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                         SECURITIES AND EXCHANGE COMMISSION

                             Washington, D.C. 20549

                                    FORM 10-K
     (Mark One)

     [X]         Annual report pursuant to Section 13 or 15(d) of the Securities
                 Exchange Act of 1934 for the fiscal year ended DECEMBER 31,
                 2000

     [   ]       Transition report pursuant to Section 13 or 15(d) of the
                 Securities Exchange Act of 1934 for the transition period from
                 ________________________ to ______________________

                        Commission File Number: 0-27246

                               ZORAN CORPORATION
             (Exact Name of registrant as specified in its charter)

        DELAWARE                                       94-2794449
(State or other jurisdiction of                        (I.R.S. Employer
incorporation or organization)                         Identification No.)

               3112 SCOTT BOULEVARD, SANTA CLARA, CALIFORNIA 95054
               (Address of principal executive offices) (Zip code)

                                 (408) 919-4111
              (Registrant's telephone number, including area code)
           Securities registered pursuant to Section 12(b) of the Act:

       Title of each class                Name of Exchange on which registered
       -------------------                ------------------------------------
             NONE                                         NONE

           Securities registered pursuant to Section 12(g) of the Act:

                          COMMON STOCK, $.001 PAR VALUE
                                (Title of Class)

Indicate by check mark whether registrant (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES [X] NO [ ]

Indicate by `check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K. [ ]

The aggregate market value of registrant's voting stock held by
non-affiliates of registrant based upon the closing sale price of the Common
Stock on March 17, 2001, as reported on the Nasdaq National Market, was
approximately $226,000,000. Shares of Common Stock held by each officer,
director and holder of 10% or more of the outstanding Common Stock have been
excluded in that such persons may be deemed to be affiliates. This
determination of affiliate status is not necessarily a conclusive
determination for other purposes.

Outstanding shares of registrant's Common Stock, $0.001 par value, as of
March 16, 2001: 17,458,940

                      DOCUMENTS INCORPORATED BY REFERENCE

Parts of the definitive proxy statement for registrant's 2000 Annual Meeting of
Stockholders to be filed with the Commission pursuant to Regulation 14A not
later than 120 days after the end of the fiscal year covered by this Report are
incorporated by reference into Part III of this Report.


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                                     PART I

THIS REPORT INCLUDES A NUMBER OF FORWARD-LOOKING STATEMENTS WHICH REFLECT THE
COMPANY'S CURRENT VIEWS WITH RESPECT TO FUTURE EVENTS AND FINANCIAL PERFORMANCE.
THESE FORWARD-LOOKING STATEMENTS ARE SUBJECT TO CERTAIN RISKS AND UNCERTAINTIES,
INCLUDING THOSE DISCUSSED IN "ITEM 7 MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS - FUTURE PERFORMANCE AND RISK
FACTORS" AND ELSEWHERE IN THIS REPORT, THAT COULD CAUSE ACTUAL RESULTS TO DIFFER
MATERIALLY FROM HISTORICAL RESULTS OR THOSE CURRENTLY ANTICIPATED. IN THIS
REPORT, THE WORDS "ANTICIPATES," "BELIEVES," "EXPECTS," "INTENDS," "FUTURE" AND
SIMILAR EXPRESSIONS IDENTIFY FORWARD-LOOKING STATEMENTS. READERS ARE CAUTIONED
NOT TO PLACE UNDUE RELIANCE ON THESE FORWARD-LOOKING STATEMENTS, WHICH SPEAK
ONLY AS OF THE DATE HEREOF.

ITEM 1.  BUSINESS.

INTRODUCTION

We develop and market integrated circuits, integrated circuit cores and embedded
software used by original equipment manufacturers, or OEMs, in digital audio and
video products for commercial and consumer markets. We also provide complete,
copy-ready system reference designs based on our technology that help our
customers produce commercial and consumer products more quickly and
cost-effectively. Our integrated circuits are used in a variety of products,
including digital versatile disc, or DVD, players, Super Video CD players,
digital speakers and audio systems, filmless digital cameras, and professional
and consumer video editing systems.

INDUSTRY BACKGROUND

Until the mid-1990s, video images and audio soundtracks were transmitted, edited
and stored almost exclusively using analog formats. More recently, however,
advances in technology have allowed audio and video to be processed and stored
in digital form. Unlike analog formats, which are inherently unstable and
difficult to edit and enhance, digital formats permit the manipulation of audio
and video signals through digital signal processing and offer a number of
fundamental advantages over analog technologies. Through complex digital signal
processing operations, digital audio and video signals may be compressed,
providing significant storage and transmission efficiencies. They also may be
filtered, allowing for noise reduction, and they may be transmitted and
reproduced without perceptible image or sound degradation. Digital formats
provide users with additional benefits, including random access to data,
superior editing capabilities and enhanced security features such as protection
against unauthorized copying and controlled and secure access.

One of the most significant barriers to the widespread adoption of digital
technology has been the huge amount of data required to represent images and
sounds in a digital format, making cost-effective storage or transmission
impractical. For example, storage of a two-hour movie in uncompressed digital
form would require approximately 200 video CDs. Through digital compression
techniques a substantial number of the redundancies inherent in audio and video
data can be identified and eliminated, significantly reducing the overall amount
of data which needs to be retained. Compression techniques introduced in the
early 1990s allowed the same two-hour movie which required 200 video CDs to be
compressed and stored on only two video CDs with video resolution comparable to
that of a standard VHS tape. More recent techniques allow the storage of a
full-length movie of more than three hours on a single DVD, with substantially
improved audio and video quality and the incorporation of additional data, such
as additional languages, scenes and director and actor commentary. Additionally,
digital compression of video data allows previously unmanageable amounts of data
to be stored in the memory of a standard personal computer, thereby permitting
the data to be accessed and edited easily. Digital audio compression allows
efficient storage and delivery of multi-channel audio, making possible
high-quality special effects such as multi-channel surround sound, virtual
surround sound and wireless audio delivery via two speakers or headphones. In
the field of still photography, digital compression allows dozens or hundreds of
digital pictures to be stored on a single memory card, depending on the
resolution desired.

To drive the implementation and speed the adoption of products based on digital
formats, industry participants organized committees to define international
compression standards. The principal standards in use today include:

     o The Joint Photographic Experts Group, or JPEG, standard for the high
       quality compression of still images and the real-time, low-cost
       compression and decompression of moving images;


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     o The MPEG 1 standard, adopted by the Moving Pictures Experts Group, or
       MPEG, for the compression of both audio and video data at the high
       compression ratios necessary for the limited storage capacity of the
       CD-ROM format;

     o The MPEG 2 standard, subsequently adopted by the Motion Pictures Expert
       Group, for the compression of both audio and video data, designed to
       provide improved quality in broadcast and video playback applications;

     o The MPEG 4 standard, is an extension of MPEG 1 and MPEG 2 that provides
       the ability to view, access and manipulate objects rather than pixels,
       which is especially significant in video streaming, digital television,
       module multimedia and video game applications; and

     o Dolby AC-3, also known as Dolby Digital, developed by Dolby Laboratories,
       an industry standard for the compression of audio for use in
       multi-channel digital surround sound systems.

These industry standard techniques have enabled the dramatic growth in a variety
of digital multimedia markets, including:

     o DVD PLAYERS. DVD players use MPEG 2 video compression and Dolby
       Digital audio technology to provide significantly higher quality
       playback than is possible with VCR or video CD technology. According
       to Cahners In-Stat Group, a market research firm, worldwide sales of
       DVD players are expected to grow from 2.4 million units in 1998 to
       54.3 million units in 2004, a compounded annual growth rate of 68.2%.

     o DIGITAL AUDIO SYSTEMS. Dolby Digital and other audio compression
       techniques are used in multi-channel surround sound products including
       movie theater sound systems, audio/video receivers and digital speakers.
       According to data gathered from marketing research firms including
       Cahners In Stat Group and NPD-Intellect amongst others, the demand
       for digital audio systems is expected to grow from 2.2 million units in
       1998 to 85.3 million units in 2004, a compounded annual growth rate
       of 84.0%.

     o FILMLESS DIGITAL CAMERAS. Filmless digital cameras use JPEG compression
       technology to capture high resolution images that can be viewed, edited
       and stored on a computer system and transmitted over telephone lines and
       computer networks. According to Cahners In-Stat Group, a market research
       firm, sales of megapixel digital cameras are expected to grow from 3.6
       million units in 1998 to 40.8 million units in 2004, a compounded annual
       growth rate of 49.9%.

     o PC VIDEO SYSTEMS. JPEG-based PC video systems are used to capture and
       "cut and paste" video sequences and add special audio and video
       effects. The growth in the desktop video editing market has slowed in
       recent years. However, according to Cahners In-Stat Group, a marketing
       research firm, the demand for PC TV tuners over USB is expected to
       grow from 186,000 units in 2000 to 5.8 million units in 2005, a
       compound annual growth rate of 99.0%.

Additional products and markets are developing based on these established
compression standards as well as emerging compression technologies such as MLP,
a new standard for DVD audio, and MP3, a compression standard for the download
of audio recordings from the Internet.

These established and emerging compression standards specify data formats in
which compressed data must be presented in order to enable products from
different vendors to interact and permit the capture, transmission, storage and
display of audio and video data in digital format. These standards do not
specify the compression methodologies to be employed or additional functionality
which may be used to enhance or manipulate digital signals. These standards,
therefore, do not determine image or sound quality or compression efficiency.
For example, data compression may comply with relevant standards despite being
poorly processed and containing artifacts which result in image degradation in
video applications or poor sound quality in audio applications. As a result
there can be significant differences in overall image or sound quality between
two solutions based on the same standard. Therefore, integrated circuit
manufacturers can differentiate their products on the basis of the quality of
their compression solution.


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Historically, as system vendors sought compression solutions, the cost,
complexity, and time required to compress and decompress data have imposed
significant limitations on the use of digital compression. Over the last
several years, as cost-effective compression solutions have emerged, product
manufacturers have increasingly sought to design and market lower-cost
digital audio and video systems and products to address high volume consumer
applications. In addition, product manufacturers are facing competitive
pressure to introduce their products more rapidly. To address these issues,
OEMs seek to integrate multiple functions on individual chips in order to
reduce their costs, speed time-to-market and produce smaller products with
reduced power consumption. They also seek solutions that can be easily
integrated into their commercial and consumer products. The current challenge
to manufacturers of compression integrated circuits is, therefore, to provide
product manufacturers with high-quality, cost-effective, standards-based
solutions that deliver flexible control, image enhancement, audio effects and
other functions in addition to high quality compression solutions.

THE ZORAN SOLUTION

We provide feature-rich, cost-effective, standards-based solutions for a broad
range of digital audio and video applications. We were a pioneer in the
development of high performance digital signal processor products, and have
developed expertise in digital signal processing, integrated circuit design,
mathematical algorithms and software development, as well as proprietary digital
signal processing, audio and video compression technologies. We apply our
multi-disciplinary expertise and proprietary technologies to the development of
fully-integrated solutions for high-growth multimedia markets. The key elements
of our solution are:

STANDARDS-PLUS METHODOLOGY. We have leveraged our broad multi-disciplinary
expertise and proprietary digital signal processing and compression technologies
to develop what we refer to as "standards-plus" solutions. We have enabled OEMs
to improve image and sound quality and deliver superior products to end users by
adding more features around compression standards, such as more efficient use of
memory, processing and communication resources, as well as audio and image
enhancement algorithms. We have also provided OEMs the ability to include
OEM-programmable effects, as well as variable compression ratios for video.
These "standards-plus" features allow our customers to differentiate their
products from those of their competitors.

EXPANDABLE AND PROGRAMMABLE ARCHITECTURE. We design our integrated circuits to
enable easy adaptation for a broad range of specific applications. We can vary
the architecture of our chips by adding or deleting modules, and we can also
modify the software embedded in the chips themselves to address specific
applications. We also license ready-to manufacture "cores"--building blocks of
integrated circuits--that can be integrated into our customers' chips. Combined
with the enhanced functionality of our "standards-plus" technology, our
expandable and programmable architecture facilitates product design, upgrades
and customization, substantially accelerating our customers' time to market with
differentiated products.

INTEGRATED SYSTEM SOLUTIONS. We help our customers meet their total system
requirements by providing integrated products that combine hardware and software
to address required system functions and features on a single integrated circuit
or chip set, reducing the number of integrated circuits, and in some cases
providing a complete solution on a single chip. As a result, our customers'
total system cost can be reduced and they can concentrate on differentiating
their products from those of their competitors. For example, we introduced the
Camera On A CHip, or COACH, which includes most of the electronics of a filmless
digital camera. With the acquisition of PixelCam Inc., we also offer the CMOS
sensor that is tightly integrated with COACH. By delivering a camera on a chip
with the CMOS sensor, we enable our customers to reduce the costs of their
products and focus on providing products that meet the needs of their end users.

COST-EFFECTIVE PRODUCTS. We focus on reducing the feature size, power
requirements and number of integrated circuits necessary to perform required
system functions, including compression functions. This reduces our customers'
manufacturing costs for their products which incorporate our integrated
circuits, and also reduces the operating costs for these products, enabling the
use of our products in a broader range of high volume applications. The modular
nature of our architecture reduces our new product development costs, and
enables our design engineers to meet our customers' new product specification
and cost parameters.


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COPY-READY SYSTEM REFERENCE DESIGNS. We provide our customers with a broad
range of engineering reference boards and products complete with device
driver software, embedded software and detailed schematics. These products
substantially shorten our customers' product design time.

STRATEGY

We provide cost-effective, high-performance digital audio and video solutions
addressing selected high-growth applications enabled by compression in evolving
multimedia markets. Key elements of our strategy include:

FOCUS ON HIGH-GROWTH APPLICATIONS. Our strategy is to focus on providing digital
audio and video solutions for emerging high-growth consumer electronics, PC and
communications applications. Our current focus markets include DVD players and
Super Video CD players, digital speakers and audio systems, filmless digital
cameras and professional and consumer video editing systems.

LEVERAGE EXISTING TECHNOLOGY AND EXPERTISE. We intend to continue to identify
those markets that we believe have the highest growth potential for our products
and to actively pursue those markets. Our proprietary digital signal processing
and compression technologies can be used to serve emerging markets for digital
audio and video. Potential markets include Internet audio and video appliances,
digital television and television set-top boxes, as well as personal digital
audio and video devices.

FURTHER PENETRATE KEY INTERNATIONAL MARKETS. In 1998 we opened an office in
Shenzhen, China. During 2000, we opened offices in Taiwan and Japan. At the
beginning of 2001, we opened offices in Korea and Hong Kong. We believe that by
opening these offices we will be able to better provide sales, marketing, and
applications support for these growing consumer electronics markets.

EXTEND TECHNOLOGICAL LEADERSHIP. Our years of experience in the fields of
digital signal processing, integrated circuit design, algorithms and software
development have enabled us to become a leader in the development of digital
audio and video solutions enabled by compression. Using our multi-disciplinary
expertise, we have developed new technologies for compression of digital audio
and video. For example, our proprietary bit rate control technology has helped
us provide reliable and inexpensive JPEG-based video compression and our
proprietary Virtual Multi-Channel Digital, or VMD, technology enables
high-quality surround-sound effects from two low-cost audio speakers, rather
than the four or five speakers required by other technologies. During 2000, we
acquired PixelCam Inc., which enabled us to develop a competitive advantage by
combining our Camera On A Chip, or COACH, processor with PixelCam's CMOS sensor,
providing a more integrated system. Furthermore, during 2000 we acquired
Nogatech Inc., which provided us with low cost PC connectivity and MPEG-4
technologies that allow us to address high growth opportunities, including the
transmission of live video for wireless applications. We intend to continue to
invest in our own research and development, and to evaluate opportunities to
acquire additional technologies in order to maintain and extend our
technological leadership.

EXPAND STRATEGIC PARTNERSHIPS. We work closely in the product development
process with leading manufacturers of products that incorporate our integrated
circuits. We also work closely with key customers and provide them early access
to our technologies. Potential products are designed to meet customer-driven
product requirements defined jointly by us and our partners with the partner
providing technological input and, in selected cases, a portion of the
development funding. This strategy has enabled us to develop products with
substantial financial and other assistance while retaining ownership of the
technology and ensuring an established customer for the product once development
is completed. In some cases, our strategic partners also provide sales and
marketing support. We have also established long-term relationships with
strategic partners that provide manufacturing capacity and will seek to develop
additional strategic relationships with manufacturers.

