**SECURITIESAND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

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

 

**For the Quarterly Period EndedSeptember 30, 2003**

 

**OR**

 

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

 

**For the transition period from                           to                            **

 

**Commission File No. 0-27246**

 

**ZORANCORPORATION**

(Exact name ofregistrant as specified in its charter)

 

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

** **

**1390 Kifer RoadSunnyvale, California 94086**

(Address of principal executive offices, including zip code)

 

**(408) 523-6500**

(Registrant’s telephone number, including area code)

 

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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 November 11, 2003,there were outstanding 42,252,076 shares of the registrant’s Common Stock, parvalue $0.001 per share.

 

 

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**ZORAN CORPORATION AND SUBSIDIARIES**

 

**FORM 10-Q**

**INDEX**

**For the Quarter Ended September 30,2003**

 
| **PART I. FINANCIAL INFORMATION** |
|-----------------------------------|
|                              |   |
| **Item  1.**                      | Financial Statements  (Unaudited): |   |
|                              |   |   |
|                              | Condensed  Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002 | 3 |
|                              |   |   |
|                              | Condensed  Consolidated Statements of Operations for the Three Months and Nine Months  Ended September 30, 2003 and September 30, 2002 | 4 |
|                              |   |   |
|                              | Condensed Consolidated  Statements of Cash Flows for the Nine Months Ended September 30, 2003  and September 30, 2002 | 5 |
|                              |   |   |
|                              | Notes  to Condensed Consolidated Financial Statements | 6 |
|                              |   |   |
| **Item 2.**                       | Management’s Discussion and Analysis of  Financial Condition and Results of Operations | 14 |
|                              |   |   |
| **Item 3.**                       | Quantitative and Qualitative Disclosures About  Market Risk | 31 |
|                              |   |   |
| **Item 4.**                       | Control and Procedures | 32 |
|                              |   |   |
|                              |   |   |
| **PART II. OTHER INFORMATION**    |
|                              |   |   |
| **Item  4.**                      | Submission of Matters to a Vote of Security  Holders | 33 |
|                              |   |   |
| **Item 6.**                       | Exhibits and Reports on Form 8-K | 34 |
|                              |   |   |
| Signatures                        |   | 35 |
|                                   |  |  |  |

 

2

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**ZORANCORPORATION**

**CONDENSEDCONSOLIDATED BALANCE SHEETS**

**(inthousands, except share data)**

**(unaudited)**

 
|                                                                                                                                                                                                                                                                                          |   | **September  30,  2003** |    | **December  31,  2002** |   |
|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------|--------------------------|---------|-------------------------|--------|
|                                                                                                                                                                                                                                                                                          |   |                     |    |                    |   |
| ASSETS                                                                                                                                                                                                                                                                                        |   |                     |    |                    |   |
| Current  assets:                                                                                                                                                                                                                                                                              |   |                     |    |                    |   |
| Cash  and cash equivalents                                                                                                                                                                                                                                                                    |   | $                        | 52,462  |                    | $      | 31,607 |   |
| Short-term  investments                                                                                                                                                                                                                                                                       |   | 100,475                  |    | 105,468                 |   |
| Accounts  receivable, net                                                                                                                                                                                                                                                                     |   | 71,272                   |    | 34,652                  |   |
| Inventory                                                                                                                                                                                                                                                                                     |   | 11,058                   |    | 12,686                  |   |
| Prepaid  expenses and other current assets                                                                                                                                                                                                                                                    |   | 24,884                   |    | 6,479                   |   |
| Total  current assets                                                                                                                                                                                                                                                                         |   | 260,151                  |    | 190,892                 |   |
|                                                                                                                                                                                                                                                                                          |   |                     |    |                    |   |
| Property  and equipment, net                                                                                                                                                                                                                                                                  |   | 21,202                   |    | 5,848                   |   |
| Other  assets                                                                                                                                                                                                                                                                                 |   | 39,342                   |    | 78,334                  |   |
| Goodwill                                                                                                                                                                                                                                                                                      |   | 122,655                  |    | 59,131                  |   |
| Intangible  assets, net                                                                                                                                                                                                                                                                       |   | 198,318                  |    | 8,411                   |   |
|                                                                                                                                                                                                                                                                                          |   |                     |    |                    |   |
|                                                                                                                                                                                                                                                                                          |   | $                        | 641,668 |                    | $      | 342,616 |   |
|                                                                                                                                                                                                                                                                                          |   |                     |    |                    |   |
|                                                                                                                                                                                                                                                                                          |   |                     |    |                    |   |
| LIABILITIES  AND STOCKHOLDERS’ EQUITY                                                                                                                                                                                                                                                    |   |                     |    |                    |   |
| Current  liabilities:                                                                                                                                                                                                                                                                         |   |                     |    |                    |   |
| Accounts  payable                                                                                                                                                                                                                                                                             |   | $                        | 29,882  |                    | $      | 9,639 |   |
| Accrued  expenses and other liabilities                                                                                                                                                                                                                                                       |   | 55,810                   |    | 21,965                  |   |
| Total  current liabilities                                                                                                                                                                                                                                                                    |   | 85,692                   |    | 31,604                  |   |
|                                                                                                                                                                                                                                                                                          |   |                     |    |                    |   |
| Other  long-term liabilities                                                                                                                                                                                                                                                                  |   | 9,910                    |    | —                  |   |
|                                                                                                                                                                                                                                                                                          |   |                     |    |                    |   |
| Stockholders’  equity:                                                                                                                                                                                                                                                                   |   |                     |    |                    |   |
| Common  stock, $0.001 par value; 105,000,000 shares authorized at September 30, 2003  and 55,000,000 shares authorized at December 31, 2002; 42,114,552 shares  issued and outstanding as of  September  30, 2003; and 27,395,117 shares issued and outstanding as of December 31,  2002 |   | 42                       |    | 27                      |   |
| Additional  paid-in capital                                                                                                                                                                                                                                                                   |   | 701,720                  |    | 399,052                 |   |
| Deferred  stock-based compensation                                                                                                                                                                                                                                                            |   | (16,849                  | )       | (83                     | )      |
| Accumulated  other comprehensive income (loss)                                                                                                                                                                                                                                                |   | (297                     | )       | 508                     |   |
| Accumulated  deficit                                                                                                                                                                                                                                                                          |   | (138,550                 | )       | (88,492                 | )      |
| Total  stockholders’ equity                                                                                                                                                                                                                                                              |   | 546,066                  |    | 311,012                 |   |
|                                                                                                                                                                                                                                                                                          |   |                     |    |                    |   |
|                                                                                                                                                                                                                                                                                          |   | $                        | 641,668 |                    | $      | 342,616 |   |

 

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

 

3

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** **

**ZORANCORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF OPERATIONS**

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

**(unaudited)**

 
|                                                        |   | **Three  Months Ended  September 30,** |    | **Nine  Months Ended  September 30,** |   |
|-------------------------------------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                                                        |   | **2003**                               |    | **2002**                              |   | **2003** |   | **2002** |   |
|                                                        |   |                                   |    |                                  |   |   |   |   |   |
| Revenues:                                                   |   |                                   |    |                                  |   |   |   |   |   |
| Product  revenues                                           |   | $                                      | 64,654  |                                  | $      | 43,814 |   | $ | 143,261 |   | $ | 105,118 |   |
| Software  and other revenues                                |   | 2,766                                  |    | 243                                   |   | 6,723 |   | 4,023 |   |
| Total  revenues                                             |   | 67,420                                 |    | 44,057                                |   | 149,984 |   | 109,141 |   |
|                                                        |   |                                   |    |                                  |   |   |   |   |   |
| Costs  and expenses:                                        |   |                                   |    |                                  |   |   |   |   |   |
| Cost  of product revenues                                   |   | 40,394                                 |    | 25,349                                |   | 93,331 |   | 64,740 |   |
| Research  and development                                   |   | 12,179                                 |    | 5,880                                 |   | 22,889 |   | 16,922 |   |
| Selling,  general and administrative                        |   | 11,293                                 |    | 6,697                                 |   | 26,031 |   | 18,342 |   |
| Amortization  of intangible assets                          |   | 6,516                                  |    | 2,309                                 |   | 8,403 |   | 6,927 |   |
| Deferred  stock compensation                                |   | 2,426                                  |    | 10                                    |   | 2,446 |   | 282 |   |
| In-process  research and development                        |   | 50,100                                 |    | —                                |   | 50,100 |   | — |   |
| Total  costs and expenses                                   |   | 122,908                                |    | 40,245                                |   | 203,200 |   | 107,213 |   |
|                                                        |   |                                   |    |                                  |   |   |   |   |   |
| Operating  income (loss)                                    |   | (55,488                                | )       | 3,812                                 |   | (53,216 | ) | 1,928 |   |
|                                                        |   |                                   |    |                                  |   |   |   |   |   |
| Interest  income                                            |   | 1,297                                  |    | 1,684                                 |   | 4,325 |   | 5,507 |   |
| Other  income (loss), net                                   |   | 212                                    |    | (8                                    | )      | 41 |   | (520 | ) |
|                                                        |   |                                   |    |                                  |   |   |   |   |   |
| Income  (loss) before income taxes                          |   | (53,979                                | )       | 5,488                                 |   | (48,850 | ) | 6,915 |   |
|                                                        |   |                                   |    |                                  |   |   |   |   |   |
| Provision  for income taxes                                 |   | 505                                    |    | 781                                   |   | 1,208 |   | 1,413 |   |
|                                                        |   |                                   |    |                                  |   |   |   |   |   |
| Net  income (loss)                                          |   | $                                      | (54,484 | )                                     | $      | 4,707 |   | $ | (50,058 | ) | $ | 5,502 |   |
|                                                        |   |                                   |    |                                  |   |   |   |   |   |
| Basic  net income (loss) per share                          |   | $                                      | (1.53   | )                                     | $      | 0.17 |   | $ | (1.66 | ) | $ | 0.20 |   |
|                                                        |   |                                   |    |                                  |   |   |   |   |   |
| Diluted  net income (loss) per share                        |   | $                                      | (1.53   | )                                     | $      | 0.17 |   | $ | (1.66 | ) | $ | 0.19 |   |
|                                                        |   |                                   |    |                                  |   |   |   |   |   |
| Shares  used to compute basic net income (loss) per share   |   | 35,718                                 |    | 27,150                                |   | 30,188 |   | 27,018 |   |
|                                                        |   |                                   |    |                                  |   |   |   |   |   |
| Shares  used to compute diluted net income (loss) per share |   | 35,718                                 |    | 28,089                                |   | 30,188 |   | 28,687 |   |

