

 

*Cost of Hardware Product Revenues*

 

Cost of hardware productrevenues was $66.6 million and $170.7 million for the three and nine monthperiods ended September 30, 2004, compared to $40.4 million and $93.3 millionfor the same periods of 2003.  Theincreased costs were due to increased shipments for both periods. As a percentof hardware product revenues, hardware product costs were 66.9% and 66.4% forthe three and nine month periods ended September 30, 2004, compared to 62.5%and 65.1% for the same periods of 2003. The increase in hardware product costs as a percentage of hardwareproduct revenues for both periods was due to erosion of average selling pricesfor our older DVD products.  Based on expectedproduct mix we currently anticipate that hardware product costs as a percentageof hardware product revenues will diminish for the three months ending December31, 2004 compared to the three months ended September 30 2004.

 

*Research and Development*

 

Research and development(“R&D”) expenses were $21.6 million and $61.4 million for the three andnine month periods ended September 30, 2004, compared to $12.2 million and$22.9 million for the same periods of 2003. The increases were primarily aresult of the inclusion of the former Oak and Emblaze operations as well ascontinued investments in research and development across all of our segments.In addition, in the three and nine month periods ended September 30, 2004, werecorded approximately $500,000 and $860,000, respectively, in grants from theChief Scientist in Israel’s Ministry of Industry and Trade as an offset toR&D expense, compared to $500,000 and $2.5 million, respectively, recordedin the same periods in 2003.  As apercentage of revenues, R&D expense remained flat at 18.1% of revenues forthe three months ended September 30, 2004 compared to the same period of theprior year.  As a percentage of revenues,R&D expenses increased to 20.2% for the nine month period ended September30, 2004, compared to 15.3% for the same period of 2003. We expect R&Dexpenses for the three months ending December 31, 2004 to be relativelyunchanged from the three months ended September 30, 2004.

 

*Selling, General andAdministrative*

 

Selling, general andadministrative (“SG&A”) expenses were $18.8 million and $50.1 million forthe three and nine month periods ended September 30, 2004, compared to $11.3million and $26.0 million for the same periods of 2003.  This increase was primarily a result of theinclusion of the former Oak and Emblaze operations, increased legal feesrelated to our pending patent litigation with Mediatek, Inc., Sarbanes Oxleycompliance costs and continued increases in marketing and field applicationsupport expenses to support planned revenue growth in our Asia Pacific markets. As a percentage of revenues, SG&Aexpenses were 15.7% and 16.5% for the three and nine month periods endedSeptember 30, 2004, compared to 16.8% and 17.4% for the same periods of 2003primarily as a result of increased revenues.

 

*Amortization of Intangible Assets*

 

During the three monthsended September 30, 2004, we incurred charges of $12.3 million related to theamortization of intangible assets compared to $6.5 million for the three monthsended September 30, 2003.  For the ninemonths ended September 30, 2004, we recorded amortization of intangible assetsof $33.0 million compared to $8.4 million during the same period of the prioryear.  The increase for the nine month periodwas due to the addition of approximately $198 million of amortizable intangibleassets acquired in the Oak acquisition during August 2003, and $24.2 million ofamortizable intangible assets acquired in the Emblaze acquisition during July2004.

 

*Amortizationof Deferred Stock Compensation*

 

For the three monthsended September 30, 2004, we recorded charges of $1.8 million related to theamortization of deferred stock compensation compared to $2.4 million during thesame period of the prior year.  For thenine months ended September 30, 2004, these charges were $6.4 million comparedto $2.5 million during the same period of the prior year.  The increase for the nine month period wasdue to the stock options granted in connection with the Oak acquisition duringAugust 2003 resulting in a deferred stock compensation balance of $19.2 millionat the time of acquisition which is being amortized over the remaining vestingperiod.  As of September 30, 2004, theCompany had a remaining deferred stock compensation balance of $6.6 millionwhich will be amortized over the remaining vesting period using the multipleoption approach through the quarter ending September 30, 2007.

 

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*In-ProcessResearch and Development*

 

For the three and ninemonths periods ended September 30, 2003, we recorded $50.1 million ofin-process research and development expense as a result of the Oakacquisition.  There were no such chargesfor the same periods of 2004.

 

*OperatingLoss*

 

The operating losses of$1.4 million and $17.6 million for the three and nine month periods endedSeptember 30, 2004 were driven primarily by charges of $12.3 and $33.0 million,respectively, for the amortization of intangible assets and $1.8 million and$6.4 million, respectively, for the amortization of deferred stockcompensation, each related primarily to the Oak acquisition.  Excluding these charges, our operating incomewould have been $12.8 million, or 10.6% of total revenues, and $21.9 million,or 7.2% of total revenues, for the three and nine months ended September 30,2004.  On a comparable basis, excludingthe amortization of intangible assets of $6.5 million and $8.4 million,deferred stock compensation of $2.4 million and $2.5 million and the in-processresearch and development charge of $50.1 million for the three and nine monthperiods ended September 30, 2003, respectively, we would have recordedoperating income of $3.5 million, or 5.2% of total revenues, and $7.8 millionor 5.2% of total revenues in the respective periods.  These improvements in adjusted operatingincome were primarily due to the net contribution of product segments acquiredin the Oak acquisition. Continued investment in DVD recording technology, HDTVtechnology, multimedia mobile phone technology and advanced sensor technologyadversely affected our profitability.

 

*Interest and Other Income (Loss)*

 

Interest and other incomeor loss was a loss of $265,000 and income of $632,000 for the three and ninemonths ended September 30, 2004, compared to interest and other income of $1.5million and $4.4 million for the same periods of 2003. The decrease wasprimarily due to a decline in interest rates and a decrease in our cashbalances due primarily to the use of cash in the Oak and Emblaze acquisitions.

 

*Provision for Income Taxes*

 

Excluding charges relatedto the amortization of goodwill and other intangibles, our estimated effective incometax rate was 15% for the third quarter of 2004. We have recorded a tax rate commensurate with the jurisdictionaldistribution of profits between the U.S. and Israel and the underlying taxpositions as a result of the approved enterprise status in Israel.

