**SECURITIES AND EXCHANGECOMMISSION**

**WASHINGTON,D.C. 20549**

 

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### **FORM 10-Q**

 
| **ý** | ** ** | **QUARTERLY  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF  1934** |
|------------|------------|---------------------------------------------------------------------------------------------------|

 

**For theQuarterly Period Ended June 30, 2005**

 

**OR**

 
| **o** | ** ** | **TRANSITION  REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES AND EXCHANGE ACT OF  1934** |
|-------|------------|----------------------------------------------------------------------------------------------------|

 

**For the transition period from                          to                          **

 

**CommissionFile No. 0-27246**

 

**ZORAN CORPORATION**

(Exact name ofregistrant as specified in its charter)

 
| **Delaware**                       | ** ** | **94-2794449**          |
|------------------------------------|------------|-------------------------|
| (State or other  jurisdiction      |       | (I.R.S. Employer        |
| of incorporation  or organization) |       | Identification  Number) |

 

**1390Kifer Road**

**Sunnyvale,California 94086**

(Address ofprincipal executive offices, including zip code)

 

**(408)523-6500**

(Registrant’stelephone number, including area code)

 

----

 

Indicate by checkmark whether the registrant (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding12 months (or for such shorter period that the registrant was required to filesuch reports) and (2) has been subject to such filing requirements for the past90 days. Yes ý    No o

 

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

Yes ý    No o

 

As of August 5, 2005,there were outstanding 44,862,429 shares of the registrant’s Common Stock, parvalue $0.001 per share.

 

 

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**ZORANCORPORATION AND SUBSIDIARIES**

**FORM 10-Q**

**INDEX**

 

**For theQuarter Ended June 30, 2005**

 
| ** **  | **PART  I. FINANCIAL INFORMATION**                                                                                 | ** ** |
|-------------|--------------------------------------------------------------------------------------------------------------------|------------|
|        |                                                                                                               |       |
| **Item 1.** | Financial Statements  (Unaudited):                                                                                 |       |
|        |                                                                                                               |       |
|        | Condensed Consolidated  Balance Sheets as of June 30, 2005 and December 31, 2004                                   |       |
|        |                                                                                                               |       |
|        | Condensed Consolidated  Statements of Operations for the Three Months and Six Months Ended June 30,  2005 and 2004 |       |
|        |                                                                                                               |       |
|        | Condensed Consolidated  Statements of Cash Flows for the Six Months Ended June 30, 2005 and 2004                   |       |
|        |                                                                                                               |       |
|        | Notes to Condensed  Consolidated Financial Statements                                                              |       |
|        |                                                                                                               |       |
| **Item 2.** | Management’s Discussion and Analysis of  Financial Condition and Results of Operations                        |       |
|        |                                                                                                               |       |
| **Item 3.** | Quantitative and Qualitative  Disclosures About Market Risk                                                        |       |
|        |                                                                                                               |       |
| **Item 4.** | Controls and Procedures                                                                                            |       |
|        |                                                                                                               |       |
|        |                                                                                                               |       |
| ** **  | **PART II. OTHER INFORMATION**                                                                                     | ** ** |
|        |                                                                                                               |       |
| **Item 1.** | Legal Proceedings                                                                                                  |       |
|        |                                                                                                               |       |
| **Item 6.** | Exhibits                                                                                                           |       |
|        |                                                                                                               |       |
| Signatures  |                                                                                                               |
|             |                                                                                                                    |            |  |

 

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**ZORANCORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**

**(unaudited)**

 
| ** **                                                                                                                                                                                                                                   | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------|------------|------------------------|------------|
| ASSETS                                                                                                                                                                                                                                       |       |               |       |                   |       |
| Current assets:                                                                                                                                                                                                                              |       |               |       |                   |       |
| Cash and cash  equivalents                                                                                                                                                                                                                   |       | $                  | 53,425     |                   | $          | 37,435 |   |
| Short-term  investments                                                                                                                                                                                                                      |       | 62,618             |       | 32,978                 |       |
| Accounts  receivable, net                                                                                                                                                                                                                    |       | 68,454             |       | 59,863                 |       |
| Inventories                                                                                                                                                                                                                                  |       | 25,353             |       | 50,033                 |       |
| Prepaid expenses  and other current assets                                                                                                                                                                                                   |       | 14,903             |       | 14,130                 |       |
| Total current  assets                                                                                                                                                                                                                        |       | 224,753            |       | 194,439                |       |
|                                                                                                                                                                                                                                         |       |               |       |                   |       |
| Property and  equipment, net                                                                                                                                                                                                                 |       | 17,233             |       | 17,190                 |       |
| Other assets and  investments                                                                                                                                                                                                                |       | 16,476             |       | 68,619                 |       |
| Goodwill                                                                                                                                                                                                                                     |       | 185,456            |       | 150,151                |       |
| Intangible  assets, net                                                                                                                                                                                                                      |       | 152,683            |       | 168,882                |       |
| Total assets                                                                                                                                                                                                                                 |       | $                  | 596,601    |                   | $          | 599,281 |   |
|                                                                                                                                                                                                                                         |       |               |       |                   |       |
| LIABILITIES AND  STOCKHOLDERS’ EQUITY                                                                                                                                                                                                   |       |               |       |                   |       |
| Current  liabilities:                                                                                                                                                                                                                        |       |               |       |                   |       |
| Accounts payable                                                                                                                                                                                                                             |       | $                  | 38,837     |                   | $          | 34,017 |   |
| Accrued expenses  and other liabilities                                                                                                                                                                                                      |       | 56,330             |       | 51,102                 |       |
| Total current  liabilities                                                                                                                                                                                                                   |       | 95,167             |       | 85,119                 |       |
|                                                                                                                                                                                                                                         |       |               |       |                   |       |
| Other long-term  liabilities                                                                                                                                                                                                                 |       | 12,250             |       | 13,535                 |       |
|                                                                                                                                                                                                                                         |       |               |       |                   |       |
| Stockholders’  equity:                                                                                                                                                                                                                  |       |               |       |                   |       |
| Common stock,  $0.001 par value; 105,000,000 shares authorized at June 30, 2005 and December  31, 2004; 44,759,422 shares issued  and outstanding as of June 30, 2005; and 43,195,432  shares issued and outstanding as of December 31, 2004 |       | 45                 |       | 43                     |       |
| Additional paid-in  capital                                                                                                                                                                                                                  |       | 721,143            |       | 705,661                |       |
| Deferred stock-based  compensation                                                                                                                                                                                                           |       | (1,417             | )          | (2,791                 | )          |
| Accumulated  other comprehensive income                                                                                                                                                                                                      |       | 3,088              |       | 1,538                  |       |
| Accumulated  deficit                                                                                                                                                                                                                         |       | (233,675           | )          | (203,824               | )          |
| Total  stockholders’ equity                                                                                                                                                                                                             |       | 489,184            |       | 500,627                |       |
| Total  liabilities and stockholders’ equity                                                                                                                                                                                             |       | $                  | 596,601    |                   | $          | 599,281 |   |
|                                                                                                                                                                                                                                              |            |                    |            |                        |            |  |  |  |  |

 

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

 

3

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**ZORANCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
| ** **                                         | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                         | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Revenues:                                          |       |                             |       |                           |       |   |   |   |   |
| Hardware product  revenues                         |       | $                                | 80,897     |                           | $          | 89,681 |   | $ | 139,899 |   | $ | 157,710 |   |
| Software and  other revenues                       |       | 14,182                           |       | 14,035                         |       | 29,064 |   | 26,643 |   |
| Total revenues                                     |       | 95,079                           |       | 103,716                        |       | 168,963 |   | 184,353 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Costs and  expenses:                               |       |                             |       |                           |       |   |   |   |   |
| Cost of hardware  product revenues                 |       | 45,236                           |       | 58,838                         |       | 82,200 |   | 104,166 |   |
| Research and  development                          |       | 21,321                           |       | 21,136                         |       | 41,421 |   | 39,782 |   |
| Selling, general and administrative                |       | 24,318                           |       | 16,485                         |       | 47,492 |   | 31,302 |   |
| Amortization of  intangible assets                 |       | 12,431                           |       | 10,343                         |       | 24,761 |   | 20,686 |   |
| Deferred stock  compensation                       |       | 457                              |       | 572                            |       | 974 |   | 2,399 |   |
| In process  research and development               |       | 2,650                            |       | —                         |       | 2,650 |   | — |   |
| Total costs and  expenses                          |       | 106,413                          |       | 107,374                        |       | 199,498 |   | 198,335 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Operating loss                                     |       | (11,334                          | )          | (3,658                         | )          | (30,535 | ) | (13,982 | ) |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Interest income                                    |       | 572                              |       | 383                            |       | 1,107 |   | 783 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Other income  (loss), net                          |       | (293                             | )          | (211                           | )          | (423 | ) | 114 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Loss before  income taxes                          |       | (11,055                          | )          | (3,486                         | )          | (29,851 | ) | (13,085 | ) |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Provision for  income taxes                        |       | —                           |       | 1,114                          |       | — |   | 1,500 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Net loss                                           |       | $                                | (11,055    | )                              | $          | (4,600 | ) | $ | (29,851 | ) | $ | (14,585 | ) |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Basic net loss  per share                          |       | $                                | (0.25      | )                              | $          | (0.11 | ) | $ | (0.69 | ) | $ | (0.34 | ) |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Diluted net loss  per share                        |       | $                                | (0.25      | )                              | $          | (0.11 | ) | $ | (0.69 | ) | $ | (0.34 | ) |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Shares used to  compute basic net loss per share   |       | 43,707                           |       | 42,697                         |       | 43,460 |   | 42,610 |   |
|                                               |       |                             |       |                           |       |   |   |   |   |
| Shares used to  compute diluted net loss per share |       | 43,707                           |       | 42,697                         |       | 43,460 |   | 42,610 |   |
|                                                    |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |

 

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

 

4

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**ZORANCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(inthousands)**

**(unaudited)**

 
| ** **                                                             | ** ** | **Six Months Ended** | ** ** |
|------------------------------------------------------------------------|------------|----------------------|------------|
| ** **                                                             | ** ** | **June 30,**         | ** ** |
| ** **                                                             | ** ** | **2005**             | ** ** | **2004** | ** ** |
| Cash flows from  operating activities:                                 |       |                 |       |   |   |
| Net loss                                                               |       | $                    | (29,851    | ) | $ | (14,585 | ) |
| Adjustments to  reconcile net loss to net cash provided by operations: |       |                 |       |   |   |
| Depreciation,  amortization and other                                  |       | 6,516                |       | 5,159 |   |
| Amortization of  intangible assets                                     |       | 24,761               |       | 20,686 |   |
| Amortization of  deferred stock compensation                           |       | 974                  |       | 2,399 |   |
| In process  research and development                                   |       | 2,650                |       | — |   |
| Changes in  current assets and liabilities:                            |       |                 |       |   |   |
| Accounts  receivable                                                   |       | (8,215               | )          | (6,074 | ) |
| Inventory                                                              |       | 24,893               |       | (19,839 | ) |
| Prepaid expenses  and other current assets and other assets            |       | (1,663               | )          | (3,225 | ) |
| Accounts payable                                                       |       | 4,275                |       | 25,572 |   |
| Accrued expenses  and other liabilities and long-term liabilities      |       | 645                  |       | (1,315 | ) |
| Net cash  provided by operating activities                             |       | 24,985               |       | 8,778 |   |
|                                                                   |       |                 |       |   |   |
| Cash flows from  investing activities:                                 |       |                 |       |   |   |
| Capital  expenditures for property and equipment                       |       | (5,276               | )          | (5,243 | ) |
| Purchases of  investments                                              |       | (4,300               | )          | (146,079 | ) |
| Proceeds from  sales and maturities of investments                     |       | 25,080               |       | 151,928 |   |
| Acquisition of  Oren net of cash acquired, $812                        |       | (27,567              | )          | — |   |
| Net cash  provided by (used in) investing activities                   |       | (12,063              | )          | 606 |   |
|                                                                   |       |                 |       |   |   |
| Cash flows from  financing activities:                                 |       |                 |       |   |   |
| Proceeds from  issuance of common stock                                |       | 3,068                |       | 4,641 |   |
| Net cash  provided by financing activities                             |       | 3,068                |       | 4,641 |   |
|                                                                   |       |                 |       |   |   |
| Net increase in  cash and cash equivalents                             |       | 15,990               |       | 14,025 |   |
|                                                                   |       |                 |       |   |   |
| Cash and cash  equivalents at beginning of period                      |       | 37,435               |       | 47,994 |   |
|                                                                   |       |                 |       |   |   |
| Cash and cash  equivalents at end of period                            |       | $                    | 53,425     |   | $ | 62,019 |   |

 

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

 

5

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**ZORANCORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

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

 

The accompanyingunaudited condensed consolidated financial statements of Zoran Corporation and itssubsidiaries (“Zoran” or the “Company”) have been prepared in conformity withaccounting principles generally accepted in the United States of America.  However, certain information or footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission (the “Commission”).  In the opinion of management, the condensedconsolidated financial statements reflect all adjustments considered necessary,consisting only of normal recurring adjustments, for a fair statement of theconsolidated financial position, operating results and cash flows for theperiods presented.  The results ofoperations for the interim periods presented are not necessarily indicative ofthe results that may be expected for the full fiscal year or in any futureperiod.  This quarterly report on Form10-Q should be read in conjunction with the audited consolidated financialstatements and notes thereto for the year ended December 31, 2004,included in the Zoran Corporation 2004 Annual Report on Form 10-K filedwith the Commission.