 

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

 

4

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**ZORAN CORPORATION**

**CONDENSEDCONSOLIDATED STATEMENTS OF CASH FLOWS**

**(in thousands)**

**(unaudited)**

 
|                                                                     |   | **Nine  Months Ended  September 30,** |    |
|--------------------------------------------------------------------------|--------|---------------------------------------|---------|
|                                                                     |   | **2003**                              |    | **2002** |   |
| Cash  flows from operating activities:                                   |   |                                  |    |   |   |
| Net  loss                                                                |   | $                                     | (50,058 | ) | $ | 5,502 |   |
| Adjustments  to reconcile net loss to net cash provided by operations:   |   |                                  |    |   |   |
| Depreciation,  amortization and other                                    |   | 3,642                                 |    | 1,804 |   |
| Amortization  of intangible assets                                       |   | 8,403                                 |    | 6,927 |   |
| Amortization  of deferred stock compensation                             |   | 2,446                                 |    | 282 |   |
| In-process  research and development                                     |   | 50,100                                |    | — |   |
| Realized  loss on exchange of marketable securities                      |   | —                                |    | 696 |   |
| Changes  in current assets and liabilities:                              |   |                                  |    |   |   |
| Accounts  receivable                                                     |   | (28,534                               | )       | (970 | ) |
| Inventory                                                                |   | 5,304                                 |    | (6,014 | ) |
| Prepaid  expenses and other current assets and other assets              |   | (1,165                                | )       | (141 | ) |
| Accounts  payable                                                        |   | 12,786                                |    | (3,665 | ) |
| Accrued  expenses and other liabilities                                  |   | 4,614                                 |    | 3,063 |   |
| Deferred  income taxes, deferred revenue and other long-term liabilities |   | 1,055                                 |    | (65 | ) |
| Net  cash provided by operating activities                               |   | 8,593                                 |    | 7,419 |   |
|                                                                     |   |                                  |    |   |   |
| Cash  flows from investing activities:                                   |   |                                  |    |   |   |
| Capital  expenditures for property and equipment                         |   | (6,717                                | )       | (1,308 | ) |
| Purchases  of investments                                                |   | (114,909                              | )       | (129,488 | ) |
| Proceeds  from sales and maturities of investments                       |   | 163,217                               |    | 119,587 |   |
| Acquisition  of Oak Technology, Inc., net of cash acquired               |   | (44,404                               | )       | — |   |
| Net  cash used in investing activities                                   |   | (2,813                                | )  | (11,209 | ) |
|                                                                     |   |                                  |    |   |   |
| Cash  flows from financing activities:                                   |   |                                  |    |   |   |
| Proceeds  from issuance of common stock                                  |   | 17,775                                |    | 4,181 |   |
| Installment  payment on purchased core technology                        |   | (2,700                                | )       | — |   |
| Net  cash provided by financing activities                               |   | 15,075                                |    | 4,181 |   |
|                                                                     |   |                                  |    |   |   |
| Net  increase in cash and cash equivalents                               |   | 20,855                                |    | 391 |   |
|                                                                     |   |                                  |    |   |   |
| Cash  and cash equivalents at beginning of period                        |   | 31,607                                |    | 20,287 |   |
|                                                                     |   |                                  |    |   |   |
| Cash  and cash equivalents at end of period                              |   | $                                     | 52,462  |   | $ | 20,678 |   |

 

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

 

5

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** **

**ZORAN CORPORATION**

**NOTES TOCONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

 

 

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

 

The accompanyingunaudited condensed consolidated financial statements of Zoran Corporation andsubsidiaries (“Zoran” or the “Company”) have been prepared in conformity withaccounting principles generally accepted in the United States of America.  However, certain information or footnotedisclosures normally included in financial statements prepared in accordancewith accounting principles generally accepted in the United States of Americahave been condensed or omitted pursuant to the rules and regulations of theSecurities and Exchange Commission (the “Commission”).  In the opinion of management, the condensedconsolidated financial statements reflect all adjustments considered necessaryfor a fair presentation of the consolidated financial position, operatingresults and cash flows for the periods presented.  The results of operations for the interim periods presented arenot necessarily indicative of the results that may be expected for the fullfiscal year or in any future period. This quarterly report on Form 10-Q should be read in conjunction withthe audited consolidated financial statements and notes thereto for the yearended December 31, 2002, included in the Zoran Corporation 2002Annual Report on Form 10-K filed with the Commission.

 

 

***Reclassifications***

 

Certain prior period amountshave been reclassified to conform to the current period presentation.

 

 

***Recently Issued Accounting Standards***

 

InNovember 2002, the Emerging Issues Task Force (“EITF”) reached a consensus onIssue No. 00-21, “Revenue Arrangements with Multiple Deliverables.”  EITF Issue No. 00-21 provides guidance onhow to account for arrangements that involve the delivery or performance ofmultiple products, services and/or rights to use assets. The provisions of EITFIssue No. 00-21 will apply to revenue arrangements entered into in fiscalperiods beginning after June 15, 2003. The adoption of this standard did not have a material impact on theCompany’s financial statements.

 

InJanuary 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”),“Consolidation of Variable Interest Entities, an Interpretation of ARB No.51.”  FIN 46 requires certain variableinterest entities to be consolidated by the primary beneficiary of the entityif the equity investors in the entity do not have the characteristics of a controllingfinancial interest or do not have sufficient equity at risk for the entity tofinance its activities without additional subordinated financial support fromother parties.  FIN 46 is effectiveimmediately for all new variable interest entities created or acquired afterJanuary 31, 2003.  For variable interestentities created or acquired prior to February 1, 2003, the provisions of FIN46 must be applied for the first interim or annual period beginning after June15, 2003.  The adoption of this standardwill not have a material impact on the Company's financial statements.

 

DuringOctober 2003, the FASB issued FSP 46-6 which is effective for financialstatements issued after October 9, 2003, and provides a broad deferral of thelatest date by which all public entities must apply FIN 46 to certain variableinterest entities, to the first reporting period ending after December 15,2003.

 

6

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**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.  In connection with stock options grantedthrough the acquisition of Nogatech, Inc. during 2000 and Oak Technology, Inc.during 2003, the Company recorded deferred stock-based compensation which isbeing amortized over the vesting periods of the options.  Deferred stock compensation expenserecognized as a result of the amortization of these options during the quarterended September 30, 2003 and the nine-month period ended September 30, 2003 wasapproximately $2,426,000 and $2,446,000, respectively.  

 

 

Had compensation cost forthe Company’s option and stock purchase plans been determined based on the fairvalue of the option at the grant date, as prescribed in Statement of FinancialAccounting Standards No. 123 (“SFAS 123”), the Company’s net loss and net lossper share for each of the three and nine month periods ended September 30, 2003and 2002, would have been as follows (in thousands, except per share data):

 
|                                                                               |   | **Three  Months Ended  September 30,** |    | **Nine  Months Ended  September 30,** |   |
|------------------------------------------------------------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                                                                               |   | **2003**                               |    | **2002**                              |   | **2003** |   | **2002** |   |
|                                                                               |   |                                   |    |                                  |   |   |   |   |   |
|                                                                               |   |                                   |    |                                  |   |   |   |   |   |
| Net  loss as reported                                                              |   | $                                      | (54,484 | )                                     | $      | 4,707 |   | $ | (50,058 | ) | $ | 5,502 |   |
|                                                                               |   |                                   |    |                                  |   |   |   |   |   |
| Adjustments:                                                                       |   |                                   |    |                                  |   |   |   |   |   |
| Stock-based  employee compensation  expense included in net loss                   |   | 2,426                                  |    | 10                                    |   | 2,446 |   | 282 |   |
|                                                                               |   |                                   |    |                                  |   |   |   |   |   |
| Stock-based  employee compensation  expense determined under the fair value method |   | (15,692                                | )       | (6,714                                | )      | (28,770 | ) | (17,899 | ) |
|                                                                               |   |                                   |    |                                  |   |   |   |   |   |
| Pro  forma net loss                                                                |   | $                                      | (67,750 | )                                     | $      | (1,997 | ) | $ | (76,382 | ) | $ | (12,115 | ) |
|                                                                               |   |                                   |    |                                  |   |   |   |   |   |
|                                                                               |   |                                   |    |                                  |   |   |   |   |   |
| Pro  forma net loss per share:                                                     |   |                                   |    |                                  |   |   |   |   |   |
| Basic                                                                              |   | $                                      | (1.90   | )                                     | $      | (0.07 | ) | $ | (2.53 | ) | $ | (0.45 | ) |
| Diluted                                                                            |   | $                                      | (1.90   | )                                     | $      | (0.07 | ) | $ | (2.53 | ) | $ | (0.45 | ) |
|                                                                               |   |                                   |    |                                  |   |   |   |   |   |
| Net  income (loss) per share as reported:                                          |   |                                   |    |                                  |   |   |   |   |   |
| Basic                                                                              |   | $                                      | (1.53   | )                                     | $      | 0.17 |   | $ | (1.66 | ) | $ | 0.20 |   |
| Diluted                                                                            |   | $                                      | (1.53   | )                                     | $      | 0.17 |   | $ | (1.66 | ) | $ | 0.19 |   |

 

 

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 model with the followingassumptions used for options and purchase grants during the applicable periods.