 

At September 30, 2004, wecontinue to carry a full valuation allowance against our net deferred taxassets as management has determined that it is more likely than not that ourdeferred tax assets may not be realized.

 

**Liquidity and Capital Resources**

 

At September 30, 2004, wehad $41.6 million of cash and cash equivalents, $31.8 million of short-terminvestments and $102.7 million of working capital. In addition, we had $71.5 millionof investments in long-term marketable securities which are included in otherassets on our consolidated balance sheet.

 

Net cash provided byoperating activities during the nine months ended September 30, 2004 was $9.3million.  While we recorded a net loss of$20.4 million, this loss included non-cash charges of approximately $47.1million comprised of depreciation of property and equipment of $7.7 million,amortization of intangible asset of $33.0 million and amortization of deferredstock compensation of $6.4 million, resulting in net income adjusted fornon-cash charges of approximately $26.7 million for the nine months ended September30, 2004.  Additional cash from operatingactivities was provided by a $41.9 million increase in accounts payable, offsetby a $44.6 million increase in inventory and $18.5 million increase in accountsreceivable.

 

Cash usedin investing activities was $21.4 million during the nine months ended September30, 2004, reflecting $54.2 million used in the acquisition of Emblaze, net ofcash acquired, and purchases of $7.2 million of property and equipment.  This cash outflow was partially offset by $40.0million in proceeds from the net sales of investments.

 

Cash provided byfinancing activities was $5.7 million during the nine months ended September 30,2004, attributable to the issuance of common stock during the period underemployee benefit plans.

 

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At September 30, 2003, wehad $52.5 million of cash and cash equivalents, $100.5 million of short-terminvestments and $174.5 million of working capital. In addition, we had $33.9million of investments in long-term marketable securities which are included inother investments in our consolidated balance sheet.

 

Our operating activitiesprovided cash of $8.6 million during the nine months ended September 30, 2003,primarily due to our net income of $10.9 million excluding amortizationexpense, deferred stock compensation and in-process research and developmentcharge.  This amount was reduced by the impact associated with an increaseof $28.5 million in accounts receivable, an increase of $1.2 million in prepaidexpenses and other assets, offset by depreciation expense of $3.6 million, anincrease in accounts payable, accrued expenses and other liabilities of $18.4million, an increase in deferred income taxes, deferred revenue and long-termliabilities of $1.1 million and a decrease in inventory of $5.3 million.

 

Cash provided by investing activities was $2.8 million during the nine monthsended September 30, 2003.  This reflects net proceeds of $48.3 millionfrom purchase and sale of investments which was offset by the use of $44.4million in the acquisition of Oak Technology, net of cash acquired, andpurchases of property and equipment of $6.7 million.

 

Cash provided by financing activities was $15.1 million for the ninemonths ended September 30, 2003, reflecting $17.8 million in proceeds from theissuance of common stock offset by installment payments of $2.7 million forcore technology.

 

At September30, 2004, we did not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. Accordingly, we are not exposed to the type of financing,liquidity, market or credit risk that could arise if we had engaged in suchrelationships.

 

We believe that ourcurrent balances of cash, cash equivalents and short-term investments, andanticipated cash flow from operations, will satisfy our anticipated workingcapital and capital expenditure requirements at least through the next 12months. Nonetheless, our future capital requirements may vary materially fromthose now planned and will depend on many factors including, but not limitedto:

 

•                  the levelsat which we maintain inventory and accounts receivable;

 

•                  the marketacceptance of our products;

 

•                  unanticipatedexpenses associated with the recently completed acquisitions of Oak and EmblazeSemiconductor;

 

•                  the levelsof promotion and advertising required to launch our new products or to entermarkets 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;

 

•                  the responseof competitors to our products; and

 

•                  ourrelationships with our suppliers and customers.

 

In addition, we mayrequire an increase in the level of working capital to accommodate plannedgrowth, hiring and infrastructure needs. Additional capital may also berequired for additional acquisitions of businesses, products or technologies.

 

To the extent thatour existing resources and cash generated from operations are insufficient tofund our future activities, we may need to raise additional funds throughpublic or private financings or borrowings. If additional funds are raisedthrough the issuance of debt securities, these securities could have rights,preferences and privileges senior to holders of common stock, and the terms ofthis debt could impose restrictions on our operations. The sale of additionalequity or convertible debt securities could result in additional dilution toour stockholders. We cannot be certain that additional financing will beavailable in amounts or on terms acceptable to us, if at all. If we are unableto obtain this additional financing, we may be required to reduce the scope ofour

 

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plannedproduct development and sales and marketing efforts, which could harm ourbusiness, financial condition and operating results.

 

**FuturePerformance and Risk Factors**

 

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

 

**We aresubject to a number of special risks as a result of our recent acquisitions ofOak Technology, Inc. and Emblaze Semiconductor Ltd.**

 

On August 11, 2003,we completed the acquisition of Oak and on July 8, 2004, we completed theacquisition of Emblaze.  Although we havemade substantial progress with the integration of the Oak and Emblazeoperations, we remain subject to a number of risks and uncertainties, includingthe following:

 

•                  We have faced and continue to face anumber of significant challenges in integrating the technologies, operationsand personnel of Oak and Emblaze with Zoran in a timely and efficient manner,and our failure to do so effectively could have a material adverse effect on ourbusiness and operating results.

 

•                  We may not achieve the strategicobjectives, revenue increases, cost savings and other anticipated potentialbenefits of the two acquisitions, and our failure to achieve these objectivescould have a material adverse effect on our revenues, expenses and operatingresults.