MARKETS AND APPLICATIONS

Our products are currently used in a variety of consumer multimedia and PC
applications.


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  VIDEO PLAYBACK SYSTEMS

Currently, three types of digital video playback systems are available for
consumer video applications: video CD players, Super Video CD players and DVD
players.

Video CD players are essentially CD audio players with MPEG 1 decoders and a
video output. Video CD players offer video playback of near-VCR quality and
two-channel stereo audio playback. Compression enables 60 to 70 minutes of video
to be stored on a single CD. Video CD players can also play karaoke titles and
are particularly popular in China, which we believe will continue to be the
primary market for these products. We formerly sold MPEG 1-based products to
manufacturers of stand-alone video CD players but are no longer selling these
products for this market.

In 1998, the Chinese government adopted the Super Video CD standard. By
utilizing MPEG 2 compression technology as well as graphics, Super Video CD
offers substantially higher audio and video quality than is possible with a
video CD player. The Super Video CD standard is replacing video CD in China.

DVD players, the latest generation of video playback systems, use MPEG 2 video
compression and Dolby Digital or similar audio technology to provide
significantly higher quality playback than is possible with VCRs, Video CD or
Super Video CD players. DVD players are sold as stand-alone products and are
also included in place of CD-ROM drives in some newer PCs, where they are
referred to as DVD-ROMs. DVD-ROMs are also sold as upgrade products. The growth
in the DVD market is demonstrated by the rapidly growing sales of DVD players,
the increasing number of models and manufacturers, and the increasing number of
DVD titles available for purchase and rent.

  DIGITAL VIDEO RECORDING SYSTEMS

Digital video recording systems are aimed at replacing the analog VCR.
Digital video recording systems will not only store home made movies and TV
programs but will allow them to be easily edited. In addition, digital video
recording systems will enable high quality time shifting of TV program
viewing by recording the program so that it can be watched simultaneously or
on a delayed basis. The recording media includes DVD recordable media and
hard disks. Digital video recording systems use MPEG 2 as the video
compression format and Dolby Digital or MPEG audio as the audio format.

  DIGITAL AUDIO SYSTEMS

Digital audio facilitates enhanced audio playback with features such as
multi-channel surround sound and virtual surround sound utilizing two channel
technology. Many standards have emerged for the digital compression of audio.
Current digital audio compression standards in use include Dolby Digital, DTS,
MLP and MP3. Dolby Digital and DTS are competing standards of audio compression
for use in multi-channel digital surround sound systems in movie theaters and at
home. MLP was developed for audio compression in DVD audio. MP3 is one of the
compression standards recognized for the download of audio recordings over the
Internet. Our audio integrated circuits incorporate all of these standards. The
principal products using compressed digital audio in the consumer market are DVD
players, PCs incorporating DVD-ROMs, digital speakers and portable MP3 players.

  FILMLESS DIGITAL CAMERAS

Filmless digital cameras allow the capture of high resolution images, the
viewing, editing and storage of such images on a computer system and their
transmission over telephone lines and computer networks. High quality copies of
these images can be printed using color printers. In addition, digital cameras
can be connected directly to a PC for downloading of pictures and to a
television for displaying pictures. The original digital cameras were developed
for the professional market and currently sell at prices of $3,000 to $10,000.
As technology has advanced and manufacturing costs have decreased, digital
cameras for the consumer market have been introduced in the $100 to $1,000 price
range. Compression technology has also enabled the development of digital video
security cameras and low cost digital video cameras for use with PCs.

  PC VIDEO SYSTEMS

Historically, professional video editing systems were comprised of expensive
pieces of analog audio and video equipment. Compression technology allows
digital video images to be stored in a computer's memory in sufficient


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volume to enable capture and "cut and paste" editing to be performed through
random access to stored images. As the cost of compression technology has
declined, a number of manufacturers have designed low cost digital video
capture and editing systems that run on PCs, creating a new category of users
in the corporate, education and government markets.

The availability of universal serial bus, or USB, connectors on most PCs
currently being manufactured creates an opportunity for the development of
low-cost external video capture and editing accessories that can be easily
installed by consumers. We believe that enhanced support of video in the
Windows-ME, and the growing popularity of wideband Internet services will open
new opportunities for video capture and sharing applications on the PC and will
increase the popularity of such products.

  OTHER APPLICATIONS

Other existing and potential applications for our audio and video compression
technologies include Internet audio and video appliances, digital television and
television set-top boxes, as well as personal digital audio and video devices.

TECHNOLOGY

  IMAGE AND VIDEO TECHNOLOGY

The JPEG Standard. In 1991, the Joint Photographic Experts Group, or JPEG,
Committee of the International Standards Organization completed a technical
specification for a standard to compress individual digitized images which may
consist of still images or consecutive frames of video data. JPEG has been
widely adopted for video editing applications, since each frame in the video is
individually compressed, allowing cutting and pasting of sequences as well as
modification of individual frames. Images are compressed through elimination of
spatial redundancies within an image and the filtering of high frequency areas
to which the eye is less sensitive. Using these techniques, the JPEG compression
standard is able to reduce the data necessary to represent an image without
significant degradation of image quality. Still images or motion video can be
compressed to varying degrees using JPEG, with greater compression resulting in
lower quality. Typically, four-to-one or five-to-one compression yields
broadcast image quality while 20-to-1 compression is similar to VHS quality.

ZORAN JPEG TECHNOLOGY. Our JPEG technology incorporates a proprietary bit rate
control algorithm that enables our JPEG-based products to compress any image to
a predetermined size while optimizing video quality using pre-selected
parameters. Without this feature, the JPEG compression process results in
compressed data files of various sizes based on the actual content of the
original image given a constant degree of compression. An image with large
amounts of visual detail will generate a larger data file than that generated
from an image with less detail. Performance of many video applications is
hampered by variability in the size of the compressed images in a video
sequence, which can result in inefficient use of available memory, bus speed or
communication channel capacity or even the loss of images. Our bit rate control
is a "standards-plus" solution that uses real-time digital signal processing
algorithms to optimize video quality based on pre-selected parameters, which can
be programmed by OEMs, without the loss of any image or video frame. Our bit
rate control has been incorporated in our JPEG-based devices that are used in
video editing systems, filmless and tapeless digital cameras, color scanners,
PC-based security systems, video conferencing and other applications. Other
features of our JPEG-based products include their ability to handle a wide range
of compression ratios, to perform a "lossless" compression algorithm in the same
JPEG device, to rapidly scan or browse a large number of images and utilize
advanced image processing algorithms that enable bit rate control of USB data,
vertical blank interval detection, infrared remote control detection and scene
analysis for computer control applications. We implement these functions in a
single integrated circuit while we believe most other manufacturers either offer
fewer functions or require multiple chips, resulting in higher manufacturing
costs and greater power consumption.

CMOS SENSOR TECHNOLOGY. With the widespread availability of inexpensive
complementary metal oxide semiconductor, or CMOS, fabrication facilities, image
sensor designers are now able to offer a single chip solution to perform the
"light-to-bytes" function at a quality level that is competitive with the long
established charge coupled device, or CCD, sensor technology, but with far
greater operational flexibility and at much lower power consumption. CMOS
sensors can scan in a variety of modes and directions and perform analog-domain
pre-processing of the signal which may be advantageous from a system
perspective. Although the greater pixel circuit complexity results in a larger
imager today, progress is being made to both reduce the geometry of the pixel
and use more aggressive design rules. The result will be


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a sensor which provides both cost reduction and performance enhancement paths
to the system designer over the traditional CCD-based solution.

ZORAN CMOS SENSOR TECHNOLOGY. The PixelCam ZR32112 is a high performance 1.3
megapixel CMOS image sensor that is ideal for digital still and video imaging
products. With its proprietary Distributed-Pixel Amplifier design, the pixel
response is independent of its distance from each column's CDS circuitry. This
unique architecture results in an extremely uniform pixel array with low
fixed-pattern noise without the need for off-chip background frame subtraction
circuitry. The bank of analog front-end circuits quantizes each pixel to 10 bit
resolution. This highly parallel approach eases speed requirements on individual
analog circuits and reduces overall power consumption. Separate programmable
red, green and blue PGA circuits enable analog-domain color balance. The
flexibility of the ZR32112 output image format permits the tradeoff between
resolution and frame rate. The image output may also be horizontally "mirrored"
and vertically "flipped".

THE MPEG STANDARDS. In 1991, the Moving Pictures Expert Group, or MPEG,
Committee of the International Standards Organization completed a technical
specification for a standard to compress moving audio and video into a single
data stream. Like JPEG, MPEG 1 removes spatial redundancies from single frames
of video data. MPEG 1 improves on JPEG by also removing redundancies that occur
between consecutive video frames. Because video represents movement, it is
possible to detect and estimate the movement of similar picture elements between
video frames, a process called motion estimation. MPEG motion estimation uses
the content of previous and future frames to predict the content of the current
frame without using its full content. MPEG 1 implements audio compression by
exploiting psycho-acoustic masking, taking advantage of the fact that the ear is
less sensitive to a quiet note at one frequency when a much louder note is
present at a nearby frequency. MPEG 1 often achieves audio compression ratios of
six-to-one and video compression ratios of over 100-to-1. MPEG 1 is particularly
suitable for low-cost CD-ROM applications due to its low-cost implementation.

In 1993, the MPEG 2 video committee completed a technical specification to
address the more stringent requirements of the broadcast industry. MPEG 2
provides more sophisticated prediction techniques, enabling a compression
solution to comprehend video as interlaced fields of data, rather than
individual frames. MPEG 2 also allows for operation at higher resolution and at
higher bit rates than MPEG 1, resulting in improved image quality for high
motion, high detail video. MPEG 2 typically achieves compression ratios of
50-to-1. Because of its higher bit rate, MPEG 2 technology cannot be used in
standard CD-ROM applications, but can be used in DVD players.

MPEG 4 builds on the experience of the MPEG 1 and MPEG 2 standards, which are
currently used in digital video applications. MPEG 4 is rich in features, and
can be customized to serve the needs of specific industries while preserving a
high level of interoperability across a variety of applications. It allows a new
level of interaction with visual content, providing the ability to view, access
and manipulate objects rather than pixels. MPEG 4's impact is especially
significant in video streaming, digital television, mobile multimedia and game
applications

ZORAN MPEG TECHNOLOGY. Beginning in 1997, we established ourselves as a
leading provider of MPEG 2 technology for DVD and Super Video CD
applications. We introduced the first DVD decoder device integrating digital
video with multi-channel digital audio and programmable audio effects for use
in DVD players. We also introduced new MPEG compression chip cores that can
be integrated into chips manufactured by OEM customers, enabling these
customers to reduce the cost of custom chip design and accelerate the
time-to-market of their products. We are developing advanced video processing
technology for implementation and enhancement of the MPEG 4 video compression
standard for PC video accessories and for communication across networks. We
are adapting and enhancing our existing core technologies in order to develop
algorithms and chips that will be compatible with the variety of Internet
video, plug-and-play and other applications based upon MPEG 4.

  AUDIO TECHNOLOGY

The Dolby Digital Standard. In 1992, Dolby Laboratories launched Dolby Digital,
an audio compression technique which has emerged as an industry standard. Dolby
Digital was developed as a successor to Dolby's Pro-Logic analog technique for
use in multi-channel digital surround sound systems. It is currently used in
movie theaters comprising over


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24,000 screens worldwide and is also used in home theater and computer
multimedia applications. Digital compression of audio data allows the storage
of full quality multi-channel audio playback in the limited space allocated
for audio in video-oriented formats. It also facilitates the seamless
integration of sound with compressed video. The Dolby Digital audio
compression standard is currently the principal audio compression technique
used in DVD players. Dolby Digital has also been adopted as a standard for
use in high-definition television and digital cable systems.

OTHER AUDIO STANDARDS. Other digital audio compression standards currently in
use include DTS, an audio compression standard that competes with Dolby Digital,
MLP, a compression standard for DVD audio, and MP3, used for the download of
audio recordings from the Internet.

ZORAN AUDIO TECHNOLOGY. Working closely with Dolby Laboratories, we have
developed a programmable audio digital signal processing engine with an
architecture optimized for Dolby Digital and other demanding audio
applications and we were the first to develop a single-chip solution for
Dolby Digital decoding. Our Vaddis DVD decoders and audio processors now
incorporate this engine to allow systems manufacturers to replace system
components with software modules, differentiate their products from their
competition, use our Silicon Software library of advanced audio algorithms,
and reduce system costs and time to market. In addition to Dolby Digital, our
DVD decoders and audio processors implement all principal audio compression
standards, including DTS, MLP and MP3. Our integrated circuits also include
additional functions such as Virtual Multi-Channel Digital, surround sound
for headphones, High-Definition CD, karaoke processing and speaker
equalization.

PRODUCTS

Our multimedia product line consists of four principal product families:

     o DVD/Super Video CD--audio and video decompression products based on MPEG,
       Dolby Digital and DTS;

     o Digital Audio--audio decompression products for use in products using
       MPEG, Dolby Digital, DTS, MLP, MP3 and other audio technologies;

     o Filmless Digital Cameras--video compression and decompression products
       based on JPEG technology and CMOS sensors; and

     o PC Video--video compression and decompression products based on JPEG
       technology and USB multimedia controllers.


                                       9
<PAGE>

The following table lists our principal multimedia integrated circuits currently
in production, including the months in which initial production units were first
made available to customers:

<TABLE>
<CAPTION>
----------------- ------------------------------------------------- -------------- -----------------------------------------
                                                                      INITIAL
   PRODUCT                                                           COMMERCIAL                     PRINCIPAL
   FAMILY                            PRODUCTS                         SHIPMENT                     APPLICATIONS

<S>               <C>                                               <C>            <C>
                  Vaddis DVD decoder (ZR36700)                      December 1997
----------------- ------------------------------------------------- -------------- -----------------------------------------
                  Vaddis III Integrated DVD decoder (ZR36710)       August 1998
                   ------------------------------------------------- -------------
                  Vaddis IV Integrated DVD decoder (ZR36730)        June 1999      DVD players
                  ------------------------------------------------- --------------
DVD and Super     Vaddis IV-LC Integrated DVD decoder (ZR36732)     November 2000
 Video CD         ------------------------------------------------- -------------- -----------------------------------------
                  SupraAV I Super Video CD decoder (ZR36205)        August 1998
                  ------------------------------------------------- --------------
                  SupraAV II Super Video CD decoder (ZR36215)       September 1998 Super Video CD players
                  ------------------------------------------------- --------------
                  SupraAV II Super Video CD decoder (ZR36225)       June 2000
----------------- ------------------------------------------------- -------------- -----------------------------------------
                  6-channel Dolby Digital decoder                   December 1994  Home theater
                  (ZR38500)
                  ------------------------------------------------- -------------- -----------------------------------------
                  Programmable Digital audio processor (ZR38601)    December 1998  Digital speakers for home theater,
Digital Audio                                                                      computers and gaming consoles
                  ------------------------------------------------- -------------- -----------------------------------------
                  Multi-standard Programmable Digital audio         December 1998  Audio/video receivers, 3D headphones
                  processor (ZR38650)
----------------- ------------------------------------------------- -------------- -----------------------------------------
                  Filmless digital camera processor--COACH           February 1999
                  (ZR36400)
                  ------------------------------------------------- --------------
Filmless Digital  Filmless digital camera processor--COACH-XL        March 2000    Filmless digital cameras, security
   Cameras        (ZR36410)
                  ------------------------------------------------- --------------
                  Filmless digital camera processor--COACH-LC        March 2000
                  (ZR36420)
                  ------------------------------------------------- --------------
                  CMOS sensor (ZR32112)                             July 2000
----------------- ------------------------------------------------- -------------- -----------------------------------------
                  JPEG codec (ZR36050)                              April 1993     PC video editing, office automation
                  ------------------------------------------------- -------------- -----------------------------------------
                  Integrated converter (ZR36016)*                   February 1995  Color scanners and printers
                  ------------------------------------------------- -------------- -----------------------------------------
                  JPEG codec (ZR36060)                              February 1997  PC video editing, security
                  ------------------------------------------------- -------------- -----------------------------------------
                  JPEG PCI multimedia controller                    September 1997 PC video editing
                  (ZR36067)
                  ------------------------------------------------- -------------- -----------------------------------------
    PC Video      PCI multimedia controller (ZR36125)               March 1997     PC video capture
                  ------------------------------------------------- -------------- -----------------------------------------
                  USB multimedia controller  (ZR36503)              June 1998      PC-TVs, PC digital cameras, video
                                                                                   capture devices
                  ------------------------------------------------- -------------- -----------------------------------------
                  USB multimedia controller (ZR36504)               December 1999  PC-TVs, PC digital cameras, PC set-top
                                                                                   boxes, cable modems
----------------- ------------------------------------------------- -------------- -----------------------------------------
</TABLE>

* Designed and manufactured by a third party and sold by us under our name
pursuant to a non-exclusive license. See "Proprietary Rights and Licenses."