 

7

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|                    |   | **Stock Option Plans**                                       |   | **Stock Purchase Plan**                                      |   |
|-------------------------|--------|--------------------------------------------------------------|--------|--------------------------------------------------------------|--------|
|                    |   | **Three and nine  month periods  ended  September 30, 2003** |   | **Three and nine  month periods  ended  September 30, 2002** |   | **Three and nine  month periods  ended  September 30, 2003** |   | **Three and nine  month periods  ended  September 30, 2002** |   |
|                    |   |                                                         |   |                                                         |   |   |   |   |   |
| Expected life (years)   |   | 5.0                                                          |   | 5.0                                                          |   | 0.50 |   | 0.50 |   |
| Expected volatility     |   | 92                                                           | %      | 92                                                           | %      | 92 | % | 92 | % |
| Risk-free interest rate |   | 3.4                                                          | %      | 4.7                                                          | %      | 2.3 | % | 2.9 | % |

 

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

 

 

**3.****              ComprehensiveIncome (Loss)**

 

The following tablepresents the calculation of comprehensive income (loss) as required by SFAS130.  The components of comprehensiveincome (loss), net of tax, are as follows (in thousands):

 
|                                                  |   | **Three  Months Ended  September 30,** |    | **Nine  Months Ended  September 30,** |   |
|-------------------------------------------------------|--------|----------------------------------------|---------|---------------------------------------|--------|
|                                                  |   | **2003**                               |    | **2002**                              |   | **2003** |   | **2002** |   |
|                                                  |   |                                   |    |                                  |   |   |   |   |   |
| Net  income (loss)                                    |   | $                                      | (54,484 | )                                     | $      | 4,707 |   | $ | (50,058 | ) | $ | 5,502 |   |
| Change  in unrealized gain (loss) on investments, net |   | (589                                   | )       | (953                                  | )      | (805 | ) | (2,623 | ) |
| Total  comprehensive income (loss)                    |   | $                                      | (55,073 | )                                     | $      | 3,754 |   | $ | (50,863 | ) | $ | 2,879 |   |

 

The components ofaccumulated other comprehensive income (loss) are unrealized gain (loss) onshort-term and long-term marketable securities.

 

 

**4.****              Inventories**

 

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

 
|                                 |   | **September  30,  2003** |   | **December  31,  2002** |   |
|--------------------------------------|--------|--------------------------|--------|-------------------------|--------|
|                                 |   |                     |   |                    |   |
| Purchased  parts and work in process |   | $                        | 4,440  |                    | $      | 6,365 |   |
| Finished  goods                      |   | 6,618                    |   | 6,321                   |   |
|                                 |   | $                        | 11,058 |                    | $      | 12,686 |   |

 

 

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

 

The Company adoptedStatement of Financial Accounting Standards No. 142, “Goodwill and OtherIntangible Assets”, or SFAS 142, as of January 1, 2002.  SFAS 142 superseded Accounting PrinciplesBoard Opinion No. 17, Intangible Assets, and discontinued the amortization ofgoodwill.  In addition, SFAS 142includes provisions regarding: 1) the 

 

8

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reclassification betweengoodwill and identifiable intangible assets in accordance with the newdefinition of intangible assets set forth in Statement of Financial AccountingStandards No. 141, Business Combinations; 2) the reassessment of the usefullives of existing recognized intangibles; and 3) the testing for impairment ofgoodwill and other intangibles.  

 

In accordance with SFAS142, beginning January 1, 2002, goodwill is no longer amortized, but isrequired to be reviewed periodically for impairment upon the initial adoptionof SFAS No. 142 and, thereafter, on at least an annual basis.  For the year ending December 31, 2003, theCompany performed the annual analysis as of September 30, 2003 and concludedthat goodwill was not impaired.

 

Goodwill and intangibleassets are comprised of the following (in thousands):

 
|                         |   |              |       | **September 30, 2003**      |       | **December 31, 2002**         |       |
|------------------------------|--------|-------------------|------------|-----------------------------|------------|-------------------------------|------------|
|                         |   | **Life  (Years)** |       | **Gross  Carrying  Amount** |       | **Accumulated  Amortization** |       | **Net  Balance** |   | **Gross  Carrying  Amount** |   | **Accumulated  Amortization** |   | **Net  Balance** |   |
|                         |   |              | ** ** |                        | ** ** |                          | ** ** |   | ** ** |   | ** ** |   | ** ** |   | ** ** |
| Amortized intangible assets: |   |              |       |                        |       |                          |       |   |   |   |   |   |   |   |   |
| Purchased technology         |   | 2-3               |       | $                           | 176,720    |                          | $          | (23,266 | ) | $ | 153,454 |   | $ | 18,820 |   | $ | (16,634 | ) | $ | 2,186 |   |
| Patents                      |   | 3-5               |       | 27,900                      |       | (1,646                        | )          | 26,254 |   | 900 |   | (750 | ) | 150 |   |
| Customer base                |   | 3-5               |       | 13,010                      |       | (1,784                        | )          | 11,226 |   | 1,560 |   | (1,137 | ) | 423 |   |
| Tradename and others         |   | 3-5               |       | 2,100                       |       | (895                          | )          | 1,205 |   | 800 |   | (667 | ) | 133 |   |
| Purchased core technology *  |   | 4-5               |       | 7,135                       |       | (956                          | )          | 6,179 |   | 5,582 |   | (63 | ) | 5,519 |   |
| Total                        |   |              |       | $                           | 226,865    |                          | $          | (28,547 | ) | $ | 198,318 |   | $ | 27,662 |   | $ | (19,251 | ) | $ | 8,411 |   |

 

----

(*) The Company recordsthe amortization of purchased core technology as cost of product sales. 

 

 

Estimated futureintangible amortization expense, based on current balances, as ofSeptember 30, 2003 is as follows (in thousands):

 

 
| **Year ending December 31,**   |   | **Amount** |    |
|--------------------------------|--------|------------|---------|
| 2003  (remaining three months) |   | $          | 10,919  |   |
| 2004                           |   | 42,857     |    |
| 2005                           |   | 42,961     |    |
| 2006                           |   | 41,629     |    |
| 2007                           |   | 38,457     |    |
| 2008                           |   | 21,495     |    |
| Total                          |   | $          | 198,318 |   |

 

 

Changes in the carryingamount of goodwill for the nine months ended September 30, 2003 are asfollows (in thousands): 

 
|                                 |   | **Amount** |               |
|--------------------------------------|--------|------------|--------------------|
| Balance  at December 31, 2002        |   | $          | 59,131             |   |
| Acquisition  of Oak Technology, Inc. |   | 63,524     |  (see note 8) |
| Balance  at September 30, 2003  |   | $          | 122,655            |   |

 

9

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**6.****              OtherIncome (Loss)**

 

During the nine monthperiod ended September 30, 2002, Roxio Inc. (“Roxio”) acquired MGI Software Inc(“MGI”). As of the date of acquisition, the Company held approximately 373,000shares of MGI common stock. Upon consummation of the acquisition, the Company’sMGI common stock was exchanged for 18,843 shares of Roxio common stock. Inconnection with the exchange, the Company recorded a realized loss of $696,000and established a new cost basis of its Roxio common stock equal to the fairvalue of the stock on the date of the exchange.

 

 

**7.****              IncomeTaxes**

 

The provision for incometaxes reflects the estimated annualized effective tax rate applied to earningsexcluding charges for amortization of goodwill and other intangibles for theinterim periods.  The effective tax ratediffers from the U.S. statutory rate due to utilization of net operatinglosses, adjustments for the nondeductible amortization of goodwill and otherintangibles and income tax rate differences on foreign earnings.  The Company has provided for tax on incomein excess of net operating loss carryforwards for U.S. federal and stateearnings.  The Company has also providedfor tax on its foreign earnings.

 

 

**8.****              Acquisition**

 

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

 

The transaction isaccounted for under SFAS No. 141, “Business Combinations,” using the purchasemethod of accounting and accordingly the results of operations of Oak have beenincluded in the Company’s financial statements since the date of acquisition. 

 

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

 

•                  Oak’s complementary technologies andproducts, especially in the digital TV markets, and the ability of the combinedcompany to expand its existing customer base and market share in the digitalconsumer electronics market by integrating the product lines of each company; 

 

•                  Oak’s intellectual property portfolioand related expertise, especially intellectual property relating to front-endoptical recording; 

 

•                  access to Oak’s customerrelationships, providing cross-selling opportunities to existing customers aswell as opportunities to build new relationships; 

 

•                  the opportunity to achieve synergiesand realize significant cost savings, including operational efficiencies, suchas acceleration of various product development activities by leveraging Oak’sintellectual property, reduced overhead and, in geographic areas where the twocompanies overlap, increased efficiency in the combined company’s saleschannels; and 

 

•                  Oak’s existing market position as aleading supplier of HDTV integrated circuits, providing the combined companywith access to this high-growth market segment. 

 

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

 

The financial statementsreflect an estimated purchase price of approximately $392.7 million,determined as follows (in thousands): 

 

10

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

 

 

The cash paymentand fair value of common stock issued represents the conversion of eachoutstanding share of Oak common stock into $1.78 in cash and 0.2323 of a shareof Zoran common stock.  As a result ofthe acquisition, 56,737,298 shares of Oak common stock were converted into$101.0 million in cash and 13,180,074 shares of Zoran common with a fair valueof $227.5 million based on the fair market value of Zoran common stock for the period two daysbefore and after the date on which the terms of agreement were finalized andannounced, May 5, 2003.

 

Non-qualified options to purchase approximately 4.5million shares of Zoran common stock with a term of ten years were granted toOak employees as part of the acquisition. The corresponding fair value of these options of $57.4 million wasestimated based on the fair value of the Zoran common stock as of theacquisition date using the Black-Scholes option pricing model applying thefollowing assumptions: expected life of 50 months, risk-free interest rateof 3.65%, expected volatility of 93% and no expected dividend yield.  The intrinsic value of the unvested options,totaling approximately $19.2 million, has been recorded as deferred stockcompensation and will be amortized over the vesting period on a multiple optionapproach basis.

 

Acquisition costs include $3.3 million of investmentbanker fees, $1.7 million of insurance costs, $1.1 million of legal andaccounting fees and $0.7 million in other acquisition related expenses.

 

The purchase price allocation was as follows (inthousands): 

 

 
| Net  assets acquired                 |   | $       | 62,261  |   |
|--------------------------------------|--------|---------|---------|--------|
| Deferred  stock compensation         |   | 19,212  |    |
| In-process  research and development |   | 50,100  |    |
| Intangible  assets                   |   | 197,650 |    |
| Goodwill                             |   | 63,524  |    |
|                                 |   | $       | 392,747 |   |

 

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

 

 
| Cash  and short-term investments |   | $       | 67,761 |   |
|----------------------------------|--------|---------|--------|--------|
| Accounts  receivable             |   | 8,086   |   |
| Other  current assets            |   | 17,090  |   |
| Inventory                        |   | 3,676   |   |
| Property,  plant and equipment   |   | 13,075  |   |
| Other  assets                    |   | 816     |   |
| Current  liabilities             |   | (38,015 | )      |
| Non-current  liabilities         |   | (10,228 | )      |
| Net assets acquired              |   | $       | 62,261 |   |

 

Tangible assets werevalued at estimates of their current fair values.  The valuation of the acquired intangible assets which was basedon management’s estimates and considered various factors including appraisals,resulted in a value of purchased technology of approximately $157.9 million,patents of $27.0 million, customer base of $11.5 million and  trademarks and tradenames of approximately$1.3 million.  Purchased technology isbeing amortized over a weighted average estimated life of 4.8 years andpatents, customer base, trademarks and tradenames are being amortized overtheir estimated useful lives of 5 years with no residual values.  