 

***Restatement of Financial Results for the Quarters EndedMarch 31, June 30 and September 30, 2004***

 

During the fourth quarterof 2004, in connection with the review and evaluation of the effectiveness ofour internal control over financial reporting undertaken pursuant to Section404 of the Sarbanes-Oxley Act of 2002, management discovered that excess stockcompensation expenses had been recognized during the quarters ended March 31,June 30 and September 30, 2004.  Thecompensation expense was related to options that we had assumed as part of ouracquisition of Oak Technology, Inc. in 2003. Under purchase accounting, part of the cost relating to the acquisitionwas attributed to the assumed options and was to be recognized over time as theoptions continued to vest, based on each option holder’s continued employmentwith Zoran.  If an option holder’semployment terminated before the option was fully vested, vesting would cease,and we would no longer recognize compensation expense related to thatoption.  At the time of the acquisition,a schedule was prepared detailing the terms of each assumed option; however,the names of the option holders were omitted from the schedule for reasons ofconfidentiality.  After the acquisitionwas completed, we did not update our personnel or financial records to includethe omitted information. As a result, the Company improperly recognizeddeferred stock compensation expenses relating to options that had been held byformer Oak employees after the vesting of such options had ceased, and did notreverse stock based compensation expense recognized in excess of amounts thatactually vested.

 

The amounts presented inthis Form 10-Q for the three and six month periods ended June 30, 2004 havebeen restated to correct this error.  For the quarters ended March 31, 2004, June30, 2004 and September 30, 2004, the previously recorded deferred stockcompensation expense was reduced by $704,000, $1,545,000 and $880,000,respectively, as a result of the restatement.

 

The following table showsthe effect of the restatement:

 
| ** **                           | ** ** | **Three Months Ended**                    | ** ** |
|--------------------------------------|------------|-------------------------------------------|------------|
| ** **                           | ** ** | **March 31, 2004**                        | ** ** | **June 30, 2004** | ** ** | **September 30, 2004** | ** ** |
| ** **                           | ** ** | **As reported**                           | ** ** | **As restated** | ** ** | **As reported** | ** ** | **As restated** | ** ** | **As reported** | ** ** | **As restated** | ** ** |
| ** **                           | ** ** | **(In Thousands, Except Per Share Data)** | ** ** |
| ** **                           | ** ** | ** **                                | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** | ** ** |
| Deferred stock  compensation expense |       | $                                         | 2,531      |   | $ | 1,827 |   | $ | 2,117 |   | $ | 572 |   | $ | 1,790 |   | $ | 910 |   |
| Operating loss                       |       | $                                         | (11,028    | ) | $ | (10,324 | ) | $ | (5,203 | ) | $ | (3,658 | ) | $ | (1,381 | ) | $ | (501 | ) |
| Net loss                             |       | $                                         | (10,689    | ) | $ | (9,985 | ) | $ | (6,145 | ) | $ | (4,600 | ) | $ | (3,519 | ) | $ | (2,639 | ) |
| Basic net loss  per share            |       | $                                         | (0.25      | ) | $ | (0.23 | ) | $ | (0.14 | ) | $ | (0.11 | ) | $ | (0.08 | ) | $ | (0.06 | ) |
| Diluted net loss  per share          |       | $                                         | (0.25      | ) | $ | (0.23 | ) | $ | (0.14 | ) | $ | (0.11 | ) | $ | (0.08 | ) | $ | (0.06 | ) |
|                                      |            |                                           |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

6

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| ** **                           | ** ** | **Six Months Ended**                       | ** ** |
|--------------------------------------|------------|--------------------------------------------|------------|
| ** **                           | ** ** | **June 30, 2004**                          | ** ** |
| ** **                           | ** ** | **As reported**                            | ** ** | **As restated** | ** ** |
| ** **                           | ** ** | **(In Thousands, Except Per  Share Data)** | ** ** |
| ** **                           | ** ** | ** **                                 | ** ** | ** ** | ** ** |
| Deferred stock  compensation expense |       | $                                          | 4,648      |   | $ | 2,399 |   |
| Operating loss                       |       | $                                          | (16,231    | ) | $ | (13,982 | ) |
| Net loss                             |       | $                                          | (16,834    | ) | $ | (14,585 | ) |
| Basic net loss  per share            |       | $                                          | (0.40      | ) | $ | (0.34 | ) |
| Diluted net loss  per share          |       | $                                          | (0.40      | ) | $ | (0.34 | ) |
|                                      |            |                                            |            |  |  |  |  |  |  |  |  |

 

***Recent accounting pronouncements***

 

In December 2004, the FinancialAccounting Standards Board (“FASB”), issued FASB Statement No. 123R, “Share-BasedPayment, an Amendment of FASB Statement No. 123” (“FAS No. 123R”).  On April 14, 2005, the U.S. Securitiesand Exchange Commission (the “SEC”), adopted a new rule amending the compliancedates for FAS 123R.  In accordance withthe new rule, the accounting provisions of FAS 123R will be effective for theCompany in 2006.  FAS No. 123R requirescompanies to recognize in the statement of operations the grant-date fair valueof stock options and other equity-based compensation issued to employees.  SFAS No. 123R requires the use ofan option pricing model for estimating fair value, which is amortized toexpense over the service periods.  SFAS No. 123Rallows for either prospective recognition of compensation expense or retrospectiverecognition, which may be back to the original issuance ofSFAS No. 123, or only to interim periods in the year ofadoption.  Management is currentlyevaluating the impact of adopting SFAS 123R; however, it believes the adoptionof SFAS No. 123R will have a significant impact on net income (loss)and net income (loss) per share.  Theimpact on our financial statements will be dependent on the transition method,the option-pricing model used to compute fair value and the inputs to thatmodel such as volatility and expected life. The pro-forma disclosures of the impact of SFAS 123 provided in Note 2to the Consolidated Financial Statements may not be representative of theimpact of adopting SFAS 123R.

 

OnMarch 29, 2005, the SEC issued Staff Accounting Bulletin No. 107(“SAB 107”).  This staff accounting bulletin expresses views of the staff regardingthe interaction between Statement of Financial Accounting Standards StatementNo. 123 (revised 2004), Share-Based Payment (“Statement 123R” or the “Statement”)and certain SEC rules and regulations and provides the staff’s views regardingthe valuation of share-based payment arrangements for public companies.   The Company does not expect the adoption ofSAB 107 to have a material impact on its consolidated financial position,results of operations or cash flows.

 

In May 2005, the FASBissued SFAS No. 154, “Accounting Changes and Error Corrections”.  SFAS No. 154 replaces APB Opinion No. 20, “AccountingChanges”, and SFAS No. 3, “Reporting Accounting Changes in Interim FinancialStatements”. SFAS No. 154 requires retrospective application to prior periods’financial statements of changes in accounting principles, unless it isimpracticable to determine either the period-specific effects or the cumulativeeffect of the change. SFAS 154 will be effective for all periods beginningafter December 15, 2005. The impact of adopting SFAS 154 will depend on thenature and amount of any future accounting change or error, if any.

 

**2.****                   ****Stock Based Compensation**

 

Zoran applies AccountingPrinciples Board Opinion No. 25, “Accounting for Stock Issued to Employees,”and related interpretations in accounting for its stock plans.  Stock options are generally granted withexercise prices equivalent to fair market value of the underlying common stockon the date of grant, and no compensation cost is recognized.  As a result of stock options granted inconnection with the acquisition of Nogatech, Inc. during 2000 and OakTechnology, Inc. during 2003, the Company recorded deferred stock-basedcompensation which is being amortized over the vesting period of theoptions.  Amortization of deferred stockcompensation expense recognized as a result of the amortization of theseoptions was $457,000 and $572,000 during the three and six month periods endedJune 30, 2005, respectively, and $974,000 (as restated) and $2,399,000 (asrestated) during the three and six month periods ended June 30, 2004,respectively.

 

Had compensation cost forthe Company’s option and stock purchase plans been determined based on the fairvalue of the options at the grant date, as prescribed in Statement of FinancialAccounting Standards No. 123 “Accounting for Stock Based Compensation” (“SFAS123”), the Company’s net loss and net loss per share for the three month andsix month periods ended June 30, 2005 and 2004 would have been asfollows (in thousands, except per share data):

 

7

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| ** **                                                                              | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------------------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                                              | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Net loss  attributable to common stockholders, as reported                              |       | $                                | (11,055    | )                              | $          | (4,600 | ) | $ | (29,851 | ) | $ | (14,585 | ) |
|                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Add:                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Employee  stock-based compensation expense included in loss                             |       | 457                              |       | 572                            |       | 974 |   | 2,399 |   |
|                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Total employee  stock-based compensation expense determined under the fair value method |       | (7,436                           | )          | (9,932                         | )          | (14,240 | ) | (21,072 | ) |
|                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Pro forma net  loss attributable to common stockholders                                 |       | $                                | (18,034    | )                              | $          | (13,960 | ) | $ | (43,117 | ) | $ | (33,258 | ) |
|                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Pro forma net  loss per share attributable to common stockholders:                      |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                   |       | $                                | (0.41      | )                              | $          | (0.33 | ) | $ | (0.99 | ) | $ | (0.78 | ) |
| Diluted                                                                                 |       | $                                | (0.41      | )                              | $          | (0.33 | ) | $ | (0.99 | ) | $ | (0.78 | ) |
|                                                                                    |       |                             |       |                           |       |   |   |   |   |
| Net loss per  share as reported attributable to common stockholders:                    |       |                             |       |                           |       |   |   |   |   |
| Basic                                                                                   |       | $                                | (0.25      | )                              | $          | (0.11 | ) | $ | (0.69 | ) | $ | (0.34 | ) |
| Diluted                                                                                 |       | $                                | (0.25      | )                              | $          | (0.11 | ) | $ | (0.69 | ) | $ | (0.34 | ) |
|                                                                                         |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |

 

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

 
| ** **              | ** ** | **Stock Option Plans**                 | ** ** |
|-------------------------|------------|----------------------------------------|------------|
| ** **              | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Three Months  Ended  June 30, 2004** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2004** | ** ** |
|                    |       |                                   |       |   |   |   |   |   |   |
| Expected life (years)   |       | 3.9                                    |       | 5.2 |   | 4.0 |   | 5.2 |   |
| Expected volatility     |       | 70                                     | %          | 82 | % | 71 | % | 84 | % |
| Risk-free interest rate |       | 3.8                                    | %          | 3.7 | % | 3.8 | % | 3.4 | % |

 
| ** **              | ** ** | **Employee Stock Purchase Plans**      | ** ** |
|-------------------------|------------|----------------------------------------|------------|
| ** **              | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Three Months  Ended  June 30, 2004** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2004** | ** ** |
|                    |       |                                   |       |   |   |   |   |   |   |
| Expected life (years)   |       | 0.5                                    |       | 0.5 |   | 0.5 |   | 0.5 |   |
| Expected volatility     |       | 41                                     | %          | 70 | % | 48 | % | 78 | % |
| Risk-free interest rate |       | 3.2                                    | %          | 1.4 | % | 3.1 | % | 1.2 | % |

 

TheBlack-Scholes option pricing model was developed for use in estimating thevalue of traded options that have no vesting restrictions and are fullytransferable. In addition, option pricing models require the input of highlysubjective assumptions including the expected stock price volatility. TheCompany uses projected data for expected volatility and expected life of itsstock options based upon historical and other economic data trended into futureyears. Because the Company’s employee stock options have characteristics

 

8

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significantlydifferent from those of traded options, and because changes in the subjectiveinput assumptions can materially affect the estimate, in management’s opinion,existing valuation models, including the Black-Scholes model, do notnecessarily provide a reliable measure of the fair value of the Company’s stockoptions.

 

**3.****              ComprehensiveLoss**

 

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

 
| ** **                                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                   | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                                         |       |                             |       |                           |       |   |   |   |   |
| Net loss                                                     |       | $                                | (11,055    | )                              | $          | (4,600 | ) | $ | (29,851 | ) | $ | (14,585 | ) |
| Change in  unrealized gain (loss) on investments, net of tax |       | 583                              |       | (1,679                         | )          | 1,550 |   | 785 |   |
| Total  comprehensive loss                                    |       | $                                | (10,472    | )                              | $          | (6,279 | ) | $ | (28,301 | ) | $ | (13,800 | ) |
|                                                              |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |

 

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

 

**4.****Inventories**

 

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

 
| ** **                           | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|--------------------------------------|------------|--------------|------------|------------------|------------|
| ** **                           | ** ** | **2005**     | ** ** | **2004**         | ** ** |
|                                 |       |         |       |             |       |
| Purchased parts  and work in process |       | $            | 9,745      |             | $          | 23,959 |   |
| Finished goods                       |       | 15,608       |       | 26,074           |       |
|                                 |       | $            | 25,353     |             | $          | 50,033 |   |

 

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

 

Inaccordance with SFAS 142, goodwill is not amortized.  The Company monitors the recoverability ofgoodwill recorded in connection with acquisitions, by reporting unit, annually,or sooner if events or changes in circumstances indicate that the carryingamount may not be recoverable.  For theyear ended December 31, 2004, the Company performed the annual analysis as ofSeptember 30, 2004 and concluded that goodwill was not impaired, asthe fair value of each reporting unit exceeded its carrying value, includinggoodwill.

