**SECURITIES AND EXCHANGE COMMISSION**

**Washington,D.C.  20549**

 

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**FORM 10-Q**

 
| **(Mark One)** |
|----------------|
|           |
| **ý**     |   | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |   |
|           |   | **For the quarterly period ended  September 30, 2002** |
|           |   |   |
| **or**         |
|           |
| **o**          |   | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934** |
|           |   |   |
|           |   | **For the transition period  from                         to                         ** |

 

**CommissionFile Number:  0-27246**

 

**ZORAN CORPORATION**

(Exact name of registrantas specified in its charter)

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

 

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

 

Yes  ý                  No  o

 

The number of outstanding shares of the registrant’s Common Stock,$.001 par value, as of October 31, 2002 was 27,191,727.

 

 

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**ZORAN CORPORATION**

 

**INDEX**

 
| **PART I. FINANCIAL INFORMATION** |
|----------------------------------------|
|                                   |   |
| Item 1.                                | Financial Statements |
|                                   |   |
|                                   | Condensed Consolidated  Balance Sheets  September 30, 2002 and December 31, 2001 |
|                                   |   |
|                                   | Condensed  Consolidated Statements of Operations  Three and Nine Months Ended September 30, 2002 and 2001 |
|                                   |   |
|                                   | Condensed  Consolidated Statements of Cash Flows  Nine Months Ended September 30, 2002 and 2001 |
|                                   |   |
|                                   | Notes  to Condensed Consolidated Financial Statements |
|                                   |   |
| Item  2.                               | Management’s  Discussion and Analysis of Financial Condition and Results of Operations |
|                                   |   |
| Item  3.                               | Quantitative  and Qualitative Disclosures About Market Risk |
|                                   |   |
| Item 4.                                | Controls and  Procedures |
|                                   |   |
| **PART II. OTHER  INFORMATION**   |
|                                   |   |
| Item 6.                                | Exhibits and  Reports on Form 8-K |
|                                   |   |
| SIGNATURES                             |

 

2

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**ZORAN CORPORATION**

**CONDENSED CONSOLIDATED BALANCE SHEETS**

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

**(unaudited)**

 
|                                                                                                                     |   | **September  30,  2002** |    | **December  31,  2001** |   |
|--------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
| ASSETS                                                                                                                   |   |                     |    |                    |   |
| Current assets:                                                                                                          |   |                     |    |                    |   |
| Cash and cash  equivalents                                                                                               |   | $                        | 20,678  |                    | $      | 20,287 |   |
| Short-term investments                                                                                                   |   | 97,855                   |    | 89,818                  |   |
| Accounts  receivable, net                                                                                                |   | 34,449                   |    | 33,367                  |   |
| Inventory                                                                                                                |   | 21,695                   |    | 15,681                  |   |
| Prepaid expenses  and other current assets                                                                               |   | 5,271                    |    | 5,130                   |   |
| Total current  assets                                                                                                    |   | 179,948                  |    | 164,283                 |   |
|                                                                                                                     |   |                     |    |                    |   |
| Property and  equipment, net                                                                                             |   | 6,670                    |    | 7,159                   |   |
| Other  investments                                                                                                       |   | 87,975                   |    | 89,727                  |   |
| Goodwill                                                                                                                 |   | 59,131                   |    | 59,131                  |   |
| Intangible  assets                                                                                                       |   | 4,116                    |    | 11,044                  |   |
|                                                                                                                     |   |                     |    |                    |   |
|                                                                                                                     |   | $                        | 337,840 |                    | $      | 331,344 |   |
|                                                                                                                     |   |                     |    |                    |   |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                               |   |                     |    |                    |   |
| Current  liabilities:                                                                                                    |   |                     |    |                    |   |
| Accounts payable                                                                                                         |   | $                        | 13,040  |                    | $      | 16,705 |   |
| Accrued expenses  and other liabilities                                                                                  |   | 19,620                   |    | 16,801                  |   |
| Total current  liabilities                                                                                               |   | 32,660                   |    | 33,506                  |   |
|                                                                                                                     |   |                     |    |                    |   |
| Stockholders’  equity:                                                                                              |   |                     |    |                    |   |
| Common Stock,  $0.001 par value;  55,000,000 shares authorized; 27,156,498 and 26,702,781 shares issued and  outstanding |   | 27                       |    | 27                      |   |
| Additional  paid-in capital                                                                                              |   | 396,563                  |    | 391,665                 |   |
| Warrants                                                                                                                 |   | —                   |    | 717                     |   |
| Deferred  stock-based compensation                                                                                       |   | (93                      | )       | (375                    | )      |
| Accumulated  other comprehensive loss                                                                                    |   | (2,629                   | )       | (6                      | )      |
| Accumulated  deficit                                                                                                     |   | (88,688                  | )       | (94,190                 | )      |
| Total stockholders’  equity                                                                                         |   | 305,180                  |    | 297,838                 |   |
|                                                                                                                     |   |                     |    |                    |   |
|                                                                                                                     |   | $                        | 337,840 |                    | $      | 331,344 |   |

 

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

 

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**ZORAN CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
|                                                        |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|-------------------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                        |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Revenues:                                                   |   |                                   |   |                                  |   |   |   |   |   |
| Product sales                                               |   | $                                      | 43,814 |                                  | $      | 28,976 |   | $ | 105,118 |   | $ | 66,913 |   |
| Software,  licensing and development                        |   | 243                                    |   | 1,448                                 |   | 4,023 |   | 5,028 |   |
| Total revenues                                              |   | 44,057                                 |   | 30,424                                |   | 109,141 |   | 71,941 |   |
|                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Costs and  expenses:                                        |   |                                   |   |                                  |   |   |   |   |   |
| Cost of product  sales                                      |   | 25,349                                 |   | 18,971                                |   | 64,740 |   | 43,075 |   |
| Research and development                                    |   | 5,880                                  |   | 5,210                                 |   | 16,922 |   | 17,100 |   |
| Selling, general  and administrative                        |   | 6,697                                  |   | 5,416                                 |   | 18,342 |   | 15,819 |   |
| Amortization of  goodwill and other intangibles             |   | 2,319                                  |   | 10,808                                |   | 7,209 |   | 32,425 |   |
| Total costs and  expenses                                   |   | 40,245                                 |   | 40,405                                |   | 107,213 |   | 108,419 |   |
|                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Operating income  (loss)                                    |   | 3,812                                  |   | (9,981                                | )      | 1,928 |   | (36,478 | ) |
|                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Interest and  other income, net                             |   | 1,676                                  |   | 2,412                                 |   | 4,987 |   | 7,763 |   |
|                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Income (loss)  before income taxes                          |   | 5,488                                  |   | (7,569                                | )      | 6,915 |   | (28,715 | ) |
|                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Provision for  income taxes                                 |   | 781                                    |   | 486                                   |   | 1,413 |   | 557 |   |
|                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Net income  (loss)                                          |   | $                                      | 4,707  |                                  | $      | (8,055 | ) | $ | 5,502 |   | $ | (29,272 | ) |
|                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Basic net income  (loss) per share                          |   | $                                      | 0.17   |                                  | $      | (0.31 | ) | $ | 0.20 |   | $ | (1.12 | ) |
|                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Diluted net  income (loss) per share                        |   | $                                      | 0.17   |                                  | $      | (0.31 | ) | $ | 0.19 |   | $ | (1.12 | ) |
|                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Shares used to  compute basic net income (loss) per share   |   | 27,150                                 |   | 26,253                                |   | 27,018 |   | 26,060 |   |
|                                                        |   |                                   |   |                                  |   |   |   |   |   |
| Shares used to  compute diluted net income (loss) per share |   | 28,089                                 |   | 26,253                                |   | 28,687 |   | 26,060 |   |