 

Approximately $63.5 million of the purchase price wasallocated to goodwill. Goodwill represents the excess of the 

 

11

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purchase price over the fair value of the net tangible andidentifiable intangible assets acquired. In accordance with SFAS 142, “Goodwilland Other Intangible Assets”, goodwill will not be amortized and will be testedfor impairment at least annually.  We donot expect goodwill to be deductible for tax purposes.

 

Approximately $50.1 million of the purchase price was allocated toin-process research and development which had not yet reached technologicalfeasibility and had no alternative future use. Accordingly, this amount was immediately expensed upon theacquisition date.  This amount was determined using management’s estimates including consultationwith an independent appraiser.  Thein-process research and development was determined using a discounted cash flowmethod and factors including projected financial results, relative risk ofsuccessful development, time-value of money and level of completion. 

 

The Company expects thatthe in-process technologies will be successfully completed by the secondquarter of calendar 2005 with approximately $30.0 million in remainingcosts.  At the time of acquisition, Oakhad five material development projects in process as follows: 

 

•                  OTI-4100 – a highly integrated, fullyprogrammable system-on-a-chip (SOC) solution for the emerging class ofappliance type printers.  The OTI-4100incorporates the ARM9E RISC CPU core and Quatro SIMD DSP core to provide aneasy to program controller platform.

 

•                  Fire 3 – a programmable SOC solutionthat will complement the OTI-4110 and ZR-4100 in the inkjet market.  Fire 3 will provide a fully scalablesolution platform to cover much of the performance and feature range of anOEM’s inkjet offerings.

 

•                  Integrated Print System – TheIntegrated Print System (“IPS”) is a dynamic embedded scalable architectureproviding peripheral manufacturers with highly integrated modular controllerand connectivity software for powering single and multifunctional devices.

 

•                  Generation 9 - an integrated SOC thatintegrates a previous generation of HDTV digital video technology with a newAudio-DSP Core as well as a MIPS 64 bit processor and certain other videoprocessing features.

 

•                  A new lower cost highly integratedHDTV decoder – the first in a family of highly integrated HDTV decodersspecifically designed for the FCC mandated digital television chassismarket.  This device includes all the requiredinterfacing to support digital cable applications and is applicable to existingCRT and flat panel display devices.

 

The value of in-processresearch and development was determined using the multi-period excess earningsmethod by estimating the expected net cash flows from the projects oncecommercially viable and discounting the net cash flows back to their presentvalue using a discount rate of 22%. This rate was based on the industry segment for the technology, natureof the products to be developed, length of time to complete the project andoverall maturity and history of the development team.  The net cash flows from the identified projects were based onestimates of revenue, cost of revenue, research and development expenses,selling general and administrative expenses, and applicable income taxes.  These estimates did not take into accountany potential synergies that could be realized as a result of theacquisition.  Revenues for theincremental core technologies developed are expected to commence in the fourthquarter of 2005 and extend through 2011.Revenue projections were based on estimates of market size and growth,expected trends in technology and the expected timing of new productintroductions.  

 

As of September 30, 2003,the Company has incurred approximately $1.8 million of the estimated $30.0million in remaining costs to complete the development of the in-processprojects.  As of September 30, 2003,there have been no material variations from the underlying assumptions thatwere used in the original computation of the value of the acquired in-processresearch and development.

 

The following unauditedpro forma financial information presents the combined results of operations ofZoran and Oak as if the acquisition had occurred as of the beginning of fiscal2002 and 2003, after giving effect to certain adjustments, includingamortization of intangibles.  Thein-process research and development charge of $50.1 million is notreflected in the unaudited pro forma combined condensed statement of operations.  The unaudited pro forma financialinformation does not necessarily reflect the results of operations that wouldhave occurred had the combined companies constituted a single entity duringsuch periods, and is not necessarily indicative of results which may beobtained in the future.

 

12

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|                                        |   | **Three  Months Ended  September 30,** |    | **Nine  Months Ended  September 30,** |       |
|---------------------------------------------|--------|----------------------------------------|---------|---------------------------------------|------------|
| **In thousands except for per share data:** |   | **2003**                               |    | **2002**                              | ** ** | **2003** | ** ** | **2002** | ** ** |
|                                        |   |                                   |    |                                  |       |   |   |   |   |
| Pro  forma revenues                         |   | $                                      | 78,677  |                                  | $          | 74,266 |   | $ | 209,113 |   | $ | 216,394 |   |
|                                        |   |                                   |    |                                  |       |   |   |   |   |
| Pro  forma net loss                         |   | $                                      | (43,858 | )                                     | $          | (14,039 | ) | $ | (86,693 | ) | $ | (59,885 | ) |
|                                        |   |                                   |    |                                  |       |   |   |   |   |
| Pro  forma net loss per share:              |   |                                   |    |                                  |       |   |   |   |   |
| Basic                                       |   | $                                      | (1.06   | )                                     | $          | (0.35 | ) | $ | (2.13 | ) | $ | (1.50 | ) |
| Diluted                                     |   | $                                      | (1.06   | )                                     | $          | (0.35 | ) | $ | (2.13 | ) | $ | (1.50 | ) |

** **

 

**9.****              NetIncome (Loss) Per Share**

 

Basic and diluted netincome (loss) per share have been computed using the weighted average number ofshares of common stock and dilutive common equivalent shares from stock optionsand warrants outstanding during the period in accordance with Statement ofFinancial Accounting Standards (SFAS) No. 128, “Earnings per Share.”  The following table provides areconciliation of the components of the basic and diluted net income (loss) pershare computations (in thousands, except per share data):

 
|                               |   | **Three  Months Ended  September 30,** |    | **Nine  Months Ended  September 30,** |       |
|------------------------------------|--------|----------------------------------------|---------|---------------------------------------|------------|
|                               |   | **2003**                               |    | **2002**                              | ** ** | **2003** | ** ** | **2002** | ** ** |
|                               |   |                                   |    |                                  |       |   |   |   |   |
| Net  income (loss)                 |   | $                                      | (54,484 | )                                     | $          | 4,707 |   | $ | (50,058 | ) | $ | 5,502 |   |
|                               |   |                                   |    |                                  |       |   |   |   |   |
| Basic  common shares               |   | 35,718                                 |    | 27,150                                |       | 30,188 |   | 27,018 |   |
| Effect  of dilutive securities:    |   |                                   |    |                                  |       |   |   |   |   |
| Common  stock options and warrants |   | —                                 |    | 939                                   |       | — |   | 1,669 |   |
| Dilutive  weighted average shares  |   | 35,718                                 |    | 28,089                                |       | 30,188 |   | 28,687 |   |
|                               |   |                                   |    |                                  |       |   |   |   |   |
| Net  income (loss) per share:      |   |                                   |    |                                  |       |   |   |   |   |
| Basic                              |   | $                                      | (1.53   | )                                     | $          | 0.17 |   | $ | (1.66 | ) | $ | 0.20 |   |
| Diluted                            |   | $                                      | (1.53   | )                                     | $          | 0.17 |   | $ | (1.66 | ) | $ | 0.19 |   |

** **

** **

**10.****       StockSplit**

 

On April 21, 2002, theCompany’s Board of Directors approved a three-for-two split of our common stockwhich was effected in the form of a 50 percent stock dividend, paid on May 22,2002 to stockholders of record on May 7, 2002. All share and per shareinformation for all periods presented in this report are on a post-split basis.

 

13

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

 

*The following discussion includes forward-looking statementswith respect to the Company’s future financial performance.  Actual results may differ materially fromthose currently anticipated depending upon a variety of factors, includingthose described below under the sub-heading, “Future Performance and RiskFactors” and discussed more fully in the Company’s Annual Report on Form 10-K forthe year ended December 31, 2002.*

 

 

**Overview**

 

From our inception in1981 through 1991, we derived the substantial majority of our revenue fromdigital filter processors and vector signal processors used principally inmilitary, industrial and medical applications. In 1989, we repositioned ourbusiness to develop and market data compression products for the evolvingmultimedia markets and discontinued development of digital filter processor andvector signal processor products. In 1994, we discontinued production of theseproducts. Prior to the acquisition of Oak Technology, Inc. on August 11, 2003,our products consisted of integrated circuits and related products used indigital versatile disc players, or DVDs, movie and home theater systems,filmless digital cameras and video editing systems.  As a result of the acquisition of Oak, we now provide integratedcircuits, software and platforms for digital television applications thatenable the delivery and display of digital video content through a set top boxor television as well as digital imaging products consisting of semiconductorhardware and software that enable users to print, scan, process and transmitdocuments to computer peripherals that perform printing functions.  

 

We derive most of ourrevenues from the sale of our integrated circuit products. Historically,average selling prices in the semiconductor industry in general, and for ourproducts in particular, have decreased over the life of a particular product.Average selling prices for our hardware products have fluctuated substantiallyfrom period to period, primarily as a result of changes in our customer mix oforiginal equipment manufacturer, or OEM, sales versus sales to resellers andthe transition from low-volume to high-volume production. In the past, we havereduced the prices of some of our products in order to better penetrate theconsumer market. We believe that, as our product lines continue to mature andcompetitive markets evolve, we are likely to experience further declines in theaverage selling prices of our products, although we cannot predict the timingand amount of such future changes with any certainty.