 

9

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***Components of Acquired IntangibleAssets****(in thousands):*

 
| ** **                    | ** ** | ** **        | ** ** | **June 30, 2005**           | ** ** | **December 31, 2004**         | ** ** |
|-------------------------------|------------|-------------------|------------|-----------------------------|------------|-------------------------------|------------|
| ** **                    | ** ** | **Life  (Years)** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Balance** | ** ** | **Gross  Carrying  Amount** | ** ** | **Accumulated  Amortization** | ** ** | **Net  Balance** | ** ** |
| Amortized  intangible assets: |       |              |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Purchased  technology         |       | 2-3               |       | $                           | 195,505    |                          | $          | (85,841 | ) | $ | 109,664 |   | $ | 188,505 |   | $ | (67,139 | ) | $ | 121,366 |   |
| Patents                       |       | 3-5               |       | 40,265                      |       | (15,217                       | )          | 25,048 |   | 40,265 |   | (10,457 | ) | 29,808 |   |
| Customer base                 |       | 3-5               |       | 13,860                      |       | (5,893                        | )          | 7,967 |   | 13,010 |   | (4,739 | ) | 8,271 |   |
| Tradename and  others         |       | 3-5               |       | 3,350                       |       | (1,305                        | )          | 2,045 |   | 2,100 |   | (1,161 | ) | 939 |   |
| Purchased core  technology *  |       | 4-5               |       | 13,600                      |       | (5,641                        | )          | 7,959 |   | 12,679 |   | (4,181 | ) | 8,498 |   |
| Total                         |       |              |       | $                           | 266,580    |                          | $          | (113,897 | ) | $ | 152,683 |   | $ | 256,559 |   | $ | (87,677 | ) | $ | 168,882 |   |
|                               |            |                   |            |                             |            |                               |            |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

----

(*) The Company records theamortization of purchased core technology as cost of product sales.

 

Estimatedfuture intangible amortization expense, based on current balances, as of June30, 2005 was as follows (in thousands):

 
| Remaining six months  of 2005  |   | $      | 27,035  |   |
|--------------------------------|--------|--------|---------|--------|
| Year ending  December 31, 2006 |   | 52,810 |    |
| Year ending  December 31, 2007 |   | 45,636 |    |
| Year ending  December 31, 2008 |   | 24,400 |    |
| Year ending  December 31, 2009 |   | 1,992  |    |
| Year ending  December 31, 2010 |   | 810    |    |
|                           |   | $      | 152,683 |   |
|                                |        |        |         |        |  |

 

Goodwillby reporting units was as follows (in thousands):

 
| ** ** | ** ** | **June 30,** | ** ** | **December 31,** | ** ** |
|------------|------------|--------------|------------|------------------|------------|
| ** ** | ** ** | **2005**     | ** ** | **2004**         | ** ** |
| ** ** | ** ** | ** **   | ** ** | ** **       | ** ** |
| DVD        |       | $            | 63,855     |             | $          | 63,855 |   |
| Imaging    |       | 6,177        |       | 6,177            |       |
| Mobile     |       | 62,131       |       | 62,131           |       |
| DTV        |       | 53,293       |       | 17,988           |       |
|       |       | $            | 185,456    |             | $          | 150,151 |   |
|            |            |              |            |                  |            |  |  |  |  |

 

**6.****                    IncomeTaxes**

 

The provision for incometaxes reflects the estimated annualized effective tax rate and consideration ofthe need for a valuation allowance.  The effective tax rate differs fromthe U.S. statutory rate due to adjustments for the nondeductible amortizationof goodwill and other intangibles, changes in valuation allowance and incometax rate differences on foreign earnings.  The Company believes thatreasonable uncertainty exists regarding future results such that no benefit hasbeen recorded for the losses during the three and six months ended June 30,2005.  Accordingly, the Company hasrecorded a valuation allowance for non-benefited tax losses.

 

**7.****                    SegmentReporting**

 

SFAS No. 131 establishesstandards for the reporting by public business enterprises of information aboutoperating segments, products and services, geographic areas, and majorcustomers.  The method for determiningwhat information to report is based on the way that management organizes theoperating segments within the Company for making operational decisions andassessments of financial performance. The Company’s chief operating decision-maker is considered to be theChief Executive Officer.

 

10

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Subsequent to theacquisition of Oak Technology, Inc. in 2003, the Company determined it hadfour reportable segments: Digital Versatile Disc (DVD), Imaging, Digital Camera(DC) and Digital Television (DTV). Subsequent to the acquisition of Emblaze Semiconductor, Ltd. in July2004, the Digital Camera segment was combined with the Emblaze Mobile businessunit and renamed the Mobile segment. Each segment’s primary products are based on highly integratedapplication-specific integrated circuits, or ASICs, and system-on-a-chip, orSOC, solutions.  The DVD, Imaging and DTVsegments also license certain software and other intellectual property.  The DVD group provides products for use inDVD players and recordable DVD players. The Imaging group provides products used in digital copiers, laser andinkjet printers as well as multifunction peripherals.  The Mobile group focuses on solutions formultimedia mobile phone products and digital camera products.  The DTV group provides products for standardand high definition digital television products including televisions, set topboxes and personal video recorders.

 

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

 

Informationabout reported segment income or loss is as follows for the three and sixmonths ended June 30, 2005 and 2004 (in thousands):

 
| ** **            | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|-----------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **            | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Total revenues:       |       |                             |       |                           |       |   |   |   |   |
| DVD                   |       | $                                | 36,950     |                           | $          | 67,154 |   | $ | 69,132 |   | $ | 114,376 |   |
| Imaging               |       | 22,969                           |       | 21,694                         |       | 43,877 |   | 39,882 |   |
| Mobile                |       | 23,624                           |       | 7,284                          |       | 36,626 |   | 15,139 |   |
| DTV                   |       | 11,536                           |       | 7,584                          |       | 19,328 |   | 14,956 |   |
|                  |       | $                                | 95,079     |                           | $          | 103,716 |   | $ | 168,963 |   | $ | 184,353 |   |
|                  |       |                             |       |                           |       |   |   |   |   |
| Operating  expenses:  |       |                             |       |                           |       |   |   |   |   |
| DVD                   |       | $                                | 39,491     |                           | $          | 61,211 |   | $ | 78,187 |   | $ | 109,272 |   |
| Imaging               |       | 15,793                           |       | 13,333                         |       | 30,709 |   | 23,841 |   |
| Mobile                |       | 18,641                           |       | 8,016                          |       | 32,911 |   | 15,917 |   |
| DTV                   |       | 16,950                           |       | 13,899                         |       | 29,306 |   | 26,220 |   |
|                  |       | $                                | 90,875     |                           | $          | 96,459 |   | $ | 171,113 |   | $ | 175,250 |   |
|                  |       |                             |       |                           |       |   |   |   |   |
| Contribution  margin: |       |                             |       |                           |       |   |   |   |   |
| DVD                   |       | $                                | (2,541     | )                              | $          | 5,943 |   | $ | (9,055 | ) | $ | 5,104 |   |
| Imaging               |       | 7,176                            |       | 8,361                          |       | 13,168 |   | 16,041 |   |
| Mobile                |       | 4,983                            |       | (732                           | )          | 3,715 |   | (778 | ) |
| DTV                   |       | (5,414                           | )          | (6,315                         | )          | (9,978 | ) | (11,264 | ) |
|                  |       | $                                | 4,204      |                           | $          | 7,257 |   | $ | (2,150 | ) | $ | 9,103 |   |
|                       |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |  |

 

Areconciliation of the totals reported for the operating segments to theapplicable line items in the consolidated financial statements for the threemonths ended June 30, 2005 and 2004 is as follows (in thousands):

 
| ** **                                   | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|----------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                   | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| Contribution  margin from operating segments |       | $                                | 4,204      |                           | $          | 7,257 |   | $ | (2,150 | ) | $ | 9,103 |   |
| Amortization of  intangibles                 |       | 12,431                           |       | 10,343                         |       | 24,761 |   | 20,686 |   |
| Amortization of  deferred stock compensation |       | 457                              |       | 572                            |       | 974 |   | 2,399 |   |
| In process  research and development         |       | 2,650                            |       | —                         |       | 2,650 |   | — |   |
| Total operating  loss                        |       | $                                | (11,334    | )                              | $          | (3,658 | ) | $ | (30,535 | ) | $ | (13,982 | ) |
|                                              |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |

 

11

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Zoranmaintains operations in the United States, Israel, Canada, the United Kingdom,Germany, China, Taiwan, Korea and Japan. Activities in the United States and Israel consist of corporateadministration, product development, logistics and worldwide salesmanagement.  Other foreign operationsconsist of sales, product development and technical support.

 

Thedistribution of total revenues for the three and six months ended June 30, 2005and 2004 was as follows (in thousands):

 
| ** **                                                 | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|------------------------------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                                                 | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
| **Revenue  from unaffiliated customers originating from:** |       |                             |       |                           |       |   |   |   |   |
| China                                                      |       | $                                | 40,584     |                           | $          | 37,433 |   | $ | 68,549 |   | $ | 66,240 |   |
| Japan                                                      |       | 27,667                           |       | 28,527                         |       | 51,713 |   | 52,364 |   |
| Taiwan                                                     |       | 9,929                            |       | 17,427                         |       | 15,332 |   | 22,213 |   |
| Korea                                                      |       | 4,434                            |       | 11,471                         |       | 8,344 |   | 21,909 |   |
| United States                                              |       | 6,770                            |       | 5,099                          |       | 12,380 |   | 12,564 |   |
| North America  (other than the United States)              |       | 419                              |       | 639                            |       | 1,112 |   | 1,998 |   |
| Other                                                      |       | 5,276                            |       | 3,120                          |       | 11,533 |   | 7,065 |   |
|                                                       |       | $                                | 95,079     |                           | $          | 103,716 |   | $ | 168,963 |   | $ | 184,353 |   |
|                                                            |            |                                  |            |                                |            |  |  |  |  |  |  |  |  |  |  |

 

Forthe three months ended June 30, 2005, one customer accounted for 11% of totalrevenues.  For the same period of 2004, onecustomer accounted for 12% of total revenues of total revenues.  For the six months ended June 30, 2005 and2004, no customer accounted for more than 10% of total revenues.

 

As of June 30, 2005, onecustomer accounted for 21% of total net accounts receivable, and as of December31, 2004, two customers accounted for 27% and 13% of total net accountsreceivable, respectively.

 

**8.****              Acquisitions**

 

**OrenSemiconductor, Inc.**

 

On June 10, 2005, Zorancompleted the acquisition of Oren Semiconductor, Inc. (“Oren”), aprivately-held provider of demodulator ICs for the global high definitiontelevision market.  Prior to thisacquisition, Zoran had made investments in Oren that represented a 17%ownership interest.  Under the terms ofthe acquisition agreement, Zoran acquired the remaining 83% of Oren’soutstanding stock by means of a merger of Oren with a wholly-owned subsidiaryof Zoran, in consideration for which Zoran paid an aggregate of$28.4 million in cash and issued 1,188,061 shares of Zoran common stockvalued at $12.9 million for total consideration of $41.3 million to theother stockholders of Oren and to employees holding Oren options.  The Company considered the requirements underAccounting Principles Board Opinions 18 (“APB 18”), “The Equity Method ofAccounting for Investments in Common Stock,” to retroactively record the gainsor losses on investment of the prior 17% ownership under the equity basis.  Based on the Company’s analysis, suchadjustments were considered to be immaterial to the prior financial results ofthe Company and accordingly, such adjustments are not reflected in the Company’spreviously reported results of operations.

 

Theprimary purpose of the acquisition was to obtain Oren’s demodulatorIC technology for the global high definition television market.  The Company intends to combine thistechnology with Zoran’s digital television technology to deliver a complete andcost-effective system solution for digital television makers.

 

The transactionwas accounted for under SFAS No. 141, “Business Combinations,” using thepurchase method of accounting.  TheCompany incurred approximately $375,000 for acquisition-related expensesconsisting of financial advisory, legal and other consulting services.  The Company completed a valuation analysisand purchase price allocation.  Theresults of operations of Oren have been included in the consolidated financialstatements from the date of acquisition. The acquisition resulted in goodwill of approximately $35.3 million.  In accordance with SFAS 142, goodwill willnot be amortized and will be tested for impairment at least annually.

 

12

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

 
| Net liabilities  acquired            |   | $      | (941   | )      |
|--------------------------------------|--------|--------|--------|--------|
| In process  research and development |   | 2,650  |   |
| Intangible  assets                   |   | 9,100  |   |
| Goodwill                             |   | 35,305 |   |
|                                 |   | $      | 46,114 |   |

 

Thepurchase price exceeded the net assets acquired resulting in the recognition ofgoodwill.  The amounts allocatedto intangible assets include purchased technology totaling $7.0 million,patents totaling $1.25 million and customer base totaling $850,000 which arebeing amortized over their estimated useful lives of five years.

 

**Emblaze Semiconductor Ltd.**

 

On July 8, 2004,Zoran acquired Emblaze Semiconductor Ltd. (“Emblaze”), a subsidiary of Emblaze Ltd. and a provider ofsemiconductor-based solutions for high volume manufacturers of multimediamobile telephones.  Under the terms ofthe agreement, Zoran’s wholly-owned Israel based subsidiary, ZoranMicroelectronics Ltd., acquired all of the outstanding common shares of Emblazefor approximately $54.2 million in cash.

 

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

 

The transactionwas accounted for under SFAS No. 141, “Business Combinations,” using thepurchase method of accounting.  TheCompany incurred approximately $180,000 for acquisition-related expensesconsisting of financial advisory, legal and other consulting services.  The Company completed a valuation analysisand purchase price allocation.  Theresults of operations of Emblaze have been included in the consolidated financialstatements from the date of acquisition. The historical operations of Emblaze are not material to the financialposition or results of operations of the Company; therefore, no pro formainformation is presented.  Theacquisition resulted in goodwill of approximately $30.9 million.  In accordance with SFAS 142, goodwill willnot be amortized and will be tested for impairment at least annually.

 

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

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

 

Thepurchase price exceeded the net assets acquired resulting in the recognition ofgoodwill.  The amounts allocatedto intangible assets include purchased technology totaling $11.8 million andpatents totaling $12.4 million which are being amortized over their estimateduseful lives of three years.