 

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

 

4

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**ZORAN CORPORATION**

**CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
|                                                                            |   | **Nine  Months Ended  September 30,** |   |
|---------------------------------------------------------------------------------|--------|---------------------------------------|--------|
|                                                                            |   | **2002**                              |   | **2001** |   |
| Cash flows from  operating activities:                                          |   |                                  |   |   |   |
| Net income  (loss)                                                              |   | $                                     | 5,502  |   | $ | (29,272 | ) |
| Adjustments to  reconcile net income (loss) to net cash provided by operations: |   |                                  |   |   |   |
| Depreciation,  amortization and other                                           |   | 1,804                                 |   | 3,022 |   |
| Amortization of  goodwill and other intangibles                                 |   | 7,209                                 |   | 32,017 |   |
| Realized loss on  exchange of marketable securities                             |   | 696                                   |   | — |   |
| Changes in  current assets and liabilities:                                     |   |                                  |   |   |   |
| Accounts  receivable                                                            |   | (970                                  | )      | (3,618 | ) |
| Inventory                                                                       |   | (6,014                                | )      | (1,596 | ) |
| Prepaid expenses  and other current assets                                      |   | (141                                  | )      | 1,309 |   |
| Accounts payable                                                                |   | (3,665                                | )      | 2,631 |   |
| Accrued expenses  and other liabilities                                         |   | 2,998                                 |   | (1,014 | ) |
| Net cash  provided by operating activities                                      |   | 7,419                                 |   | 3,479 |   |
|                                                                            |   |                                  |   |   |   |
| Cash flows from  investing activities:                                          |   |                                  |   |   |   |
| Capital  expenditures for property and equipment                                |   | (1,308                                | )      | (3,120 | ) |
| Purchases of  investments                                                       |   | (129,488                              | )      | (160,558 | ) |
| Sales of  investments                                                           |   | 37,686                                |   | 14,404 |   |
| Maturities of  investments                                                      |   | 81,901                                |   | 143,093 |   |
| Purchases of  long-term equity investments                                      |   | —                                |   | (1,171 | ) |
| Net cash used in  investing activities                                          |   | (11,209                               | )      | (7,352 | ) |
|                                                                            |   |                                  |   |   |   |
| Cash flows from  financing activities:                                          |   |                                  |   |   |   |
| Proceeds from  issuance of Common Stock, net                                    |   | 4,181                                 |   | 4,753 |   |
| Repurchases of  Common Stock                                                    |   | —                                |   | (3,867 | ) |
| Net cash  provided by financing activities                                      |   | 4,181                                 |   | 886 |   |
|                                                                            |   |                                  |   |   |   |
| Net increase  (decrease) in cash and cash equivalents                           |   | 391                                   |   | (2,987 | ) |
|                                                                            |   |                                  |   |   |   |
| Cash and cash  equivalents at beginning of period                               |   | 20,287                                |   | 16,099 |   |
|                                                                            |   |                                  |   |   |   |
| Cash and cash  equivalents at end of period                                     |   | $                                     | 20,678 |   | $ | 13,112 |   |

 

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

 

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**ZORAN CORPORATION**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

**1.             Basis of Presentation**

 

The accompanying unaudited condensed consolidated financial statementscontain all adjustments (consisting only of normal recurring adjustments)which, in the opinion of management, are necessary to present fairly thefinancial information included therein. While the Company believes that the disclosures are adequate to make theinformation not misleading, it is suggested that these financial statements beread in conjunction with the audited consolidated financial statements andaccompanying notes included in the Company’s Annual Report on Form 10-K for theyear ended December 31, 2001.  Resultsfor the interim periods presented are not necessarily indicative of the resultsto be expected for the full year.

 

**2.             Comprehensive Income**

 

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

 

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

 
|                                              |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|---------------------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                                   |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Net income  (loss)                                |   | $                                      | 4,707  |                                  | $      | (8,055 | ) | $ | 5,502 |   | $ | (29,272 | ) |
| Unrealized gain  (loss) on marketable investments |   | (953                                   | )      | 1,170                                 |   | (2,623 | ) | (623 | ) |
| Comprehensive  income (loss)                      |   | $                                      | 3,754  |                                  | $      | (6,885 | ) | $ | 2,879 |   | $ | (29,895 | ) |

 

The components of accumulated other comprehensiveincome (loss) are unrealized gain (loss) on short-term and long-term marketablesecurities.

 

 

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

** **
|            |   | **September  30,  2002** |   | **December  31,  2001** |   |
|-----------------|--------|--------------------------|--------|-------------------------|--------|
| **Inventory:**  |   |                     |   |                    |   |
| Work-in-process |   | $                        | 6,172  |                    | $      | 3,119 |   |
| Finished goods  |   | 15,523                   |   | 12,562                  |   |
|            |   |                     |   |                    |   |
|            |   | $                        | 21,695 |                    | $      | 15,681 |   |

 

 

**4.             Goodwill and Other IntangibleAssets**

 

The Company adopted Financial Accounting Standards Board (“FASB”)Statement No. 142 “Goodwill and Other Intangible Assets” (“SFAS 142”) as ofJanuary 1, 2002. SFAS 142 changed the accounting for goodwill from anamortization method to an impairment only approach. Under SFAS 142, goodwillwill be tested annually and whenever events or circumstances occur indicatingthat goodwill might be impaired. In connection with the adoption of SFAS 142,the Company has performed a transitional goodwill impairment assessment basedon its structure as one reporting unit and determined that no impairmentexisted at January 1, 2002. The Company is in the process of conducting itsannual impairment assessment. The Company does not anticipate that thecompletion of this assessment will have a material impact on its financialposition, results of operations, or cash flows.