 

Our cost of productrevenues consists primarily of fabrication costs, assembly and test costs, andthe cost of materials and overhead from operations. If we are unable to reduceour cost of product revenues to offset anticipated decreases in average sellingprices, our product gross margins will decrease. Our product gross margin isalso dependent on product mix and on the percentage of products sold directlyto our OEM customers versus indirectly through our marketing partners whopurchase our products at lower prices but absorb most of the associatedmarketing and sales support expenses, maintain inventories and provide customersupport and training. Lower gross margins on sales to resellers are partiallyoffset by reduced selling and marketing expenses related to such sales.  Product sales in Japan are primarily madethrough Fujifilm, our strategic partner and reseller in Japan.  Fujifilm provides more sales and marketingsupport than our other resellers. We expect both product and customer mix tocontinue to fluctuate in future periods, causing further fluctuations inmargins.

 

We also derive revenuefrom licensing our software and other intellectual property. Licensing revenueincludes one-time license fees and royalties based on the number of unitsdistributed by the licensee. In addition, we have historically generated asignificant percentage of our total revenues from development contracts,primarily with key customers, although development revenue has declinedsubstantially as a percentage of total revenues over the past several years.These development contracts have provided us with partial funding for thedevelopment of some of our products. These development contracts provide forlicense and milestone payments which are recorded as development revenue. Weclassify all development costs, including costs related to these developmentcontracts, as research and development expenses. We retain ownership of theintellectual property developed by us under these development contracts. Whilewe intend to continue to enter into development contracts with certainstrategic partners, we expect development revenue to continue to decline as apercentage of total revenues.

 

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

 

14

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development expenses arenet of these grants, which fluctuate from period to period. We believe thatsignificant investments in research and development are required for us toremain competitive 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,royalties, sales commissions, product promotion and other professionalservices. We expect that selling, general and administrative expenses willcontinue to increase to support our anticipated growth.

 

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

 

Our effective income taxrate has benefited from the availability of net operating losses which we haveutilized to reduce taxable income for U.S. federal income tax purposes and byour Israeli subsidiary’s status as an “Approved Enterprise” under Israeli law,which provides a ten-year tax holiday for income attributable to a portion ofour operations in Israel. Our U.S. federal net operating losses expire atvarious times between 2003 and 2020, and the benefits from our subsidiary’sApproved Enterprise status expire at various times beginning in 2003.

 

On April 21, 2002, ourBoard of Directors approved a three-for-two split of our common stock which waseffected in the form of a fifty percent stock dividend, paid on May 22, 2002 tostockholders of record on May 7, 2002. All share and per share information forall periods presented in this report are on a post-split basis.

 

 

**RecentDevelopments**

 

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

 

Following the completionof the acquisition, the results of operations of Oak have been included in ourconsolidated financial statements. Accordingly, our results of operations for the three and nine monthperiods ended September 30, 2003 reflect Oak’s operations since August 12,2003, while our results of operations for the comparable 2002 periods reflectonly Zoran’s historical operations.

 

 

**Results ofOperations**

* *

*Revenues*

 

Total revenues increased53% to $67.4 million for the three months ended September 30, 2003 compared tothe $44.1 million for the three months ended September 30, 2002.  This increase includes $9.9 million ofrevenues attributable to the inclusion of revenues as a result of thecompletion of the Oak acquisition.  An additional$3.9 million of software license revenues that would have been reported by Oakon a stand alone basis for the period from August 11 through September 30, 2003were excluded from reported revenues due to purchase accounting rules.  Excluding the Oak revenues from August 11,2003 through September 30, 2003, total revenues from Zoran’s historicaloperations increased $13.4 million or 30%. For the nine months ended September 30, 2003 and 2002, total revenueswere $150.0 million and $109.1 million, respectively, representing an increaseof 37%.  Excluding the Oak revenue fromAugust 11, 2003 through September 30, 2003, total revenues increased by $30.9million, or 28%.

 

15

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Product revenues for thethree months ended September 30, 2003 was $64.7 million compared to $43.8million recorded in the comparable period of the prior year.  Excluding product revenues attributable tothe inclusion of Oak operations from August 11, 2003 to September 30, 2003 of$8.7 million, product revenues for the three months ended September 30, 2003increased by $12.2 million over the comparable period in 2002.  Product revenues were $143.3 million and$105.1 million for the nine months ended September 30, 2003 and 2002,respectively.  Excluding the revenuesattributable to the inclusion of Oak operations from August 11, 2003 toSeptember 30, 2003, product revenues increased by 28%.

 

Excluding the impact ofOak operations during the quarter, the increase in product revenues wasprimarily driven by increased sales in our digital camera and DVD product linesoffset by slight decreases in other revenues. These increases totaled $12.4 million and $29.0 million for the threemonths ended September 30, 2003 and nine months ended September 30, 2003,respectively, compared to the comparable periods of the prior year.  The increased sales for both product lineswere due to increased unit shipments. DVD products again accounted for the majority of our total productsales, representing 79% of the total for the third quarter. We expect DVD salesto continue to comprise the majority of our product sales for the balance of2003.

 

Software and otherrevenues were $2.8 million and $0.2 million for the three months endedSeptember 30, 2003 and 2002, respectively. The increase included $1.3 million of revenues attributable to theinclusion of Oak operations from August 11 through September 30, 2003, butexcludes $3.9 million of software license revenues that would have beenreported by Oak on a stand alone basis for the period from August 11 throughSeptember 30, 2003 but were excluded from reported revenues due to purchaseaccounting rules.  Without the inclusionof Oak operations, software and other revenues increased by $1.3 million overthese comparable periods.  For the ninemonths ended September 30, 2003 and 2002, software and other revenues were $6.7million and $4.0 million, respectively. The increase excluding the operations of Oak from August 11, 2003 was$1.4 million, or 35%. 

 

* *

*Product Gross Margin*

 

Product gross marginswere 38% and 35% for the three and nine months ended September 30, 2003,compared to 42% and 38% for the same periods of 2002. Excluding the operationsof Oak from August 11 through September 30, 2003, product gross margins were37% and 34% for the three and nine months ended September 30, 2003.  The decreases in product gross margins weredue to a number of factors including market driven competition and the erosionof average selling prices for our DVD products which was offset in part by theintroduction of new more highly integrated product with higher relative sellingprices.

 

*Research and Development*

 

Research and development(“R&D”) expenses were $12.2 million and $22.9 million for the three andnine months ended September 30, 2003, compared to $5.9 million and $16.9million for the same periods of 2002. Excluding the Oak operations from August11 to September 30, 2003, R&D expenses were $5.8 and $16.5 million for thethree and nine months ended September 30, 2003. Excluding the Oak operations,R&D expenses remained consistent quarter-over-quarter andyear-over-year.  As a percentage ofrevenues, R&D expenses, excluding the impact of Oak, were 10% and 12% forthe three and nine month periods ended September 30, 2003, compared to 13% and16% for the same periods of 2002. 

 

*Selling, General and Administrative*

* *

Selling, general andadministrative (“SG&A”) expenses were $11.3 million and $26.0 million forthe three and nine months ended September 30, 2003, compared to $6.7 millionand $18.3 million for the same periods of 2002.  Excluding the impact of Oak from August 11, 2003, SG&Aexpenses were $8.3 million and $23.1 million for the three and nine monthsended September 30, 2003.  Theseincreases were principally due to the continued increase in marketing andapplication expenses to support planned revenue growth in our Asia Pacificmarkets.  As a percentage of revenues,SG&A expenses, excluding the impact of Oak, were 14% and 17% for the threeand nine months ended September 30, 2003, compared to 15% and 17% for thecomparable periods in the prior year. 

 

16

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*Amortization of Intangibles Assets*

 

During the three and ninemonths ended September 30, 2003, we incurred charges of $6.5 million and $8.4million, respectively, related to the amortization of intangible assets.  This compares to $2.3 million and $6.9million in amortization of intangible assets for the three and nine monthsended September 30, 2002. The increases were primarily due to the addition ofapproximately $198 million of amortizable intangible assets as a result of theacquisition of Oak during the quarter. These increases also reflect the full amortization by the end of 2002 ofthe completed technology acquired as part of the Nogatech Inc. acquisition in2000. 

 

*Interest and Other Income*

 

Interest and other incomewas $1.5 million and $4.4 million for the three and nine month periods endedSeptember 30, 2003, compared to $1.7 million and $5.0 million for the sameperiods of 2002. The quarter-over-quarter reduction was primarily due to a declinein market interest rates.  In the prioryear, we also recorded a non-cash loss of $696,000 realized in the firstquarter of 2002, upon the exchange of shares of MGI Software Inc. (“MGI”)common stock held by us for shares of Roxio Inc. (“Roxio”) common stock inconjunction with Roxio’s acquisition of MGI.

* *

*Provision for Income Taxes*

* *

We have booked a tax ratecommensurate with the jurisdictional distribution of profits between the U.S.and Israel and the underlying tax positions as a result of our approvedenterprise status in Israel.  Managementdoes not currently believe it is more likely than not that sufficient futuretaxable income will be generated to realize all of our deferred tax assets.  Accordingly, a valuation allowance existedagainst substantially all of the deferred tax assets as of December 31, 2002and September 30, 2003.  No income taxbenefit was recognized with respect to operating losses incurred in the thirdquarter of 2003 or for the nine months ended September 30, 2003.

 

 

**Liquidity and Capital Resources**

** **

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

** **

Our operating activitiesprovided cash of $8.6 million during the nine months ended September 30, 2003,primarily due to our net income of $10.9 million excluding amortizationexpense, deferred stock compensation and in-process research and developmentcharge.  This amount was reduced by theimpact associated with an increase of $28.5 million in accounts receivable, anincrease of $1.2 million in prepaid expenses and other assets, offset bydepreciation expense of $3.6 million, an inrease in accounts payable, accruedexpenses and other liabilities of $17.4 million, an increase in deferred incometaxes, deferred revenue and long-term liabilities of $1.1 million and a decreasein inventory of $5.3 million.   

 

Cashprovided by investing activities was $2.8 million during the nine months endedSeptember 30, 2003.  This reflects thenet purchases and sales of investments of $48.3 million which was offset by theuse of $44.4 million in the acquisition of Oak Technology, net of cashacquired, and purchases of property and equipment of $6.7 million.   

 

Cash provided byfinancing activities was $15.1 million for the nine months ended September 30,2003, reflecting $17.8 million in proceeds from the issuance of common stockoffset by installment payments of $2.7 million for core technology.