 

13

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**Pro Forma Financial Information**

 

Thefollowing unaudited pro forma financial information presents the combinedresults of operations of Zoran, Oren and Emblaze as if the acquisitions hadoccurred as of the beginning of each of the previous periods presented, aftergiving effect to certain adjustments, including amortization ofintangibles.  The in-process research anddevelopment charge of $2.65 million is not reflected in the unaudited proforma combined condensed statement of operations. The unaudited pro formafinancial information does not necessarily reflect the results of operationsthat would have occurred had the combined companies constituted a single entityduring such periods, and is not necessarily indicative of results which may beobtained in the future.

 
| ** **                                   | ** ** | **Six Months Ended  June 30,** | ** ** | **Year Ended  December 31,** | ** ** |
|----------------------------------------------|------------|--------------------------------|------------|------------------------------|------------|
| ** **                                   | ** ** | **2005**                       | ** ** | **2004**                     | ** ** |
|                                         |       |                           |       |                         |       |
| **In  thousands except for per share data:** |       |                           |       |                         |       |
| Pro forma  revenues                          |       | $                              | 169,942    |                         | $          | 383,131 |   |
|                                         |       |                           |       |                         |       |
| Pro forma net  loss                          |       | $                              | (32,821    | )                            | $          | (62,453 | ) |
|                                         |       |                           |       |                         |       |
| Pro forma net  loss per share:               |       |                           |       |                         |       |
| Basic                                        |       | $                              | (0.76      | )                            | $          | (1.46 | ) |
|                                         |       |                           |       |                         |       |
| Diluted                                      |       | $                              | (0.76      | )                            | $          | (1.46 | ) |

 

**9.****              Net Loss Per Share**

 

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

 

** **
| ** **                           | ** ** | **Three Months Ended  June 30,** | ** ** | **Six Months Ended  June 30,** | ** ** |
|--------------------------------------|------------|----------------------------------|------------|--------------------------------|------------|
| ** **                           | ** ** | **2005**                         | ** ** | **2004**                       | ** ** | **2005** | ** ** | **2004** | ** ** |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Net loss from  continuing operations |       | $                                | (11,055    | )                              | $          | (4,600 | ) | $ | (29,851 | ) | $ | (14,585 | ) |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Basic common  shares                 |       | 43,707                           |       | 42,697                         |       | 43,460 |   | 42,610 |   |
| Effect of  dilutive securities:      |       |                             |       |                           |       |   |   |   |   |
| Common stock  options                |       | —                           |       | —                         |       | — |   | — |   |
| Dilutive  weighted average shares    |       | 43,707                           |       | 42,697                         |       | 43,460 |   | 42,610 |   |
|                                 |       |                             |       |                           |       |   |   |   |   |
| Net loss per  share:                 |       |                             |       |                           |       |   |   |   |   |
| Basic                                |       | $                                | (0.25      | )                              | $          | (0.11 | ) | $ | (0.69 | ) | $ | (0.34 | ) |
| Diluted                              |       | $                                | (0.25      | )                              | $          | (0.11 | ) | $ | (0.69 | ) | $ | (0.34 | ) |

 

**Options to purchase 10,656,000 shares and 5,051,000 sharesof common stock were excluded from the computation of diluted net loss pershare for the three months ended June 30, 2005 and 2004, respectively, as theseshares would have had an anti-dilutive effect.**

** **

**Options to purchase 10,837,000 shares and 5,044,000 sharesof common stock were excluded from the computation of diluted net loss pershare for the six months ended June 30, 2005 and 2004, respectively, as theseshares would have had an anti-dilutive effect.**

 

14

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**10.****                   LegalProceedings**

 

Zoran and its OakTechnology, Inc. subsidiary have initiated two legal actions against MediaTek,Inc. and customers of MediaTek alleging that products incorporating certainMediaTek components infringe three patents co-owned by Zoran and Oak relatingto optical drive controller design and integrated CD/DVD controller design.

 

On March 11, 2004,Zoran and Oak filed a complaint with****theUnited States International Trade Commission (“ITC”) alleging that certainMediaTek DVD player and optical disk controller chips and chipsets, andproducts in which they are used, infringe Zoran’s and Oak’s patents.  In addition to MediaTek, the complaint named10 other proposed respondents that sell products, including DVD players and PCoptical storage devices that use MediaTek’s chips and chipsets.  The other proposed respondents were ASUSTekComputer, Inc., Creative Labs, Inc., Creative Technology, Ltd., Jiangsu ShincoElectronic Group Co., Ltd., LITE-ON Information Technology Corporation, MintekDigital, Shinco International AV Co., Ltd., TEAC Corporation, TEAC America,Inc., Terapin Technology Corporation and Terapin Technology.  The complaint requested that the ITCinstitute an investigation of the accused products and issue exclusion andcease and desist orders prohibiting the importation into the United States ofthe infringing MediaTek devices and products that contain them.  On April 8, 2004, the ITC instituted aninvestigation based on Zoran’s complaint. On April 28, 2004, Zoran and Oak reached a settlement withrespondents Creative Technology, Ltd. and Creative Labs, Inc., and theserespondents were subsequently dismissed from the investigation pursuant to theterms of the settlement agreement.  OnJuly 13, 2004, the ITC granted Zoran’s request that nine additionalrespondents be added to the investigation. These additional respondents are Artronix Technology, ASUS ComputerInternational, Audiovox Corporation, EPO Science and Technology, Inc., InitialTechnology, Inc., Micro-Star International Co., Ltd., MSI Computer Corp.,Shinco Digital Technology Ltd. and Ultima Electronics Corporation.  On October 26, 2004, MediaTek filed amotion for summary determination seeking an order that two of the assertedpatents were invalid.  This motion wasdenied on November 18, 2004.  OnDecember 13, 2004, MediaTek filed another motion for summary determinationseeking a similar order on different grounds. This motion was denied on December 22, 2004.  The hearing took place in February 2005, andthe target date for completion of the investigation is September 14, 2005.

 

OnMarch 15, 2004, Zoran and Oak filed a complaint against MediaTek andMintek Digital in the United States District Court, Central District ofCalifornia alleging similar facts regarding infringement by MediaTek’s chipsand chipsets and products in which they are used.  The lawsuit seeks both monetary damages andan injunction to stop the importation and sale of infringing products.  Zoran subsequently amended the complaint toname ASUSTek Computer, Inc., Jiangsu Shinco Electronic Group Co., Ltd.,LITE-ON Information Technology Corporation, Mintek Digital, ShincoInternational AV Co., Ltd., TEAC Corporation, TEAC America, Inc., TerapinTechnology Corporation and Terapin Technology as defendants.  On June 17, 2004, pursuant tostipulation of the parties, the case was transferred to the United StatesDistrict Court, Northern District of California.  On July 2, 2004, the defendants filed afirst amended answer which included counterclaims for declaration ofnoninfringement, declaration of invalidity, declaration of unenforceability,breach of covenant not to sue, breach of covenant of good faith and fairdealing and unfair competition.  OnJuly 22, 2004, Zoran and Oak moved to dismiss certain of the defendants’defenses and counterclaims and, on July 30, 2004, MediaTek filed a motionfor summary judgment as to two of the three patents asserted by Zoran and Oakagainst MediaTek.  On December 9,2004, the Court granted Zoran and Oak’s motion, in part, and dismissed certainof defendant’s counterclaims and affirmative defenses.  The Court also denied MediaTek’s motion forsummary judgment.  On October 15,2004, MediaTek filed a second motion for summary judgment seeking summaryjudgment on alternate grounds as to the same two patents.  This motion was nearly identical to themotion filed by MediaTek on October 26, 2004 in the ITC.  The hearing on this motion was held on December 10,2004.  The Court has not ruled on thismotion.  On October 29, 2004, Zoranand Oak voluntarily dismissed two of their three claims against the defendantswithout prejudice and refiled those two claims as a separate lawsuit againstthe defendants.  The parties havestipulated, and the Court has agreed, that the newly filed action will beconsolidated for all purposes with the first filed action, including forpurposes of trial and all pre-trial scheduling. On January 3, 2005, defendants Audiovox Corporation, ArtronixTechnology, Inc., ASUS Computer International, Inc., Initial Technology, Inc.,Changzhou Shinco Digital Technology Co., Ltd., EPO Science and Technology Co.,Inc., Micro-Star International, Co., Ltd., MSI Computer Corp., Shinco InternationalAV Co. and Ultima Electronics Corp. were added to this case by stipulation ofthe parties.  No trial date has yet beenset in these consolidated actions.

 

On July 23, 2004,MediaTek filed a complaint with the ITC alleging that certain Zoran and Oak DVDplayer and optical disk controller chips and chipsets infringe two MediaTekpatents.  The complaint requested thatthe ITC institute an investigation into the accused products and issueexclusion and cease and desist orders prohibiting importation into the UnitedStates of allegedly infringing chips and products that contain them.  On August 26, 2004, the ITC institutedan investigation.  On September 24,2004, MediaTek filed a motion to amend the complaint to add one additionalpatent and to name Sunext Technology Co., Ltd. as a respondent.  This motion was granted on October 7,2004.  Discovery is currentlyunderway.  On February 16, 2005,MediaTek filed a motion for leave to amend the complaint and notice ofinvestigation to assert additional claims of the MediaTek patents against Oak,Zoran and Sunext.  That motion was deniedon March 4, 2005.  The hearing took placein June and July 2005, and the target date for completion of the investigationis January 30, 2006.

 

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

 

On February 2, 2005,MediaTek filed a complaint against Zoran and Zoran Digital Technologies (Shenzhen) Ltd. (Zoran’s local Chineseoperations) in the Shenzhen People’s Republic of China court alleginginfringement of the Chinese counterpart patent of one of the two patentsasserted in MediaTek’s ITC complaint and seeking monetary damages.  Because Zoran Digital Technologies (Shenzhen)Ltd. had been improperly identified in the original complaint, it was not untilJuly 22, 2005 that Zoran Digital Technologies (Shenzhen) Ltd. was formallyserved with the complaint.  At this time,Zoran has not been served with the complaint. The initiation of the full proceeding is stayed until all parties areformally served.

 

Based upon itspreliminary review, Zoran believes that it has meritorious defenses to thethree MediaTek complaints, which Zoran believes were filed in response to theproceedings that Zoran has been prosecuting against MediaTek and itscustomers.  Zoran intends to defend theMediaTek actions vigorously.  However,the litigation is in the preliminary stage, and Zoran cannot predict itsoutcome with certainty.  Patentlitigation is particularly complex and can extend for a protracted time, whichcan substantially increase litigation expenses.

 

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**Item 2.  Management’s Discussion and Analysis of Financial Condition and Resultsof Operations**

 

*This report includes a number offorward-looking statements which reflect the Company’s current views withrespect to future events and financial performance. These forward-lookingstatements are subject to certain risks and uncertainties, including thosediscussed below under the heading “Future Performance and Risk Factors” and in “Item7—Management’s Discussion and Analysis of Financial Condition and Results ofOperations—Future Performance and Risk Factors” included in the**Company’s Annual Report on Form 10-K for the year ended December 31,2004. In this report, the words “anticipates,” “believes,”“expects,” “intends,” “future” and similar expressions identify forward-lookingstatements. Readers are cautioned not to place undue reliance on these forward-lookingstatements, which speak only as of the date hereof.*

 

**Restatement of Financial Resultsfor Quarters Ended March 31, June 30 and September 30, 2004**

 

In connection with the review and evaluation of theeffectiveness of our internal control over financial reporting undertakenpursuant to Section 404 of the Sarbanes-Oxley Act of 2002, managementdiscovered that excess stock compensation expenses had been recognized duringthe quarters ended March 31, June 30 and September 30, 2004.  Thecompensation expense was related to options that we had assumed as part of ouracquisition of Oak Technology, Inc. in 2003.  Under purchase accounting,part of the cost relating to the acquisition was attributed to the assumedoptions and was to be recognized over time as the options continued to vest,based on each option holder’s continued employment with Zoran.  If anoption holder’s employment terminated before the option was fully vested,vesting would cease, and we would no longer recognize compensation expenserelated to that option.  At the time of the acquisition, a schedule wasprepared detailing the terms of each assumed option; however, the names of theoption holders were omitted from the schedule for reasons ofconfidentiality.  After the acquisition was completed, we did not updateour personnel or financial records to include the omitted information. As aresult, the Company improperly recognized deferred stock compensation expensesrelating to options that had been held by former Oak employees after thevesting of such options had ceased, and did not reverse stock basedcompensation expense recognized in excess of amounts that actually vested.

 

To correct this error, we have restated thefinancial results that we previously reported for the quarters ended March 31,June 30 and September 30, 2004.  For information about the effects of therestatement, see Note 1 to our condensed consolidated financial statements, containedin Item 1 of this quarterly report.

 

**Overview**

 

Our products consist ofintegrated circuits and related products used in digital versatile discplayers, or DVDs, movie and home theater systems, digital cameras and videoediting systems.  We also provideintegrated circuits, software and platforms for digital television applicationsthat enable the delivery and display of digital video content through a set-topbox or television as well as digital imaging products consisting ofsemiconductor hardware and software that enable users to print, scan, processand transmit documents to computer peripherals that perform printingfunctions.  Subsequent to our acquisitionof Emblaze Semiconductor, Ltd. on July 8, 2004, we also provide highperformance, low-power application processors, technology and products for themultimedia mobile telephone market.  Throughthe acquisition of Oren Semiconductor, Inc. on June 10, 2005, Zoran obtainedOren’s demodulator IC technology for the global highdefinition television market.

 

We derive most of ourrevenues from the sale of our integrated circuit products.  Historically, average selling prices in thesemiconductor industry in general, and for our products in particular, havedecreased over the life of a particular product.  Average selling prices for our hardwareproducts have fluctuated substantially from period to period, primarily as aresult of changes in our customer mix of original equipment manufacturer, orOEM, sales versus sales to resellers and the transition from low-volume tohigh-volume production.  In the past, wehave periodically reduced the prices of some of our products in order to betterpenetrate the consumer market.  We believethat, as our product lines continue to mature and competitive markets evolve,we are likely to experience further declines in the average selling prices ofour products, although we cannot predict the timing and amount of such futurechanges with any certainty.