 

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

 

Our historical operatingresults have varied significantly from quarter to quarter due to a number offactors, including:

 

•                  fluctuation in demand for their products;

 

•                  the timing of new product introductions or enhancements byZoran and its competitors;

 

•                  the level of market acceptance of new and enhanced versionsof their products and their customers’ products;

 

•                  the timing or cancellation of large customer orders;

 

•                  the length and variability of the sales cycle for theirproducts;

 

•                  pricingpolicy changes by Zoran and its competitors and suppliers;

 

•                  the cyclical nature of the semiconductor industry;

 

•                  the availability of development funding and the timing ofdevelopment revenue;

 

•                  changes in the mix of products sold;

 

•                  seasonality in demand for their products;

 

•                  increasedcompetition in product lines, and competitive pricing pressures; and

 

•                  the evolving and unpredictable nature of the markets forproducts incorporating Zoran’s integrated circuits and embedded software.

 

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

 

•                  the cost and availability of adequate foundry capacity;

 

•                  fluctuations in manufacturing yields;

 

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•                  changes in or the emergence of new industry standards;

 

•                  failure to anticipate changing customer productrequirements;

 

•                  the loss or gain of important customers;

 

•                  product obsolescence; and

 

•                  the amount of research and development expenses associatedwith new product introductions.

 

The operating results ofthe combined company could also be harmed by:

 

•                  economic conditions generally or in various geographic areaswhere we or our customers do business;

 

•                  terrorism and international conflicts or other crisis, suchas the recent recurrence of Severe Acute Respiratory Syndrome, or SARS;

 

•                  other conditions affecting the timing of customer orders;

 

•                  changes in governmental regulations that could affect ourproducts; or

 

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

 

These factors aredifficult or impossible to forecast. We place orders with independent foundriesseveral months in advance of the scheduled delivery date, often in advance ofreceiving non-cancelable orders from our customers. This limits our ability toreact to fluctuations in demand for their products. If anticipated shipments inany quarter are canceled or do not occur as quickly as expected, or if we failto foresee a technology change that could render a product obsolete, expenseand inventory levels could be disproportionately high. If anticipated licenserevenues in any quarter are canceled or do not occur, gross margins may bereduced. A significant portion of our expenses are relatively fixed, and thetiming of increases in expenses is based in large part on our forecast offuture revenues. As a result, if revenues do not meet our expectations, we maybe unable to quickly adjust expenses to levels appropriate to actual revenues,which could harm our operating results.

 

Product supply and demandfluctuations common to the semiconductor industry are historically characterizedby periods of manufacturing capacity shortages immediately followed by periodsof overcapacity, which are caused by the addition of manufacturing capacity inlarge increments. We cannot predict whether we will achieve timely,cost-effective access to that capacity when needed, or if there will be acapacity shortage again in the future.

 

As a result of thesefactors, our operating results may vary significantly from quarter to quarter.  These fluctuations may be more pronounced inthe future as a result of the challenges we face in integrating the operationsof Oak and Emblaze with Zoran.  Anyshortfall in revenues or net income from levels expected by the investmentcommunity could cause a decline in the trading price of our stock.

 

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

 

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

 

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

 

The semiconductorindustry is subject to cyclical variations in product supply and demand.Downturns in the industry often occur in connection with, or anticipation of,maturing product cycles for both semiconductor companies and their customersand declines in general economic conditions. These downturns have beencharacterized by abrupt fluctuations in product demand, productionover-capacity and accelerated decline of average selling prices. In some cases,these downturns have lasted more than one year. A

 

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downturnin the semiconductor industry could harm our sales and revenues if demanddrops, or our gross margins if average selling prices decline.

 

**Our successfor the foreseeable future will be dependent on growth in demand for integratedcircuits for a limited number of applications.**

 

In recent years, we havederived a substantial majority of our product revenues from the sale ofintegrated circuits for DVD and digital camera applications. We expect thatsales of our products for these applications will continue to account for asignificant portion of our revenues for the foreseeable future. As a result ofOak’s sale of its optical storage business, the future financial performance ofthe former Oak operations will depend on our ability to successfully developand market new products in the digital television, HDTV and digital imagingmarkets. If the markets for these products and applications decline or fail todevelop as expected, or we are not successful in our efforts to market and sellour products to manufacturers who incorporate integrated circuits into theseproducts, our financial results will be harmed.

 

**Ourfinancial performance is highly dependent on the timely and successfulintroduction of new and enhanced products.**

 

Our financial performancedepends in large part on our ability to successfully develop and marketnext-generation and new products in a rapidly changing technologicalenvironment. If we fail to successfully identify new product opportunities andtimely develop and introduce new products that achieve market acceptance, wemay lose our market share and our future revenues and earnings may suffer. Inrecent years, our success has been dependent on our successful development andtimely introduction of integrated circuits for DVD players, DVD recorders anddigital cameras. These markets are characterized by the incorporation of asteadily increasing level of integration and numbers of features on a chip atthe same or lower system cost, enabling original equipment manufacturers, orOEMs, to continually improve the features or reduce the prices of the systemsthey sell. If we are unable to continually develop and introduce integratedcircuits with increasing levels of integration and new features at competitiveprices, our operating results will suffer.

 

In the consumerelectronics market, Oak’s performance has been highly dependent upon thesuccessful development and timely introduction of new products and solutionsfor broadband digital television and HDTV. In the digital office market, Oak’sperformance has been dependant on its ability to successfully develop embeddedimage processing system on a chip, or SOC, solutions for the digital officemarket, in particular, embedded digital color copier technology and imageprocessing chips for a variety of imaging peripherals, including printers andmulti-function peripherals, or MFPs. Among other technological changes,embedded PDF and color capability are rapidly emerging as market requirementsfor printers and other imaging devices. Some of Oak’s competitors have thecapacity to supply these solutions, and some of their solutions have been wellreceived in the marketplace. We face the challenge of continuing Oak’sdevelopment of digital television and HDTV solutions as well as developing newimaging products with the capability to handle greater color and imagecomplexity, including web-based documents, and work with higher-performingdevices in networked environments. If we are unable to meet these challengeswith the development of products that can effectively compete in the OEMsoftware and solutions market, our future operating results could suffer.