 

AtSeptember 30, 2003, we did not have any relationships with unconsolidatedentities or financial partnerships, such as entities often referred to asstructured finance or special purpose entities, established for the purpose offacilitating off-balance sheet arrangements or other contractually narrow orlimited purposes. Accordingly, we are not exposed to the type of financing,liquidity, market or credit risk that could arise if we had engaged in suchrelationships.

 

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

 

•                  the levels at which we maintaininventory and accounts receivable;

 

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•                  the market acceptance of ourproducts;

 

•                  unanticipated expenses associatedwith the recently completed acquisition of Oak;

 

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

 

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

 

•                  volume pricing concessions;

 

•                  capital improvements to new andexisting facilities;

 

•                  technological advances;

 

•                  the response of competitors to ourproducts; and

 

•                  our relationships with our suppliersand customers.

 

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

 

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

 

**Future Performance and Risk Factors**

 

Our futurebusiness, operating results and financial condition are subject to variousrisks and uncertainties, including those described below.

 

# **We are subject to a number of special risks as a result of our recentacquisition of Oak Technology, Inc.**

 

On August 11,2003, we completed the acquisition Oak, and as a result, we are subject to anumber of risks and uncertainties, including the following:

 

•                  We will facea number of significant challenges in integrating the technologies, operationsand personnel of Zoran and Oak in a timely and efficient manner, and ourfailure to do so effectively could have a material adverse effect on thebusiness and operating results of the combined company.

 

•                  We may notachieve the strategic objectives, cost savings and other anticipated potentialbenefits of the merger, and our failure to achieve these strategic objectivescould have a material adverse effect on our revenues, expenses and operatingresults.

 

•                  Transactioncosts associated with the merger were included as part of the total purchasecost for accounting purposes.  Inaddition, we incurred charges to operations in the quarter in which the mergerwas completed.  We may incur additionalcharges in amounts not currently estimable in future quarters, to reflect costsassociated with integrating the two companies. These costs could adversely affect our future liquidity and operatingresults.

 

•                  Historically,Oak has depended largely on its optical storage business, which during its 2002fiscal year accounted for approximately 67% of Oak’s revenues.  Following the recent sale of certain assetsof its 

 

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optical storage business, Oak’s digitalimaging and digital television businesses will represent the primary source ofrevenue from the ongoing Oak operations, and revenues from these emergingbusinesses are difficult to forecast. As a result, it is not possible to use Oak’s historical financialinformation to predict its contribution to the future operating results of thecombined company.  

 

# **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, and those of Oak, have varied significantly from quarter to quarterdue to a number of factors, including:

 

•                  fluctuationin demand for their products;

 

•                  the timingof new product introductions or enhancements by Zoran, Oak and theircompetitors;

 

•                  the level ofmarket acceptance of new and enhanced versions of their products and theircustomers’ products;

 

•                  the timingor cancellation of large customer orders;

 

•                  the lengthand variability of the sales cycle for their products;

 

•                  pricingpolicy changes by Zoran, Oak and their competitors and suppliers;

 

•                  the cyclicalnature of the semiconductor industry;

 

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

 

•                  changes inthe mix of products sold;

 

•                  seasonalityin demand for their products;

 

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

 

•                  the evolvingand unpredictable nature of the markets for products incorporating Zoran’s andOak’s integrated circuits and embedded software.

 

We expect that theoperating results of the combined company will continue to fluctuate in thefuture as a result of these factors and a variety of other factors, including: 

 

•                  the cost andavailability of adequate foundry capacity;

 

•                  fluctuationsin manufacturing yields;

 

•                  changes inor the emergence of new industry standards;

 

•                  failure toanticipate changing customer product requirements;

 

•                  the loss orgain of important customers;

 

•                  productobsolescence; and

 

•                  the amountof research and development expenses associated with new product introductions.

 

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

 

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

 

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•                  acts ofterrorism and international conflicts or crises, such as the recent outbreak ofSevere Acute Respiratory Syndrome, or SARS;

 

•                  otherconditions affecting the timing of customer orders;

 

•                  changes ingovernmental regulations that could affect our products; or

 

•                  a downturnin the markets for our customers’ products, particularly the consumerelectronics market.

 

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. The industry has moved from a period of capacity shortages in 2000 tothe current condition of excess capacity. We cannot predict whether we will achieve timely, cost-effective accessto that capacity when needed, or if there will be a capacity shortage again inthe future.

 

As a result of these factors,our operating results may vary significantly from quarter to quarter.  These fluctuations may be more pronounced inthe future as a result of the challenges we face in integrating the operationsof Zoran and Oak.  Any shortfall inrevenues or net income from levels expected by the investment community couldcause a decline in the trading price of our stock.

 

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

# ** **

Because the markets thatour customers serve are characterized by numerous new product introductions andrapid product enhancements, our operating results may vary significantly fromquarter to quarter.  During the finalproduction of a mature product, our customers typically exhaust their existinginventory of our products. Consequently, orders for our products may decline in thosecircumstances, even if the products are incorporated into both mature productsand replacement products.  A delay inthe customer’s transition to commercial production of a replacement productwould delay our ability to recover the lost sales from the discontinuation ofthe related mature product.  Ourcustomers also experience significant seasonality in the sales of their consumerproducts, which affects their orders of our products.  Typically, the second half of the calendar year represents adisproportionate percentage of sales for our customers due to the holidayshopping period for consumer electronics products, and therefore, adisproportionate percentage of our sales. We expect these sales fluctuations to continue for the foreseeablefuture.

 

# **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.  Asa result of Oak’s recent sale of its optical storage business, the futurefinancial performance of the former Oak operations will depend on our abilityto successfully develop and market new products in the digital television, HDTVand digital imaging markets.  If the 

 

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markets for theseproducts and applications decline or fail to develop as expected, or we are notsuccessful in our efforts to market and sell our products to manufacturers whoincorporate integrated circuits into these products, our financial results willbe 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 revenue and earnings may suffer. In recent years, our success has been dependent on our successfuldevelopment and timely introduction of integrated circuits for DVD players, DVDrecorders and digital cameras.  Thesemarkets are characterized by the incorporation of a steadily increasing levelof integration and numbers of features on a chip at the same or lower systemcost, enabling original equipment manufacturers, or OEMs, to continuallyimprove the features or reduce the prices of the systems they sell.  If we are unable to continually develop andintroduce integrated circuits with increasing levels of integration and newfeatures at competitive prices, our operating results will suffer.

 

In the consumerelectronics market, Oak’s performance has been highly dependent upon thesuccessful development and timely introduction of new products and solutionsfor broadband digital television and HDTV. In the digital office market, Oak’s performance has been dependant onits ability to successfully develop embedded image processing system on a chip,or SOC, solutions for the digital office market, in particular, embeddeddigital color copier technology and image processing chips for a variety ofimaging peripherals, including printers and multi-function peripherals, orMFPs.  Among other technologicalchanges, embedded PDF and color capability are rapidly emerging as marketrequirements for printers and other imaging devices.  Some of Oak’s competitors have the capacity to supply thesesolutions, and some of their solutions have been well received in themarketplace.  We face the challenge ofcontinuing Oak’s development of digital television and HDTV solutions as wellas developing new imaging products with the capability to handle greater colorand image complexity, including web-based documents, and work withhigher-performing devices in networked environments.  If we are unable to meet these challenges with the development ofproducts that can effectively compete in the OEM software and solutions market,our future operating results could suffer.

 

# **Wemust keep pace with rapid technological changes and evolving industry standardsto remain 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 to anticipate futurestandards, and the rate of adoption and acceptance of those standards, will bea significant factor in maintaining or improving our competitive position andprospects for growth.  If new industrystandards emerge, our products or the products of our customers could becomeunmarketable or obsolete, and we could lose market share or be required toincur substantial unanticipated costs to comply with these new standards.

 

Our success will alsodepend on the successful development of new markets and the application andacceptance of new technologies and products in those new markets.  For example, our success will depend on 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 digitalreceiver.  If new markets do not developas we anticipate, 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 ableto sell products incorporating our products, and our sales would suffer.

 

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

# ** **

We do not operate anymanufacturing facilities, and we rely on independent foundries to manufacturesubstantially all of our products. These independent foundries fabricate products for other companies andmay also produce products of 

 

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their own design.  From time to time, there are manufacturingcapacity shortages in the semiconductor industry.  We do not have long-term supply contracts with any of oursuppliers, including our principal supplier, Taiwan Semiconductor ManufacturingCompany, or TSMC.  Therefore, TSMC andour other suppliers are not obligated to manufacture products for us for anyspecific period, in any specific quantity or at any specified price, except asmay be provided in a particular purchase order.

 

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

 

•                  theinability to obtain adequate manufacturing capacity;

 

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

 

•                  lack ofcontrol over delivery schedules;

 

•                  lack ofcontrol over quality assurance;

 

•                  lack ofcontrol over 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 onour independent 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 assemblyor testing could lead to supply constraints or delays in the delivery of ourproducts.  These constraints or delayscould damage our relationships with current and prospective customers and harmour 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:

 

•                  optionpayments or other prepayments to a foundry;

 

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

 

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

 

•                  issuance ofour equity securities to a foundry;

 

•                  investmentin a foundry;

 

•                  jointventures; or

 

•                  otherpartnership relationships with foundries.

 

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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 could harm our financialresults.

 

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

# ** **

The fabrication ofsilicon wafers is a complex process.  Minutelevels of contaminants in the manufacturing environment, defects in photomasksused to print circuits on a wafer, difficulties in the fabrication process orother factors can cause a substantial portion of the integrated circuits on awafer to be non-functional.  Many ofthese problems are difficult to detect at an early stage of the manufacturingprocess and may be time consuming and expensive to correct.  As a result, foundries often experienceproblems achieving acceptable yields, which are represented by the number ofgood integrated circuits as a proportion of the number of total integratedcircuits on any particular wafer.  Pooryields from our independent foundries would reduce our ability to deliver our productsto customers, harm our relationships with our customers and harm our business.

 

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

# ** **

We face intensecompetition in the markets in which we compete.  We expect that the level of competition will increase in thefuture from existing competitors and from other companies that may enter itsexisting or future markets with solutions that may be less costly or providehigher performance or additional features.

 

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

 

•                  ALiCorporation;

 

•                  AtmelCorporation;

 

•                  Cirrus Logic(Crystal Semiconductor);

 

•                  ESSTechnology, Inc.;

 

•                  Fujitsu;

 

•                  LSI Logic;

 

•                  MediaTekInc.;

 

•                  Motorola;

 

•                  OmnivisionTechnologies, Inc.;

 

•                  SunplusTechnology; and

 

•                  TexasInstruments.