 

Our cost of hardwareproduct revenues consists primarily of fabrication costs, assembly and testcosts, and the cost of materials and overhead from operations.  If we are unable to reduce our cost ofhardware product revenues to offset anticipated decreases in average sellingprices, our product gross margins will decrease.  Our hardware product gross margin is alsodependent on product mix and on the proportion of products sold directly to ourOEM customers versus indirectly through our marketing partners.  These marketing partners purchase ourproducts at lower prices but absorb most of the associated marketing and salessupport expenses, maintain inventories and provide customer support andtraining.  As a result, lower grossmargins on sales to these resellers are partially offset by reduced selling andmarketing expenses related to such sales. We expect both product and customer mix to continue to fluctuate infuture periods, causing further fluctuations in margins.

 

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We also derive revenuefrom licensing our software and other intellectual property.  Licensing revenue includes one-time licensefees and royalties based on the number of units distributed by thelicensee.  Quarterly licensing revenuecan be significantly affected by the timing of a small number of licensingtransactions, each accounting for substantial revenues.  Accordingly, licensing revenues havefluctuated, and will continue to fluctuate, on a quarterly basis.  In addition, we have historically generated aportion of our total revenues from development contracts, primarily with keycustomers, although development revenue has declined substantially as apercentage of total revenues over the past several years.  These development contracts have provided uswith partial funding for the development of some of our products.  These development contracts provide forlicense and milestone payments which are recorded as development revenue.  We classify all development costs, includingcosts related to these development contracts, as research and development expenses.  We retain ownership of the intellectualproperty developed by us under these development contracts.  While we intend to continue to enter intodevelopment contracts with certain strategic partners, we expect developmentrevenue to continue to decline as a percentage of total revenues.

 

We recognize softwarelicense revenues in accordance with the provisions of Statement of Position(SOP) 97-2, *Software RevenueRecognition,*as amended by SOP 98-9, *Modification of*SOP 97-2, *Software Revenue Recognition, With Respect to Certain Transactions.* Software license agreements typicallyinclude obligations to provide maintenance and other support over a fixed termand allows for renewal of maintenance on an annual basis. We determine the fairvalue of maintenance obligations with reference to substantive renewal rateswithin the agreement or objective evidence of fair value as required under SOP97-2. Maintenance and support revenue is recognized ratably over the term ofthe arrangement.  We also receive royaltyrevenues based on per unit shipments of products embedding our software which werecognize upon receipt of a royalty report from the customer, typically onequarter in arrears.

 

Our research anddevelopment expenses consist of salaries and related costs of employees engagedin ongoing research, design and development activities and costs of engineeringmaterials and supplies.  We are also aparty to research 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 contractmaximums.  These agreements require us touse our best efforts to achieve specified results and require us to payroyalties at rates of 3% to 5% of resulting product sales, and up to 30% ofresulting license revenues, up to a maximum of 100% to 150% of total fundingreceived.  Reported research anddevelopment expenses are net of these grants, which fluctuate from period toperiod.  We believe that significantinvestments in research and development are required for us to remaincompetitive, and we expect to continue to devote significant resources toproduct development, although such expenses as a percentage of total revenuesmay fluctuate.

 

Our selling, general andadministrative expenses consist primarily of employee-related expenses, salescommissions, product promotion and other professional services.  We expect that selling, general andadministrative expenses will continue to increase to support our anticipatedgrowth.

 

We conduct a materialamount of our research and development and certain sales and marketing andadministrative operations in our foreign subsidiary offices.  As a result, some of our expenses areincurred in foreign currency.  To date,substantially all of our hardware product revenues and our software and otherrevenues have been denominated in U.S. dollars and most costs of hardwareproduct revenues have been incurred in U.S. dollars.  We expect that most of our revenues and costsof revenue will continue to be denominated and incurred in U.S. dollars for theforeseeable future.  We have notexperienced material losses or gains as a result of currency exchange ratefluctuations and have not engaged in hedging transactions to reduce ourexposure to such fluctuations.  We may inthe future elect to take action to reduce our foreign exchange risk.

 

Our effective income taxrate has benefited from the availability of net operating losses which we haveutilized to reduce taxable income for U.S. federal income tax purposes and by our Israel based subsidiary’s statusas an “Approved Enterprise” under Israeli law, which provides a ten-year taxholiday for income attributable to a portion of our operations in Israel.  Our U.S. federal net operating losses expireat various times between 2004 and 2025, and the benefits from our subsidiary’sApproved Enterprise status expire at various times beginning in 2004.

 

**Acquisitions**

 

*OrenSemiconductor, Inc.*

 

On June 10, 2005, wecompleted our acquisition of Oren Semiconductor, Inc. (“Oren”), aprivately-held provider of demodulator ICs for the global high definitiontelevision market.  Prior to thisacquisition, we had made investments in Oren that represented a 17% ownershipinterest. Under the terms of the acquisition agreement, we acquired theremaining 83% of Oren’s outstanding stock by means of a merger of Oren with awholly-owned subsidiary of Zoran, in consideration for which we paid anaggregate of $28.4 million in cash and issued 1,188,061 shares of Zorancommon stock valued at $12.9 million, for total consideration of $41.3million, to the other stockholders of Oren and to employees holding Orenoptions.  The acquisition was accountedfor under the purchase method of accounting.

 

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Following the completionof the acquisition, the results of operations of Oren have been included in ourconsolidated financial statements.  Accordingly,our results of operations for the three and six month periods endedJune 30, 2005 include 20 days of Oren’s operations, while such operationsare not reflected in our results of operations for the same periods of theprior year.

 

*EmblazeSemiconductor Ltd.*

 

On July 8, 2004, wecompleted our acquisition of Emblaze Semiconductor Ltd.  (“Emblaze”), a wholly-owned subsidiary ofEmblaze Ltd. for $54.2 million in cash. The acquisition was accounted for under the purchase method ofaccounting.

 

Following the completionof the acquisition, the results of operations of Emblaze have been included inour consolidated financial statements. Accordingly, our results of operations for the three and six monthperiods ended June 30, 2005 include Emblaze’s operations for the entireperiod, while such operations are not reflected in our results of operationsfor the same periods of the prior year.

 

**Segments**

 

Prior to July 2004, we hadfour reportable segments: Digital Versatile Disc (DVD), Imaging, Digital Camera(DC) and Digital Television (DTV). Subsequent to the Emblaze acquisition in July 2004, the Digital Cameragroup was combined with the Emblaze Mobile segment and renamed the Mobile segment.  Each segment’s primary products are based onhighly integrated application-specific integrated circuits, or ASICs, andsystem-on-a-chip, or SOC, solutions.  TheDVD, Imaging and DTV segments also license certain software and otherintellectual property.  The DVD groupprovides products for use in DVD players and recordable DVD players.  The Imaging group provides products used indigital copiers, laser and inkjet printers as well as multifunctionperipherals.  The Mobile group focuses onsolutions for multimedia mobile phone products and digital cameraproducts.  The DTV group providesproducts for standard and high definition digital television products includingtelevisions, set top boxes and personal video recorders.

 

**Results ofOperations**

 

*Revenues*

 

Total revenues decreased8.3% to $95.1 million for the three months ended June 30, 2005 compared to$103.7 million for the same period of the prior year.  For the six months ended June 30, 2005, totalrevenues also decreased 8.3% to $169.0 million compared to $184.4 millionrecorded during the same period of 2004. These decreases in total revenues were primarily the result of decliningrevenues in the DVD segment which recorded decreases of $30.2 million for thethree months ended June 30, 2005 compared to the same period of the prior yearand $45.2 million for the six month period ended June 30, 2005 compared to thesame period of the prior year.  Thesedecreases were partially offset by increases of $16.3 million and $21.5 millionin Mobile segment revenues for the three and six months periods ended June 30,2005, respectively, compared to the same periods of the prior year.  In addition, the DTV segment recordedincreases in total revenues of $4.0 million and $4.4 million for the three andsix month periods ended June 30, 2005, respectively, compared to the sameperiods in 2004.  The decreases in DVDsegment revenues were primarily the result of lower hardware product revenueswhile the increases in the Mobile and DTV segment revenues were associated withhigher hardware product revenues.  Totalrevenues by segment for the three months ended June 30, 2005 were 38.9% DVD,24.2% Imaging, 24.8% Mobile and 12.1% DTV, compared to 64.8% DVD, 20.9%Imaging, 7.0% Mobile and 7.3% DTV for the same period in 2004.  Total revenues by segment for the six monthsended June 30, 2005 were 40.9% DVD, 26.0% Imaging, 21.7% Mobile and 11.4% DTV,compared to 62.0% DVD, 21.6% Imaging, 8.2% Mobile and 8.1% DTV for the sameperiod in 2004.  These changes in revenuemix were the result of increased unit sales of our DTV and Mobile products asthe markets for these segments continue to expand coupled with a decrease inDVD revenues due to an inventory correction in the worldwide DVD market.  We believe that revenues for the DVD segmentwill increase in the quarter ending September 30, 2005 as we believe that the oversupply of inventory that has affected the worldwide DVD industry has now beencorrected.

 

Hardware product revenueswere $80.9 million for the three months ended June 30, 2005 compared to $89.7million for the comparable period of the prior year and $139.9 million and$157.7 million for the six month periods ended June 30, 2005 and 2004,respectively.  The decreases in hardwareproduct revenues were primarily due to the decrease in hardware productrevenues for the DVD segment of $30.6 million for the three months ended June30, 2005 compared to the same period of the prior year, primarily due to lowerunit shipments.  Partially offsetting thedecrease in DVD hardware product revenues were increases in hardware productrevenues of $15.8 million for the Mobile segment, $3.1 million for the DTVsegment and $2.9 million for the Imaging segment due to increased unitshipments.  For the six months ended June30, 2005, DVD segment hardware product revenues decreased $43.8 million fromthe comparable 2004 period.  Thisdecrease was partially offset by increases in the Mobile, Imaging and DTVsegments’ hardware product revenues of $20.4 million, $3.2 million and $2.4million, respectively.  Again, thedecrease in DVD hardware

 

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product revenue was theresult of lower unit shipments while the increases in hardware product revenuesfor the Mobile, Imaging and DTV segments were due to increased unitshipments.   Hardware product revenues bysegment for the three months ended June 30, 2005 were 44.5% DVD, 28.6% Mobile, 13.8%Imaging, and 13.1% DTV, compared to 74.3% DVD, 9.2% Imaging, 8.4% DTV and 8.1%Mobile for the same period in 2004.

 

Software and otherrevenues were $14.2 million and $29.1 million for the three and six monthsended June 30, 2005, respectively, compared to $14.0 million and $26.6 millionfor the same periods in 2004.  Theincrease for the six month period ended June 30, 2005 compared to the same periodof the prior year was primarily due to increased revenues in the Mobile segmentin which software and other revenues increased by $1.0 million primarilyassociated with IP licensing revenues. In addition, Imaging software and other revenues increased byapproximately $798,000 during this timeframe. This increase in the Imaging segment software and other revenues wasmainly due to increased royalty revenues.

 

*Cost of Hardware Product Revenues*

 

Cost of hardware productrevenues was $45.2 million and $82.2 million, respectively, for the three andsix month periods ended June 30, 2005 compared to $58.8 million and $104.2million for the same periods of 2004. This decrease was primarily a result of the decline in correspondinghardware product revenues.  In addition,we reduced our inventory allowance by $5.3 million as a result of the sale ordisposal of fully written down inventory during the quarter ended June 30, 2005. As a percentage of hardware productrevenues, hardware product costs were 55.9% and 58.8%, respectively, for thethree and six month periods ended June 30, 2005, compared to 65.6% and 66.0%for the three and six month periods ended June 30, 2004.  In addition to the reduction in inventoryreserves discussed above, the decreases in hardware product costs as apercentage of hardware revenues reflected a change in product mix as revenuesfrom the lower margin DVD segment, which has a higher percentage of hardwareproduct costs relative to its hardware product revenue, represented a smallerproportion of total hardware product revenue.

 

*Research and Development*

 

Research and development(“R&D”) expenses were $21.3 million and $41.4 million for the three and sixmonths ended June 30, 2005, respectively, compared to $21.1 million and $39.8million for the same periods of 2004.  Theseslight increases were primarily a result of the inclusion of the Emblaze operationsas well as continued investments in research and development across all of oursegments.  R&D expenses were 22.4% oftotal revenues for the three month period ended June 30, 2005 and 24.5% for thesix month period ended June 20, 2005. This compared to 20.4% and 21.6% for the three and six month periodsended June 30, 2004, respectively.  Theseincreases were the result of the lower revenues recorded during the three andsix month periods ended June 30, 2005 compared to the same periods of the prioryear.

 

*Selling, General andAdministrative*

 

Selling, general andadministrative (“SG&A”) expenses were $24.3 million and $47.5 million forthe three and six month periods ended June 30, 2005, respectively, compared to $16.5million and $31.3 million for the three and six month periods ended June 20,2004, respectively.  These increases wereprimarily due to increased legal fees related to our pending patent litigationwith Mediatek, Inc., the inclusion of the Emblaze operations and the continuedincreases in marketing and field application support expenses to support ourAsia Pacific markets.  SG&A expenseswere 25.6% and 28.1% of total revenues for the three and six months ended June30, 2005, respectively, compared to 15.9% and 17.0% for the three and six monthperiods ended June 30, 2004, respectively.