 

6

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

 
|                         |   |                             |   | **September  30, 2002**     |   | **December  31, 2001**        |   |
|------------------------------|--------|----------------------------------|--------|-----------------------------|--------|-------------------------------|--------|
|                         |   | **Weighted  Avg.  Life (Years)** |   | **Gross  carrying  Amount** |   | **Accumulated  Amortization** |   | **Gross  carrying  Amount** |   | **Accumulated  Amortization** |   |
| Amortized  intangible assets |   |                             |   |                        |   |                          |   |   |   |   |   |
| Covenant not to  compete     |   | 3                                |   | $                           | 800    |                          | $      | 600 |   | $ | 800 |   | $ | 400 |   |
| Patents                      |   | 3                                |   | 900                         |   | 675                           |   | 900 |   | 450 |   |
| Core technology              |   | 3                                |   | 8,060                       |   | 5,203                         |   | 8,060 |   | 3,187 |   |
| Completed  technology        |   | 2                                |   | 10,760                      |   | 10,479                        |   | 10,760 |   | 6,382 |   |
| Customer base                |   | 3                                |   | 1,560                       |   | 1,007                         |   | 1,560 |   | 617 |   |
|                         |   |                             |   |                        |   |                          |   |   |   |   |   |
| Total                        |   |                             |   | $                           | 22,080 |                          | $      | 17,964 |   | $ | 22,080 |   | $ | 11,036 |   |

 

During the quarter ended September 30, 2002, the Company incurred $2.3million in charges related to the amortization of acquired intangible assetsassociated with the acquisitions of PixelCam Inc. and Nogatech Inc. in June andOctober 2000, respectively. The Company will incur charges of $1.2 million forthe balance of 2002 and $2.9 million for 2003 related to the amortization ofthese acquired intangible assets.

 

**Reconciliationof Net Income (Loss) Excluding Goodwill Amortization**(inthousands except per share data):

 
|                                  |   | **Three  Months Ended  September 30,** |   | **Nine  Months Ended  September 30,** |   |
|---------------------------------------|--------|----------------------------------------|--------|---------------------------------------|--------|
|                                  |   | **2002**                               |   | **2001**                              |   | **2002** |   | **2001** |   |
| Net income (loss):                    |   |                                   |   |                                  |   |   |   |   |   |
| Net income  (loss), as reported       |   | $                                      | 4,707  |                                  | $      | (8,055 | ) | $ | 5,502 |   | $ | (29,272 | ) |
| Add back  goodwill amortization       |   | —                                 |   | 8,383                                 |   | — |   | 25,149 |   |
| Adjusted net  income (loss)           |   | $                                      | 4,707  |                                  | $      | 328 |   | $ | 5,502 |   | $ | (4,123 | ) |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Basic net income  (loss) per share:   |   |                                   |   |                                  |   |   |   |   |   |
| Net income  (loss), as reported       |   | $                                      | 0.17   |                                  | $      | (0.31 | ) | $ | 0.20 |   | $ | (1.12 | ) |
| Add back  goodwill amortization       |   | —                                 |   | 0.32                                  |   | — |   | 0.97 |   |
| Adjusted net  income (loss)           |   | $                                      | 0.17   |                                  | $      | 0.01 |   | $ | 0.20 |   | $ | (0.15 | ) |
|                                  |   |                                   |   |                                  |   |   |   |   |   |
| Diluted net  income (loss) per share: |   |                                   |   |                                  |   |   |   |   |   |
| Net income  (loss), as reported       |   | $                                      | 0.17   |                                  | $      | (0.31 | ) | $ | 0.19 |   | $ | (1.12 | ) |
| Add back  goodwill amortization       |   | —                                 |   | 0.32                                  |   | — |   | 0.97 |   |
| Adjusted net  income (loss)           |   | $                                      | 0.17   |                                  | $      | 0.01 |   | $ | 0.19 |   | $ | (0.15 | ) |

 

**5.             Interest and Other Income, Net**

 

On February 1, 2002, Roxio Inc. (“Roxio”) acquired MGI Software Inc(“MGI”). As of the date of acquisition, the Company held approximately 373,000shares of MGI common stock. Upon consummation of the acquisition, the Company’sMGI common stock was exchanged for 18,843 shares of Roxio common stock. Inconnection with the exchange, the Company recorded a realized loss of $696,000and established a new cost basis of its Roxio common stock. The cost basis forthe Company’s Roxio common stock is the fair value of the stock on the date ofthe exchange.

 

7

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**6.             Income Taxes**

 

The provision for income taxes reflects the estimated annualizedeffective tax rate applied to earnings excluding charges for amortization of goodwilland other intangibles for the interim periods. The effective tax rate differs from the U.S. statutory rate due toutilization of net operating losses, adjustments for the nondeductibleamortization of goodwill and other intangibles and income tax rate differenceson foreign earnings.  The Company hasprovided for tax on income in excess of net operating loss carryforwards forU.S. Federal and State earnings.  TheCompany has also provided for tax on its foreign earnings.

 

**7.             Earnings Per Share**

 

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

 
|                                                |   | **Three Months Ended September 30,** |   |
|-----------------------------------------------------|--------|--------------------------------------|--------|
|                                                |   | **2002**                             |   | **2001** |   |
|                                                |   | **Income  (Numerator)**              |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   | **(Loss)  (Numerator)** |   | **Shares  (Denominator)** |   | **Per Share  Amount** |   |
| Basic and Diluted  EPS:                             |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Net income  (loss) available to common stockholders |   | $                                    | 4,707  |   | 27,150 |   | ­$ | ­0.17 |   | $ | (8,055 | ) | 26,253 |   | $ | (0.31 | ) |
|                                                |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Effects of  Dilutive Securities:                    |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Stock Options                                       |   | —                               |   | 939 |   |   |   | — |   | — |   |   |   |
|                                                |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Diluted EPS:                                        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  available to common stockholders     |   | $                                    | 4,707  |   | 28,089 |   | $ | 0.17 |   | $ | (8,055 | ) | 26,253 |   | $ | (0.31 | ) |

 
|                                                |   | **Nine Months Ended September 30,** | ** ** |
|-----------------------------------------------------|--------|-------------------------------------|------------|
|                                                |   | **2002**                            |       | **2001** | ** ** |
|                                                |   | **Income  (Numerator)**             |       | **Shares  (Denominator)** |   | **Per Share  Amount** |   | **(Loss)  (Numerator)** |   | **Shares  (Denominator)** |   | **Per Share  Amount** | ** ** |
| Basic and  Diluted EPS:                             |   |                                |       |   |   |   |   |   |   |   |   |   |   |
| Net Income  (loss) available to common stockholders |   | $                                   | 5,502      |   | 27,018 |   | $ | 0.20 |   | $ | (29,272 | ) | 26,060 |   | $ | (1.12 | ) |
|                                                |   |                                |       |   |   |   |   |   |   |   |   |   |   |
| Effects of  Dilutive Securities:                    |   |                                |       |   |   |   |   |   |   |   |   |   |   |
| Stock Options                                       |   | —                              |       | 1,646 |   |   |   | — |   | — |   |   |   |
| Warrants                                            |   | —                              |       | 23 |   |   |   | — |   | — |   |   |   |
|                                                |   |                                |       |   |   |   |   |   |   |   |   |   |   |
| Diluted EPS:                                        |   |                                |       |   |   |   |   |   |   |   |   |   |   |
| Income (loss)  available to common stockholders     |   | $                                   | 5,502      |   | 28,687 |   | $ | 0.19 |   | $ | (29,272 | ) | 26,060 |   | $ | (1.12 | ) |

 

**8.             Repurchase of Common Stock**

 

During the nine months ended September 30,2001, the Company repurchased 382,500 shares of its common stock for $3.9million.