                                      10
<PAGE>

DVD/SUPER VIDEO CD PRODUCTS. In 1997, we introduced the first member of our
Vaddis line of DVD decoders, the Vaddis I. During 1998, we introduced the Vaddis
II and Vaddis III, and in 1999 we introduced the Vaddis IV. During 2000, we
introduced the Vaddis IV-LC and the companion CPU chips. Our Vaddis decoders
perform all the audio and video decoding and display requirements of the DVD
specification, including MPEG 2 audio and video decoding, Dolby Digital, DTS and
MLP audio decoding, on-screen display, decryption required for copyright
protection and presentation of graphic information. The Vaddis has additional
computation power that can be utilized for customer differentiation features.
For example, it can incorporate virtual surround sound algorithms without the
addition of hardware. This allows the user to enjoy the theater-like sound
obtained from six speakers using a system that includes only two speakers and
the Vaddis. The Vaddis IV incorporates a more powerful audio digital signal
processor that enables the support of advanced audio algorithms like MPEG 5.1,
DTS and audio DVD, which are needed in today's DVD player systems. Vaddis
decoders are being used in DVD players manufactured by Sharp, Toshiba and
others. The SupraAV is our single chip solution for the Super Video CD market.
This single chip performs all of the audio and video decoding required by the
Super Video CD standard and also allows additional features, like karaoke, to be
implemented without any additional hardware. We provide full reference designs
of DVD players and a Super Video CD player, based on our Vaddis and SupraAV
chips, that helps our customers accelerate their time to market for their
players.

DIGITAL AUDIO PRODUCTS. The ZR38601, a single-chip digital audio processor
designed to support the growing PC and home theater digital speaker market,
takes advantage of most of the advanced audio algorithms included in our Silicon
Software library. Its eight channel output architecture supports the latest home
theater applications, including Dolby Surround EX 6.1 channel sound. The
ZR38601's ability to accept six individual channels of audio input also makes it
the ideal processor for today's four channel Direct Sound computer games. The
ZR38650, a true multi-standard digital audio processor, takes advantage of our
complete Silicon Software library. It is designed to support the large mid and
low range audio/video receiver market, while providing features previously
available only on more expensive models.

FILMLESS DIGITAL CAMERA PRODUCTS. Our JPEG technology is used in filmless
digital cameras. In September 1999, we introduced the Camera On A CHip, or
COACH--an integrated system on a chip solution that includes most of the
electronics of a filmless digital camera. The COACH can be connected directly to
a high-resolution (up to 4 mega pixel) CCD or CMOS sensor, process the video
information in real time, compress the captured image in real time to a flash
memory, interface an LCD or micro display and interface to all types of flash
memory. Among the unique capabilities of the COACH is the ability to transfer in
real-time, over a USB bus, high quality video to the PC and thus serve also as a
PC video camera. The COACH also allows for direct connection to a printer,
including color correction and special effects, for the non-PC consumer
environment. The COACH is supplemented by full filmless digital camera reference
designs, "Cam ON" and "Cam Mini," shortening the time to market for COACH
customers. In June 2000, Zoran acquired PixelCam, Inc., a provider of high
quality megapixel CMOS image sensors and integrated lens/sensor modules. The
PixelCam CMOS sensor products currently deliver CCD image quality with 1.3
megapixel resolution at one-quarter the power dissipation and twice the
integration level of CCD sensors. The sensor's architecture is scalable, which
will enable higher resolution product offerings as the digital camera OEM's
needs change. These products also offer the digital camera manufacturer longer
battery life and reduced "time to next shot".

PC VIDEO PRODUCTS. Our ZR36050 and ZR36060 codecs are compression/decompression
devices used for real time encoding and decoding of JPEG video for editing
applications. They are fully compliant with JPEG standards. The ZR36050 and
ZR36060 utilize our proprietary bit rate control technology for high quality
video capture. The ZR36050 also features a unique, embedded, "lossless" mode
that allows customers to elect to use low compression ratio techniques that
result in no data loss for applications where quality is the primary
consideration. The ZR36050 and ZR36060 can be installed in a chipset that
includes the ZR36067 motion controller for PCI board implementation or
pre/post-processing devices such as the ZR36016 integrated color
space/raster-to-block converter. The ZR36060 integrates the functions of the
ZR36050, ZR36015 and an additional SRAM device in a single chip. The ZR36067 is
a PCI motion JPEG controller targeting consumer-priced but professional quality
desktop PCI video editing systems. The ZR36503 is a video chip for video
communication across the USB channel to the PC. The ZR36504 chip incorporates
video, audio and data streaming into a single chip for video, audio and data
transfer across the USB channel to the PC.

INTEGRATED CIRCUIT CORES. We offer multimedia integrated circuit cores which can
be incorporated into our customers' chips. For example, our latest generation
programmable audio digital signal processor engine, the ZR39000, offers extended
processing power and software compatibility with all previous generations of our
digital audio processors, thus


                                      11
<PAGE>

allowing it to use our extensive Silicon Software library. The ZR39000 is
designed to be integrated into DVD, television set-top box, home network, and
Internet appliance system-on-a-chip applications. Our video decoder core, the
ZR4VD1, can be used to reformat and process video from television-type analog
format to digital format, enabling video processing by PCs, digital
televisions and other video systems. Our video encoder core, the ZR4VE2,
enables the conversion of various digital video formats for display on
televisions and PC monitors, and can be integrated into graphics integrated
circuits, digital televisions, television set-top boxes and digital cameras.

CUSTOMERS

The following table lists representative customers, as well as other OEMs who
purchase our products through our distributors. Each of these customers and OEMs
purchased, directly or indirectly, at least $100,000 of our products from
January 1, 2000 through December 31, 2000:

<TABLE>
<CAPTION>
------------------------------ --------------------------------------------------------------- --------------------
PRODUCT FAMILY                                      CUSTOMERS                                    OTHER OEMS
------------------------------ --------------------------------------------------------------- --------------------
<S>                            <C>                              <C>                            <C>
DVD/Super Video CD             CET LTD.                         Marketa Semiconductor          Orion
                               C.R.G. Electronics LTD.          Newell Hong Kong               Quisheng
                               Daewoo Electronics Co., LTD.     RH Electronics LTD.            Sharp
                               Farimex S.A.                     Shanghai Thakral Electronics   Toshiba
                               Fly Ring Digital Technology      Sinoglobal Technology Inc.
                               FM COM Corp.                     Tatung
                               Fujifilm                         Xiaxin
------------------------------ --------------------------------------------------------------- --------------------
Digital Audio                  Acoustic Accessories             Dolby Laboratories             Denon
                               Altec Lansing                    Edge Electronics Inc.
                               Amega Technology                 Fujifilm
                               ATL Electronics                  Harvatek Corporation
                               Boston Acoustics                 Minton Optical Industry
                               Creative Technology
------------------------------ --------------------------------------------------------------- --------------------
PC Video                       Alcom Electronics                Matrox                         Avid
                               Amega Group Limited              Pemstar Electromechanical      Lucent Technologies
                               ATD Electronique                 Pinnacle Systems               Silicon Graphics
                               ATI Technologies LTD.            Q.S.R. LTD.
                               Avermedia Technologies           Ryantronics Inc.
                               CET LTD.                         SCI Manufacturing Inc.
                               Dazzle, Inc.                     Solectron Technology Inc.
                               Dovatron Ireland B.V.            Takachiho Koheki Co., LTD.
                               Edge Electronics Inc.            Tomen Electronics Corp.
                               Electronics for Imaging          Topas Electronic
                               Fujifilm                         Xanbo Inc.
                               Hauppauge Computer Works
------------------------------ --------------------------------------------------------------- --------------------
Filmless Digital Cameras       Kinpo Electronics Ltd.           Samsung Techwin Co. LTD.       Minolta
                               Mustek Systems Inc.              Sinoglobal Technology Inc.     Ricoh
                               NuCam Corporation                Xirlink, Inc.
                               Primax Electronics Ltd.
------------------------------ --------------------------------------------------------------- --------------------
</TABLE>


Fujifilm purchases our products primarily as a distributor and resells these
products, in many cases under its own trade name. Fujifilm acts as our primary
distributor in Japan and accounts for most of our product sales in Japan.

During 1999, sales to Fujifilm accounted for 37.3% of our total revenues,
including 41.0% of product sales. During 2000, sales to Fujifilm accounted for
25.2% of our total revenues, including 27.5% of product sales. During 1999, our
four largest customers accounted for 56.9% of our revenues, and during 2000, our
four largest customers accounted for 45.4% of our revenues.


                                      12
<PAGE>

RESEARCH AND DEVELOPMENT

We believe that our future success depends on our ability to continue to enhance
our existing products and to develop new products that maintain technological
competitiveness and compliance with new standards in rapidly evolving
consumer-oriented digital audio and video markets. We attempt to leverage our
expertise in the fields of digital signal processing, integrated circuit design,
algorithms and software development to maintain our position as a leader in the
development of digital audio and video solutions enabled by compression.
Accordingly, we devote a significant portion of our resources to maintaining and
upgrading our products to reduce integrated circuit cost, feature size, power
consumption and the number of integrated circuits required to perform
compression and other functions necessary for the evolving digital audio and
video application markets. In addition, we seek to design integrated circuits
and cores, as well as copy-ready reference designs which can reduce the time
needed by manufacturers to integrate our products into their own products.

We have historically generated a significant percentage of our total revenues
from development contracts with our strategic partners. These development
contracts provide that we will receive payments upon reaching certain
development milestones and that we will retain ownership of the intellectual
property developed. Development contracts have enabled us to fund portions of
our product development efforts, to respond to the feature requirements of
our customers, to accelerate the incorporation of our products into our
customers' products and to accelerate the time-to-market of our customers'
products. We are currently developing new integrated circuits based on MPEG
and Dolby Digital compression standards pursuant to a development contract
with Fujifilm, under which Fujifilm is providing a portion of the development
funding. Fujifilm has participated directly in product definition for these
development programs and has the right to sell resulting products in Japan
under its distribution agreement with us. Fujifilm also has the right to
manufacture a portion of our requirements for which it has contributed
significant funding.

We are a party to research and development agreements with the Chief Scientist
in Israel's Ministry of Industry and Trade and the Israel-United States
Binational Industrial Research and Development Foundation. These organizations
fund up to 50% of incurred project costs for approved projects up to contract
maximums. The agreements require us to use our best efforts to achieve specified
results and to pay royalties at rates of 3% to 5% of resulting product sales and
up to 30% of resulting license revenues, up to a maximum of 100% to 150% of the
total funding received. Reported research and development expenses are net of
these grants, which fluctuate from period to period. Total grants earned in 1998
were $851,000, in 1999 were $484,000 and in 2000 were $333,000. The terms of
Israeli Government participation also contain restrictions on the location of
research and development activities, and the terms of the grants from the Chief
Scientist prohibit the transfer of technology developed pursuant to these grants
to any person without the prior written consent of the Chief Scientist. We are
currently engaged in the development of improvements to our Camera On A CHip, or
COACH, technology under grant from the Chief Scientist. Although we have
received grants from the Chief Scientist and the Foundation in the past, we
intend to fund future research and development efforts for new products
primarily from our own funds and through research and development arrangements
with our major OEM customers.

As of December 31, 2000, we had a staff of 128 full-time and 40 part-time
research and development personnel, 160 of whom are based in Israel.

SALES AND MARKETING

Our sales and marketing strategy is to focus on providing solutions, primarily
compression related, for manufacturers seeking to design audio and video
products for emerging high volume consumer applications. In cooperation with
leading manufacturers of audio and video equipment in the commercial and
consumer markets, we attempt to identify market segments which have the
potential for substantial growth. To implement our strategy, we have established
a direct sales force located at several sales and marketing offices, and a
worldwide network of independent sales representatives and distributors. In some
cases, our strategic partners also provide sales and marketing support.

We work closely in the product development process with strategic partners to
incorporate our integrated circuits and software into their products. Potential
products are designed to meet customer-specific product requirements defined
jointly by us and our strategic partners with our partners providing
technological input, and in some cases, a portion of the development funding.
This strategy has permitted us to develop products with substantial financial
and other assistance, while retaining ownership of the technology and ensuring
an established customer for the product once


                                      13
<PAGE>

development is completed. In addition, our application engineers assist
customers in designing their products to incorporate our integrated circuits.

Our sales are generally made pursuant to purchase orders received between one
and six months prior to the scheduled delivery date. We sell our products
primarily through our 11-person direct sales staff, of whom four are located in
the United States and seven are located internationally. Our United States sales
staff is primarily responsible for sales in North America, South America and
Asia, and our Israeli sales staff is primarily responsible for sales in Europe
and the Middle East. In addition, we sell our products indirectly through 23
commissioned sales representatives as well as selected distributors. We
typically warrant our products for a 12-month period. To date, we have not
experienced material product returns or warranty expense.

We have begun to open offices in other parts of the world in order to better
address the markets in those regions. During 1998, we opened an office in
Shenzhen, China as part of our effort to capture a leadership position in the
Chinese digital audio and video markets. During 2000, we opened an office in
Taipei, Taiwan in an effort to better address the digital camera market. As of
December 31, 2000, we had a staff of 23 employees in our China office and 6
employees in our Taiwan office, including sales, applications and customer
support employees. In addition, at the beginning of 2001 we opened offices in
Hong Kong and Korea. These offices will also provide sales, applications and
customer support and currently have two employees each.

We distribute our integrated circuit products in Japan primarily under an
agreement with Fujifilm. Under this agreement, Fujifilm acts as the primary
distributor in Japan of products developed by us under development contracts
with Fujifilm. Fujifilm also sells some of these products in Japan under its
own name. We may sell these products directly in Japan only to specified
customers and must first buy the products from Fujifilm. Fujifilm also has a
nonexclusive license to distribute most of our products outside of Japan. We
operate a representative office in Tokyo to help promote our products in
Japan and to manage the sale of products not sold through Fujifilm, such as
integrated circuit cores and certain JPEG products.

We sell our Dolby Digital-based products under a perpetual, non-exclusive
license from Dolby to sell products that incorporate the Dolby Digital
algorithm. We are not required to pay license fees or royalties to Dolby under
this agreement. Our customers enter into license agreements directly with Dolby,
pursuant to which they pay royalties to Dolby. Under our agreement with Dolby,
we may sell our Dolby Digital-based products only to customers who are licensees
of Dolby. To date, most potential customers for our Dolby Digital-based products
are licensees of Dolby. However, the failure or refusal of potential customers
to enter into license agreements with Dolby in the future could harm our sales.

We sell our DTS Technology-based products under a non-exclusive license from
DTS Technology LLC to sell products that incorporate the DTS algorithm. We
are not required to pay royalties to DTS Technology under this agreement. Our
customers enter into license agreements directly with DTS, pursuant to which
they pay royalties to DTS. Under our agreement with DTS, we may sell our
DTS-based products only to customers who are licensees of DTS. The failure or
refusal of potential customers to enter into license agreements with Dolby in
the future could harm our sales.

BACKLOG

Sales of our products are made pursuant to firm purchase orders. However,
sometimes we allow customers to cancel or reschedule deliveries. In addition,
purchase orders are subject to price renegotiations and to changes in quantities
of products ordered as a result of changes in customers' requirements and
manufacturing availability. Our business is characterized by short lead times
and quick delivery schedules. As a result of these factors, we do not believe
that backlog at any given time is a meaningful indicator of future sales.