 

**We mustkeep pace with rapid technological changes and evolving industry standards toremain competitive.**

 

Our future success willdepend on our ability to anticipate and adapt to changes in technology andindustry standards and our customers’ changing demands. The consumerelectronics market, in particular, is characterized by rapidly changingtechnology, evolving industry standards, frequent new product introductions,short product life cycles and increasing demand for higher levels ofintegration. Our ability to adapt to these changes and to anticipate futurestandards, and the rate of adoption and acceptance of those standards, will bea significant factor in maintaining or improving our competitive position andprospects for growth. If new industry standards emerge, our products or theproducts of our customers could become unmarketable or obsolete, and we couldlose market share or be required to incur substantial unanticipated costs tocomply with these new standards.

 

Our success will alsodepend on the successful development of new markets and the application andacceptance of new technologies and products in those new markets. For example,our success will depend on the ability of our customers to develop new productsand enhance existing products in the recordable DVD player market and productsfor the broadband digital television and HDTV markets and to introduce andpromote those products successfully. These markets may not continue to developto the extent or in the time periods that we currently anticipate due tofactors outside our control, such as delays in implementation of FCC 02-320requiring all new televisions to include a digital receiver. If new markets donot develop as we anticipate, or if our products do not gain widespreadacceptance in these markets, our business, financial condition and results ofoperations could be materially and adversely affected. The emergence of newmarkets 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 this content is notavailable, manufacturers may not be able to sell products incorporating ourproducts, and our sales would suffer.

 

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**We relyon independent foundries and contractors for the manufacture, assembly andtesting of our integrated circuits and other hardware products, and the failureof any of these third parties to deliver products or otherwise perform asrequested could damage our relationships with our customers and harm our salesand financial results.**

 

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

 

Our reliance onindependent foundries involves a number of risks, including:

 

•                  the inability to obtain adequate manufacturing capacity;

 

•                  the unavailability of or interruption in access to certainprocess technologies necessary for manufacture of our products;

 

•                  lack of control over delivery schedules;

 

•                  lack of control over quality assurance;

 

•                  lack of control over manufacturing yields and cost; and

 

•                  potential misappropriation of our intellectual property.

 

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

 

We also rely on a limitednumber of independent contractors for the assembly and testing of our products.Our reliance on independent assembly and testing houses limits our control overdelivery schedules, quality assurance and product cost. Disruptions in theservices provided by our assembly or testing houses or other circumstances thatwould require them to seek alternative sources of assembly or testing couldlead to supply constraints or delays in the delivery of our products. Theseconstraints or delays could damage our relationships with current andprospective customers and harm our financial results.

 

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

 

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

 

•                  option payments or other prepayments to a foundry;

 

•                  nonrefundable deposits with or loans to foundries inexchange for capacity commitments;

 

•                  contracts that commit us to purchase specified quantities ofsilicon wafers over extended periods;

 

•                  issuance of our equity securities to a foundry;

 

•                  investment in a foundry;

 

•                  joint ventures; or

 

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•                  other partnership relationships with foundries.

 

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

 

**If ourindependent foundries do not achieve satisfactory yields, our relationshipswith our customers may be harmed.**

 

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

 

**We facecompetition or potential competition from companies with greater resources thanours, and if we are unable to compete effectively with these companies, ourmarket share may decline and our business could be harmed.**

 

We face intensecompetition in the markets in which we compete. We expect that the level ofcompetition will increase in the future from existing competitors and from othercompanies that may enter our existing or future markets with solutions that maybe less costly or provide higher performance or additional features.

 

Competition in Zoran’score compression technology market has historically been dominated by large companies,such as ST Microelectronics, and companies that develop and use their ownintegrated circuits, such as Sony and Matsushita. As this market continues todevelop, we face competition from other large semiconductor vendors.

 

The DVD market continues toexpand, and additional competitors are expected to enter the market for DVDplayers and software. Some of these potential competitors may develop captiveimplementations for use only with their own PC and consumer electronicsproducts. It is also possible that application software vendors, such asMicrosoft, may attempt to enter the DVD application market in the future. Thisincreased competition may result in price reductions, reduced profit marginsand loss of market share.

 

We face competition fromseveral large semiconductor companies in the broadband digital television andset-top box markets. We expect competition to continue to increase in thesemarkets as industry standards become well known and as other competitors enterthese markets.

 

We also face significantcompetition in the digital office market. The future growth of the digitaloffice market is highly dependent on OEMs continuing to outsource anincreasing portion of their product development work. While the trend towardoutsourcing on the part of our OEM customers in this market has accelerated inrecent years, any reversal of this trend, or a change in the way theyoutsource, could seriously harm our business.

 

Many of our existingcompetitors, as well as OEM customers that are expected to compete with us inthe future, have substantially greater financial, manufacturing, technical,marketing, distribution and other resources, broader product lines and longerstanding relationships with customers than we have. In addition, much of ourfuture success is dependent on the success of our OEM customers. If we or ourOEM customers are unable to compete successfully against current and futurecompetitors, we could experience price reductions, order cancellations andreduced gross margins, any one of which could harm our business.

 

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

 

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

 

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

 

Zoran’s and Oak’s largestcustomers have accounted for a substantial percentage of their revenues. In2003, sales to Fujifilm accounted for approximately 14% of Zoran’s totalrevenues, and Zoran’s four largest customers accounted for approximately 46% ofits total revenues. Similarly, during Oak’s fiscal 2002, Oak’s top 10 customersaccounted for approximately 69% of its total revenues. Sales to these largecustomers have varied significantly from year to year and will continue tofluctuate in the future. These sales also may fluctuate significantly fromquarter to quarter. We may not be able to retain our key customers, or thesecustomers may cancel purchase orders or reschedule or decrease their level ofpurchases from us. Any substantial decrease or delay in sales to one or more ofour key customers could harm our sales and financial results. In addition, anydifficulty in collecting amounts due from one or more key customers could harmour financial results.