 

**9.             Stock Split**

 

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

 

**10.          Recently Issued Accounting Standard**

 

In August 2001, the FASB issued SFAS No. 143 (“SFAS 143”), “Accountingfor Asset Retirement Obligations”. SFAS 143 addresses financial accounting andreporting for obligations associated with the retirement of tangible long-livedassets and the associated asset retirement costs. SFAS 143 applies to allentities. It applies to legal obligations associated with the retirement oflong-lived assets that result from the acquisition, construction, developmentand/or the normal operation of a long-lived asset, except for certainobligations of lessees. SFAS 143 is effective for financial statements issuedfor fiscal years beginning after

 

8

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June 25, 2002. The Company expects that the initial application of SFAS143 will not have a material impact on its financial statements.

 

In April 2002, the FASB issued SFAS No. 145 (“SFAS 145”), “Rescissionof SFAS Nos. 4, 44 and 64, Amendment of SFAS 13, and Technical Corrections.”SFAS 145 rescinds SFAS No. 4, “Reporting Gains and Losses from Extinguishmentof Debt,” and an amendment of that statement, SFAS No. 64, “Extinguishments ofDebt Made to Satisfy Sinking-Fund Requirements,” as well as SFAS No. 44,“Accounting for Intangible Assets of Motor Carriers.” SFAS 145 amends SFAS No.13, “Accounting for Leases,” to eliminate an inconsistency between the requiredaccounting for sale-leaseback transactions and the required accounting forcertain lease modifications that have economic effects that are similar tosale-leaseback transactions. SFAS 145 also amends other existing authoritativepronouncements to make various technical corrections, clarify meanings, ordescribe their applicability under changed conditions. The provisions of SFAS145 will be adopted during fiscal 2003. The Company does not expect that theadoption of SFAS 145 will have a material impact on its financial position,results of operations, or cash flows.

 

In June 2002, the FASB issued SFAS No. 146, (“SFAS 146”), “Accountingfor Exit or Disposal Activities.” SFAS 146 addresses significant issuesregarding the recognition, measurement, and reporting of costs that areassociated with exit and disposal activities, including restructuring activitiesthat are currently accounted for under EITF No. 94-3, “Liability Recognitionfor Certain Employee Termination Benefits and Other Costs to Exit an Activity(Including Certain Costs Incurred in a Restructuring).” The scope of SFAS 146also includes costs related to terminating a contract that is not a capitallease and termination benefits that employees who are involuntarily terminatedreceive under the terms of a one-time benefit arrangement that is not anongoing benefit arrangement or an individual deferred-compensation contract.SFAS 146 will be effective for exit or disposal activities that are initiatedafter December 31, 2002 and early application is encouraged. The Company willadopt SFAS 146 for its fiscal year beginning January 1, 2003 and does notexpect that the adoption will have a material impact on its financial position,results of operations, or cash flows.

 

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**Item2.   Management’s Discussion andAnalysis of Financial Condition and Results of Operations**

 

***The following discussion includesforward-looking statements with respect to the Company’s future financialperformance.  Actual results may differmaterially from those currently anticipated depending upon a variety offactors, including those described below under the sub-heading, “FuturePerformance and Risk Factors” and discussed more fully in the Company’s AnnualReport on Form 10-K for the year ended December 31, 2001.***

 

**Overview**

 

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

 

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

 

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

 

We also derive revenue from licensing our software and otherintellectual property. Licensing revenue includes one-time license fees androyalties based on the number of units distributed by the licensee. Inaddition, we have historically generated a significant percentage of our totalrevenues from development contracts, primarily with key customers, although developmentrevenue has declined 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 and development expenses consist of salaries and relatedcosts of employees engaged in ongoing research, design and developmentactivities and costs of engineering materials and supplies. We are a party toresearch and development agreements with the Chief Scientist in Israel’sMinistry of Industry and Trade and the Israel-United States BinationalIndustrial Research and Development Foundation, which fund up to 50% ofincurred project costs for approved products up to specified contract maximums.These agreements require us to use our best efforts to achieve specifiedresults and require us to pay royalties at rates of 3% to 5% of resultingproduct sales, and up to 30% of resulting license revenues, up to a maximum 

 

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of 100% to 150% of total funding received. Reported research anddevelopment expenses are net of these grants, which fluctuate from period toperiod. We believe that significant investments in research and development arerequired for us to remain competitive and we expect to continue to devotesignificant resources to product development, although such expenses as apercentage of total revenues may fluctuate.

 

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

 

We conduct most of our research and development and certain sales andmarketing and administrative operations in Israel through our wholly-ownedIsraeli subsidiary. As a result, some of our expenses are incurred in NewIsraeli Shekels. To date, substantially all of our product sales and ourdevelopment and licensing revenue have been denominated in U.S. dollars andmost costs of product sales have been incurred in U.S. dollars. We expect thatmost of our sales and costs of sales will continue to be denominated andincurred in U.S. dollars for the foreseeable future. We have not experiencedmaterial losses or gains as a result of currency exchange rate fluctuations andhave not engaged in hedging transactions to reduce our exposure to suchfluctuations. We may in the future elect to take action to reduce our foreign exchangerisk.

 

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

 

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

 

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

 

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

 

**Results of Operations**

 

*Revenues*

 

Total revenues were $44.1 million and $109.1 million for the three andnine month periods ended September 30, 2002, compared to $30.4 million and$71.9 million for the same periods of 2001, representing increases of 44.8% and51.7% for the respective periods.  Forthe three and nine month periods ended September 30, 2002, product revenueswere $43.8 million and $105.1 million, compared to $29.0 million and $66.9million for the same periods in 2001, increases of 51.2% and 57.1%,respectively.  The increase in productsales for the quarter was primarily driven by increased sales in our DVD anddigital camera product lines of $9.4 million and $3.5 million, respectively.The increased sales for both product lines were due to increased unitshipments. DVD products again accounted for the majority of our total productsales, representing 77% of the total for the quarter. We expect DVD sales tocontinue to comprise the majority of our product sales for the balance of 2002.Software, licensing and development revenues were $243,000 and $4.0 million,respectively, for the three and nine month periods ended September 30, 2002,compared to $1.4 million and $5.0 million for the same periods of 2001,representing decreases of 83.2% and 20.0% for the respective periods. We didnot enter into any new licensing or development agreements during the currentquarter. These declines are

 

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not necessarily indicative of a developing trend as revenue fromlicensing and development activities tends to fluctuate significantly fromquarter to quarter.