MANUFACTURING

We contract our wafer fabrication, assembly and testing to independent foundries
and contractors, which enables us to focus on our design strengths, minimize
fixed costs and capital expenditures and gain access to advanced manufacturing
facilities. Our engineers work closely with our foundry partners and
subcontractors to increase yields, lower manufacturing costs and assure quality.

Our primary foundry is Taiwan Semiconductor Manufacturing Company, or TSMC,
which has manufactured integrated circuits for us since 1987. TSMC is currently
manufacturing our DVD, audio, JPEG and some of our COACH products.


                                      14
<PAGE>

In addition, Fujifilm, Samsung and National Semiconductor manufacture some
integrated circuit products for us. Fujifilm is currently manufacturing our
JPEG codec, our JPEG-based converter products and our MPEG 1 decoder. Samsung
is currently manufacturing some of our COACH products. Hyundai and Fujitsu
manufacture our USB multimedia controller chips. Our independent foundries
fabricate products for other companies and may also produce products of their
own design.

All of our devices are currently fabricated using standard complementary metal
oxide semiconductor process technology with 0.25 micron to 0.8 micron feature
sizes. All of our semiconductor products are currently being assembled by one of
three independent contractors, ASE, Amkor or ASAT, and tested by those
contractors or other independent contractors.

Our ZR36050 JPEG codec was developed jointly with Fujifilm and is currently
manufactured by Fujifilm pursuant to an agreement that grants Fujifilm the right
to manufacture up to 80% of our requirements for this product subject to
Fujifilm's ability to manufacture the product on substantially the same or
better terms and conditions as we could obtain from a third party. This
agreement also grants Fujifilm marketing rights in Japan with respect to these
products. See "Sales and Marketing."

We currently purchase products from all of our foundries under individually
negotiated purchase orders. Our agreement with Fujifilm entitles us to obtain
wafer foundry services from Fujifilm on most favored pricing and availability
terms, subject to Fujifilm's technological capabilities and reasonable
limitations as to quality and delivery terms requested by us.

We do not currently have a long-term supply contract with TSMC or Samsung, and
therefore neither TSMC nor Samsung is obligated to manufacture products for us
for any specific period, in any specific quantity or at any specified price,
except as may be provided in a particular purchase order.


COMPETITION

Our existing and potential competitors include many large domestic and
international companies that have substantially greater resources in the areas
of:

     o finance;

     o manufacturing;

     o technology;

     o marketing; and

     o distribution.

Some of these competitors also have broader product lines and longer standing
relationships with customers than we do. Some of our principal competitors
maintain their own semiconductor foundries and may therefore benefit from
capacity, cost and technical advantages. In the market for JPEG-based
products for desktop video editing applications, our principal competitors
are Divio and Sunplus. Cirrus Logic (Crystal Semiconductor), Fujitsu,
Motorola, STMicroelectronics and Yamaha are currently shipping Dolby
Digital-based audio compression products. C-Cube, ESS, LuxSonor, Matsushita,
National Semiconductor, STMicroelectronics, Sony and Winbond have introduced
integrated audio and video devices for DVD and Super Video CD applications.
These manufacturers, as well as others, are licensed by Dolby to incorporate
Dolby Digital technology in their products. In addition, some manufacturers,
including Sony, incorporate compression technologies other than Dolby Digital
in audio products that compete with products using our integrated circuits.
In the markets for JPEG-based products for use in filmless digital cameras,
our principal competitors are in-house solutions developed and used by major
Japanese OEMs and Texas Instruments. Conexant is currently offering
system-on-a-chip solutions for filmless digital cameras. Conexant and
Motorola are providing CMOS sensor products. In the market for MPEG-based
chip core products, our principal competitors are David Sarnoff Research
Center and SICAN Microelectronics.


                                      15
<PAGE>

We believe that our ability to compete successfully in the rapidly evolving
markets for high performance audio and video compression technology depends on a
number of factors, including:

     o price, quality, performance and features of our products;

     o the timing and success of new product introductions by us, our customers
       and our competitors;

     o the emergence of new industry standards;

     o our ability to obtain adequate foundry capacity;

     o the number and nature of our competitors in a given market; and

     o general market and economic conditions.

The markets in which we compete are intensely competitive and are characterized
by rapid technological change, declining average unit selling prices and rapid
product obsolescence. We expect competition to increase in the future from
existing competitors and from other companies that may enter our existing or
future markets with solutions which may be less costly or provide higher
performance or more desirable features than our products.

The DVD market is growing, and additional competitors are expected to enter
the market for integrated circuits used in DVD players. We believe that
several large Japanese consumer electronics companies may be planning to
enter this market and may attempt to develop MPEG 2 hardware or software to
compete with our products. Some of these potential competitors may develop
captive implementations for use only with their own PC and commercial and
consumer electronics products. This increased competition may result in price
reductions, reduced profit margins and loss of market share.

Historically, average unit selling prices in the semiconductor industry in
general, and for our products in particular, have decreased over the life of a
particular product. We expect that the average unit selling prices of our
products will continue to be subject to significant pricing pressures. In order
to offset expected declines in the average unit selling prices of our products,
we will likely need to reduce the cost of our products. We intend to accomplish
this by implementing design changes that lower the cost of manufacture, assembly
and testing, by negotiating reduced charges by our foundries as and if volumes
increase, and by successfully managing our manufacturing and subcontracting
relationships. Since we do not operate our own manufacturing, assembly or
testing facilities, we may not be able to reduce our costs as rapidly as
companies that operate their own facilities. If we fail to introduce lower cost
versions of our products in a timely manner or to successfully manage our
manufacturing, assembly and testing relationships our business would be harmed.

PROPRIETARY RIGHTS AND LICENSES

Our ability to compete successfully is dependent in part upon our ability to
protect our proprietary technology and information. Although we rely on a
combination of patents, copyrights, trademarks, trade secret laws and licensing
arrangements to protect some of our intellectual property, we believe that
factors such as the technological and creative skills of our personnel and the
success of our ongoing product development efforts are more important in
maintaining our competitive position. We generally enter into confidentiality or
license agreements with our employees, distributors, customers and potential
customers and limit access to our proprietary information. We currently hold
several U.S. patents, and have additional patent applications pending, that
pertain to technologies and processes relating to our current business. Our
intellectual property rights, if challenged, may not be upheld as valid, may not
be adequate to prevent misappropriation of our technology or may not prevent the
development of competitive products. Additionally, we may not be able to obtain
patents or other intellectual property protection in the future. In particular,
the existence of several consortiums that license patents relating to the MPEG
standard has created uncertainty with respect to the use and enforceability of
patents implementing that standard. Furthermore, the laws of certain foreign
countries in which our products are or may be developed, manufactured or sold,
including various countries in Asia, may not protect our


                                      16
<PAGE>

products or intellectual property rights to the same extent as do the laws of
the United States and thus make the possibility of piracy of our technology
and products more likely in these countries.

We sell our Dolby Digital-based products under a perpetual non-exclusive license
from Dolby which permits us to incorporate the Dolby Digital algorithm into our
products. Our customers enter into license agreements with Dolby pursuant to
which they pay royalties directly to Dolby. Under our agreement with Dolby, we
may sell our Dolby Digital-based products only to customers who are licensees of
Dolby. To date, most potential customers for our Dolby Digital-based products
are licensees of Dolby. However, the failure or refusal of potential customers
to enter into license agreements with Dolby in the future could harm our
business. We sell our DTS Technology-based products under a non-exclusive
license from DTS Technology LLC ("DTS") to sell products that incorporate the
DTS algorithm. We are not required to pay royalties to DTS under this agreement.
Our customers enter into license agreements directly with DTS, pursuant to which
they pay royalties to DTS. Under our agreement with DTS, we may sell our
DTS-based products only to customers who are licensees of DTS. The failure or
refusal of potential customers to enter into license agreements with Dolby in
the future could harm our sales.

The semiconductor industry is characterized by vigorous protection and
pursuit of intellectual property rights, which have resulted in significant
and often protracted and expensive litigation. We or our foundries from time
to time are notified of claims that we may be infringing patents or other
intellectual property rights owned by third parties. We have been subject to
intellectual property claims and litigation in the past and we may be subject
to additional claims in the future. In particular, given the uncertainty
discussed above regarding patents relating to the MPEG standard, it is
difficult for us to assess the possibility that our activities in the MPEG
field may give rise to future patent infringement claims. Litigation by or
against us relating to patent infringement or other intellectual property
matters could result in significant expense to us and divert the efforts of
our technical and management personnel, whether or not such litigation
results in a determination favorable to us. In the event of an adverse result
in any such litigation, we could be required to pay substantial damages,
cease the manufacture, use and sale of infringing products, expend
significant resources to develop non-infringing technology, discontinue the
use of certain processes or obtain licenses to the infringing technology.
Licenses may not be offered or the terms of any offered licenses may not be
acceptable to us. If we fail to obtain a license from a third party for
technology used by us we could incur substantial liabilities and to suspend
the manufacture of products, or the use by our foundries of certain processes.


EMPLOYEES

As of December 31, 2000, we had 242 full-time and 43 part-time and contract
employees, including 128 full-time and 40 part-time and contract employees
primarily involved in research and development activities, 74 in marketing and
sales, 29 in finance and administration and 19 in manufacturing control and
quality assurance. We have 155 full-time employees and 43 part-time and contract
employees based in Israel, including 160 employees who are primarily involved in
engineering and research and development. There are 56 individuals at our
facilities in Santa Clara, California. The remaining employees are located in
our international offices in Canada, Japan, China and Taiwan. We believe that
our future success will depend in large part on our ability to attract and
retain highly-skilled, engineering, managerial, sales and marketing personnel.
Competition for such personnel is intense. Our employees are not represented by
any collective bargaining unit, and we have never experienced a work stoppage.
We believe that our employee relations are good.

ITEM 2.  PROPERTIES.

Our executive offices, our principal administration, marketing and sales
operations and a portion of our research and development operations are located
in approximately 24,000 square feet of leased space in Santa Clara, California
under a lease expiring in March 2003. Our principal research and development and
engineering facilities and the balance of our administration, marketing and
sales operations are located in approximately 20,000 square feet of leased space
in an industrial park in Haifa, Israel under a lease expiring in 2005 and
approximately 3,000 square feet of leased space in Kfar Saba, Israel under a
lease expiring in 2003. The aggregate annual gross rent for our facilities was
approximately $1,239,000 in 2000. We also lease sales offices in Tokyo, Japan,
Taipei, Taiwan, and Shenzhen, China. See Note 6 of Notes to Consolidated
Financial Statements. In addition, at the beginning of 2001 we opened offices in
Hong Kong and Korea. We believe that our current facilities are adequate for our
needs for the foreseeable future and that, should it be


                                      17
<PAGE>

needed, suitable additional space will be available to accommodate expansion
of our operations on commercially reasonable terms.

ITEM 3.  LEGAL PROCEEDINGS.

We are not a party to any pending legal proceedings which we believe will
materially affect our financial condition or results of operations.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

The Company held a special stockholder meeting on October 31, 2000. The
following items were voted upon at the meeting:

1. A proposal to amend our certificate of incorporation to increase the number
of authorized shares of our common stock from 20,000,000 to 55,000,000 shares
was approved by a vote of 12,310,738 shares for; 1,155,141 shares against; and
6,299 shares abstaining.

2. A proposal to amend our 1993 Stock Option Plan to increase the number of
shares of our common stock reserved for issuance thereunder by 500,000 shares
was approved by a vote of 9,217,253 shares for; 4,247,900 shares against; and
7,025 shares abstaining.


EXECUTIVE OFFICERS

The names of our executive officers and their ages as of December 31, 2000 are
as follows:

<TABLE>
<CAPTION>
NAME                       AGE    POSITION
----                       ---    --------
<S>                        <C>    <C>
Levy Gerzberg, Ph.D....    55     President, Chief Executive Officer and Director
Aharon Aharon..........    46     Senior Vice President and Chief Operating Officer
Isaac Shenberg, Ph.D...    49     Senior Vice President, Business and Strategic Development
Karl Schneider.........    46     Vice President, Finance and Chief Financial Officer
Arie Heiman, Ph.D......    54     Senior Vice President, New Technology and New Markets

</TABLE>

LEVY GERZBERG was a co-founder of Zoran in 1981 and has served as our President
and Chief Executive Officer since December 1988 and as a director since 1981.
Dr. Gerzberg also served as our President from 1981 to 1984 and as our Executive
Vice President and Chief Technical Officer from 1985 to 1988. Prior to
co-founding Zoran, Dr. Gerzberg was Associate Director of Stanford University's
Electronics Laboratory. Dr. Gerzberg holds a Ph.D. in Electrical Engineering
from Stanford University and an M.S. in Medical Electronics and a B.S. in
Electrical Engineering from the Technion-Israel Institute of Technology in
Haifa, Israel.

AHARON AHARON joined Zoran as Vice President, Engineering-Haifa Operations in
February 1997 and was elected Vice President, Engineering in August 1997 and
Senior Vice President and Chief Operating Officer in October 1998. From 1983 to
February 1997, Mr. Aharon was employed by IBM in a variety of engineering and
management positions, including Senior Manager of VLSI Design Tools from 1993 to
February 1997 and Design Automation Manager from 1989 to 1993. Mr. Aharon holds
a B.S. and M.S. in Electrical Engineering from the Technion.

ISAAC SHENBERG has served as Vice President, Sales and Marketing of Zoran since
January 1995 and as Senior Vice President, Business and Strategic Development
since October 1998. From August 1990 to January 1995, Dr. Shenberg served as our
Product Line Business Manager. Dr. Shenberg holds a Ph.D. in Electrical
Engineering from Stanford University and a B.S. and M.S. in Electrical
Engineering from the Technion.

KARL SCHNEIDER joined Zoran as Corporate Controller in January 1998 and was
elected Vice President, Finance and Chief Financial Officer in July 1998. From
September 1996 through 1997, Mr. Schneider served as Controller for the Film


                                      18
<PAGE>

Measurement and Robotics and Integrated Technologies divisions of KLA-Tencor,
a semiconductor equipment company. Mr. Schneider served as the Corporate
Controller for SCM Microsystems, Inc. from October 1995 to September 1996,
Controller for Reply Corporation from January 1994 to September 1995,
Director of Finance for Digital F/X from October 1992 to January 1994 and
Controller for Flextronics from September 1987 through June 1991. Mr.
Schneider holds a B.S. in Business Administration from San Diego State
University.

ARIE HEIMAN joined Zoran as Senior Vice President, New Technology and New
Markets in October 2000, following our acquisition of Nogatech, Inc., which
Dr. Heiman co-founded in 1993. Dr. Heiman served as Nogatech's Chief
Executive Officer and a director of Nogatech from November 1995 to October
2000. From November 1995 to February 1999, Dr. Heiman also served as
Nogatech's Chief Financial Officer. From January 1993 to November 1995, Dr.
Heiman served as Nogatech's Vice President of Engineering and Technology.
From 1990 to January 1993, Dr. Heiman served as Vice President, Image
Activity for DSP Group, a computer technology company. From 1978 to 1990,
Dr. Heiman was Head of Digital Signal Processing Activities for Tadiran
Communications Group, an electronics/communications manufacturing company.
Dr. Heiman holds a Ph.D in Electrical Engineering from Tel Aviv University.


                                      19
<PAGE>

                                     PART II

ITEM 5.  MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED STOCKHOLDER
         MATTERS.

We effected our initial public offering of our common stock on December 15,
1995. Since that date, our common stock has been quoted on the Nasdaq National
Market under the symbol "ZRAN." The following table sets forth the high and low
closing sales price of our common stock as reported on The Nasdaq National
Market for the periods indicated:

<TABLE>
<CAPTION>
                                                        High          Low
                                                        ----          ---
      <S>                                              <C>           <C>
      2000:
            First Quarter...........................   $74.31        $45.19
            Second Quarter..........................   $68.50        $33.50
            Third Quarter...........................   $70.06        $39.69
            Fourth Quarter..........................   $51.50        $13.19

      1999:
            First Quarter...........................   $20.00        $11.88
            Second Quarter..........................   $17.50         $8.88
            Third Quarter...........................   $35.81        $17.06
            Fourth Quarter..........................   $55.75        $21.00
</TABLE>


As of December 31, 2000, there were 304 holders of record of our common stock.