 

*Amortization of Intangible Assets*

 

During the three and six monthperiods ended June 30, 2005, we incurred charges of $12.4 and $24.8 million,respectively, related to the amortization of intangible assets compared to$10.3 million and $20.7 million for the three and six months ended June 30,2004, respectively.  These increases werethe result of the addition of $24.2 million of amortizable intangible assetsacquired in the Emblaze acquisition in July 2004 and $9.1 million of intangibleassets as a result of the Oren acquisition in June 2005.  At June 30, 2005, we had approximately $152.7million in net acquired intangible assets which we will continue to amortize ona straight line basis through 2010.

 

*Amortizationof Deferred Stock Compensation*

 

For the three and six monthperiods ended June 30, 2005, we incurred charges of $457,000 and $974,000,respectively, related to the amortization of deferred stock compensationcompared to $572,000 and $2.4 million during the three and six month periodsended June 30, 2004, respectively.  Thisdeferred stock compensation expense was recorded primarily as a result of stockoptions granted in connection with the Oak acquisition.  These decreasesin expense were due to the cancellation of options held by employees whoterminated their employment during the year and the lower amortizationassociated with the graded vesting under the FIN 28 model.

 

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As of June 30, 2005, theCompany has a remaining deferred stock compensation balance of $1.4 millionwhich will continue to be amortized through the quarter ending September 30,2007.

 

*Interest and Other Income*

 

Interest and other incomewas $279,000 and $684,000, respectively, for the three and six month periods endedJune 30, 2005, compared to $172,000 and $897,000 for the same periods of 2004.  These fluctuations were primarily due to changesin interest income as a result of fluctuations in interest rates as well as thechange in translation income and losses recorded due to the fluctuation in thevalue of the United States dollar relative to the currency of other countriesin which we operate.

 

*Provision for Income Taxes*

 

The Company has notrecorded a tax provision or benefit for the three and six month periods endedJune 30, 2005.  The Company believes that reasonable uncertainty existsregarding future results such that no benefit has been recorded for the lossesduring the  three and six months endedJune 30, 2005.  The Company will continue to reassess this position in subsequentquarters during 2005. The Company has determined that it is more likely thannot the deferred tax assets will not be realized due to the uncertainty offuture profit and as such, the Company continues to carry a full valuationallowance as of June 30, 2005.  We will continue to evaluate our taxposition commensurate with the jurisdictional distribution of profits betweenthe U.S. and Israel and the underlying tax positions as a result of the taxholiday in Israel.

 

**Liquidity and Capital Resources**

 

At June 30, 2005, we had$53.4 million of cash and cash equivalents, $62.6 million of short-terminvestments and $129.6 million of working capital.  In addition, we had $3.9 million ofinvestments in long-term marketable securities which are included in otherassets and investments on our consolidated balance sheet.

 

Net cash provided byoperating activities during the first six months of 2005 was $25.0million.  While we recorded a net loss of$29.9 million, this loss included non-cash charges for depreciation of propertyand equipment of $6.5 million, amortization of intangible assets of $24.8million and amortization of deferred stock compensation of $974,000.  Changes in current assets and liabilities resultedin the use of cash totaling $19.9 million which included an increase inaccounts receivable of $8.2 million offset by a $24.9 million decrease ininventory and a $4.3 million increase in accounts payable.

 

Cash used in investingactivities was $12.1 million during the six months ended June 30, 2005,reflecting $27.6 million used in the acquisition of Oren and purchases of propertyand equipment totaling $5.3 million, partially offset by the net sales andmaturities of investments of $20.8 million.

 

Cash provided byfinancing activities was $3.1 million during the six months ended June 30, 2005attributable to the issuance of common stock during the period.

 

Net cash provided by operatingactivities during the six months ended June 30, 2004 was $8.8 million.  While we recorded a net loss of $14.6million, this loss included non-cash charges of approximately $28.2 millioncomprised of depreciation of property and equipment of $5.2 million,amortization of intangible asset of $20.7 million and amortization of deferredstock compensation of $2.4 million.  Additionalcash from operating activities was provided by a $25.6 million increase inaccounts payable, partially offset by a $19.8 million increase in inventory.

 

Cashprovided by investing activities was $606,000 during the six months ended June30, 2004, reflecting the net sale of investments of $5.8 million offset by thepurchase of $5.2 million of property and equipment.

 

Cash provided byfinancing activities was $4.6 million during the six months ended June 30,2004, attributable to the issuance of common stock during the period.

 

At June30,2005, we did not have any relationships with unconsolidated entities orfinancial partnerships, such as entities often referred to as structuredfinance or special purpose entities, established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes.  Accordingly, we arenot exposed to the type of financing, liquidity, market or credit risk thatcould arise if we had engaged in such relationships.

 

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

 

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•                  thelevels at which we maintain inventory and accounts receivable;

 

•                  themarket acceptance of our products;

 

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

 

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

 

•                  volumepricing concessions;

 

•                  capitalimprovements to new and existing facilities;

 

•                  technologicaladvances;

 

•                  theresponse of competitors to our products; and

 

•                  ourrelationships with our suppliers and customers.

 

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

 

To the extent thatour existing resources and cash generated from operations are insufficient tofund our future activities, we may need to raise additional funds throughpublic or private financings or borrowings. If additional funds are raised through the issuance of debt securities,these securities could have rights, preferences and privileges senior toholders of common stock, and the terms of this debt could impose restrictionson our operations.  The sale ofadditional equity or convertible debt securities could result in additionaldilution to our stockholders.  We cannotbe certain that additional financing will be available in amounts or on termsacceptable to us, if at all.  If we areunable to obtain this additional financing, we may be required to reduce thescope of our planned product development and sales and marketing efforts, whichcould harm our business, financial condition and operating results.

 

**Future Performance and Risk Factors**

 

Ourfuture business, operating results and financial condition are subject tovarious 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 prices of our stock.**

 

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

 

•                  fluctuation indemand for our products;

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

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

•                  the timing orcancellation of large customer orders;

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

•                  pricing policychanges by us and by our competitors and suppliers;

•                  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;

 

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

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

 

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

 

•                  the cost andavailability of adequate foundry capacity;

•                  fluctuations inmanufacturing yields;

•                  changes in orthe emergence of new industry standards;

•                  failure toanticipate changing customer product requirements;

•                  the loss or gainof important customers;

•                  productobsolescence; and

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

 

Our operating resultscould also be harmed by:

 

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

•                  terrorism andinternational conflicts or other crises, such as the outbreak of Severe AcuteRespiratory Syndrome, or SARS, several years ago;

•                  other conditionsaffecting the timing of customer orders;

•                  changes ingovernmental regulations that could affect our products; or

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

 

These factors aredifficult or impossible to forecast.  Weplace orders with independent foundries several months in advance of thescheduled delivery date, often in advance of receiving non-cancelable ordersfrom our customers.  This limits ourability to react to fluctuations in demand for their products.  If anticipated shipments in any quarter arecanceled or do not occur as quickly as expected, or if we fail to foresee atechnology change that could render a product obsolete, expense and inventorylevels could be disproportionately high. If anticipated license revenues in any quarter are canceled or do notoccur, gross margins may be reduced.  Asignificant portion of our expenses are relatively fixed, and the timing ofincreases in expenses is based in large part on our forecast of futurerevenues.  As a result, if revenues donot meet our expectations, we may be unable to quickly adjust expenses tolevels appropriate to actual revenues, which could harm our operating results.

 

Product supply and demandfluctuations common to the semiconductor industry are historicallycharacterized by periods of manufacturing capacity shortages immediatelyfollowed by periods of overcapacity, which are caused by the addition ofmanufacturing capacity in large increments. We cannot predict whether we will achieve timely, cost-effective accessto that capacity when needed, or when there will be a capacity shortage againin the future.

 

As a result of thesefactors, our operating results may vary significantly from quarter toquarter.  Any shortfall in revenues ornet income from levels expected by the investment community could cause adecline in the trading price of our stock.

 

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

 

Because the markets thatour customers serve are characterized by numerous new product introductions andrapid product enhancements, our operating results may vary significantly fromquarter to quarter.  During the finalproduction of a mature product, our customers typically exhaust their existinginventory of our products.  Consequently,orders for our products may decline in those circumstances, even if theproducts are incorporated into both mature products and replacement products.  A delay in a customer’s transition to commercialproduction of a replacement product would delay our ability to recover the lostsales from the discontinuation of the related mature product.  Our customers also experience significantseasonality in the sales of their consumer products, which affects their ordersof our products.  Typically, the secondhalf of the calendar year represents a disproportionate percentage of sales forour customers due to the holiday shopping period for consumer electronicsproducts, and therefore, a disproportionate percentage of our sales.  We expect these seasonal sales fluctuationsto continue for the foreseeable future.

 

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

 

The semiconductorindustry is subject to cyclical variations in product supply and demand.  Downturns in the industry often occur inconnection with, or anticipation of, maturing product cycles for bothsemiconductor companies and their customers and declines in general economicconditions.  These downturns have beencharacterized by abrupt fluctuations in product demand, productionover-capacity and accelerated decline of average selling prices.  In some cases, these downturns have lastedmore than one year.  A downturn in thesemiconductor industry could harm our sales and revenues if demand drops, orour gross margins if average selling prices decline.

 

**Oursuccess for the foreseeable future will be dependent on growth in demand forintegrated circuits for a limited number of applications.**

 

In recent years, we havederived a substantial majority of our product revenues from the sale ofintegrated circuits for DVD and digital camera applications.  We expect that sales of our products forthese applications will continue to account for a significant portion of ourrevenues for the foreseeable future.  Ourfuture financial performance will also depend on our ability to successfullydevelop and market new products in the digital television, HDTV and digitalimaging markets.  If the markets forthese products and applications decline or fail to develop as expected, or weare not successful in our efforts to market and sell our products tomanufacturers who incorporate integrated circuits into these products, ourfinancial results will be harmed.

 

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

 

Our financial performancedepends in large part on our ability to successfully develop and marketnext-generation and new products in a rapidly changing technologicalenvironment.  If we fail to successfullyidentify new product opportunities and timely develop and introduce newproducts that achieve market acceptance, we may lose our market share and ourfuture revenues and earnings may suffer.

 

In the consumerelectronic market, our performance has been dependent on our successfuldevelopment and timely introduction of integrated circuits for DVD players, DVDrecorders, digital cameras, broadband digital television and HDTV.  These markets are characterized by theincorporation of a steadily increasing level of integration and numbers offeatures on a chip at the same or lower system cost, enabling originalequipment manufacturers, or OEMs, to continually improve the features or reducethe prices of the systems they sell.  Ifwe are unable to continually develop and introduce integrated circuits withincreasing levels of integration and new features at competitive prices, ouroperating results will suffer.

 

In the digital officemarket, our performance has been dependant on our ability to successfullydevelop embedded image processing system on a chip, or SOC, solutions for thedigital office market, in particular, embedded digital color copier technologyand image processing chips for a variety of imaging peripherals, includingprinters and multi-function peripherals, or MFPs.  Among other technological changes, embeddedPDF and color capability are rapidly emerging as market requirements forprinters and other imaging devices.  Someof our competitors have the capacity to supply these solutions, and some oftheir solutions have been well received in the marketplace.  We face the challenge of developing newimaging products with the capability to handle greater color and imagecomplexity, including web-based documents, and work with higher-performingdevices in networked environments.  If weare unable to meet these challenges with the development of products that caneffectively compete in the OEM software and solutions market, our futureoperating results could suffer.

 

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

 

Our future success willdepend on our ability to anticipate and adapt to changes in technology andindustry standards and our customers’ changing demands.  The consumer electronics market, inparticular, is characterized by rapidly changing technology, evolving industrystandards, frequent new product introductions, short product life cycles andincreasing demand for higher levels of integration.  Our ability to adapt to these changes and toanticipate future standards, and the rate of adoption and acceptance of thosestandards, will be a significant factor in maintaining or improving our competitiveposition and prospects for growth.  Ifnew industry standards emerge, our products or the products of our customerscould become unmarketable or obsolete, and we could lose market share or berequired to incur substantial unanticipated costs to comply with these newstandards.

 

Our success will alsodepend on the successful development of new markets and the application andacceptance of new technologies and products in those new markets.  For example, our success will depend on theability of our customers to develop new products and enhance existing productsin the recordable DVD player market and products for the broadband digitaltelevision and HDTV markets and to introduce and promote those productssuccessfully.  These markets may notcontinue to develop to the extent or in the time periods that we currentlyanticipate due to factors outside our control, such as delays in implementationof FCC 02-320 requiring all new televisions to include a digital receiver.  If new markets do not develop as weanticipate, or if our products do not gain widespread acceptance in thesemarkets, our business, financial condition and results of operations could bematerially and adversely affected.  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 this content is not available,manufacturers may not be able to sell products incorporating our products, andour sales would suffer.

 

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

 

We do not operate anymanufacturing facilities, and we rely on independent foundries to manufacturesubstantially all of our products.  Theseindependent foundries fabricate products for other companies and may alsoproduce products of their own design. From time to time, there are manufacturing capacity shortages in thesemiconductor industry.  We do not havelong-term supply contracts with any of our suppliers, including our principalsupplier, Taiwan Semiconductor Manufacturing Company, or TSMC.  Therefore, TSMC and our other suppliers arenot obligated to manufacture products for us for any specific period, in anyspecific quantity or at any specified price, except as may be provided in aparticular purchase order.

 

Our reliance onindependent foundries involves a number 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 andsome of our other foundries are located in areas of the world that are subjectto natural disasters such as earthquakes. While the 1999 earthquake in Taiwan did not have a material impact on ourindependent foundries, a similar event centered near TSMC’s facility couldseverely reduce TSMC’s ability to manufacture our integrated circuits.  The loss of any of our manufacturers as asupplier, our inability to expand the supply of their products in response toincreased demand, or our inability to obtain timely and adequate deliveriesfrom our current or future suppliers due to a natural disaster or any otherreason could delay or reduce shipments of our products.  Any of these circumstances could damage ourrelationships with current and prospective customers and harm our sales andfinancial results.