 

Fujifilm has been ourlargest customer over the last six years. Fujifilm purchases our productsprimarily as a reseller. Fujifilm acts as the primary reseller in Japan of DVDrelated products developed by us under development contracts with Fujifilm. Wemay sell these products directly in Japan only to specified customers withFujifilm’s consent. Fujifilm provides more sales and marketing support than ourother resellers. Fujifilm has also provided funding to support Zoran’sdevelopment efforts. If our relationship with Fujifilm were terminated, ourbusiness could be harmed.

 

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

 

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

 

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

 

**We arenot protected by long-term contracts with our customers.**

 

We generally do not enterinto long-term purchase contracts with our customers, and we cannot be certainas to future order levels from our customers. Customers generally purchase ourproducts subject to cancelable short-term purchase orders. We cannot predictwhether our current customers will continue to place orders, whether existingorders will be canceled, or whether customers who have ordered products willpay invoices for delivered products. When we do enter into a long-termcontract, the contract is generally terminable at the convenience of thecustomer. In the event of an early termination by one of our major customers,it is unlikely that we will be able to rapidly replace that revenue source,which would harm our financial results.

 

**Regulationof our customers’ products may slow the process of introducing new products andcould impair our ability to compete.**

 

The FederalCommunications Commission, or FCC, has broad jurisdiction over our targetmarkets in the digital television business we acquired from Oak. Variousinternational entities or organizations may also regulate aspects of ourbusiness or the business of our customers. Although our products are notdirectly subject to regulation by any agency, the transmission pipes, as wellas much of the equipment into which our products are incorporated, are subjectto direct government regulation. For example, before they can be sold in theUnited States, advanced televisions and emerging interactive displays must betested and certified by Underwriters Laboratories and meet FCC regulations.Accordingly, the effects of regulation on our customers or the industries inwhich our customers operate may in turn harm our business. FCC regulatorypolicies affecting the ability of cable operators or telephone companies tooffer certain services and other terms on which these companies conduct theirbusiness may impede sales of our products. In addition, our digital televisionbusiness may also be adversely affected by the imposition of tariffs, dutiesand other import restrictions on our suppliers or by the imposition of exportrestrictions on products that we sell internationally. Changes in current lawsor regulations or the imposition of new laws or regulations in the UnitedStates or elsewhere could harm our business. For example, any delays by the FCCin imposing its pending requirement that all new televisions have a digitalreceiver could have an adverse effect on our HDTV business.

 

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**We aredependent upon our international sales and operations; economic, political ormilitary events in a country where we make significant sales or havesignificant operations could interfere with our success or operations there andharm our business.**

 

During 2003, 97% of ourtotal revenues and 89% of Oak’s total revenues were derived from internationalsales. We anticipate that international sales will continue to account for themajority of our total revenues for the foreseeable future. In addition,substantially all of our semiconductor products are manufactured, assembled andtested outside of the United States by independent foundries andsubcontractors.

 

We are subject to therisks inherent in doing business internationally, including:

 

•                  unexpected changes in regulatory requirements;

 

•                  fluctuations in exchange rates;

 

•                  political and economic instability;

 

•                  imposition of tariffs and other barriers and restrictions;

 

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

 

•                  health risks in a particular region.

 

A material amount of ourresearch and development personnel and facilities and a portion of our salesand marketing personnel are located in Israel. Political, economic and militaryconditions in Israel directly affect our operations. Some of our employees inIsrael are obligated to perform up to 39 days of military reserve dutyannually. The absence of these employees for significant periods during thework week may cause us to operate inefficiently during these periods.

 

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

 

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

 

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

 

Our business andoperating results are subject to uncertainties arising out of possibleterrorist attacks on the United States and other regions of the world includinglocations where we maintain operations and by armed conflict in the Middle Eastand related economic instability. Our operations could be harmed due to:

 

•                  disruption in commercial activities associated withheightened security concerns affecting international travel and commerce;

 

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

 

•                  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

 

•                  potential expansion of armed conflict in the Middle Eastwhich could adversely affect our operations in Israel.

 

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

 

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

 

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**Ourability to compete could be jeopardized if we are unable to protect ourintellectual property rights.**

 

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

 

The protection offered bypatents is subject to numerous uncertainties. For example, our competitors maybe able to effectively design around our patents, or the patents may bechallenged, invalidated or circumvented. Those competitors may alsoindependently develop technologies that are substantially equivalent orsuperior to our technology. Moreover, while we hold, or have applied for,patents relating to the design of our products, some of our products are basedin part on standards, for which we do not hold patents or other intellectualproperty rights.

 

Oak has generally limitedaccess to and distribution of the source and object code of its software andother proprietary information. With respect to its page description languagesoftware and drivers for the digital office market and in limited circumstanceswith respect to firmware and platforms for its HDTV products, Oak has grantedlicenses that give its customers access to and restricted use of the sourcecode of Oak’s software. This access increases the likelihood of misappropriationor misuse of our technology.

 

**We areinvolved in several lawsuits.**

 

Zoran and Oak are partiesto various legal proceedings, including a number of patent-related lawsuits,both as plaintiff and defendant. In connection with these lawsuits, managementtime has been, and will continue to be, expended. In addition, both Oak andZoran have incurred, and we expect to continue to incur, substantial legal andother expenses in connection with these pending lawsuits. No provision for anyliability that may result upon adjudication of these lawsuits has been made inour financial statements.

 

**We couldbecome subject to claims and litigation regarding intellectual property rights,which could seriously harm its business and require us to incur significantcosts.**

 

In recent years, therehas been significant litigation in the United States involving patents andother intellectual property rights. In the past, Zoran and Oak have beensubject to claims and litigation regarding alleged infringement of otherparties’ intellectual property rights, and both Oak and Zoran are currentlyparties to a number of patent-related lawsuits, both as plaintiff anddefendant.  We could become subject toadditional 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 or 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 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.

 

Although patent disputesin the semiconductor industry have often been settled through cross-licensingarrangements, we may not be able in any or every instance to settle an allegedpatent infringement claim through a cross-licensing arrangement. We have a morelimited patent portfolio than many of our competitors. If a successful claim ismade against us or any of our customers and a license is not made available tous on commercially reasonable terms or we are required to pay substantialdamages or awards, our business, financial condition and results of operationswould be materially adversely affected.