 

*ProductGross Margin*

 

Product gross margins were 42.1% and 38.4% of product revenues for thethree and nine month periods ended September 30, 2002, compared to 34.5% and35.6% for the same periods of 2001. The increase in product gross margin forthe quarter ended September 30, 2002 was due to margin improvements in our DVDproduct line resulting from a higher percentage of newer, more cost effectiveDVD products that are not required to be sold in combination with DVD CPUcompanion chips which, historically, were sold at low margins. Managementcurrently anticipates that product gross margins for the quarter endingDecember 31, 2002 will remain at levels comparable to those experienced in thequarter ended September 30, 2002.

 

*Researchand Development*

 

Research and development (“R&D”) expenses were $5.9 million and$16.9 million for the three and nine month periods ended September 30, 2002,compared to $5.2 million and $17.1 million for the same periods of 2001.R&D expenses increased quarter-over-quarter as a result of increasedtape-out expenses. As a percentage of revenues, R&D expenses decreased to13.3% and 15.5% for the three and nine month periods ended September 30, 2002,compared to 17.1% and 23.8% for the same periods of 2001 primarily as a resultof increased revenues. Management currently expects that gross R&D expensesfor the quarter ending December 31, 2002 will be relatively unchanged from thequarter ended September 30, 2002.

 

*Selling,General and Administrative*

 

Selling, general and administrative (“SG&A”) expenses were $6.7million and $18.3 million for the three and nine month periods ended September30, 2002, compared to $5.4 million and $15.8 million for the same periods of2001. The increase quarter over quarter was principally due to $768,000 ofincreased marketing and application expenses to support planned revenue growthin our Asia Pacific markets and $243,000 of increased product marketingexpenses related to the development of our digital camera products. As apercentage of revenues, SG&A expenses were 15.2% and 16.8% for the threeand nine month periods ended September 30, 2002, compared to 17.8% and 22.0%for the same periods of 2001. SG&A expenses as a percent of total revenuesdecreased as a result of increased revenues. Management currently anticipatesthat for the quarter ending December 31, 2002, SG&A spending will increasecompared to the quarter ended September 30, 2002 as we continue to build ourpresence in Asia Pacific.

 

*Amortizationof Goodwill and Other Intangibles*

 

Based on the adoption of Financial Accounting Standards Board (FASB)Statements Nos. 141 and 142, “Business Combinations” and “Goodwill and OtherIntangible Assets” (“SFAS 141” and “SFAS 142”), we did not record charges forthe amortization of goodwill during the quarter or nine months ended September30, 2002. For the same periods last year, we recorded charges of $8.4 millionand $25.1 million, respectively, in connection with our acquisitions ofPixelCam Inc. and Nogatech Inc. SFAS 142 changed the accounting for goodwillfrom an amortization method to an impairment-only approach. Under SFAS 142,goodwill will be tested annually and whenever events or circumstances occurindicating that goodwill might be impaired. In connection with the adoption ofSFAS 142, the Company has performed a transitional goodwill impairmentassessment based on its structure as one reporting unit and determined that noimpairment existed at January 1, 2002. We are currently in the process ofconducting our annual impairment assessment and we do not anticipate that thecompletion of this assessment will have a material impact on our financialposition, results of operations, or cash flows.

 

During the three and nine months ended September 30, 2002, we incurredcharges of $2.3 million and $6.9 million, respectively, related to theamortization of other intangible assets, the same as incurred for thecomparable periods last year.

 

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*Interestand Other Income, Net*

 

Net interest and other income for the three and six month periods endedSeptember 30, 2002 was $1.7 million and $5.0 million, respectively, a decreaseof 30.5% and 35.8% compared to the same periods in 2001. The decrease was areflection of the decrease in market interest rates.

 

On February 1, 2002, Roxio Inc. (“Roxio”) acquired MGI Software Inc(“MGI”). As of the date of acquisition, we held approximately 373,000 shares ofMGI common stock. Upon consummation of the acquisition, our MGI common stockwas exchanged for 18,843 shares of Roxio common stock. In connection with theexchange, we recorded a realized loss of $696,000 and established a new costbasis of our Roxio common stock. The cost basis for our Roxio common stock isthe fair value of the stock on the date of the exchange.

 

*Provisionfor Income Taxes*

 

Excluding charges related to the amortization of goodwill and otherintangibles, our estimated effective tax rate was reduced from 15% for thethree and nine months ended September 30, 2001 to 10% for the three and ninemonths ended September 30, 2002. The Company has booked a tax rate commensuratewith the jurisdictional distribution of profits between the U.S. and Israel andthe underlying tax positions as a result of the approved enterprise status inIsrael. We anticipate utilizing the 10% tax rate for the foreseeable future.

 

**Liquidityand Capital Resources**

 

At September 30, 2002, we had $20.7 million of cash and cashequivalents, $97.9 million of short-term investments and $147.3 million ofworking capital. In addition, we had $84.3 million of investments in long-termmarketable securities at September 30, 2002.

 

Our operating activities provided cash of $7.4 million during the ninemonths ended September 30, 2002, primarily due to net income adjusted for thenon-cash impact of depreciation and amortization of $14.5 million, and a $3.0million increase in accrued expenses. Use of cash was associated with a $6.0million increase in inventory and a $3.7 million decrease in accounts payable.The increase in inventory was the result of increased purchases of our DVDchips that incorporate the functionality of our CPU companion chip. Changes toaccrued expenses and accounts payable were due to normal timing differences inour payment patterns.

 

Cash used in investing activities was $11.2 million during the ninemonths ended September 30, 2002, principally reflecting the purchases ofshort-term and long-term marketable investments net of proceeds from sales andmaturities of $9.9 million and capital expenditures for property and equipmentof $1.3 million.

 

Cash provided by financing activities was $4.2 million for the ninemonths ended September 30, 2002, due to the proceeds from the issuance ofcommon stock.

 

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

 

•                  the levels atwhich we maintain inventory and accounts receivable;

 

•                  the marketacceptance of our products;

 

•                  the levels ofpromotion and advertising required to launch our new products or to entermarkets and attain a competitive position in the marketplace;

 

•                  our business,product, capital expenditure and research and development plans and technologyroadmap;

 

•                  volume pricingconcessions;

 

•                  capital improvementsto new and existing facilities;

 

•                  technologicaladvances;

 

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•                  the response ofcompetitors to our products; and

 

•                  ourrelationships with our suppliers and customers.