 

We also rely on a limitednumber of independent contractors for the assembly and testing of ourproducts.  Our reliance on independentassembly and testing houses limits our control over delivery schedules, qualityassurance and product cost.  Disruptionsin the services provided by our assembly or testing houses or othercircumstances that would require them to seek alternative sources of

 

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assembly or testing couldlead to supply constraints or delays in the delivery of our products.  These constraints or delays could damage ourrelationships with current and prospective customers and harm our financial results.

 

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

 

If we are not able toobtain additional foundry capacity as required, our relationships with ourcustomers would be harmed and our sales would likely be reduced.  In order to secure additional foundrycapacity, we have considered, and may in the future need to consider, variousarrangements with 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 tomake any such arrangement in a timely fashion or at all, and such arrangements,if any, may not be on terms favorable to us. Moreover, if we are able to secure foundry capacity, we may be obligatedto utilize all of that capacity or incur penalties.  Such penalties may be expensive and couldharm our financial results.

 

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

 

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

 

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

 

We face intensecompetition in the markets in which we compete. We expect that the level of competition will increase in the future fromexisting competitors and from other companies that may enter our existing orfuture markets with solutions that may be less costly or provide higherperformance or additional features.

 

Competition in Zoran’s corecompression technology market has historically been dominated by largecompanies, such as ST Microelectronics, and companies that develop and usetheir own integrated circuits, such as Sony and Matsushita.  As this market continues to develop, we face competitionfrom other large semiconductor vendors.

 

The DVD market continuesto expand, and additional competitors are expected to enter the market for DVDplayers and software.  Some of thesepotential competitors may develop captive implementations for use only withtheir own PC and consumer electronics products. It is also possible that application software vendors, such asMicrosoft, may attempt to enter the DVD application market in the future.  This increased competition may result inprice reductions, reduced profit margins and loss of market share.

 

We face competition fromseveral large semiconductor companies in the broadband digital television andset-top box markets.  We expectcompetition to continue to increase in these markets as industry standardsbecome well known and as other competitors enter these markets.

 

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

 

Many of our existingcompetitors, as well as OEM customers that are expected to compete with us inthe future, have substantially greater financial, manufacturing, technical,marketing, distribution and other resources, broader product lines and longerstanding relationships with customers than we have.  In addition, much of our future success isdependent on the success of our OEM customers. If we or our OEM customers are unable to compete successfully againstcurrent and future competitors, we could experience price reductions, ordercancellations and reduced gross margins, any one of which could harm ourbusiness.

 

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

 

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

 

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

 

Our largest customershave accounted for a substantial percentage of our revenues.  In 2004, one customer accounted for 11% ofour total revenues while sales to our four largest customers accounted for 35%of our total revenues.   In 2003, twocustomers accounted for 17% and 14% of our total revenues, respectively, whileour four largest customers accounted for 46% of our total revenues.  Sales to these large customers have variedsignificantly from year to year and will continue to fluctuate in the future.  These sales also may fluctuate significantlyfrom quarter to quarter.  We may not beable to retain our key customers, or these customers may cancel purchase ordersor reschedule or decrease their level of purchases from us.  Any substantial decrease or delay in sales toone or more of our key customers could harm our sales and financialresults.  In addition, any difficulty incollecting amounts due from one or more key customers could harm our financialresults.

 

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

 

Our products aretechnologically complex.  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 processes are oftensubject to delays associated with lengthy approval processes that typicallyaccompany the design and testing of new products.  The sales cycles of our products often lastfor 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 alsosubject us to other risks, including customers’ budgetary constraints, internalacceptance reviews and cancellations.  Inaddition, orders expected in one quarter could shift to another because of thetiming of customers’ purchase decisions. The time required for our customers to incorporate our products intotheir own can vary significantly with the needs of our customers and generallyexceeds several months, which further complicates our planning processes andreduces the predictability of our operating results.

 

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

 

We generally do not enterinto long-term purchase contracts with our customers, and we cannot be certainas to future order levels from our customers. Customers generally purchase our products subject to cancelableshort-term purchase orders.  We cannotpredict whether our current customers will continue to place orders, whetherexisting orders will be canceled, or whether customers who have orderedproducts will pay invoices for delivered products.  When we do enter into a long-term contract,the contract is generally terminable at the convenience of the customer.  In the event of an early termination by oneof our major customers, it is unlikely that we will be able to rapidly replacethat revenue source, which would harm our financial results.

 

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

**compete.**

 

The FederalCommunications Commission, or FCC, has broad jurisdiction over our target marketsin the digital television business. Various international entities or organizations may also regulateaspects of our business or the business of our customers.  Although our products are not directlysubject to regulation by any agency, the transmission pipes, as well as much ofthe equipment into which our products are incorporated, are subject to directgovernment regulation.  For example,before they can be sold in the United States, advanced televisions and emerginginteractive displays must be tested and certified by Underwriters Laboratoriesand meet FCC regulations.  Accordingly,the effects of regulation on our customers or the industries in which ourcustomers operate may in turn harm our business.  FCC regulatory policies affecting the abilityof cable operators or telephone companies to offer certain services and otherterms on which these companies conduct their business may impede sales of ourproducts.  In addition, our digitaltelevision business may also be adversely affected by the imposition oftariffs, duties and other import restrictions on our suppliers or by theimposition of export restrictions on products that we sellinternationally.  Changes in current lawsor regulations or the imposition of new laws or regulations in the UnitedStates or elsewhere could harm our business. For example, any delays by the FCC in imposing its pending requirementthat all new televisions have a digital receiver could have an adverse effecton our HDTV business.

 

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

 

During 2004, only 9% ofour total revenues were derived from North America sales.  We anticipate that international sales willcontinue to account for the majority of our total revenues for the foreseeablefuture.  In addition, substantially allof our semiconductor products are manufactured, assembled and tested outside ofthe United States by independent foundries and subcontractors.

 

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

 

•                  unexpectedchanges in regulatory requirements;

•                  fluctuations inexchange rates;

•                  political andeconomic instability;

•                  imposition oftariffs and other barriers and restrictions;

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

•                  health risks ina particular region.

 

A material amount of ourresearch and development personnel and facilities and a portion of our salesand marketing personnel are located in Israel. Political, economic and military conditions in Israel directly affectour operations.  Some of our employees inIsrael are obligated to perform up to 39 days of military reserve dutyannually.  The absence of these employeesfor significant periods during the work week may cause us to operateinefficiently during these periods.

 

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

 

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

 

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

 

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

 

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

•                  reduced demandfor consumer electronic products due to a potential economic slowdown;

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

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

 

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

 

Foreign currencyfluctuations may affect the prices of our products.  Prices for our products are currentlydenominated in U.S. dollars for sales to our customers throughout theworld.  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, wecannot be sure that our international customers will continue to be willing toplace orders denominated in U.S. dollars. If they do not, our revenue and operating results will be subject toforeign exchange fluctuations.

 

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

 

Our success and abilityto compete depend in large part upon protection of our proprietarytechnology.  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 measuresmay not be sufficient to protect our technology from third-party infringement,or to protect us from the claims of others. Monitoring unauthorized use of our products is difficult, and we 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 certain foreign countries inwhich our products are or may be developed, manufactured or sold, includingvarious countries in Asia, may not protect our products or intellectualproperty rights to the same extent as do the laws of the United States and thusmake the possibility of piracy of our technology and products more likely inthese countries.  If competitors are ableto use our technology, our ability to compete effectively could be harmed.

 

The protection offered bypatents is subject to numerous uncertainties. For example, our competitors may be able to effectively design aroundour patents, or the patents may be challenged, invalidated orcircumvented.  Those competitors may alsoindependently develop technologies that are substantially equivalent orsuperior to our technology.  Moreover,while we hold, or have applied for, patents relating to the design of ourproducts, some of our products are based in part on standards, for which we donot hold patents or other intellectual property rights.

 

We have generally limitedaccess to and distribution of the source and object code of our software andother proprietary information.  Withrespect to its page description language software and drivers for the digitaloffice market and in limited circumstances with respect to firmware andplatforms for its HDTV products, Oak has granted licenses that give itscustomers access to and restricted use of the source code of Oak’ssoftware.  This access increases thelikelihood of misappropriation or misuse of our technology.

 

**We areinvolved in several lawsuits.**

 

Zoranand Oak are parties to various legal proceedings, including a number ofpatent-related lawsuits, both as plaintiff and defendant.  In connection with these lawsuits, substantialmanagement time has been, and will continue to be, expended.  In addition, both Oak and Zoran haveincurred, and we expect to continue to incur, substantial legal and otherexpenses in connection with these pending lawsuits.  No provision for any liability that mayresult upon adjudication of these lawsuits has been made in our financialstatements.

 

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**Claimsand litigation regarding intellectual property rights could seriously harm ourbusiness and require us to incur significant costs.**

 

In recent years, therehas been significant litigation in the United States involving patents andother intellectual property rights.  Inthe past, Zoran and Oak have been subject to claims and litigation regarding allegedinfringement of other parties’ intellectual property rights, and both Oak andZoran are currently parties to a number of patent-related lawsuits, both asplaintiff and defendant.  We could becomesubject to additional litigation in the future, either to protect ourintellectual property or as a result of allegations that we infringe others’intellectual property rights.  Claimsthat our products infringe proprietary rights would force us to defendourselves and possibly our customers or manufacturers against the allegedinfringement.  Pending and futurelitigation, if successful, could subject us to significant liability fordamages or invalidation of our proprietary rights.  These lawsuits, regardless of their success,are time-consuming and expensive to resolve and require significant managementtime and attention.  Pending or futureintellectual property litigation could force us to do one or more of thefollowing:

 

•                  stop sellingproducts 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.

 

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

 

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

 

From time to time, we maybe required to license technology from third parties to develop new products orproduct enhancements.  Third partylicenses may not be available on commercially reasonable terms, if 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.

 

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

 

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

 

Our future net income andcash flow will be affected by our ability to apply our net operating losses, orNOLs, against taxable income in future periods. Our NOLs totaled approximately $271 million for federal and$93 million for state tax reporting purposes as of December 31,2004.  As a result of the change ofcontrol resulting from our initial public offering in 1995, the amount of NOLsthat we can use to reduce future taxable income for federal tax purposes islimited to approximately $3.0 million per year.  The Internal Revenue Code contains a numberof provisions that could limit the use of NOLs against income of the combinedcompany as a result of the merger or as a result of the combination of thesetransactions.  Our utilization of Oak’sNOLs may be further limited due to prior Oak transactions.  No opinion or IRS ruling has been soughtregarding the potential application of any of these provisions.  Changes in tax laws in the United States mayfurther limit our ability to utilize these NOLs.  Any further limitation on our ability toutilize these respective NOLs could harm our financial condition.

 

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

 

We have made investmentsin, and acquisitions of other complementary companies, products andtechnologies, and we may acquire additional businesses, products ortechnologies in the future.  In the eventof any future acquisitions, we could:

 

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

 

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•                  incur debt;

•                  assumeliabilities;

•                  incur expensesrelated to the future impairment of goodwill and the amortization of other intangibleassets; or

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

 

Our operation of anyother acquired business will also involve 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 tosuccessfully complete the integration of the business, products or technologiesor personnel that we might acquire in the future, and any failure to do socould disrupt our business and seriously harm our financial condition.

 

In addition, we have mademinority equity investments in early-stage companies, and we expect to continueto review opportunities to make additional investments in such companies wherewe believe such investments will provide us with opportunities to gain accessto important technologies or otherwise enhance important commercialrelationships.  We have little or noinfluence over the early-stage companies in which we have made or may makestrategic, minority equity investments. Each of these investments involves a high degree of risk.  We may not be successful in achieving thetechnological or commercial advantage upon which any given investment ispremised, and failure by the early-stage company to achieve its own businessobjectives could result in a loss of all or part of our invested capital andrequire us to write off all or a portion of such investment.

 

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

 

We develop complex andevolving products.  Despite testing by usand our customers, errors may be found in existing or new products.  This could result in, among other things, a delayin recognition or loss of revenues, loss of market share or failure to achievemarket acceptance.  These defects maycause us to incur significant warranty, support and repair costs, divert theattention of our engineering personnel from our product development efforts andharm our relationships with customers. The occurrence of these problems could result in the delay or loss ofmarket acceptance of our products and would likely harm our business.  Defects, integration issues or otherperformance problems in our products could result in financial or other damagesto customers or could damage market acceptance of such products.  Our customers could also seek damages from usfor their losses.  A product liabilityclaim brought against us, even if unsuccessful, would likely be time consumingand costly to defend.

 

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

 

We historically havegenerated a portion of our total revenues from development contracts, primarilywith key customers.  These developmentcontracts have provided us with partial funding for the development of some ofour products.  Under these contracts, wereceive payments upon reaching certain development milestones.  If we fail to achieve the milestones specifiedin our existing development contracts, if our existing contracts are terminatedor if we are unable to secure future development contracts, our ability tocost-effectively develop new products would be reduced and our business wouldbe harmed.

 

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

 

We may requiresubstantial additional capital to finance our future growth, secure additionalfoundry capacity and fund our ongoing research and development activitiesbeyond 2005.  Our capital requirementswill depend on many factors, including:

 

•                  acceptance ofand demand for our products;

 

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

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

•                  any additionalacquisitions that we may make.