We have never paid cash dividends on our capital stock. It is our present policy
to retain earnings to finance the growth and development of our business and,
therefore, we do not anticipate paying any cash dividends in the foreseeable
future.


                                      20
<PAGE>

ITEM 6.  SELECTED FINANCIAL DATA.

The following selected consolidated financial data should be read in
conjunction with the consolidated financial statements and the notes thereto
included elsewhere herein.

<TABLE>
<CAPTION>
                                                                                YEAR ENDED DECEMBER 31,
                                                                 --------------------------------------------------
                                                                    2000       1999        1998     1997     1996
                                                                 ---------    -------   -------   -------   -------
                                                                         (in thousands, except per share data)
<S>                                                              <C>          <C>       <C>       <C>       <C>
CONSOLIDATED STATEMENT OF OPERATIONS DATA:

Revenues:
  Product sales                                                  $  67,782    $52,887   $33,465   $32,717   $35,503
  Software, licensing and development                               11,889      8,787    10,760    12,210     8,606
                                                                 ---------    -------   -------   -------   -------
    Total revenues                                                  79,671     61,674    44,225    44,927    44,109
                                                                 ---------    -------   -------   -------   -------

Costs and expenses:
  Cost of product sales                                             37,993     28,523    19,036    16,032    20,262
  Research and development                                          18,628     12,651    13,548    13,787     8,954
  Selling, general and administrative                               19,148     14,251    11,551    11,209    10,739
  Amortization of goodwill and
   write-off of acquired in-process
   research & development                                           31,769       --        --        --       2,153
                                                                 ---------    -------   -------   -------   -------
    Total costs and expenses                                       107,538     55,425    44,135    41,028    42,108
                                                                 ---------    -------   -------   -------   -------

Operating income (loss)                                            (27,867)     6,249        90     3,899     2,001
Interest and other income (expense), net                             9,229      1,585     1,071     1,258     1,027
                                                                 ---------    -------   -------   -------   -------
Income (loss) before income taxes                                  (18,638)     7,834     1,161     5,157     3,028
Provision for income taxes                                           1,970      1,175       232       928       665
                                                                 ---------    -------   -------   -------   -------
Net income (loss)                                                $ (20,608)   $ 6,659   $   929   $ 4,229   $ 2,363
                                                                 =========    =======   =======   =======   =======
Basic net income (loss) per share (1)                            $   (1.37)   $  0.61   $  0.09   $  0.45   $  0.27
                                                                 =========    =======   =======   =======   =======
Diluted net income (loss) per share (1)                          $   (1.37)   $  0.54   $  0.08   $  0.38   $  0.22
                                                                 =========    =======   =======   =======   =======
Shares used to compute basic net income (loss) per share (1)        15,070     10,844    10,042     9,412     8,802
                                                                 =========    =======   =======   =======   =======
Shares used to compute diluted net income (loss) per share (1)      15,070     12,249    11,119    11,072    10,661
                                                                 =========    =======   =======   =======   =======
</TABLE>


<TABLE>
<CAPTION>
                                                                             DECEMBER 31,
                                                    ----------------------------------------------------------
                                                        2000        1999        1998         1997       1996
                                                    ---------    ---------    --------     --------   --------
                                                                           (in thousands)
<S>                                                 <C>          <C>          <C>         <C>         <C>
CONSOLIDATED BALANCE SHEET DATA:

Cash, cash equivalents and short-term investments   $ 175,638    $ 145,632    $ 19,175    $ 22,376    $ 23,419
Working capital                                       197,719      157,583      30,830      28,582      24,673
Total assets                                          359,466      182,468      49,170      50,944      41,382
Long-term debt, less current portion                     --           --          --          --          --
Accumulated deficit                                   (58,125)     (37,517)    (44,176)    (45,105)    (49,334)
Total stockholders' equity                            331,454      163,445      36,186      34,286      28,530

</TABLE>

---------
(1)  See Note 2 of Notes to Consolidated Financial Statements for a description
     of the computation of the number of shares and net income (loss) per share.


                                      21
<PAGE>


ITEM 7.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
         RESULTS OF OPERATIONS.

OVERVIEW

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

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

Our cost of product sales consists primarily of fabrication costs, assembly and
test costs, and the cost of materials and overhead from operations. If we are
unable to reduce our cost of product sales to offset anticipated decreases in
average selling prices, our product gross margins will decrease. Our product
gross margin is also dependent on product mix and on the percentage of products
sold directly to our OEM customers versus indirectly through our marketing
partners who purchase our products at lower prices but absorb most of the
associated marketing and sales support expenses, maintain inventories and
provide customer support and training. Lower gross margins on sales to
distributors are partially offset by reduced selling and marketing expenses
related to such sales. Product sales in Japan are primarily made through
Fujifilm, our strategic partner and distributor in Japan. Fujifilm provides more
sales and marketing support than our


                                      22
<PAGE>

other distributors. We expect both product and customer mix to continue to
fluctuate in future periods, causing further fluctuations in margins.

We also derive revenue from licensing our software and other intellectual
property. Licensing revenue includes one-time license fees and royalties based
on the number of units distributed by the licensee. In addition, we have
historically generated a significant percentage of our total revenues from
development contracts, primarily with key customers, although development
revenue has declined as a percentage of total revenues over the past several
years. These development contracts have provided us with partial funding for the
development of some of our products. These development contracts provide for
license and milestone payments which are recorded as development revenue. We
classify all development costs, including costs related to these development
contracts, as research and development expenses. We retain ownership of the
intellectual property developed by us under these development contracts. While
we intend to continue to enter into development contracts with certain strategic
partners, we expect development revenue to continue to decline as a percentage
of total revenues.

Our research and development expenses consist of salaries and related costs of
employees engaged in ongoing research, design and development activities and
costs of engineering materials and supplies. We are also a party to research and
development agreements with the Chief Scientist in Israel's Ministry of Industry
and Trade and the Israel-United States Binational Industrial Research and
Development Foundation, which fund up to 50% of incurred project costs for
approved products up to specified contract maximums. These agreements require us
to use our best efforts to achieve specified results and require us to pay
royalties at rates of 3% to 5% of resulting product sales, and up to 30% of
resulting license revenues, up to a maximum of 100% to 150% of total funding
received. Reported research and development expenses are net of these grants,
which fluctuate from period to period. We believe that significant investments
in research and development are required for us to remain competitive and we
expect to continue to devote significant resources to product development,
although such expenses as a percentage of total revenues may fluctuate.

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

We conduct most of our research and development and certain sales and
marketing and administrative operations in Israel through our wholly-owned
Israeli subsidiary. As a result, some of our expenses are incurred in New
Israeli Shekels. To date, substantially all of our product sales and our
development and licensing revenue have been denominated in 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 to be denominated and
incurred in U.S. dollars for the foreseeable future. We have not experienced
material losses or gains as a result of currency exchange rate fluctuations
and have not engaged in hedging transactions to reduce our exposure to such
fluctuations. We may in the future elect to take appropriate action to reduce
our foreign exchange risk.

Our effective income tax rate has benefited from the availability of net
operating losses which we have utilized to reduce taxable income for U.S.
federal income tax purposes and by our Israeli subsidiary's status as an
"Approved Enterprise" under Israeli law, which provides a ten-year tax holiday
for income attributable to a portion of our operations in Israel. Our U.S.
federal net operating losses expire at various times between 2001 and 2020, and
the benefits from our subsidiary's Approved Enterprise status expire at various
times beginning in 2003.

In June 1999, we sold to MGI Software of Canada the intellectual property
related to our SoftDVD product line and transferred to MGI certain related
software development and support resources in exchange for cash, MGI common
stock and future royalties. Our results for the second quarter of 1999
included a $732,000 gain realized from this transaction which was reported as
part of interest and other income or expense. In connection with this
transaction, we also recorded a charge that reduced software, licensing and
development revenue for the quarter by $517,000 for possible issues related
to receivables associated with the SoftDVD product line. The net impact of
the MGI transaction on our operating results was an after-tax gain of
$172,000, or $0.01 per share on a diluted basis. This gain did not reflect
the potential future economic benefit that may be derived from this
transaction and realized in future periods in the form of royalties. We do
not currently expect, however, that these royalties will have a material
impact on quarterly revenues for the foreseeable future. In addition, the
shares of MGI stock received by us as part of this transaction are subject to
future appreciation or depreciation. Our software revenues have declined
significantly as a result of the sale of the SoftDVD product line.


                                      23
<PAGE>

On June 29, 2000, we acquired PixelCam, Inc. ("PixelCam"), a manufacturer of
megapixel CMOS image sensors, in exchange for 370,832 shares of our common
stock and options to purchase 4,168 shares of our common stock with an
aggregate value of $24.6 million. Of our common stock issued in the
acquisition, 123,612 shares are subject to repurchase by us until the
satisfaction of vesting periods applicable to the PixelCam shares for which
they were exchanged. Additional shares of our common stock are contingently
issuable to former PixelCam stockholders upon achievement of certain
milestones. Any contingent consideration will be valued and recorded as of
the date the satisfaction of the applicable milestones becomes probable. The
acquisition was accounted for under the purchase method of accounting.
Accordingly, the results of operations and estimated fair value of assets
acquired and liabilities assumed were included in the Company's consolidated
financial statements from the date of acquisition. In connection with the
PixelCam acquisition, we recorded a one-time charge of $6.8 million as a
write-off of acquired in process research and development and recorded
goodwill and other intangible assets of $18.0 million.

On October 26, 2000, we acquired Nogatech, Inc. ("Nogatech"), a manufacturer
of USB multimedia controllers, in exchange for 2,534,559 shares of our common
stock and options to purchase 168,472 shares of our common stock with an
aggregate value of $163.6 million. The acquisition was accounted for under
the purchase method of accounting. Accordingly, the results of operations and
estimated fair value of assets acquired and liabilities assumed were included
in the Company's consolidated financial statements from the date of
acquisition. In connection with the Nogatech acquisition, we recorded a
one-time charge of $15.1 million as a write-off of Nogatech's in process
research and development and recorded goodwill and other intangible assets of
$104.7 million.

RESULTS OF OPERATIONS

The following table sets forth certain consolidated statement of operations data
as a percentage of total revenues for the periods indicated:

<TABLE>
<CAPTION>
                                                               YEAR ENDED DECEMBER 31,
                                                         -----------------------------------
                                                         2000           1999           1998
                                                         -----          -----          -----
<S>                                                      <C>             <C>             <C>
Revenues:
   Product sales.......................................   85.1%          85.8%          75.7%
   Software, licensing and development.................   14.9           14.2           24.3
                                                         -----          -----          -----
      Total revenues...................................  100.0          100.0          100.0
                                                         -----          -----          -----

Costs and expenses:
   Cost of product sales...............................   47.7           46.3           43.0
   Research and development............................   23.4           20.5           30.7
   Selling, general and administrative.................   24.0           23.1           26.1
   Amortization of goodwill and
     write-off of in-process research & development....   39.9             --             --
                                                         -----          -----          -----
      Total costs and expenses.........................  135.0           89.9           99.8
                                                         -----          -----          -----

Operating income (loss)................................  (35.0)          10.1            0.2
Interest and other income (expense), net...............   11.6            2.6            2.4
Income (loss) before income taxes......................  (23.4)          12.7            2.6
Provision for income taxes.............................    2.5            1.9            0.5
                                                         -----          -----          -----
Net income (loss)......................................  (25.9)%         10.8%           2.1%
                                                         =====          =====          =====
</TABLE>


YEAR ENDED DECEMBER 31, 2000 COMPARED TO YEAR ENDED DECEMBER 31, 1999

REVENUES. Total revenues increased by 29.2% to $79.7 million in 2000 from $61.7
million in 1999. Product sales increased by 28.2% to $67.8 million in 2000 from
$52.9 million in 1999. The increase in product sales resulted primarily from
increased unit sales of DVD and Super Video CD products as well as filmless
digital cameras. Software, licensing and development revenues increased by 35.3%
to $11.9 million in 2000 from $8.8 million in 1999. This increase was the result
of significant license and development contracts entered into during 2000 which
offset the decline in revenues resulting from our sale of our SoftDVD product
line in June 1999.


                                      24
<PAGE>

PRODUCT GROSS MARGIN. Product gross margin decreased to 43.9% in 2000 compared
to 46.1% in 1999. The decrease was due to a shift in product mix to a higher
percentage of lower-margin products and a shift in customer mix to a lower
percentage of direct sales to OEM customers.

RESEARCH AND DEVELOPMENT. Research and development ("R&D") expenses increased by
47.2% to $18.6 million in 2000 from $12.7 million in 1999. R&D expenses in 2000
were net of reimbursements in the amounts of $333,000 under product development
agreements with the Chief Scientist. For 1999, Chief Scientist reimbursements
were $484,000. Gross R&D expenses increased primarily as a result of our
acquisitions of PixelCam in June 2000 and Nogatech in October 2000 as well as
our planned enhancement to our technology and development capabilities. R&D
expenses increased as a percentage of total revenues to 23.4% in 2000, compared
to 20.5% in 1999.

SELLING, GENERAL AND ADMINISTRATIVE. Selling, general and administrative
("SG&A") expenses increased by 34.4% to $19.1 million in 2000 from $14.3 million
in 1999. The increase was primarily due to our acquisitions of PixelCam and
Nogatech, the continued expansion of our China office and the opening of our
Taiwan office.

AMORTIZATION OF GOODWILL AND WRITE-OFF OF ACQUIRED IN-PROCESS RESEARCH AND
DEVELOPMENT. The acquisitions of PixelCam and Nogatech resulted in the
following charges.

PIXELCAM: During 2000, we recorded $3.0 million in charges related to the
amortization of goodwill associated with our acquisition of PixelCam. In
addition to the amortization charge, we recorded, during the second quarter
of 2000, a $6.8 million charge related to the PixelCam acquisition and the
associated write-off of acquired in-process research and development. The
allocation of $6.8 million of the purchase price to the acquired in-process
research and development was determined by identifying the research project
which technological feasibility had not been established at the time of the
acquisition and for which no alternative future uses then existed. The value
was determined by estimating the expected cash flows from the project once
commercially viable, discounting the net cash flows back to their present
value, and then applying a percentage of completion to the calculated value.
The percentage of completion was determined using costs incurred by PixelCam
prior to the acquisition date compared to the remaining research and
development to be completed to bring the project to technological
feasibility. The Company estimated, as of the acquisition date, the project
was 62% complete and the estimated costs to complete the project were
approximately $4.1 million.

NOGATECH: During 2000, we recorded $6.8 million in charges related to the
amortization of goodwill and other intangibles associated with our
acquisition of Nogatech. In addition to the amortization charge, we recorded,
during the fourth quarter of 2000, a $15.1 million charge related to the
Nogatech acquisition and the associated write-off of acquired in-process
research and development. The allocation of $15.1 million of the purchase
price to the acquired in-process research and development was determined by
identifying the research project which technological feasibility had not been
established at the time of the acquisition and for which no alternative
future uses then existed. The value was determined by estimating the expected
cash flows from the project once commercially viable, discounting the net
cash flows back to their present value, and then applying a percentage of
completion to the calculated value. The percentage of completion was
determined using costs incurred by Nogatech prior to the acquisition date
compared to the remaining research and development to be completed to bring
the project to technological feasibility. The Company estimated, as of the
acquisition date, the project was 60% complete and the estimated costs to
complete the project were approximately $1.2 million.

The Company expects to complete both of these projects within 12 months from
the acquisition dates of June 29, 2000 and October 26, 2000 for PixelCam and
Nogatech, respectively. However, development of these projects remains
subject to significant risks due to the remaining effort that will be
required to achieve technical feasibility, rapidly changing customer markets
and significant competitive threats. Failure to bring these products to
market in a timely manner could adversely impact our future sales and
profitability. Additionally, the value of the intangible assets acquired may
become impaired.

INTEREST AND OTHER INCOME (EXPENSE), NET. Net interest and other income
increased by 482.3% to $9.2 million in 2000 from $1.6 million in 1999. The
increase resulted primarily from increased interest income on higher cash
balances following a follow-on public offering of common stock in December
1999.

PROVISION FOR INCOME TAXES. Excluding charges related to the amortization of
goodwill and the write-off of acquired in-process research and development
our estimated effective tax rate remained at 15.0% for 2000 and 1999.

     YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998

REVENUES. Total revenues increased by 39.5% to $61.7 million in 1999 from $44.2
million in 1998. Product sales increased by 58.0% to $52.9 million in 1999 from
$33.5 million in 1998. The increase in product sales resulted primarily from
increased unit sales of DVD and Super Video CD products. Software, licensing and
development revenues decreased by 18.3% to $8.8 million in 1999 from $10.8
million in 1998. This decrease was principally due to a decline in software
licensing revenues following the sale of our SoftDVD product line in June 1999
and, to a lesser degree, a decline in development revenue. These decreases were
partially offset by increased revenues from licenses of our integrated circuit
cores.

PRODUCT GROSS MARGIN. Product gross margin increased to 46.1% for 1999 compared
to 43.1% for 1998. The increase was due to a shift in product mix to a higher
percentage of higher-margin products, a shift in customer mix to a greater
percentage of direct sales to OEM customers and lower per-unit manufacturing
costs as a result of increased unit sales.

RESEARCH AND DEVELOPMENT. R&D expenses decreased by 6.6% to $12.7 million in
1999 from $13.5 million in 1998. R&D expenses in 1999 were net of reimbursements
in the amounts of $484,000 under product development agreements with the Chief
Scientist. For 1998, Chief Scientist reimbursements were $851,000. Gross R&D
expenses decreased as a result of a decline in software development activities
in the second half of the year following the sale of our SoftDVD product line in
June 1999. R&D expenses decreased as a percentage of total revenues to 20.5% in
1999, compared to 30.6% in 1998.

SELLING, GENERAL AND ADMINISTRATIVE. SG&A expenses increased by 23.4% to $14.3
million in 1999 from $11.5 million in 1998. The increase was primarily due to
increased sales and marketing expenses related to product market development and
to support planned revenue growth in China.

INTEREST AND OTHER INCOME (EXPENSE), NET. Net interest and other income
increased by 48.0% to $1.6 million in 1999 from $1.1 million in 1998. The
increase resulted primarily from a $732,000 gain realized from the sale of our
SoftDVD product line in the second quarter of 1999.

PROVISION FOR INCOME TAXES. Our estimated effective tax rate decreased to 15.0%
for 1999 from 20.0% in 1998. The decrease reflects our income tax expectation
going forward based on increasing foreign operations taxed at lower rates.


                                      25
<PAGE>

LIQUIDITY AND CAPITAL RESOURCES

During 1999, our capital requirements were satisfied primarily by cash flows
from operations. In December 1999, we received net proceeds of $112.9 million
from a public offering of our common stock. At December 31, 2000, we had $16.1
million of cash and cash equivalents, $159.5 million of short-term investments
and $197.7 million of working capital. In addition, we had $11.4 million of
investments in other assets that have maturity dates that are beyond one year.

Our operating activities provided cash of $4.4 million during 2000, primarily
due to net income adjusted for the non-cash impact of depreciation,
amortization of goodwill, and write-off of acquired in-process research and
development associated with our acquisitions of PixelCam and Nogatech during
2000. Increases in inventory, accounts receivable, and prepaid expenses were
partially offset by an increase in accrued expenses and other liabilities.

Cash used in investing activities was $5.2 million during the twelve months
ended December 31, 2000. Capital equipment expenditures accounted for $3.3
million of the cash used while the purchase of long-term investments used $2.2
million. Cash provided by the sale of short-term investments was partially
offset by acquisition costs net of cash provided.

Cash provided by financing activities was $4.2 during 2000 and primarily
consisted of proceeds from the issuance of common stock under our incentive
stock option and employee stock purchase plans.

We believe that our current balances of cash, cash equivalents and short-term
investments, and anticipated cash flow from operations, will satisfy our
anticipated working capital and capital expenditure requirements at least
through 2001. Nonetheless, our future capital requirements may vary materially
from those now planned and will depend on many factors including, but not
limited to:

     o the levels at which we maintain inventory and accounts receivable;

     o the market acceptance of our products;

     o the levels of promotion and advertising required to launch our new
       products or to enter markets and attain a competitive position in the
       marketplace;

     o our business, product, capital expenditure and research and
       development plans and technology roadmap; o volume pricing concessions;

     o capital improvements to new and existing facilities;

     o technological advances;

     o the response of competitors to our products; and

     o our relationships with our suppliers and customers.

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

To the extent that our existing resources and cash generated from operations,
are insufficient to fund our future activities, we may need to raise additional
funds through public or private financings or borrowings. If additional funds
are raised through the issuance of debt securities, these securities could have
rights, preferences and privileges senior to holders of common stock, and the
terms of this debt could impose restrictions on our operations. The sale of
additional equity or convertible debt securities could result in additional
dilution to our stockholders. We cannot be certain that additional financing
will be available in amounts or on terms acceptable to us, if at all. If we are
unable to obtain this


                                      26
<PAGE>

additional financing, we may be required to reduce the scope of our planned
product development and sales and marketing efforts, which could harm our
business, financial condition and operating results.

SELECTED PRO FORMA FINANCIAL DATA

The following pro forma results of operations of Zoran Corporation do not
represent our results of operations or earnings per share information in
accordance with accounting principles generally accepted in the United
States. Pro forma results of operations have been presented, in addition to
the actual results, to provide period-to-period comparability of our
underlying operating results excluding the following: amortization of
goodwill and other intangibles, the write-off of acquired in process
technology, and the amortization of deferred stock-based compensation
associated with the acquisition of Nogatech, Inc.

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                   -----------------------------------------------
                                     2000     1999       1998      1997      1996
                                   -------   -------   -------   -------   -------
                                        (in thousands, except per share data)

<S>                                <C>       <C>       <C>       <C>       <C>
Pro forma net revenues             $79,671   $61,674   $44,225   $44,927   $44,109

Pro forma income from operations     3,902     6,249        90     3,899     2,001

Pro forma net income                11,161     6,659       929     4,229     2,363

Pro forma net income per share:
  Basic                               0.74      0.61      0.09      0.45      0.27
  Diluted                             0.68      0.54      0.08      0.38      0.22
</TABLE>


FUTURE PERFORMANCE AND RISK FACTORS

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


OUR QUARTERLY REVENUES AND OPERATING RESULTS FLUCTUATE DUE TO A VARIETY OF
FACTORS, WHICH MAY RESULT IN VOLATILITY OR A DECLINE IN THE PRICE OF OUR STOCK.

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

     o fluctuation in demand for our products;

     o the timing of new product introductions by us and our competitors;

     o the level of market acceptance of new and enhanced versions of our
       products and our customers' products;

     o the timing of large customer orders;

     o the length and variability of the sales cycle for our products;

     o the cyclical nature of the semiconductor industry;

     o the availability of development funding and the timing of development
       revenue;

     o changes in the mix of products sold;

     o seasonality in demand for our products;

     o competitive pricing pressures; and

     o the evolving and unpredictable nature of the markets for products
       incorporating our integrated circuits and embedded software.

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

     o the cost and availability of adequate foundry capacity;

     o fluctuations in manufacturing yields;

     o the emergence of new industry standards;

     o product obsolescence; and

     o the amount of research and development expenses associated with new
       product introductions.

Our operating results could also be harmed by:

     o economic conditions generally or in various geographic areas where we or
       our customers do business;

     o other conditions affecting the timing of customer orders; or


                                      27
<PAGE>

     o a downturn in the markets for our customers' products, particularly the
       consumer electronics market.

These factors are difficult or impossible to forecast. We place orders to
purchase our products from independent foundries several months in advance of
the scheduled delivery date, often in advance of receiving non-cancelable
orders from our customers. If anticipated shipments in any quarter are
canceled or do not occur as quickly as expected, expense and inventory levels
could be disproportionately high. If anticipated license revenues in any
quarter are canceled or do not occur, gross margins may be reduced. A
significant portion of our expenses are relatively fixed, and the timing of
increases in expenses is based in large part on our forecast of future
revenues. As a result, if revenues do not meet our expectations we may be
unable to quickly adjust expenses to levels appropriate to actual revenues,
which could harm our operating results.

As a result of these factors, our operating results may vary significantly from
quarter to quarter. Any shortfall in revenues or net income from levels expected
by securities analysts could cause a decline in the trading price of our stock.

OUR SUCCESS FOR THE FORESEEABLE FUTURE WILL BE DEPENDENT ON GROWTH IN DEMAND FOR
INTEGRATED CIRCUITS FOR DIGITAL VERSATILE DISC, OR DVD, SUPER VIDEO CD, DIGITAL
AUDIO, VIDEO EDITING AND FILMLESS DIGITAL CAMERA APPLICATIONS AND OUR ABILITY TO
MARKET AND SELL OUR PRODUCTS TO MANUFACTURERS WHO INCORPORATE THOSE TYPES OF
INTEGRATED CIRCUITS INTO THEIR PRODUCTS.

In 2000, we derived a majority of our product revenues from the sale of
integrated circuits for DVD and Super Video CD applications. We expect that
sales of our products for DVD and Super Video CD applications, filmless digital
camera applications, digital audio applications and video editing applications
will continue to account for a significant portion of our revenues for the near
future. If the markets for these products and applications decline or fail to
develop as expected, or we are not successful in our efforts to market and sell
our products to manufacturers who incorporate integrated circuits into these
products, our financial results will be harmed.

OUR CUSTOMERS EXPERIENCE FLUCTUATING PRODUCT CYCLES AND SEASONALITY, WHICH
CAUSES OUR SALES TO FLUCTUATE.

Because the markets our customers serve are characterized by numerous new
product introductions and rapid product enhancements, our operating results may
vary significantly from quarter to quarter. During the final production of a
mature product, our customers typically exhaust their existing inventory of our
products. Consequently, orders for our products may decline in those
circumstances, even if our products are incorporated into both mature products
and replacement products. A delay in the customer's transition to commercial
production of a replacement product would delay our ability to recover the lost
sales from the discontinuation of the related mature product. Our customers also
experience significant seasonality in the sales of their consumer products,
which affects their orders of our products. Typically, the fourth calendar
quarter represents a disproportionate percentage of sales for our customers due
to the holiday period, and therefore a disproportionate percentage of our sales.
We expect these sales fluctuations to continue for the foreseeable future.

PRODUCT SUPPLY AND DEMAND IN THE SEMICONDUCTOR INDUSTRY IS SUBJECT TO CYCLICAL
VARIATIONS.

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


                                      28
<PAGE>

THE DEVELOPMENT AND EVOLUTION OF MARKETS FOR OUR INTEGRATED CIRCUITS IS
DEPENDENT ON FACTORS SUCH AS INDUSTRY STANDARDS, OVER WHICH WE HAVE NO CONTROL;
FOR EXAMPLE, IF MANUFACTURERS ADOPT NEW OR COMPETING INDUSTRY STANDARDS WITH
WHICH OUR PRODUCTS ARE NOT COMPATIBLE, OUR EXISTING PRODUCTS WOULD BECOME LESS
DESIRABLE TO THE MANUFACTURERS AND OUR SALES WOULD SUFFER.

The emergence of markets for our products is affected by a variety of factors
beyond our control. In particular, our products are designed to conform to
current specific industry standards. Manufacturers may not continue to follow
these standards, which would make our products less desirable to
manufacturers and reduce our sales. Also, competing standards may emerge that
are preferred by manufacturers, which could also reduce our sales and require
us to make significant expenditures to develop new products. The emergence of
new markets for our products is also dependent in part upon third parties
developing and marketing content in a format compatible with commercial and
consumer products that incorporate our products. If content compatible with
commercial and consumer products that incorporate our products is not
available, manufacturers may not be able to sell products incorporating our
integrated circuits, and our sales to manufacturers would suffer.

WE RELY ON INDEPENDENT FOUNDRIES AND CONTRACTORS FOR THE MANUFACTURE, ASSEMBLY
AND TESTING OF OUR INTEGRATED CIRCUITS, AND THE FAILURE OF ANY OF THESE THIRD
PARTIES TO DELIVER PRODUCTS OR OTHERWISE PERFORM AS REQUESTED COULD DAMAGE OUR
RELATIONSHIPS WITH OUR CUSTOMERS AND HARM OUR SALES AND FINANCIAL RESULTS.

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

Our reliance on independent foundries involves a number of risks, including:

     o the inability to obtain adequate manufacturing capacity;

     o the unavailability of or interruption in access to certain process
       technologies necessary for manufacture of our products;

     o reduced control over delivery schedules;

     o reduced control over quality assurance;

     o reduced control over manufacturing yields and cost; and

     o potential misappropriation of our intellectual property.

In addition, TSMC and some of our other foundries are located in areas of the
world which are subject to natural disasters such as earthquakes. While the 1999
earthquake in Taiwan did not have a material impact on our independent
foundries, a similar event centered near TSMC's facility could severely reduce
TSMC's ability to manufacture our integrated circuits. The loss of any of our
manufacturers as a supplier, our inability to expand the supply of our products
in response to increased demand, or our inability to obtain timely and adequate
deliveries from our current or future suppliers due to a natural disaster or any
other reason could delay or reduce shipments of our products. Any of these
circumstances could damage our relationships with current and prospective
customers and harm our sales and financial results.

We also rely on independent contractors for the assembly and testing of our
products. At present, most of our semiconductor products are assembled by one
of five independent contractors: ASE, Amkor, ASAT, National Semiconductor or
Vate. Our semiconductor products are tested by these contractors or other
independent contractors. Our reliance on independent assembly and testing
houses limits our control over delivery schedules, quality assurance and
product cost. Disruptions in the services provided by our assembly or testing
houses or other circumstances that would require us to seek alternative
sources of assembly or testing could lead to supply constraints or delays in
the delivery of our products. These constraints or delays could damage our
relationships with current and prospective customers and harm our sales and
financial results.

BECAUSE FOUNDRY CAPACITY IS LIMITED WE MAY BE REQUIRED TO ENTER INTO COSTLY
LONG-TERM SUPPLY ARRANGEMENTS TO SECURE FOUNDRY CAPACITY.

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

                                      29
<PAGE>

     o option payments or other prepayments to a foundry;

     o nonrefundable deposits with or loans to foundries in exchange for
       capacity commitments;

     o contracts that commit us to purchase specified quantities of silicon
       wafers over extended periods;

     o issuance of our equity securities to a foundry;

     o investment in a foundry;

     o joint ventures; or

     o other partnership relationships with foundries.

We may not be able to make 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 obligated to utilize all of
that capacity or incur penalties. Such penalties may be expensive and could harm
our financial results.

IF OUR INDEPENDENT FOUNDRIES DO NOT ACHIEVE SATISFACTORY YIELDS, OUR
RELATIONSHIPS WITH OUR CUSTOMERS MAY BE HARMED.

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

TO BE SUCCESSFUL, WE MUST EFFICIENTLY DEVELOP NEW AND ENHANCED PRODUCTS TO MEET
RAPIDLY CHANGING CUSTOMER REQUIREMENTS AND INDUSTRY STANDARDS.

The markets for our products are characterized by:

     o rapidly changing technologies;

     o evolving industry standards;

     o frequent new product introductions; and

     o short product life cycles.

We expect to increase our product development expenses, and our future success
will depend to a substantial degree upon our ability to develop and introduce,
on a timely and cost-effective basis, new and enhanced products that meet
rapidly changing customer requirements and industry standards. We may not
successfully develop, introduce or manage


                                      30
<PAGE>

the transition to new products. Delays in the introduction or shipment of new
or enhanced products, lack of market acceptance for such products or problems
associated with new product transitions could harm our sales and financial
results.

WE FACE COMPETITION OR POTENTIAL COMPETITION FROM COMPANIES WITH GREATER
RESOURCES THAN OURS, AND IF WE ARE UNABLE TO COMPETE EFFECTIVELY WITH THESE
COMPANIES, OUR MARKET SHARE MAY DECLINE AND OUR BUSINESS COULD BE HARMED.

Competition in the compression technology market has historically been dominated
by large companies such as STMicroelectronics and companies that develop and use
their own integrated circuits, such as Sony. As this market continues to
develop, we face competition from other large semiconductor vendors, including:

     o C-Cube Microsystems;

     o Cirrus Logic (Crystal Semiconductor);

     o Conexant;

     o Fujitsu;

     o LSI Logic;

     o Motorola; and

     o Texas Instruments.

For example, in the markets for JPEG-based products for use in filmless digital
cameras, Conexant is providing CMOS sensor and camera DSP solutions to third
parties. We also face competition from internally-developed solutions developed
and used by major Japanese original equipment manufacturers, who may also be our
customers.