 

In addition, we may require an increase in the level of working capitalto accommodate planned growth, hiring and infrastructure needs. Additionalcapital may also be required for acquisitions of businesses, products ortechnologies.

 

To the extent that our existing resources and cash generated fromoperations are insufficient to fund our future activities, we may need to raiseadditional funds through public or private financings or borrowings. Ifadditional funds are raised through the issuance of debt securities, thesesecurities could have rights, preferences and privileges senior to holders ofcommon stock, and the terms of this debt could impose restrictions on ouroperations. The sale of additional equity or convertible debt securities couldresult in additional dilution to our stockholders. We cannot be certain thatadditional financing will be available in amounts or on terms acceptable to us,if at all. If we are unable to obtain this additional financing, we may berequired to reduce the scope of our planned product development and sales andmarketing efforts, which could harm our business, financial condition andoperating results.

 

**FuturePerformance and Risk Factors**

 

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

 

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

 

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

 

•                  fluctuation indemand for our products;

 

•                  the timing ofnew product introductions by us and our competitors;

 

•                  the level ofmarket acceptance of new and enhanced versions of our products and ourcustomers’ products;

 

•                  the timing oflarge customer orders;

 

•                  the length andvariability of the sales cycle for our products;

 

•                  the cyclicalnature of the semiconductor industry;

 

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

 

•                  changes in themix of products sold;

 

•                  seasonality indemand for our products;

 

•                  competitivepricing pressures; and

 

•                  the evolving andunpredictable nature of the markets for products incorporating our integratedcircuits and embedded software.

 

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

 

•                   the cost andavailability of adequate foundry capacity;

 

•                  fluctuations inmanufacturing yields;

 

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•                  the emergence ofnew industry standards;

 

•                  productobsolescence; and

 

•                  the amount ofresearch and development expenses associated with new product introductions.

 

Our operating results could also be harmed by:

 

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

 

•                  other conditionsaffecting the timing of customer orders; or

 

•                  a downturn inthe markets for our customers’ products, particularly the consumer electronicsmarket.

 

These factors are difficult or impossible to forecast.We place orders to purchase our products from independent foundries severalmonths in advance of the scheduled delivery date, often in advance of receivingnon-cancelable orders from our customers. If anticipated shipments in anyquarter are canceled or do not occur as quickly as expected, expense andinventory 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.

 

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

 

**Our success for the foreseeablefuture will be dependent on growth in demand for integrated circuits for DVDand filmless digital camera applications and, to a lesser extent, digital audioand video editing applications and our ability to market and sell our productsto manufacturers who incorporate those types of integrated circuits into theirproducts.**

 

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

 

**Our customers experience fluctuatingproduct cycles and seasonality, which causes our sales to fluctuate.**

 

Because the markets our customers serve arecharacterized by numerous new product introductions and rapid productenhancements, our operating results may vary significantly from quarter toquarter. During the final production of a mature product, our customerstypically exhaust their existing inventory of our products. Consequently,orders for our products may decline in those circumstances, even if ourproducts are incorporated into both mature products and replacement products. Adelay in the customer’s transition to commercial production of a replacementproduct would delay our ability to recover the lost sales from thediscontinuation of the related mature product. Our customers also experiencesignificant seasonality in the sales of their consumer products, which affectstheir orders of our products. Typically, the second half of the calendar yearrepresents a disproportionate percentage of sales for our customers due to theholiday period, and therefore a disproportionate percentage of our sales. Weexpect these sales fluctuations to continue for the foreseeable future.

 

**Product supply and demand in thesemiconductor industry is subject to cyclical variations.**

 

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

 

**The development and evolution ofmarkets for our integrated circuits is dependent on factors such as industrystandards, over which we have no control; for example, if manufacturers adoptnew or competing industry standards with which our products are not compatible,our existing products would become less desirable to the manufacturers and oursales would suffer.**

 

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

 

**We rely on independent foundries andcontractors for the manufacture, assembly and testing of our integratedcircuits, and the failure of any of these third parties to deliver products orotherwise perform as requested could damage our relationships with ourcustomers and harm our sales and financial results.**

 

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

 

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

 

•                  the inability toobtain adequate manufacturing capacity;

 

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

 

•                  lack of controlover delivery schedules;

 

•                  lack of controlover quality assurance;

 

•                  lack of controlover manufacturing yields and cost; and

 

•                  potentialmisappropriation of our intellectual property.

 

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

 

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We also rely on independent contractors for theassembly and testing of our products. At present, all of our semiconductorproducts are assembled by one of five independent contractors: ASE, Amkor,ASAT, Kyocera, or Vate. Our semiconductor products are tested by thesecontractors or other independent contractors. Our reliance on independentassembly and testing houses limits our control over delivery schedules, qualityassurance and product cost. Disruptions in the services provided by ourassembly or testing houses or other circumstances that would require us to seekalternative sources of assembly or testing could lead to supply constraints ordelays in the delivery of our products. These constraints or delays coulddamage our relationships with current and prospective customers and harm oursales and financial results.

 

**Because foundry capacity is limitedfrom time to time we may be required to enter into costly long-term supplyarrangements to secure foundry capacity.**

 

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

 

•                  option paymentsor other prepayments to a foundry;

 

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

 

•                  contracts thatcommit us to purchase specified quantities of silicon wafers over extendedperiods;

 

•                  issuance of ourequity securities to a foundry;

 

•                  investment in afoundry;

 

•                  joint ventures;or

 

•                  otherpartnership relationships with foundries.

 

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

 

**If our independent foundries do notachieve satisfactory yields, our relationships with our customers may beharmed.**

 

The fabrication of silicon wafers is a complex process.Minute levels of contaminants in the manufacturing environment, defects inphotomasks used to print circuits on a wafer, difficulties in the fabricationprocess or other factors can cause a substantial portion of the integratedcircuits on a wafer to be non-functional. Many of these problems are difficultto detect at an early stage of the manufacturing process and may be timeconsuming and expensive to correct. As a result, foundries often experienceproblems achieving acceptable yields, which are represented by the number ofgood integrated circuits as a proportion of the number of total integratedcircuits on any particular wafer.  Pooryields from our independent foundries would reduce our ability to deliver ourproducts to customers, harm our relationships with our customers, and harm ourbusiness.

 

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

 

The markets for our products are characterized by:

 

•                  rapidly changingtechnologies;

 

•                  evolvingindustry standards;

 

•                  frequent newproduct introductions; and

 

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•                  short productlife cycles.

 

Over the long run, we expect to increase our productdevelopment expenses, and our future success will depend to a substantialdegree upon our ability to develop and introduce, on a timely andcost-effective basis, new and enhanced products that meet rapidly changingcustomer requirements and industry standards. We may not successfully develop,introduce or manage the transition to new products. Delays in the introductionor shipment of new or enhanced products, lack of market acceptance for suchproducts or problems associated with new product transitions could harm oursales and financial results.