 

To the extent that ourexisting sources of liquidity and cash flow from operations are insufficient tofund our activities, we may need to raise additional funds.  If we raise 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 tothose 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 failto manage our future growth, if any, our business would be harmed.**

 

We anticipate that ourfuture growth, if any, will require us to recruit and hire a substantial numberof new engineering, managerial, sales and marketing personnel.  Our ability to manage growth successfullywill also require us to expand and improve administrative, operational,management and financial systems and controls. Many of our key operations, including a material portion of our researchand development operations and a significant portion of our sales andadministrative operations are located in Israel.  A majority of our sales and marketing andcertain of our research and development and administrative personnel, includingour President and Chief Executive Officer and other officers, are based in theUnited States.  The geographic separationof these operations places additional strain on our resources and our abilityto manage growth effectively.  If we areunable to manage growth effectively, our business will be harmed.

 

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

 

Our success depends to asignificant degree upon the continuing contributions of our senior management.  Management and other employees mayvoluntarily terminate their employment with us at any time upon shortnotice.  The loss of key personnel coulddelay product development cycles or otherwise harm our business.  We believe that our future success will alsodepend in large part on our ability to attract, integrate and retainhighly-skilled engineering, managerial, sales and marketing personnel, locatedin the United States, Israel and China. Competition for such personnel is intense, and we may not be successfulin attracting, integrating and retaining such personnel.  Failure to attract, integrate and retain keypersonnel could harm our ability to carry out our business strategy and competewith other companies.

 

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

 

A portion of the cost ofour operations, relating mainly to our personnel and facilities in Israel, isincurred in new Israeli shekels.  As aresult, we bear the risk that the rate of inflation in Israel will exceed therate of devaluation of the new Israeli shekel in relation to the United Statesdollar, which will increase our costs as expressed in United Statesdollars.  To date, we have not engaged inhedging transactions.  In the future, wemay enter into currency hedging transactions to decrease the risk of financialexposure from fluctuations in the exchange rate of the United States dollaragainst the new Israeli shekel.  Thesemeasures may not adequately protect us from the impact of inflation in Israel.

 

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

 

Historically, we havefinanced a portion of our research and development activities with grants forresearch and development from the Chief Scientist in Israel’s Ministry ofIndustry and Trade.  We earned proceedsfrom such grants in 2003 and 2004 and we plan to seek additional grants fromthe Chief Scientist in the future.  To beeligible for these grants, our development projects must be approved by theChief Scientist on a case-by-case basis. If our development projects are not approved by the Chief Scientist, wewill not receive grants to fund these projects, which would increase ourresearch and development costs.  We alsoreceive tax benefits, in particular exemptions and reductions as a result ofthe “Approved Enterprise” status of our existing operations in Israel.  To be eligible for these tax benefits, wemust maintain our Approved Enterprise status by meeting conditions, includingmaking specified investments in fixed assets located in Israel and investingadditional equity in our Israeli subsidiary. If we fail to meet these conditions in the future, the tax benefitswould be canceled and we could be required to refund the tax benefits alreadyreceived.  These tax benefits may not becontinued in the future at their current levels or at any level.  Israeli governmental authorities haveindicated that the government may reduce or eliminate these benefits in thefuture, which would harm our business.

 

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

 

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

 

•                  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.

 

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

 

The market price of ourcommon stock has fluctuated significantly since our initial public offering in1995.  Between January 1, 2004 and June30, 2005, the closing sale price of our common stock, as reported on The NasdaqNational Market, ranged from a low of $8.97 to a high of $22.20.  The market price of our common stock issubject to significant fluctuations in the future in response to a variety offactors, including:

 

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

•                  quarterlyvariations in operating results;

•                  changesin analysts’ earnings estimates;

•                  announcementsof technological innovations;

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

•                  lossof key personnel;

•                  proprietaryrights or other litigation;

•                  generalconditions in the semiconductor industry; and

•                  developmentsin the financial markets.

 

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

 

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

 

Weare exposed to financial market risks including changes in interest rates andforeign currency exchange rates.

 

Thefair value of our investment portfolio or related income would not besignificantly impacted by either a 10% increase or decrease in interest ratesdue mainly to the short-term nature of the major portion of our investmentportfolio.

 

Amajority of our revenue and capital spending is transacted in U.S. dollars,although a portion of the cost of our operations, relating mainly to our personneland facilities in Israel, is incurred in New Israeli Shekels.  As a result, we bear the risk that therate of inflation in Israel will exceed the rate of devaluation of the newIsraeli shekel in relation to the United States dollar, which will increase ourcosts as expressed in United States dollars. We have not engaged in hedgingtransactions to reduce our exposure to fluctuations that may arise from changesin foreign exchange rates.  Based on ouroverall currency rate exposure at June 30, 2005, a near-term 10% appreciationor depreciation of the New Israeli Shekel would have an immaterial affect onour financial condition.

 

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

 

***DisclosureControls and Procedures****.** ***Under thesupervision and with the participation of our management, including our ChiefExecutive Officer and our Chief Financial Officer, we evaluated theeffectiveness of our disclosure controls and procedures, as such term isdefined under Rule 13a-15(e) promulgated under the Securities Exchange Actof 1934, as amended.  Based upon thatevaluation, our Chief Executive Officer and Chief Financial Officer****concluded that our disclosure controls andprocedures were effective as of the end of the period covered by this quarterlyreport.

 

***InternalControls Over Financial Reporting****.*  There has been no change in our internalcontrol over financial reporting during the quarter ended June 30, 2005 thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

 

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**PART II. OTHER INFORMATION**

 

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

 

Zoran and its OakTechnology, Inc. subsidiary have initiated two legal actions against MediaTek,Inc. and customers of MediaTek alleging that products incorporating certainMediaTek components infringe three patents co-owned by Zoran and Oak relatingto optical drive controller design and integrated CD/DVD controller design.

 

On March 11, 2004,Zoran and Oak filed a complaint with****theUnited States International Trade Commission (“ITC”) alleging that certainMediaTek DVD player and optical disk controller chips and chipsets, andproducts in which they are used, infringe Zoran’s and Oak’s patents.  In addition to MediaTek, the complaint named10 other proposed respondents that sell products, including DVD players and PCoptical storage devices that use MediaTek’s chips and chipsets.  The other proposed respondents were ASUSTekComputer, Inc., Creative Labs, Inc., Creative Technology, Ltd., Jiangsu ShincoElectronic Group Co., Ltd., LITE-ON Information Technology Corporation, MintekDigital, Shinco International AV Co., Ltd., TEAC Corporation, TEAC America,Inc., Terapin Technology Corporation and Terapin Technology.  The complaint requested that the ITCinstitute an investigation of the accused products and issue exclusion andcease and desist orders prohibiting the importation into the United States ofthe infringing MediaTek devices and products that contain them.  On April 8, 2004, the ITC instituted aninvestigation based on Zoran’s complaint. On April 28, 2004, Zoran and Oak reached a settlement withrespondents Creative Technology, Ltd. and Creative Labs, Inc., and theserespondents were subsequently dismissed from the investigation pursuant to theterms of the settlement agreement.  OnJuly 13, 2004, the ITC granted Zoran’s request that nine additionalrespondents be added to the investigation. These additional respondents are Artronix Technology, ASUS ComputerInternational, Audiovox Corporation, EPO Science and Technology, Inc., InitialTechnology, Inc., Micro-Star International Co., Ltd., MSI Computer Corp.,Shinco Digital Technology Ltd. and Ultima Electronics Corporation.  On October 26, 2004, MediaTek filed amotion for summary determination seeking an order that two of the assertedpatents were invalid.  This motion wasdenied on November 18, 2004.  OnDecember 13, 2004, MediaTek filed another motion for summary determinationseeking a similar order on different grounds. This motion was denied on December 22, 2004.  The hearing took place in February 2005, andthe target date for completion of the investigation is September 14, 2005.

 

OnMarch 15, 2004, Zoran and Oak filed a complaint against MediaTek andMintek Digital in the United States District Court, Central District ofCalifornia alleging similar facts regarding infringement by MediaTek’s chipsand chipsets and products in which they are used.  The lawsuit seeks both monetary damages andan injunction to stop the importation and sale of infringing products.  Zoran subsequently amended the complaint toname ASUSTek Computer, Inc., Jiangsu Shinco Electronic Group Co., Ltd.,LITE-ON Information Technology Corporation, Mintek Digital, ShincoInternational AV Co., Ltd., TEAC Corporation, TEAC America, Inc., TerapinTechnology Corporation and Terapin Technology as defendants.  On June 17, 2004, pursuant tostipulation of the parties, the case was transferred to the United StatesDistrict Court, Northern District of California.  On July 2, 2004, the defendants filed afirst amended answer which included counterclaims for declaration ofnoninfringement, declaration of invalidity, declaration of unenforceability,breach of covenant not to sue, breach of covenant of good faith and fairdealing and unfair competition.  OnJuly 22, 2004, Zoran and Oak moved to dismiss certain of the defendants’defenses and counterclaims and, on July 30, 2004, MediaTek filed a motionfor summary judgment as to two of the three patents asserted by Zoran and Oakagainst MediaTek.  On December 9,2004, the Court granted Zoran and Oak’s motion, in part, and dismissed certainof defendant’s counterclaims and affirmative defenses.  The Court also denied MediaTek’s motion for summaryjudgment.  On October 15, 2004,MediaTek filed a second motion for summary judgment seeking summary judgment onalternate grounds as to the same two patents. This motion was nearly identical to the motion filed by MediaTek onOctober 26, 2004 in the ITC.  Thehearing on this motion was held on December 10, 2004.  The Court has not ruled on this motion.  On October 29, 2004, Zoran and Oakvoluntarily dismissed two of their three claims against the defendants withoutprejudice and refiled those two claims as a separate lawsuit against thedefendants.  The parties have stipulated,and the Court has agreed, that the newly filed action will be consolidated forall purposes with the first filed action, including for purposes of trial andall pre-trial scheduling.  OnJanuary 3, 2005, defendants Audiovox Corporation, Artronix Technology,Inc., ASUS Computer International, Inc., Initial Technology, Inc., ChangzhouShinco Digital Technology Co., Ltd., EPO Science and Technology Co., Inc.,Micro-Star International, Co., Ltd., MSI Computer Corp., Shinco InternationalAV Co. and Ultima Electronics Corp. were added to this case by stipulation ofthe parties.  No trial date has yet beenset in these consolidated actions.

 

On July 23, 2004,MediaTek filed a complaint with the ITC alleging that certain Zoran and Oak DVDplayer and optical disk controller chips and chipsets infringe two MediaTekpatents.  The complaint requested thatthe ITC institute an investigation into the accused products and issueexclusion and cease and desist orders prohibiting importation into the UnitedStates of allegedly infringing chips and products that contain them.  On August 26, 2004, the ITC institutedan investigation.  On September 24,2004, MediaTek filed a motion to amend the complaint to add one additionalpatent and to name Sunext Technology Co., Ltd. as a respondent.  This motion was granted on October 7,2004.  Discovery is currently underway.  On February 16, 2005, MediaTek filed amotion for leave to amend the complaint and notice of investigation to assertadditional claims of the MediaTek patents against Oak, Zoran and Sunext.

 

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That motion was denied onMarch 4, 2005.  The hearing took place inJune and July 2005, and the target date for completion of the investigation isJanuary 30, 2006.

 

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

 

On February 2, 2005,MediaTek filed a complaint against Zoran and Zoran Digital Technologies (Shenzhen) Ltd. (Zoran’s local Chineseoperations) in the Shenzhen People’s Republic of China court alleginginfringement of the Chinese counterpart patent of one of the two patentsasserted in MediaTek’s ITC complaint and seeking monetary damages.  Because Zoran Digital Technologies (Shenzhen)Ltd. had been improperly identified in the original complaint, it was not untilJuly 22, 2005 that Zoran Digital Technologies (Shenzhen) Ltd. was formallyserved with the complaint.  At this time,Zoran has not been served with the complaint. The initiation of the full proceeding is stayed until all parties areformally served.

 

Based upon itspreliminary review, Zoran believes that it has meritorious defenses to thethree MediaTek complaints, which Zoran believes were filed in response to theproceedings that Zoran has been prosecuting against MediaTek and itscustomers.  Zoran intends to defend theMediaTek actions vigorously.  However,the litigation is in the preliminary stage, and Zoran cannot predict itsoutcome with certainty.  Patentlitigation is particularly complex and can extend for a protracted time, whichcan substantially increase litigation expenses.

 

**Item 6. Exhibits**

 
| 10.11(1) |   | Lease agreement  effective May 2005 between the Company’s wholly-owned subsidiary, Zoran Microelectronics,  Ltd. and Matam-Haifa Scientific Industries Center, Ltd. |
|----------|--------|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 31.1     |   | Certification of Chief  Executive Officer pursuant to Rule 13a-14(a).                                                                                                    |
| 31.2     |   | Certification of Chief  Financial Officer pursuant to Rule 13a-14(a).                                                                                                    |
| 32.1     |   | Certification of Chief  Executive Officer, pursuant to 18 U.S.C. Section 1350.                                                                                           |
| 32.2     |   | Certification of Chief  Financial Officer, pursuant to 18 U.S.C. Section 1350.                                                                                           |

 

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(1) Incorporated byreference to identically numbered exhibit to the Company’s Form S-1registration statement (No. 333-125948), which became effective June 27, 2005.

 

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**SIGNATURES**

 

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 

 
| ** **           | ** ** | ** ** | **ZORAN CORPORATION**                         | ** ** | ** ** |
|----------------------|------------|------------|-----------------------------------------------|------------|------------|
|                 |       |       |                                          |       |       |
|                 |       |       |                                          |       |       |
| Date: August 9, 2005 |       |       | /s/ Karl Schneider                            |       |       |   |
|                 |       |       | Karl Schneider                                |       |       |
|                 |       |       | Senior Vice President,  Finance               |       |       |
|                 |       |       | and Chief Financial  Officer                  |       |       |
|                 |       |       | (Principal Financial  and Accounting Officer) |       |       |
|                      |            |            |                                               |            |            |  |

 

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