 

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.

 

Oak’s principalcompetitors in the broadband digital television and set top box markets include:

 

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•                  ATITechnologies;

 

•                  Broadcom;

 

•                  Conexant;

 

•                  NEC;

 

•                  SigmaDesigns;

 

•                  STMicroelectronics; and

 

•                  in-house,captive suppliers.

 

We expect competition tocontinue to increase in these markets as industry standards become well knownand as other competitors enter these markets.

 

Oak’s principal competitors in the digital officemarket include:

 

•                  Adobe;

 

•                  Agilent;

 

•                  Electronicsfor Imaging, Inc.

 

•                  OasisSemiconductor;

 

•                  PeerlessSystems Corporation;

 

•                  TAK ASIC;and

 

•                  in-house,captive suppliers.

 

The future growth of thedigital office market is highly dependent on OEMs continuing to outsource anincreasing portion of their product development work.  While the trend toward outsourcing on the part of Oak’s OEMcustomers has accelerated in recent years, any reversal of this trend, or achange in the way they outsource, could seriously harm our business.  

 

Many of these 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 Zoran or Oak.  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.

 

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#  

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

 

Zoran’s and Oak’s largestcustomers have accounted for a substantial percentage of their revenues.  In 2002, sales to Fujifilm accounted forapproximately 37% of Zoran’s total revenues, and Zoran’s four largest customersaccounted for approximately 59% of its total revenues.  Similarly, during Oak’s fiscal 2002, LGElectronics accounted for 20% of Oak’s total revenues, and Oak’s top 10customers accounted for approximately 69% of its 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 salesto one 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.

 

Fujifilm has been ourlargest customer over the last five years. Fujifilm purchases our products primarily as a reseller.  Fujifilm acts as the primary reseller inJapan of products developed by us under development contracts withFujifilm.  We may sell these productsdirectly in Japan only to specified customers with Fujifilm’s consent.  Fujifilm provides more sales and marketingsupport than our other resellers. Fujifilm has also provided funding to support Zoran’s developmentefforts.  If our relationship withFujifilm were terminated, our business could be harmed.

 

# **Ourproducts generally have long sales cycles and implementation periods, whichincreases our costs in obtaining orders and reduces the predictability of 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 last for many months oreven years. Longer sales cycles require us to invest significant resources inattempting to make sales and delay the generation of revenue.

 

Long sales cycles alsosubject us to other risks, including customers’ budgetary constraints, internalacceptance reviews and cancellations. In addition, orders expected in one quarter could shift to anotherbecause of the timing of customers’ purchase decisions.  The time required for our customers toincorporate our products into their own can vary significantly with the needsof our customers and generally exceeds several months, which furthercomplicates our planning processes and reduces the predictability of ouroperating results.

 

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

# ** **

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

 

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

# ** **

The FederalCommunications Commission, or FCC, has broad jurisdiction over our targetmarkets in the digital television business we acquired from Oak.  Various international entities ororganizations may also regulate aspects of our business or the business of ourcustomers.  Although our products arenot directly subject to regulation by any agency, the transmission pipes, aswell as much of the equipment into which our products are incorporated, aresubject to direct government regulation. For example, before they can be sold in the United States, advancedtelevisions and emerging interactive displays must be tested and certified byUnderwriters Laboratories and meet FCC regulations.  Accordingly, the effects of regulation on our customers or theindustries in which our customers operate may in turn harm our business.  FCC regulatory policies affecting theability of cable operators or telephone companies to offer certain services andother terms on which these companies conduct their business may impede sales ofour products.  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 currentlaws or 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 requirement that allnew televisions have a digital receiver could have an adverse effect on ourHDTV business.

 

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

# ** **

During 2002, 97% of ourtotal revenues and 89% of Oak’s total revenues were derived from internationalsales.  We anticipate that internationalsales will continue to represent a significant portion of our total revenuesfor the foreseeable future.  Inaddition, substantially all of our semiconductor products are manufactured,assembled and tested outside of the United States by independent foundries andsubcontractors.

 

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

 

•                  unexpectedchanges in regulatory requirements;

 

•                  fluctuationsin exchange rates;

 

•                  politicaland economic instability;

 

•                  impositionof tariffs and other barriers and restrictions;

 

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

 

•                  health risksin a particular region.

 

A material amount of ourresearch and development personnel and facilities and a portion of our salesand marketing personnel are located in Israel. Political, economic and military conditions in Israel directly affectour operations.  Some of our officersand employees in Israel are obligated to perform up to 39 days of militaryreserve duty annually.  The absence ofthese employees for significant periods during the work week may cause us tooperate inefficiently 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 slowdownmay have a negative effect on our business. During 2000 and 2001, we also opened offices in Taipei, Taiwan, HongKong and Seoul, Korea, and our operations are subject to the economic andpolitical uncertainties affecting these countries as well.

 

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

 

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

# ** **

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

 

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

 

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

 

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

 

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

 

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# **Therecent outbreak of SARS may adversely affect our business.**

# ** **

The recent outbreak ofsevere acute respiratory syndrome, or SARS, in a number of Asian countriescould have a negative effect on our manufacturing production capabilities, onour ability to effectively market and sell our products due to SARS-relatedtravel restrictions and on the general financial markets and business activityin Asia.  The SARS outbreak has beensignificantly focused on Asia, where many of our current and prospectivecustomers are located.  In addition,most of our manufacturing activities are carried out by third party foundriesin Taiwan and Singapore.  Should theSARS illness spread to new regions in Asia or elsewhere or intensify inseverity in areas already affected, causing reduced demand by current andprospective customers or disrupting the manufacture of those companies’products, our operating results could be harmed.

 

# **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 currently denominated in U.S. dollarsfor sales to our customers throughout the world.  If there is a significant devaluation of the currency in aspecific country, the prices of our products will increase relative to thatcountry’s currency, and our products may be less competitive in thatcountry.  Also, we cannot be sure thatour international customers will continue to be willing to place ordersdenominated in U.S. dollars.  If they donot, our revenue and operating results will be subject to foreign exchangefluctuations.

 

# **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 protect ourproprietary rights as fully as in the United States.  The laws of certain foreign countries in which our products areor may be developed, manufactured or sold, including various countries in Asia,may not protect our products or intellectual property rights to the same extentas do the laws of the United States and thus make the possibility of piracy ofour technology and products more likely in these countries.  If competitors are able to use ourtechnology, 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 or circumvented.  Those competitors may also independentlydevelop technologies that are substantially equivalent or superior to ourtechnology.  Moreover, while we hold, orhave applied for, patents relating to the design of our products, some of ourproducts are based in part on standards, for which we do not hold patents orother intellectual property rights.

 

Oak has generally limitedaccess to and distribution of the source and object code of its 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’s software.  This access increases the likelihood ofmisappropriation or misuse of our technology.

 

# **Oakis a defendant in several lawsuits.**

# ** **

Oak is a party to variouslegal proceedings, including a number of patent-related lawsuits.  In connection with these lawsuits, managementtime has been, and will continue to be, expended.  In addition, while Oak has incurred, and we expect to continue toincur, substantial legal and other expenses in connection with these pendinglawsuits, an estimate of such loss or range of loss cannot be made.  No provision for any liability that mayresult upon adjudication has been made in our financial statements.

 

# **Wecould become subject to claims and litigation regarding intellectual propertyrights, which could seriously harm its business and require it to incursignificant 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 Oak iscurrently a party to a number of patent-related lawsuits.  We could become subject to additionallitigation in the future, either to protect our intellectual property or as aresult of allegations 

 

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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.  These claims and anyresulting lawsuit, if successful, could subject us to significant liability fordamages or invalidation of our proprietary rights.  These lawsuits, regardless of their success, would likely be time-consumingand expensive to resolve and would divert management time and attention.  Any potential intellectual propertylitigation could force us to do one or more of the following:

 

•                  stop sellingproducts that incorporate the challenged intellectual property;

 

•                  obtain fromthe owner of the infringed intellectual property right a license to sell or usethe relevant technology, which license may not be available on reasonable termsor at all;

 

•                  pay damages;or

 

•                  redesignthose products that use such technology.

 

Although patent disputesin the semiconductor industry have often been settled through cross-licensingarrangements, we may not be able in any or every instance, to settle an allegedpatent infringement claim through a cross-licensing arrangement.  We have a more limited patent portfolio thanmany of our competitors.  If asuccessful claim is made against us or any of our customers and a license isnot made available to us on commercially reasonable terms or we are required topay substantial damages or awards, our business, financial condition andresults of operations would 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.

 

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

# ** **

Our future net income andcash flow will be affected by our ability to apply our net operating losses, orNOLs, against taxable income in future periods.  Our NOLs totaled approximately $34.0 million for federal and$4.0 million for state tax reporting purposes as of December 31,2002.  Oak’s NOLs totaled approximately$212.0 million for federal and $60.0 million for state tax reportingpurposes as of December 31, 2002. As a result of the change of control resulting from Zoran’s initialpublic offering in 1995, the amount of NOLs that Zoran can use to reduce futuretaxable income for federal tax purposes is limited to approximately$3.0 million per year.  TheInternal Revenue Code contains a number of provisions that could limit the useof NOLs against income of the combined company as a result of the merger or asa result of the combination of these transactions.  Our utilization of Oak’s NOLs may be further limited due to priorOak transactions.  No opinion or IRSruling has been sought regarding the potential application of any of theseprovisions.  Changes in tax laws in theUnited States may further 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.  We have recentlycompleted the acquisition of Oak. During 2000, we acquired PixelCam and Nogatech, and we may acquireadditional businesses, products or technologies in the future.  In the event of any future acquisitions, wecould:

 

•                  issue stockthat would dilute its current stockholders’ percentage ownership;

 

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•                  incur debt;

 

•                  assumeliabilities;

 

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

 

•                  adverseeffects on existing business relationships with customers;

 

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

 

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

 

We may not be able 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 byus and our customers, errors may be found in existing or new products.  This could result in, among other things, adelay in recognition or loss of revenues, loss of market share or failure toachieve market acceptance.  Thesedefects may cause us to incur significant warranty, support and repair costs,divert the attention of our engineering personnel from our product developmentefforts and harm our relationships with customers.  The occurrence of these problems could result in the delay orloss of market acceptance of our products and would likely harm ourbusiness.  Defects, integration issuesor other performance problems in our products could result in financial orother damages to customers or could damage market acceptance of suchproducts.  Our customers could also seekdamages from us for their losses.  Aproduct liability claim brought against us, even if unsuccessful, would likelybe time consuming and costly to defend.