 

**We face competition or potentialcompetition from companies with greater resources than ours, and if we areunable to compete effectively with these companies, our market share maydecline and our business could be harmed.**

 

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

 

•                  ALi Corporation;

 

•                  AtmelCorporation;

 

•                  Cirrus Logic(Crystal Semiconductor);

 

•                  ESS Technology,Inc.;

 

•                  Fujitsu;

 

•                  LSI Logic;

 

•                  MediaTek Inc.

 

•                  Motorola;

 

•                  OmnivisionTechnologies, Inc.;

 

•                  SunplusTechnology; and

 

•                  TexasInstruments.

 

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

 

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

 

•                  finances;

 

•                  manufacturing;

 

•                  technology;

 

•                  research anddevelopment;

 

•                  marketing; and

 

•                  distribution.

 

Many of our competitors have broader product lines andlonger standing relationships with customers than we do. Moreover, ourcompetitors may foresee the course of market developments more accurately thanwe

 

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do and could in the future develop new technologiesthat compete with our products or even render our products obsolete. Inaddition, a number of private companies have announced plans for new productsto address the same digital multimedia problems that our products address. Ifwe are unable to compete successfully against our current and futurecompetitors, we could experience price reductions, order cancellations andreduced gross margins, any one of which could harm our business.

 

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

 

**Our products are characterized byaverage selling prices that decline over relatively short time periods; if weare unable to reduce our costs or introduce new products with higher averageselling prices, our financial results would suffer.**

 

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

 

**We derive most of our revenue fromsales to a small number of large customers, and if we are not able to retainthese customers, or they reschedule, reduce or cancel orders, our revenueswould be reduced and our financial results would suffer.**

 

Our largest customers account for a substantialpercentage of our revenues. In 2001, sales to Fujifilm accounted for 29.2% ofour total revenue. Our four largest customers in 2001 accounted forapproximately 56.3% of our total revenues. During 2000, our four largest customers accounted for approximately45.4% of our revenues with Fujifilm accounting for 25.2%. Sales to these largecustomers have varied significantly from year to year and will continue tofluctuate in the future.  These salesalso may fluctuate significantly from quarter to quarter. We may not be able toretain our key customers or these customers may cancel purchase orders orreschedule or decrease their level of purchases from us. Any substantialdecrease or delay in sales to one or more of our key customers could harm oursales and financial results. In addition, any difficulty in collecting amountsdue from one or more key customers could harm our financial results.

 

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

 

Fujifilm has been our largest customer in four of thelast five years. Fujifilm purchases our products primarily as a distributor.Under our arrangement with Fujifilm, Fujifilm acts as the primary distributorin Japan of products developed by us under development contracts with Fujifilm.Fujifilm also sells some of these products in Japan under its own name. We maysell these products directly in Japan only to specified customers and mustfirst buy the products from Fujifilm. Fujifilm provides more sales and marketingsupport than our other distributors. Fujifilm also has a nonexclusive licenseto distribute most of our products outside of Japan. Fujifilm has providedwafer manufacturing services on a most-favored terms basis to us since 1993 andhas also provided funding to support our development efforts. If ourrelationship with Fujifilm were terminated, our business would be harmed.

 

**Our products generally have longsales cycles and implementation periods, which increases our costs in obtainingorders and reduces the predictability of our earnings.**

 

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

 

Long sales cycles also subject us to other risks,including customers’ budgetary constraints, internal acceptance reviews andcancellations. In addition, orders expected in one quarter could shift toanother because of the timing of customers’ purchase decisions. The timerequired for our customers to incorporate

 

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our products into their own can vary significantlywith the needs of our customers and generally exceeds several months, whichfurther complicates our planning processes and reduces the predictability ofour operating results.

 

**We are not protected by long-termcontracts with our customers.**

 

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

 

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

 

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

 

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

 

•                  unexpectedchanges in regulatory requirements;

 

•                  fluctuations inexchange rates;

 

•                  political andeconomic instability;

 

•                  imposition oftariffs and other barriers and restrictions; and

 

•                  the burdens ofcomplying with a variety of foreign laws.

 

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

 

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

 

**Our business and future operatingresults could be harmed by terrorist activity or armed conflict.**

 

Our business and operatingresults are subject to uncertainties arising out of possible terrorist attackson the United States and other regions of the world including locations wherewe maintain operations and by the potential expansion of armed conflict andpotential instability associated with terrorism. Our operations could be harmeddue to:

 

•                  disruption incommercial activities associated with heightened security concerns affectinginternational travel and commerce;

 

•                  reduced demandfor consumer electronic products due to a potential extension of the globaleconomic slowdown;

 

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

 

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

 

**The prices of our products may becomeless competitive due to foreign exchange fluctuations.**

 

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

 

**Our ability to compete could bejeopardized if we are unable to protect our intellectual property rights fromchallenges by third parties.**

 

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

 

**We could become subject to claims andlitigation regarding intellectual property rights, which could seriously harmour business and require us to incur significant costs.**

 

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

 

•                  stop selling ourproducts that incorporate the challenged intellectual property;

 

•                  obtain from theowner of the infringed intellectual property right a license to sell or use therelevant technology, which license may not be available on reasonable terms orat all;

 

•                  pay damages; or

 

•                  redesign thoseproducts that use such technology.

 

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

 

**If necessary licenses of third-partytechnology are not available to us or are very expensive, our products couldbecome obsolete.**

 

From time to time we may be required to licensetechnology from third parties to develop new products or product enhancements.Third party licenses may not be available to us on commercially reasonableterms, if

 

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at all. If we are unable to obtain any third-partylicense required to develop new products and product enhancements, we may haveto obtain substitute technology of lower quality or performance standards or atgreater cost, either of which could seriously harm the competitiveness of ourproducts.

 

**If we are not able to apply our netoperating losses against taxable income in future periods, our financialresults will be harmed.**

 

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

 

**Any acquisitions or strategicinvestments we make could disrupt our business and severely harm our financialcondition.**

 

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

 

•                  issue stock thatwould dilute our current stockholders’ percentage ownership;

 

•                  incur debt;

 

•                  assumeliabilities;

 

•                  incur expensesrelated to the future impairment of goodwill and the amortization of otherintangible assets; or

 

•                  incur otherlarge write-offs immediately or in the future.