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

     o finances;

     o manufacturing;

     o technology;

     o marketing; and

     o distribution.

Many of our competitors have broader product lines and longer standing
relationships with customers than we do. Moreover, our competitors may foresee
the course of market developments more accurately than we do and could in the
future develop new technologies that compete with our products or even render
our products obsolete. In addition, a number of private companies have announced
plans for new products to address the same digital multimedia compression
problems that our products address. If we are unable to compete successfully
against our current and future competitors, we could experience price
reductions, order cancellations and reduced gross margins, any one of which
could harm our business.

The DVD market is growing, and additional competitors are expected to enter the
market for DVD players and software. Some of these potential competitors may
develop captive implementations for use only with their own PC and consumer
electronics products. It is also possible that application software vendors,
such as Microsoft, may attempt to enter the DVD application market in the
future. This increased competition may result in price reductions, reduced
profit margins and loss of market share.


                                      31
<PAGE>

OUR PRODUCTS ARE CHARACTERIZED BY AVERAGE SELLING PRICES THAT DECLINE OVER
RELATIVELY SHORT TIME PERIODS; IF WE ARE UNABLE TO REDUCE OUR COSTS OR INTRODUCE
NEW PRODUCTS WITH HIGHER AVERAGE SELLING PRICES, OUR FINANCIAL RESULTS WOULD
SUFFER.

Average selling prices for our products decline over relatively short time
periods. Many of our manufacturing costs are fixed. When our average selling
prices decline, our revenues decline unless we sell more units, and our gross
margins decline unless we are able to reduce our manufacturing costs by a
commensurate amount. Our operating results suffer when gross margins decline.
We may experience these problems in the future and cannot predict when they
may occur or their severity.

WE DERIVE MOST OF OUR REVENUE FROM SALES TO A SMALL NUMBER OF LARGE CUSTOMERS,
AND IF WE ARE NOT ABLE TO RETAIN THESE CUSTOMERS, OR THEY RESCHEDULE, REDUCE OR
CANCEL ORDERS, OUR REVENUES WOULD BE REDUCED AND OUR FINANCIAL RESULTS WOULD
SUFFER.

Our largest customers account for a substantial percentage of our revenues. In
2000, sales to Fujifilm accounted for 25.2% of our total revenues and 27.5% of
our product sales. Our four largest customers in 2000 accounted for
approximately 45.4% of our total revenues. During 1999, our four largest
customers accounted for approximately 56.9% of our revenues with Fujifilm
accounting for 37.3%. Sales to these large customers have varied significantly
from year to year and will continue to fluctuate in the future. These sales also
may fluctuate significantly from quarter to quarter. We may not be able to
retain our key customers or these customers may cancel purchase orders or
reschedule or decrease their level of purchases from us. Any substantial
decrease or delay in sales to one or more of our key customers could harm our
sales and financial results. In addition, any difficulty in collecting amounts
due from one or more key customers could harm our financial results.

WE ARE DEPENDENT ON OUR RELATIONSHIP WITH FUJIFILM FOR A SIGNIFICANT PERCENTAGE
OF OUR PRODUCT SALES, AND IF THIS RELATIONSHIP WERE TERMINATED, OUR BUSINESS
WOULD BE HARMED.

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

OUR PRODUCTS GENERALLY HAVE LONG SALES CYCLES AND IMPLEMENTATION PERIODS, WHICH
INCREASES OUR COSTS IN OBTAINING ORDERS AND REDUCES THE PREDICTABILITY OF OUR
EARNINGS.

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

Long sales cycles also subject us to other risks, including customers' budgetary
constraints, internal acceptance reviews and cancellations. In addition, orders
expected in one quarter could shift to another because of the timing of
customers' purchase decisions. The time required for our customers to
incorporate our products into their own can vary significantly with the needs of
our customers and generally exceeds several months, which further complicates
our planning processes and reduces the predictability of our operating results.

WE ARE NOT PROTECTED BY LONG-TERM CONTRACTS WITH OUR CUSTOMERS.

We generally do not enter into long-term purchase contracts with our customers,
and we cannot be certain as to future order levels from our customers. When we
do enter into a long-term contract, the contract is generally terminable at the


                                      32
<PAGE>

convenience of the customer. In the event of an early termination by one of our
major customers, it is unlikely that we will be able to rapidly replace that
revenue source, which would harm our financial results.

WE ARE DEPENDENT UPON OUR INTERNATIONAL SALES AND OPERATIONS; ECONOMIC,
POLITICAL OR MILITARY EVENTS IN A COUNTRY WHERE WE MAKE SIGNIFICANT SALES OR
HAVE SIGNIFICANT OPERATIONS COULD INTERFERE WITH OUR SUCCESS OR OPERATIONS THERE
AND HARM OUR BUSINESS.

During 2000, 81.5% of our total revenues were derived from international
sales. We anticipate that international sales will continue to represent a
significant portion of our total revenues for the foreseeable future. To
support our international sales activities, we have established offices in
China, Japan, Taiwan and recently in Hong Kong and Korea. In addition,
substantially all of our semiconductor products are manufactured, assembled
and tested outside of the United States by independent foundries and
subcontractors.

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

     o unexpected changes in regulatory requirements;

     o fluctuations in exchange rates;

     o political and economic instability;

     o imposition of tariffs and other barriers and restrictions; and

     o the burdens of complying with a variety of foreign laws.

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

During 1998, we opened an office in Shenzhen, China. Our operations in China are
subject to the economic and political uncertainties affecting that country. For
example, the Chinese economy has experienced significant growth in the past
decade, but such growth has been uneven across geographic and economic sectors
and has recently been slowing. This growth may continue to decrease and any
slowdown may have a negative effect on our business. The Chinese economy has
experienced deflation which may also occur in the future. This deflation could
result in devaluation of the Chinese Yuan, which could reduce our sales to the
Chinese market.

THE PRICES OF OUR PRODUCTS MAY BECOME LESS COMPETITIVE DUE TO FOREIGN EXCHANGE
FLUCTUATIONS.

Foreign currency fluctuations may affect the prices of our products. Prices for
our products are currently denominated in U.S. dollars for sales to our
customers throughout the world. If there is a significant devaluation of the
currency in a specific country, the prices of our products will increase
relative to that country's currency and our products may be less competitive in
that country. Also, we cannot be sure that our international customers will
continue to be willing to place orders denominated in U.S. dollars. If they do
not, our revenue and operating results will be subject to foreign exchange
fluctuations.

OUR ABILITY TO COMPETE COULD BE JEOPARDIZED IF WE ARE UNABLE TO PROTECT OUR
INTELLECTUAL PROPERTY RIGHTS FROM CHALLENGES BY THIRD PARTIES.

Our success and ability to compete depend in large part upon protecting our
proprietary technology. We rely on a combination of patent, trade secret,
copyright and trademark laws, non-disclosure and other contractual agreements
and technical measures to protect our proprietary rights. These agreements and
measures may 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 cannot be certain that the
steps we have taken will prevent unauthorized use of our technology,
particularly in foreign countries where the laws may not protect our proprietary
rights as fully as in the United States. The laws of certain foreign countries
in which our products are or may be developed, manufactured or


                                      33
<PAGE>

sold, including various countries in Asia, may not protect our products or
intellectual property rights to the same extent as do the laws of the United
States and thus make the possibility of piracy of our technology and products
more likely in these countries. If competitors are able to use our
technology, our ability to compete effectively could be harmed.

WE COULD BECOME SUBJECT TO CLAIMS AND LITIGATION REGARDING INTELLECTUAL PROPERTY
RIGHTS, WHICH COULD SERIOUSLY HARM OUR BUSINESS AND REQUIRE US TO INCUR
SIGNIFICANT COSTS.

In recent years, there has been significant litigation in the United States
involving patents and other intellectual property rights. In the past, we
have been subject to claims and litigation regarding alleged infringement of
other parties' intellectual property rights. We could become subject to
litigation in the future either to protect our intellectual property or as a
result of allegations that we infringe others' intellectual property rights.
Claims that our products infringe proprietary rights would force us to defend
ourselves and possibly our customers or manufacturers against the alleged
infringement. These claims and any resulting lawsuit, if successful, could
subject us to significant liability for damages and invalidation of our
proprietary rights. These lawsuits, regardless of their success, would likely
be time-consuming and expensive to resolve and would divert management time
and attention. Any potential intellectual property litigation could force us
to do one or more of the following:

     o stop selling our products that incorporate the challenged intellectual
       property;

     o obtain from the owner of the infringed intellectual property right a
       license to sell or use the relevant technology, which license may not be
       available on reasonable terms or at all;

     o pay damages; or

     o redesign those products that use such technology.

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

IF NECESSARY LICENSES OF THIRD-PARTY TECHNOLOGY ARE NOT AVAILABLE TO US OR ARE
VERY EXPENSIVE, OUR PRODUCTS COULD BECOME OBSOLETE.

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

IF WE ARE NOT ABLE TO APPLY OUR NET OPERATING LOSSES AGAINST TAXABLE INCOME IN
FUTURE PERIODS, OUR FINANCIAL RESULTS WILL BE HARMED.

Our future net income and cash flow will be affected by our ability to apply our
net operating losses, which totaled approximately $55.0 million for federal tax
reporting purposes as of December 31, 2000, against taxable income in future
periods. Our net operating losses incurred prior to the consummation of our
initial public offering in 1995 that we can use to reduce future taxable income
for federal tax purposes are limited to approximately $3.0 million per year.
Changes in tax laws in the United States may further limit our ability to
utilize our net operating losses. Any further limitation on our ability to
utilize our net operating losses could harm our financial condition. See Note 9
of Notes to Consolidated Financial Statements.

ANY ACQUISITIONS WE MAKE COULD DISRUPT OUR BUSINESS AND SEVERELY HARM OUR
FINANCIAL CONDITION.

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

     o issue stock that would dilute our current stockholders' percentage
       ownership;


                                      34
<PAGE>

     o incur debt;

     o assume liabilities;

     o incur amortization expenses related to goodwill and other intangible
       assets; or

     o incur large and immediate write-offs.

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

     o problems combining the purchased operations, technologies or products;

     o unanticipated costs;

     o diversion of management's attention from our core business;

     o adverse effects on existing business relationships with customers;

     o risks associated with entering markets in which we have no or limited
       prior experience; and

     o potential loss of key employees, particularly those of the purchased
       organizations.

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

OUR PRODUCTS COULD CONTAIN DEFECTS, WHICH COULD REDUCE SALES OF THOSE PRODUCTS
OR RESULT IN CLAIMS AGAINST US.

We develop complex and evolving products. Despite testing by us and our
customers, errors may be found in existing or new products. This could result
in, among other things, a delay in recognition or loss of revenues, loss of
market share or failure to achieve market acceptance. These defects may cause us
to incur significant warranty, support and repair costs, divert the attention of
our engineering personnel from our product development efforts and harm our
relationships with our customers. The occurrence of these problems could result
in the delay or loss of market acceptance of our products and would likely harm
our business. Defects, integration issues or other performance problems in our
products could result in financial or other damages to our customers or could
damage market acceptance of our products. Our customers could also seek damages
from us for their losses. A product liability claim brought against us, even if
unsuccessful, would likely be time consuming and costly to defend.

IF WE DO NOT MAINTAIN OUR CURRENT DEVELOPMENT CONTRACTS OR ARE UNABLE TO ENTER
INTO NEW DEVELOPMENT CONTRACTS, OUR BUSINESS COULD BE HARMED.

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

WE MAY NEED ADDITIONAL FUNDS TO EXECUTE OUR BUSINESS PLAN, AND IF WE ARE UNABLE
TO OBTAIN SUCH FUNDS, WE WILL NOT BE ABLE TO EXPAND OUR BUSINESS AS PLANNED.

We may require substantial additional capital to finance our future growth,
secure additional foundry capacity and fund our ongoing research and development
activities beyond 2001. Our capital requirements will depend on many factors,
including:

     o acceptance of and demand for our products;


                                      35
<PAGE>

     o the types of arrangements that we may enter into with our independent
       foundries; and

     o the extent to which we invest in new technology and research and
       development projects.

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

IF WE FAIL TO MANAGE OUR FUTURE GROWTH, IF ANY, OUR BUSINESS WOULD BE HARMED.

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

WE RELY ON THE SERVICES OF OUR EXECUTIVE OFFICERS AND OTHER KEY PERSONNEL, WHOSE
KNOWLEDGE OF OUR BUSINESS AND INDUSTRY WOULD BE EXTREMELY DIFFICULT TO REPLACE.

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

THE ISRAELI RATE OF INFLATION MAY NEGATIVELY IMPACT OUR COSTS IF IT EXCEEDS THE
RATE OF DEVALUATION OF THE NEW ISRAELI SHEKEL AGAINST THE U.S. DOLLAR.

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

THE GOVERNMENT PROGRAMS WE PARTICIPATE IN AND TAX BENEFITS WE RECEIVE REQUIRE US
TO MEET SEVERAL CONDITIONS AND MAY BE TERMINATED OR REDUCED IN THE FUTURE, WHICH
WOULD INCREASE OUR COSTS.

In the year ended December 31, 2000, we received an aggregate of $333,000 in
grants for research and development from the Chief Scientist in Israel's
Ministry of Industry and Trade. To continue to be eligible for these grants, our
development projects must be approved by the Chief Scientist on a case-by-case
basis. If our development projects are not approved by the Chief Scientist, we
will not receive grants to fund these projects, which would increase our
research and development costs. We also receive tax benefits, in particular
exemptions and reductions as a result of the "Approved Enterprise" status of our
existing operations in Israel. To be eligible for these tax benefits, we must
maintain our Approved Enterprise status by meeting conditions, including making
specified investments in fixed assets located in Israel and investing additional
equity in our Israeli subsidiary. If we fail to meet these conditions in the
future, the tax


                                      36
<PAGE>

benefits would be canceled and we could be required to refund the tax
benefits already received. These tax benefits may not be continued in the
future at their current levels or at any level. Israeli governmental
authorities have indicated that the government may reduce or eliminate these
benefits in the future, which would harm our business.

WE HAVE ANTI-TAKEOVER PROVISIONS IN OUR CHARTER DOCUMENTS AND THERE ARE
PROVISIONS OF DELAWARE LAW THAT COULD PREVENT OR DELAY A CHANGE IN CONTROL OF
OUR COMPANY.

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

     o prohibiting a merger with a party that has acquired control of 15% or
       more of our outstanding common stock, such as a party that has completed
       a successful tender offer, until three years after that party acquired
       control of 15% of our outstanding common stock;

     o authorizing the issuance of "blank check" preferred stock;

     o eliminating stockholders' rights to call a special meeting of
       stockholders; and

     o requiring advance notice of any stockholder nominations of candidates for
       election to our board of directors.


OUR STOCK PRICE HAS FLUCTUATED AND MAY CONTINUE TO FLUCTUATE WIDELY.

The market price of our common stock has fluctuated significantly since our
initial public offering in 1995. Between January 1, 2000 and December 31, 2000,
the closing sale price of our common stock, as reported on the Nasdaq National
Market, ranged from a low of $13.19 to a high of $74.31. The market price of our
common stock is subject to significant fluctuations in the future in response to
a variety of factors, including:

     o announcements concerning our business or that of our competitors or
       customers;

     o quarterly variations in operating results;

     o changes in analysts' earnings estimates;

     o announcements of technological innovations;

     o the introduction of new products or changes in product pricing policies
       by us or our competitors;

     o proprietary rights or other litigation;

     o general conditions in the semiconductor industry; and

     o developments in the financial markets.

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


                                      37
<PAGE>

ITEM 7A.      QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISKS.

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

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

A majority of our revenue and capital spending is transacted in U.S. dollars,
although a portion of the cost of our operations, relating mainly to our
personnel and facilities in Israel, is incurred in New Israeli Shekels. We have
not engaged in hedging transactions to reduce our exposure to fluctuations that
may arise from changes in foreign exchange rates. Based on our overall currency
rate exposure at December 31, 2000 a near-term 10% appreciation or depreciation
of the New Israeli Shekel would have an immaterial affect on our financial
condition.


                                      38
<PAGE>

ITEM 8.     FINANCIAL STATEMENTS AND SUPPLEMENTAL DATA.