 

# **Ifwe do not maintain current development contracts or are unable to enter intonew development contracts, our business could be harmed.**

# ** **

We historically havegenerated a significant percentage of our total revenues from developmentcontracts, primarily with key customers. These development contracts have provided us with partial funding forthe development of some of our products. Under these contracts, we receive payments upon reaching certaindevelopment milestones.  If we fail toachieve the milestones specified in our existing development contracts, if ourexisting contracts are terminated or if we are unable to secure futuredevelopment contracts, our ability to cost-effectively develop new productswould be reduced and our business would be harmed.

 

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

# ** **

We may requiresubstantial additional capital to finance our future growth, secure additionalfoundry capacity and fund our ongoing research and development activitiesbeyond 2003.  Our capital requirementswill depend on many factors, including:

 

•                  acceptanceof and demand for our products;

 

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

 

•                  the extentto which we invest in new technology and research and development projects.

 

To the extent that ourexisting sources of liquidity and cash flow from operations are insufficient tofund our activities, we may need to raise additional funds.  If we raise 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.

 

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

# ** **

We anticipate that ourfuture growth, if any, will require us to recruit and hire a substantial numberof new engineering, managerial, sales and marketing personnel.  Our ability 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 and certain of our researchand development and administrative personnel, including our President and ChiefExecutive Officer and other officers, are based in the United States.  The geographic separation of theseoperations places additional strain on our resources and our ability to managegrowth effectively.  If we are unable tomanage 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 engagedin hedging transactions.  In the future,we may enter into currency hedging transactions to decrease the risk offinancial exposure from fluctuations in the exchange rate of the United Statesdollar against the new Israeli shekel. These measures may not adequately protect us from the impact ofinflation in Israel.

 

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

# ** **

Historically, we havefinanced a portion of our research and development activities with grants forresearch and development from the Chief Scientist in Israel’s Ministry ofIndustry and Trade.  Although we did notreceive proceeds from such grants in 2001 or 2002, we did receive such proceedsin the first and second quarters of 2003, and we plan to seek additional grantsfrom the Chief Scientist in the future. To be eligible for these grants, our development projects must beapproved by the Chief Scientist on a case-by-case basis.  If our development projects are not approvedby the Chief Scientist, we will not receive grants to fund these projects,which would increase our research and development 

 

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costs.  We also receive tax benefits, in particularexemptions and reductions as a result of the “Approved Enterprise” status ofour existing operations in Israel.  Tobe eligible for these tax benefits, we must maintain our Approved Enterprisestatus by meeting conditions, including making specified investments in fixedassets located in Israel and investing additional equity in our Israelisubsidiary.  If we fail to meet theseconditions in the future, the tax benefits would be canceled and we could berequired to refund the tax benefits already received.  These tax benefits may not be continued in the future at theircurrent levels or at any level.  Israeligovernmental authorities have indicated that the government may reduce oreliminate these benefits in the future, which would harm our business.

 

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

 

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

 

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

 

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

 

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

 

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

 

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

# ** **

The market price of ourcommon stock has fluctuated significantly since our initial public offering in1995.  Between September 30, 2002and September 30, 2003, the closing sale price of our common stock, asreported on The NASDAQ National Market, ranged from a low of $9.11 to a high of$27.28.  The market price of our commonstock is subject to significant fluctuations in the future in response to avariety of factors, including:

 

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

 

•                  quarterlyvariations in operating results;

 

•                  changes inanalysts’ earnings estimates;

 

•                  announcementsof technological innovations;

 

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

 

•                  loss of keypersonnel;

 

•                  proprietaryrights or other litigation;

 

•                  generalconditions in the semiconductor industry; and

 

•                  developmentsin the financial markets.

 

In addition, the stockmarket has, from time to time, experienced extreme price and volume fluctuationsthat have particularly affected the market prices for semiconductor companiesor technology companies generally and which have been unrelated to theoperating performance of the affected companies.  Broad market fluctuations of this type may reduce the futuremarket price of our common stock.

 

 

**Item 3****.    Quantitative and Qualitative DisclosuresAbout Market Risk**

 

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

 

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

 

A majority of our revenueand capital spending is transacted in U.S. dollars, although a portion of thecost of our operations, relating mainly to our personnel and facilities inIsrael, is incurred in New Israeli Shekels. We have not engaged in hedgingtransactions to reduce our exposure to fluctuations that may arise from changesin foreign exchange rates. Based on our overall currency rate exposure atSeptember 30, 2003, a near-term 10% appreciation or depreciation of the NewIsraeli Shekel would have an immaterial affect on our financial condition.

 

 

**Item 4****.    Controls and Procedures**

 

Under the supervision andwith the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, weevaluated the effectiveness of our disclosure controls and procedures, as suchterm is defined under Rule 13a-15(e) promulgated under theSecurities Exchange Act of 1934, as amended. Based upon that evaluation, ourChief Executive Officer and ChiefFinancial Officer****concludedthat our disclosure controls and procedures were effective as of the end of theperiod covered by this quarterly report.

 

There has been no change inour internal control over financial reporting during the quarter endedSeptember 30, 2003 that has materially affected, or is reasonably likely tomaterially affect, our internal control over financial reporting.

 

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**PARTII****. OTHER INFORMATION**

 

 

**Item 4.  Submission of Matters to a Vote of Security Holders**

 

 Our2003 Annual Meeting of Stockholders was held on August 8, 2003.  At themeeting, the following six persons nominated by management were elected toserve as members of our Board of Directors:

 

 

|                 |   | **Shares**    |   |
|----------------------|--------|---------------|--------|
| **Nominee**          |   | **Voted For** |   | **Withheld** |   |
| Levy  Gerzberg       |   | 24,511,082    |   | 423,986 |   |
| Uzia  Galil          |   | 24,117,327    |   | 817,741 |   |
| James  D. Meindl     |   | 24,478,532    |   | 456,536 |   |
| James  B. Owens, Jr. |   | 24,511,082    |   | 423,986 |   |
| Arthur  B Stabenow   |   | 24,117,327    |   | 817,741 |   |
| Philip  M. Young     |   | 24,511,082    |   | 423,986 |   |

 

 

Thefollowing additional items were voted upon at the meeting: 

 

1.                     Aproposal to approve the issuance of shares of our common stock in connectionwith the merger of Oak Technology, Inc. with and into our wholly-ownedsubsidiary was approved by a vote of 16,611,656 shares for; 1,238,637 sharesagainst; 56,252 shares abstaining; and 7,028,523 broker non-votes.

 

2.                     Aproposal to amend our certificate of incorporation to increase the number ofauthorized shares of our common stock from 55,000,000 to 105,000,000 wasapproved by a vote of 23,295,707 shares for; 1,585,276 shares against; 54,085shares abstaining; and no broker non-votes.

 

3.                     Aproposal to amend our 1995 Employee Stock Purchase Plan to increase the numberof shares of common stock reserved for issuance thereunder was approved by avote of 23,733,466 shares for; 1,142,624 shares against; 58,978 sharesabstaining; and no broker non-votes.

 

4.                     Aproposal to ratify the appointment of PricewaterhouseCoopers LLP as ourindependent accountants for the fiscal year ending December 31, 2003 wasapproved by a vote of 23,943,672 shares for; 935,056 shares against; and 56,340shares abstaining.

 

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**Item 6**.    Exhibits and Reports on Form 8-K

** **

(a)           Exhibits: 

 

 
| 3.3   |   | Certificate of  Amendment of Restated Certificate of Incorporation.                                                                                                                                                    |
|-------|--------|------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|
| 10.42 |   | Sublease dated June 18,  2001 between Yahoo! Inc. and Oak Technology, Inc.                                                                                                                                             |
| 10.43 |   | Amended and Restated  1995 Employee Stock Purchase Plan.                                                                                                                                                               |
| 10.44 |   | Oak Technology, Inc.  1994 Stock Option Plan (as amended and restated). (1)                                                                                                                                            |
| 10.45 |   | Oak Technology, Inc. 1994 Outside Directors’ Stock Option Plan -  (As Amended and Restated November 21, 2002) (2)                                                                                                 |
| 10.46 |   | Form of Oak Technology, Inc. Outside Directors’ Non-Qualified  Stock Option Agreement for the 1994 Stock Option Plan and 1994 Outside  Director's Stock Option Plan entered into by David Rynne and Peter Simone. |
| 10.47 |   | Asset purchase  agreement between Oak Technology, Inc, and Sunplus Technology, Co. LTC. dated  April 3, 2003. (3)                                                                                                      |
| 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.                                                                                                                                         |

 

 
| (1) |   | Incorporated by  reference to Exhibit 99.1 of Oak Technology, Inc.’s Form S-8 filed on April  14, 2003.    |
|-----|--------|-----------------------------------------------------------------------------------------------------------------|
| (2) |   | Incorporated by  reference to Exhibit 10.01 of Oak Technology, Inc.’s Form 10-Q/A filed on  June 27, 2003. |
| (3) |   | Incorporated by  reference to Exhibit 2.2 of Oak Technology, Inc.’s Form 8-K filed on April  18, 2003.     |

 

 

(b)               Reports on Form8-K:

 

1.               On July 24, 2003,we filed a Report on Form 8-K, pursuant to item 12 thereof, relating tofinancial information for the quarter ended June 30, 2003 and forward-lookingstatements relating to the third quarter of 2003 as presented in a pressrelease dated July 24, 2003.

 

2.               On August 13, 2003,we filed a Report on Form 8-K, pursuant to item 2 thereof, reporting theclosing of our acquisition of Oak Technology, Inc. 

 

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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:  November 14, 2003 |   |   | /s/  Karl Schneider                      |   |
|                          |   |   | Karl Schneider                                |
|                          |   |   | Senior Vice President,  Finance               |
|                          |   |   | and Chief Financial  Officer                  |
|                          |   |   | (Principal Financial  and Accounting Officer) |

 

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