 

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

 

•                  problemscombining the purchased operations, technologies or products;

 

•                  unanticipatedcosts;

 

•                  diversion ofmanagement’s attention from our core business;

 

•                  adverse effectson existing business relationships with customers;

 

•                  risks associatedwith entering markets in which we have no or limited prior experience; and

 

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

 

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

 

In addition, we have made minority equity investmentsin early-stage companies, and we expect to continue to review opportunities tomake additional investments in such companies where we believe such investmentswill provide us with opportunities to gain access to important technologies orotherwise enhance important commercial relationships. We have little or noinfluence over the early-stage companies in which we have made or may makestrategic, minority equity investments. Each of these investments involves ahigh degree of risk. We may not be successful in achieving the technological orcommercial advantage upon which any given investment is premised, and failureby the early-stage company to achieve its own business objectives could resultin a loss of all or part of our invested capital.

 

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

 

We develop complex and evolving products. Despitetesting by us and our customers, errors may be found in existing or newproducts. This could result in, among other things, a delay in recognition orloss of revenues, loss of market share or failure to achieve market acceptance.These defects may cause us to incur significant warranty, support and repaircosts, divert the attention of our engineering personnel from our productdevelopment efforts and harm our relationships with our customers. Theoccurrence of these problems could result in the delay or loss of marketacceptance of our products and would likely harm our business. Defects,integration issues or other performance problems in our products could resultin financial or other damages to our customers or could damage marketacceptance of our products. Our customers could also seek damages from us fortheir losses. A product liability claim brought against us, even ifunsuccessful, would likely be time consuming and costly to defend.

 

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

 

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

 

**We may need additional funds toexecute our business plan, and if we are unable to obtain such funds, we willnot be able to expand our business as planned.**

 

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

 

•                  acceptance ofand demand for our products;

 

•                  the types ofarrangements that we may enter into with our independent foundries; and

 

•                  the extent towhich we invest in new technology and research and development projects.

 

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

 

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

 

We anticipate that our future growth, if any, willrequire us to recruit and hire a substantial number of new engineering, managerial,sales and marketing personnel. Our ability to manage our growth successfullywill also require us to expand and improve our administrative, operational,management and financial systems and controls. Many of our key operations,including the major portion of our research and development operations and asignificant portion of our sales and administrative operations, are located inIsrael. A majority of our sales and marketing and certain of our research anddevelopment and administrative personnel, including our President and ChiefExecutive Officer and other officers, are based in the United States. Thegeographic separation of these operations places additional strain on ourresources and our ability to effectively manage our growth. If we are unable tomanage growth effectively, our business would be harmed.

 

**We rely on the services of ourexecutive officers and other key personnel, whose knowledge of our business andindustry would be extremely difficult to replace.**

 

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

 

**The Israeli rate of inflation maynegatively impact our costs if it exceeds the rate of devaluation of the NewIsraeli Shekel against the U.S. dollar.**

 

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

 

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

 

In 2001, we did not receive proceeds from grants forresearch and development from the Chief Scientist in Israel’s Ministry ofIndustry and Trade. However, we did receive an aggregate of $333,000 in suchgrants during 2000. We plan to seek additional grants from the Chief Scientistin the future. To be eligible for these grants, our development projects mustbe approved by the Chief Scientist on a case-by-case basis.  If our development projects are not approvedby the Chief Scientist, we will not receive grants to fund these projects,which would increase our research and development costs. We also receive taxbenefits, in particular exemptions and reductions as a result of the “ApprovedEnterprise” status of our existing operations in Israel. To be eligible forthese tax benefits, we must maintain our Approved Enterprise status by meetingconditions, including making specified investments in fixed assets located inIsrael and investing additional equity in our Israeli subsidiary. If we fail tomeet these conditions in the future, the tax benefits would be canceled and wecould be required to refund the tax benefits already received. These taxbenefits may not be continued in the future at their current levels or at anylevel. Israeli governmental authorities have indicated that the government mayreduce or eliminate these benefits in the future, which would harm ourbusiness.

 

**We have anti-takeover provisions inour charter documents and there are provisions of Delaware law that couldprevent or delay a change in control of our company.**

 

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

 

•                  prohibiting amerger with a party that has acquired control of 15% or more of our outstandingcommon stock, such as a party that has completed a successful tender offer,until three years after that party acquired control of 15% of our outstandingcommon stock;

 

•                  authorizing theissuance 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.

 

**Our stock price has fluctuated andmay continue to fluctuate widely.**

 

The market price of our common stock has fluctuatedsignificantly since our initial public offering in 1995. Between January 1,2001 and December 31, 2001, the closing sale price of our common stock, asreported

 

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on the Nasdaq National Market, ranged from a low of$8.67 to a high of $27.03.  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;

 

•                  changes inanalysts’ earnings estimates;

 

•                  announcements oftechnological innovations;

 

•                  the introductionof new products or changes in product pricing policies by us or ourcompetitors;

 

•                  proprietaryrights or other litigation;

 

•                  generalconditions in the semiconductor industry; and

 

•                  developments inthe financial markets.

 

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

 

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

 

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

 

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

 

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

 

**Item4.   Controls and Procedures**

 

Under the supervision and with the participation of our management,including our Chief Executive Officer and our Chief Financial Officer, weconducted an evaluation of our disclosure controls and procedures (as definedin Rule 13a-14(c) under the Securities Exchange Act of 1934, as amended) within90 days prior to the filing date of this report. Based on their evaluation, ourChief Executive Officer and Chief Financial Officer concluded that ourdisclosure controls and procedures are effective.

 

There have been no significant changes (including corrective actionswith regard to significant deficiencies or material weaknesses) in our internalcontrols or in other factors that could significantly affect these controlssubsequent to the date of the evaluation referred to above.

 

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**PARTII. OTHER INFORMATION**

 
| **Item 6.  Exhibits and Reports on Form 8-K** |
|----------------------------------------------------|
|                                               |   |   |
| (a)                                                |   | Exhibits: |
|                                               |   |   |
|                                               |   | 99.1      Certification  of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350. |
|                                               |   | 99.2      Certification  of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350. |
|                                               |   |   |
| (b)                                                |   | Reports on Form 8-K: |
|                                               |   |   |
|                                               |   | No reports on Form 8-K were filed during the quarter  ended September 30, 2002. |

 

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

 

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CERTIFICATION OF

CHIEF EXECUTIVE  OFFICER

 

I, Levy Gerzberg, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 
|                            | /s/ Levy Gerzberg       |   |
|---------------------------------|-------------------------|--------|
|                            | Levy Gerzberg           |
|                            | President and           |
|                            | Chief Executive Officer |
| Dated:   November 14, 2002 |                    |

 

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CERTIFICATION OF

CHIEF FINANCIAL OFFICER

 

I, Karl Schneider, certify that:

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 

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

 
|                            | /s/ Karl Schneider          |   |
|---------------------------------|-----------------------------|--------|
|                            | Karl Schneider              |
|                            | Vice President, Finance and |
|                            | Chief Financial Officer     |
|                            |                        |
| Dated:   November 14, 2002 |                        |

 

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