 

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

 

From time to time, we maybe required to license technology from third parties to develop new products orproduct enhancements. Third party licenses may not be available on commerciallyreasonable terms, if at all. If we are unable to obtain any third-party licenserequired to develop new products and product enhancements, we may have toobtain substitute technology of lower quality or performance standards or atgreater cost, either of which could seriously harm the competitiveness of ourproducts.

 

Certain technology usedin our products is licensed from third parties, and in connection with theselicenses, we are required to fulfill confidentiality obligations and, in somecases, pay royalties. Some of our products require various types of copyprotection software that we must license from third parties. If we are unableto obtain or maintain our right to use the necessary copy protection software,we would be unable to sell and market these products.

 

**The new requirements ofSection 404 of the Sarbanes-Oxley Act will increase our operatingexpenses, and our potential inability to fully comply with the requirements ofSection 404 could adversely affect the market price of our common stock.**

 

Rules adopted by the Securities and ExchangeCommission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002require annual review and evaluation of our internal control systems, andattestation of these systems by our independent auditors.  We are currently undergoing a thorough reviewof our internal control systems and procedures and implementing improvementsthat will be necessary in order for us to comply with the requirements ofSection 404 by the end of our fiscal year ending December 31,2004.  This evaluation process hasrequired us to hire additional personnel and engage outside advisory servicesand will result in additional accounting and legal expenses, all of which willcause our operating expenses to increase. In addition, the evaluation and attestation processes required bySection 404 are new and untested, and we have encountered a number ofproblems and delays in completing the implementation of improvements in ourinternal controls.  As a result, we maybe unable to fully comply with the requirements of Section 404 by theDecember 31, 2004 deadline.  Our acquisition of Oak in August 2003required us to rationalize the internal systems of the two companies andimplement uniform standards, procedures and policies, including a uniformmanagement information system.  Thesetasks have required substantial effort and time to complete, have delayed ourefforts to comply with the requirements of Section 404 and increased the riskof our achieving timely compliance.  Ourinability to complete the implementation of required improvements in ourinternal controls by the December 31, 2004 deadline or to obtain a timelyand favorable attestation by our independent auditors could result in a loss ofinvestor confidence in our financial management and the reliability of ourfinancial statements.

 

**If weare not able to apply our net operating losses against taxable income in futureperiods, our financial results will be harmed.**

 

Our future net income andcash flow will be affected by our ability to apply our net operating losses, orNOLs, against taxable income in future periods. Our NOLs totaled approximately$261 million for federal and $83 million for state tax reportingpurposes as of December 31, 2003. As a result of the change of controlresulting from our initial public offering in 1995, the amount of NOLs that wecan use to reduce future taxable income for federal tax purposes is limited toapproximately $3.0 million per year. The Internal Revenue Code contains anumber of provisions that could limit the use of NOLs against income of thecombined company as a result of the merger or as a result of the combination ofthese transactions. Our utilization of Oak’s NOLs may be further limited due toprior Oak transactions. No opinion or IRS ruling has been sought regarding thepotential application of any of these provisions. Changes in tax laws in theUnited States may further limit our ability to utilize these NOLs. Any furtherlimitation on our ability to utilize these respective NOLs could harm ourfinancial condition.

 

**Anyadditional acquisitions we make could disrupt our business and severely harmour financial condition.**

 

We have made investmentsin, and acquisitions of other complementary companies, products andtechnologies. We have recently completed the acquisitions of Oak and Emblaze,and we may acquire additional businesses, products or technologies in thefuture. In the event of any future acquisitions, we could:

 

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

 

•                  incurdebt;

 

•                  assumeliabilities;

 

•                  incurexpenses related to the future impairment of goodwill and the amortization ofother intangible assets; or

 

•                  incurother large write-offs immediately or in the future.

 

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

 

•                  problems combining the purchased operations, technologies orproducts;

 

•                  unanticipated costs;

 

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

 

•                  adverse effects on existing business relationships with customers;

 

•                  risks associated with entering markets in which we have noor limited prior experience; and

 

•                  potential loss of key employees, particularly those of thepurchased organizations.

 

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

 

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

 

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

 

We develop complex andevolving products. Despite testing by us and our customers, errors may be foundin existing or new products. This could result in, among other things, a delayin recognition or loss of revenues, loss of market share or failure to achievemarket acceptance. These defects may cause us to incur significant warranty,support and repair costs, divert the attention of our engineering personnelfrom our product development efforts and harm our relationships with customers.The occurrence 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 customers or could damage market acceptance ofsuch products. Our customers could also seek damages from us for their losses. Aproduct liability claim brought against us, even if unsuccessful, would likelybe time consuming and costly to defend.

 

**If we donot maintain current development contracts or are unable to enter into newdevelopment contracts, our business could be harmed.**

 

We historically havegenerated a portion of our total revenues from development contracts, primarilywith key customers. These development contracts have provided us with partialfunding for the development of some of our products. Under these contracts, wereceive payments upon reaching certain development milestones. If we fail toachieve the milestones specified in our existing development contracts, if ourexisting contracts are terminated or if we are unable to secure futuredevelopment contracts, our ability to cost-effectively develop new productswould be reduced and our business would be harmed.

 

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

 

We may requiresubstantial additional capital to finance our future growth, secure additionalfoundry capacity and fund our ongoing research and development activitiesbeyond 2004. Our capital requirements will depend on many factors, including:

 

•                  acceptance of and demand for our products;

 

•                  the types of arrangements that we may enter into with ourindependent foundries;

 

•                  the extent to which we invest in new technology and researchand development projects; and

 

•                  any additional acquisitions that we may make.

 

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

 

**If wefail to manage our future growth, if any, our business would be harmed.**

 

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

 

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

 

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

 

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

 

A portion of the cost ofour operations, relating mainly to our personnel and facilities in Israel, isincurred in new Israeli shekels. As a result, we bear the risk that the rate ofinflation in Israel will exceed the rate of devaluation of the new Israelishekel in relation to the United States dollar, which will increase our costsas expressed in United States dollars. To date, we have not engaged in hedgingtransactions. In the future, we may enter into currency hedging transactions todecrease the risk of financial exposure from fluctuations in the exchange rateof the United States dollar against the new Israeli shekel. These measures maynot adequately protect us from the impact of inflation in Israel.

 

**Thegovernment programs in which we participate and tax benefits we receive requireus to meet several conditions and may be terminated or reduced in the future,which would increase our costs.**

 

Historically, we havefinanced a portion of our research and development activities with grants forresearch and development from the Chief Scientist in Israel’s Ministry ofIndustry and Trade. Although we did not receive proceeds from such grants in2001 or 2002, we did earn such proceeds in 2003 and we plan to seek additionalgrants from the Chief Scientist in the future. To be eligible for these grants,our development projects must be approved by the Chief Scientist on acase-by-case basis. If our development projects are not approved by the ChiefScientist, we will not receive grants to fund these projects, which wouldincrease our research and development costs. We also receive tax benefits, inparticular exemptions and reductions as a result of the “Approved Enterprise”status of our existing operations in Israel. To be eligible for these taxbenefits, 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.

 

**Provisionsin our charter documents and Delaware law could prevent or delay a change incontrol of Zoran.**

 

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

 

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•                  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

 

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

 

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

 

The market price of ourcommon stock has fluctuated significantly since our initial public offering in1995. Between January 1, 2003 and September 30, 2004, the closingsale price of our common stock, as reported on The NasdaqNational Market, ranged from a low of $10.85 to a high of $27.28. The marketprice of our common stock is subject to significant fluctuations in the futurein response to a variety of factors, including:

 

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

 

•                  quarterlyvariations in operating results;

 

•                  any announcement that we may be required tomake regarding our inability to fully comply with the requirements of Section404 of the Sarbanes-Oxley Act by the December 31,2004 deadline;

 

•                  changes in analysts’ earningsestimates;

 

•                  announcementsof technological innovations;

 

•                  theintroduction of new products or changes in product pricing policies by Zoran orits competitors;

 

•                  loss of keypersonnel;

 

•                  proprietaryrights or other litigation;

 

•                  generalconditions in the semiconductor industry; and

 

•                  developmentsin the financial markets.

 

In addition, the stockmarket has, from time to time, experienced extreme price and volumefluctuations that have particularly affected the market prices forsemiconductor companies or technology companies generally and which have beenunrelated to the operating performance of the affected companies. Broad marketfluctuations of this type may reduce the future market price of our commonstock.

 

**Item 3.****           Quantitativeand Qualitative Disclosures About Market Risk**

 

We are exposed tofinancial market risks including changes in interest rates and foreign currencyexchange rates.

 

The fair value of ourinvestment portfolio or related income would not be significantly impacted byeither a 10% increase or decrease in interest rates due mainly to theshort-term nature of the major portion of our investment portfolio.

 

A majority of our revenueand capital spending is transacted in U.S. dollars, although a portion of thecost of our operations, relating mainly to our personnel and facilities inIsrael, is incurred in New Israeli Shekels. We have not engaged in hedgingtransactions to reduce our exposure to fluctuations that may arise from changesin foreign exchange rates. Based on our overall currency rate exposure at September30, 2004, a near-term 10% appreciation or depreciation of the New IsraeliShekel would have an immaterial affect on our financial condition.

 

**Item 4.****           Controlsand Procedures**

 

***DisclosureControls and Procedures****.** ***Under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer, we evaluated theeffectiveness of our disclosure controls and procedures, as

 

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suchterm is defined under Rule 13a-15(e) promulgated under the SecuritiesExchange Act of 1934, as amended. Based upon that evaluation, our ChiefExecutive Officer and Chief Financial Officer****concluded that our disclosure controls and procedures were effectiveas of the end of the period covered by this quarterly report.

 

***InternalControls Over Financial Reporting****.*  Therehas been no change in our internal control over financial reporting during thequarter ended September 30, 2004 that has materially affected, or is reasonablylikely to materially affect, our internal control over financial reporting.

 

***Sarbanes-OxleySection 404 Compliance.***  Rules adopted by the Securities and ExchangeCommission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002require annual review and evaluation of our internal control systems, andattestation of these systems by our independent auditor.  We are currently undergoing a thorough reviewof our internal control systems and procedures and implementing improvementsthat will be necessary in order for us to comply with the requirements ofSection 404 by the end of our fiscal year ending December 31,2004.  The evaluation and attestationprocesses required by Section 404 are new and untested, and we haveencountered a number of problems and delays in completing the implementation ofimprovements in our internal controls. As a result, we may be unable to fully comply with the requirements ofSection 404 by the December 31, 2004 deadline.  Our acquisition of Oak in August 2003required us to rationalize the internal systems of the two companies andimplement uniform standards, procedures and policies, including a uniformmanagement information system.  Thesetasks have required substantial effort and time to complete, have delayed ourefforts to comply with the requirements of Section 404 and increased the riskof our achieving timely compliance.

 

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**PART II.****OTHER INFORMATION**

 

**Item 1.****           Legal Proceedings**

 

We and our Oak subsidiaryhave initiated two legal actions against MediaTek, Inc. and customers ofMediaTek alleging that products incorporating certain MediaTek componentsinfringe three patents co-owned by Zoran and Oak relating to optical drivecontroller design and integrated CD/DVD controller design.

 

On March 11, 2004,Zoran and Oak filed a complaint with****theUnited States International Trade Commission (“ITC”) alleging that certainMediaTek DVD player and optical disk controller chips and chipsets, andproducts in which they are used, infringe Zoran’s and Oak’s patents.  In addition to MediaTek, the complaint named10 other proposed defendants that sell products, including DVD players and PCoptical storage devices, that use MediaTek’s chips andchipsets.  The other proposed defendantswere ASUSTek Computer. Inc., Creative Labs, Inc., Creative Technology, Ltd.,Jiangsu Shinco Electronic Group Co., Ltd., LITE-ON Information TechnologyCorporation, Mintek Digital, Shinco International AV Co., Ltd., TEACCorporation, TEAC America, Inc., Terapin Technology Corporation and TerapinTechnology.  The complaint requested thatthe ITC institute an immediate investigation of the accused products and issueexclusion and cease and desist orders prohibiting theimportation into the United States of the infringing MediaTek devices andproducts that contain them.  OnApril 8, 2004, the ITC instituted an investigation based on Zoran’scomplaint.  On April 28, 2004, Zoranand Oak reached a settlement with respondents Creative Technology, Ltd. andCreative Labs, Inc., and these respondents were subsequently dismissed from theinvestigation pursuant to the terms of the settlement agreement.  On July 13, 2004, the ITC granted Zoran’srequest that nine additional proposed defendants be added to theinvestigation.  These companies areArtronix Technology, ASUS Computer International, Audiovox Corporation, EPOScience and Technology, Inc., Initial Technology, Inc., Micro-StarInternational Co., Ltd., MSI Computer Corp., Shinco Digital Technology Ltd. andUltima Electronics Corporation. Discovery is currently underway. The hearing is scheduled to begin on February 7, 2005, and thetarget date for completion of the investigation is September 14,2005.  On October 26, 2004, MediaTekfiled a motion for summary determination seeking an order that two of assertedpatents were invalid.  Zoran has filedits opposition to the motion, and the motion is currently pending.

 

On March 15, 2004,Zoran and Oak filed a complaint against MediaTek and Mintek Digital in theUnited States District Court, Central District of California alleging similarfacts regarding infringement by MediaTek’s chips and chipsets and products inwhich they are used.  The lawsuit seeksboth monetary damages and an injunction to stop the importation and sale ofinfringing products.  Zoran subsequentlyamended the complaint to name ASUSTek Computer, Inc., Jiangsu Shinco ElectronicGroup Co., Ltd., LITE-ON Information Technology Corporation, Mintek Digital,Shinco International AV Co., Ltd., TEAC Corporation, TEAC America, Inc.,Terapin Technology Corporation and Terapin Technology as defendants.  On June 17, 2004, pursuant tostipulation of the parties, the case was transferred to the United StatesDistrict Court, Northern District of California.  On July 2, 2004, Defendants filed aFirst Amended Answer which included counterclaims for declaration ofnoninfringement, declaration of invalidity, declaration of unenforceability,breach of covenant not to sue, breach of covenant of good faith and fairdealing and unfair competition.  OnJuly 22, 2004, Zoran and Oak moved to dismiss certain of defendants’defenses and counterclaims and, on July 30, 2004, MediaTek filed a motionfor summary judgment as to two of the three patents asserted by Zoran and Oakagainst MediaTek.  Following a hearing,the Court took these motions under submission and has not issued a ruling.  On October 15, 2004, MediaTek filed asecond motion for summary judgment seeking summary judgment on alternategrounds as to the same two patents.  Thismotion is nearly identical to the motion filed by MediaTek on October 26,2004 in the ITC.  The hearing on thismotion is scheduled for December 10, 2004. On October 29, 2004, Zoran and Oak voluntarily dismissed two oftheir three claims against defendants without prejudice and refiled those twoclaims as a separate lawsuit against the defendants.  The parties have stipulated, and the Court hasagreed, that the newly filed action will be consolidated for all purposes withthe first filed action, including for purposes of trial and all pre-trialscheduling.  No trial date has yet beenset in these consolidated actions.

 

On July 23, 2004,MediaTek filed a complaint with the ITC alleging that certain Zoran and Oak DVDplayer and optical disk controller chips and chipsets infringe two MediaTekpatents.  The complaint requested thatthe ITC institute an investigation into the accused products and issueexclusion and cease and desist orders prohibitingimportation into the United States of allegedly infringing chips and productsthat contain them.  On August 26,2004, the ITC instituted an investigation. The hearing is scheduled to begin on June 20, 2005 and the targetdate for a completion of the investigation is November 30, 2005.  On September 24, 2004, MediaTek filed amotion to amend the complaint to add one additional patent and to name SunextTechnology Co., Ltd. as a respondent. This motion was granted on October 7, 2004.

 

Also on July 23,2004, MediaTek filed a complaint against Zoran and Oak in the United StatesDistrict Court, District of Delaware alleging infringement of the same twopatents asserted in MediaTek’s ITC complaint and seeking monetary damages andinjunctive relief.  This action wasstayed by order of the court on October 4, 2004.

 

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Based upon ourpreliminary review, we believe we have meritorious defenses to the two MediaTekcomplaints, which we believe were filed in response to the proceedings that wehave been prosecuting against MediaTek and its customers.  We intend to defend the MediaTek actionsvigorously.  However, the litigation is inthe preliminary stage, and we cannot predict its outcome with certainty.  Patent litigation is particularly complex andcan extend for a protracted time, which can substantially increase litigationexpenses.

 

**Item6.**  Exhibits

 
| 31.1 | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a).          |
|------|--------------------------------------------------------------------------------|
| 31.2 | Certification of Chief Financial  Officer pursuant to Rule 13a-14(a).          |
| 32.1 | Certification of Chief  Executive Officer, pursuant to 18 U.S.C. Section 1350. |
| 32.2 | Certification of Chief  Financial Officer, pursuant to 18 U.S.C. Section 1350. |

 

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**SIGNATURES**

 

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

 

 
| ** **             | ** ** | **ZORAN CORPORATION**                         |
|------------------------|------------|-----------------------------------------------|
|                   |       |                                          |
|                   |       |                                          |
| Date: November 9, 2004 |       | /s/ Karl Schneider                            |   |
|                   |       | Karl Schneider                                |
|                   |       | Senior Vice President,  Finance               |
|                   |       | and Chief Financial  Officer                  |
|                   |       | (Principal Financial  and Accounting Officer) |

 

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