                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                                               Page
                                                                               ----
<S>                                                                            <C>
Report of Independent Accountants ..........................................    40

Consolidated Balance Sheets as of December 31, 2000 and 1999 ...............    41

Consolidated Statements of Operations for the three years ended
            December 31, 2000 ..............................................    42

Consolidated Statements of Stockholders' Equity for the three years ended
            December 31, 2000 ..............................................    43

Consolidated Statements of Cash Flows for the three years ended
            December 31, 2000 ..............................................    44

Notes to Consolidated Financial Statements .................................    45

Supplemental Data:  Selected Quarterly Financial Information (Unaudited) ...    66
</TABLE>




                                      39
<PAGE>

                        REPORT OF INDEPENDENT ACCOUNTANTS


To the Board of Directors and Stockholders of
Zoran Corporation


In our opinion, the accompanying consolidated balance sheets and the related
consolidated statements of operations, of stockholders' equity and of cash
flows present fairly, in all material respects, the financial position of
Zoran Corporation and its subsidiaries at December 31, 2000 and 1999, and the
results of their operations and their cash flows for each of the three years
in the period ended December 31, 2000, in conformity with accounting
principles generally accepted in the United States of America. These
financial statements are the responsibility of the Company's management; our
responsibility is to express an opinion on these financial statements based
on our audits. We conducted our audits of these statements in accordance with
auditing standards generally accepted in the United States of America, which
require that we plan and perform the audit to obtain reasonable assurance
about whether the financial statements are free of material misstatement. An
audit includes examining, on a test basis, evidence supporting the amounts
and disclosures in the financial statements, assessing the accounting
principles used and significant estimates made by management, and evaluating
the overall financial statement presentation. We believe that our audits
provide a reasonable basis for our opinion.


/s/ PricewaterhouseCoopers LLP
San Jose, California
January 17, 2001


                                      40
<PAGE>

                                ZORAN CORPORATION
                           CONSOLIDATED BALANCE SHEETS
                        (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                                                    DECEMBER 31,
                                                            -------------------------
                                                                2000          1999
                                                             ----------   -----------
<S>                                                           <C>          <C>
ASSETS
Current Assets:
     Cash and cash equivalents                                $  16,099    $  12,665
     Short-term investments                                     159,539      132,967
     Accounts receivable, net                                    27,065       21,869
     Inventory                                                   17,453        7,159
     Prepaid expenses and other current assets                    5,575        1,946
                                                              ---------    ---------
           Total current assets                                 225,731      176,606
Property and equipment, net                                       6,972        5,662
Other                                                            13,899          200
Goodwill and other intangibles                                  112,864           --
                                                              ---------    ---------
                                                              $ 359,466    $ 182,468
                                                              =========    =========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
     Accounts payable                                         $  11,156    $   7,987
     Accrued expenses and other liabilities                      16,856       11,036
                                                              ---------    ---------
           Total current liabilities                             28,012       19,023
                                                              ---------    ---------

Commitments and Contingencies (Note 6)

Stockholders' Equity:
     Common Stock:  $0.001 par value; 55,000,000
        shares authorized; 17,423,216 and 13,919,270 shares
        issued and outstanding                                       17           14
     Additional paid-in capital                                 388,655      195,269
     Warrants                                                       717          717
     Deferred stock-based compensation                             (919)        --
     Accumulated other comprehensive income                       1,109        4,962
     Accumulated deficit                                        (58,125)     (37,517)
                                                              ---------    ---------
           Total stockholders' equity                           331,454      163,445
                                                              ---------    ---------
                                                              $ 359,466    $ 182,468
                                                              =========    =========
</TABLE>

                The accompanying notes are an integral part of these
                        consolidated financial statements.

                                      41
<PAGE>

                                ZORAN CORPORATION
                      CONSOLIDATED STATEMENTS OF OPERATIONS
                      (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                   YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                2000        1999       1998
                                                              ---------    --------  -------
<S>                                                           <C>          <C>       <C>
Revenues:
     Product sales                                           $  67,782    $52,887   $33,465
     Software, licensing and development                        11,889      8,787    10,760
                                                             ---------    -------   -------
           Total revenues                                       79,671     61,674    44,225
                                                             ---------    -------   -------

Costs and expenses:
     Cost of product sales                                      37,993     28,523    19,036
     Research and development                                   18,628     12,651    13,548
     Selling, general and administrative                        19,148     14,251    11,551
     Amortization of goodwill and
        write-off of acquired in-process
        research & development                                  31,769       --        --
                                                             ---------    -------   -------
           Total costs and expenses                            107,538     55,425    44,135
                                                             ---------    -------   -------

Operating income (loss)                                        (27,867)     6,249        90
Interest and other income, net                                   9,229      1,585     1,071
                                                             ---------    -------   -------

Income (loss) before income taxes                              (18,638)     7,834     1,161
Provision for income taxes                                       1,970      1,175       232
                                                             ---------    -------   -------
Net income (loss)                                            $ (20,608)   $ 6,659   $   929
                                                             =========    =======   =======


Basic net income (loss) per share                            $   (1.37)   $  0.61   $  0.09
                                                             =========    =======   =======

Diluted net income (loss) per share                          $   (1.37)   $  0.54   $  0.08
                                                             =========    =======   =======

Shares used to compute basic net income (loss) per share        15,070     10,844    10,042
                                                             =========    =======   =======

Shares used to compute diluted net income (loss) per share      15,070     12,249    11,119
                                                             =========    =======   =======
</TABLE>

              The accompanying notes are an integral part of these
                      consolidated financial statements.


                                      42
<PAGE>

                                ZORAN CORPORATION
                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
                                 (IN THOUSANDS)
<TABLE>
<CAPTION>
                                                                                     ACCUMULATED
                                      COMMON STOCK  ADDITIONAL                         OTHER
                                    ---------------   PAID-IN             DEFERRED   COMPREHENSIVE  ACCUMULATED
                                    SHARES  AMOUNT    CAPITAL  WARRANTS COMPENSATION    INCOME        DEFICIT     TOTAL
                                    ------- ------  ---------- -------- ------------ -------------  ----------- ---------
<S>                                 <C>      <C>    <C>        <C>       <C>         <C>            <C>         <C>
Balance at December 31, 1997         9,801    $ 10   $  78,664  $ 717    $   --        $    --       $(45,105)   $ 34,286
Issuance of Common Stock, net          412     --          971    --         --             --            --          971
Net income                             --      --          --     --         --             --            929         929
                                    ------    ----   --------- ------    -------       --------      --------    --------
Balance at December 31, 1998        10,213      10      79,635    717        --             --        (44,176)     36,186
Issuance of Common Stock, net        3,706       4     115,634    --         --             --            --      115,638
Unrealized gain on securities
     available for sale                --      --          --     --         --           4,962           --        4,962
Net income                             --      --          --     --         --             --          6,659       6,659
                                    ------    ----   --------- ------    -------       --------      --------    --------
Balance at December 31, 1999        13,919      14     195,269    717        --           4,962       (37,517)    163,445
Issuance of Common Stock, net          594       1       4,216    --         --             --            --        4,217
Income tax benefit of employees'
     stock transactions                --      --        1,003    --         --             --            --        1,003
Deferred stock-based compensation
     recorded in conjunction
     with the Nogatech acquisition     --      --          --     --      (1,018)           --            --       (1,018)
Amortization of deferred
     stock-based compensation          --      --          --     --          99            --            --           99
Issuance of common stock in
     connection with acquisitions    2,910       2     188,167    --         --             --            --      188,169
Decrease in unrealized gain on
     securities available for sale     --      --         --      --         --          (3,853)          --       (3,853)
Net loss                               --      --         --      --         --             --        (20,608)    (20,608)
                                    ------    ----   --------- ------    -------       --------      --------    --------
Balance at December 31, 2000        17,423    $ 17   $ 388,655 $  717    $  (919)      $  1,109      $(58,125)   $331,454
                                    ======    ====   ========= ======    =======       ========      ========    ========
</TABLE>


          The accompanying notes are an integral part of these
                   consolidated financial statements.


                                      43
<PAGE>

                                ZORAN CORPORATION
                      CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                                  YEAR ENDED DECEMBER 31,
                                                                          -------------------------------------
                                                                             2000          1999        1998
                                                                          ----------    --------    -----------
<S>                                                                       <C>          <C>          <C>
Cash flows from operating activities:
     Net income (loss) ................................................   $ (20,608)   $   6,659    $     929
     Adjustments:
           Depreciation, amortization and other .......................       2,987        2,166        2,306
           Allowance for doubtful accounts.............................         549          517         --
           Amortization of goodwill and other intangibles .............       9,922         --           --
           Write-off of in-process research and development ...........      21,847         --           --
           Income tax benefit of employees' stock transactions.........       1,003         --           --
           Changes in current assets and liabilities:
              Accounts receivable .....................................      (4,967)      (7,345)         951
              Inventory ...............................................      (7,311)         (96)      (2,940)
              Prepaid expenses and other current assets ...............      (2,640)        (108)         214
              Accounts payable ........................................         234        1,457       (3,042)
              Accrued expenses and other liabilities ..................       3,374        3,706         (812)
                                                                          ---------    ---------    ---------
                    Net cash provided by (used in) operating activities       4,390        6,956       (2,394)
                                                                          ---------    ---------    ---------

Cash flows from investing activities:
     Capital expenditures for property and equipment ..................      (3,251)      (2,775)      (1,778)
     Purchases of investments .........................................    (180,324)    (130,112)     (19,712)
     Sales and maturities of investments ..............................     181,045       14,937       21,231
     Purchases of long-term equity investments ........................      (2,250)        (200)        --
     Cash received in acquisitions (net of costs incurred) ............        (393)        --           --
                                                                          ---------    ---------    ---------
                    Net cash used in investing activities .............      (5,173)    (118,150)        (259)
                                                                          ---------    ---------    ---------

Cash flows from financing activities:
     Proceeds from issuance of Common Stock, net ......................       4,217      115,638          971
                                                                          ---------    ---------    ---------
                    Net cash provided by financing activities .........       4,217      115,638          971
                                                                          ---------    ---------    ---------

Net increase (decrease) in cash and cash equivalents ..................       3,434        4,444       (1,682)
Cash and cash equivalents at beginning of year ........................      12,665        8,221        9,903
                                                                          ---------    ---------    ---------

Cash and cash equivalents at end of year ..............................   $  16,099    $  12,665    $   8,221
                                                                          =========    =========    =========

Supplemental disclosures:

     Income taxes paid ................................................   $     732    $     506    $    --
                                                                          =========    =========    =========
</TABLE>

          The accompanying notes are an integral part of these
                 consolidated financial statements.


                                      44
<PAGE>

                                ZORAN CORPORATION
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - THE COMPANY:

Zoran Corporation ("Zoran" or the "Company") was incorporated in California in
December 1981 and reincorporated in Delaware in November 1986. Zoran develops
and markets integrated circuits and software products for digital video and
audio applications enabled by compression. The Company's integrated circuits and
software products are used in a variety of video and audio products addressing
PC and consumer multimedia markets. Current applications incorporating Zoran's
products and IP include professional and consumer video editing systems,
filmless digital cameras, standalone and PC-based DVD players, Super VCD
players, digital speakers and audio systems. The Company operates predominantly
in one industry segment.

The Company performs research and development and generates a substantial
portion of its sales from its operations located in the State of Israel. A
significant number of the Company's full-time employees are located in Israel,
including a majority of the Company's research and development personnel.
Therefore, the Company is directly affected by the political, economic and
military conditions to which that country is subject.

The semiconductor business is highly cyclical and has been subject to
significant downturns at various times that have been characterized by
diminished product demand, production, overcapacity, and accelerated erosion of
average selling prices. As such, the selling price that the Company is able to
command for its products is highly dependent on industry-wide production
capacity and demand. Both of these factors could result in rapid deviations in
product pricing and therefore could adversely effect the Company's operating
results.

  PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The consolidated financial statements include the accounts of Zoran and all of
its subsidiaries. Intercompany transactions and balances have been eliminated in
consolidation.


NOTE 2 - SIGNIFICANT ACCOUNTING POLICIES:

Zoran has adopted accounting policies which are generally accepted in the
industry in which it operates. The following is a summary of the Company's
significant accounting policies.

  USE OF ESTIMATES

The preparation of these financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates, although
such differences are not expected to be material to the consolidated financial
statements.

  TRANSLATION OF FOREIGN CURRENCIES

ZML, an Israeli subsidiary, treats the U.S. dollar as its functional currency.
In accordance with Statement of Financial Accounting Standards No. 52 ("SFAS
52"), gains and losses resulting from translation of accounts designated in
other than the functional currency are reflected in results of operations and to
date have been insignificant.

To date, substantially all of the Company's product sales have been denominated
in U.S. dollars and most costs of product sales have been incurred in U.S.
dollars. The Company has not experienced material losses or gains as a result of
currency exchange rate fluctuations and has not engaged in hedging transactions
to reduce its exposure to such fluctuations. The Company may take action in the
future to reduce its foreign exchange risk.


                                      45
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  REVENUE RECOGNITION

Revenue from product sales is generally recognized upon shipment. A provision
for estimated future returns and potential warranty liability is recorded at the
time revenue is recognized. Development revenue under development contracts is
recognized on the percentage-of-completion method. Under the
percentage-of-completion method, revenue recognized is that portion of the total
contract price equal to the ratio of costs expended to date to the anticipated
final total costs, based on current estimates of the costs to complete the
project. Amounts received in advance of performance under contracts are recorded
as deferred revenue and are generally recognized within one year from receipt.
Estimates are reviewed and revised periodically throughout the lives of the
contracts. Any revisions are recorded in the accounting period in which the
revisions are made. Costs associated with development revenues are included
primarily in research and development expenses. Revenue resulting from the
licensing of the Company's technology is recognized when significant contractual
obligations have been fulfilled and the customer has indicated acceptance. The
Company does not provide customers with product return or exchange rights in
connection with the sale of software licenses. Periodic service and maintenance
fees provide customers access to technical support and minor enhancements to
licensed releases are recognized ratably over the service or maintenance period.
Royalty revenue is recognized in the period licensed sales are reported to the
Company.

  RESEARCH AND DEVELOPMENT COSTS

Costs related to the conceptual formation and design of internally developed
software are expensed as research and development as incurred. It is the
Company's policy that certain internal software development costs incurred after
technological feasibility has been demonstrated and which meet recoverability
tests are capitalized and amortized over the estimated economic life of the
product. To date, the Company has incurred no significant internal software
development costs which meet the criteria for capitalization.

  FAIR VALUE OF FINANCIAL INSTRUMENTS

For certain of Zoran's financial instruments, including cash and cash
equivalents, accounts receivable, accounts payable, accrued expenses and other
current liabilities, the carrying values approximate their fair values due to
the relatively short maturity of these items.

  CASH EQUIVALENTS AND INVESTMENTS

All highly liquid investments purchased with an original maturity of 90 days or
less are considered to be cash and cash equivalents.

All of Zoran's investment portfolio is classified as available-for-sale and,
therefore, is reported at fair value with unrealized gains and losses, net of
related tax, if any, included as other comprehensive income, a component of
stockholders' equity. Gains and losses realized upon sales of all such
securities are reported in interest and other income and have not been
significant to date.

At December 31, 2000, the Company's investment portfolio consisted primarily
of commercial paper with maturities of less than one year. The portfolio also
consisted of bonds and medium term notes with maturities greater than one
year, which are included in other assets, and the stock acquired as a result
of the MGI transaction. The unrealized gain on this stock available for sale
of $1,109,000 included in comprehensive income represents the unrealized gain
on the stock at December 31, 2000.

  CONCENTRATION OF CREDIT RISK OF FINANCIAL INSTRUMENTS

Financial instruments that potentially subject the Company to significant
concentrations of credit risk consist principally of cash and cash equivalents,
short-term investments and trade accounts receivable. The Company places its


                                      46
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

cash in banks and cash equivalents primarily in auction rate preferred,
certificates of deposit and commercial paper. The Company, by policy, limits the
amount of credit exposure through diversification and highly-rated securities.
The Company has not experienced any significant losses on its cash equivalents
or short-term investments.

The Company markets integrated circuits and technology to manufacturers and
distributors of electronic equipment primarily in North America, Europe and the
Pacific Rim. The Company performs ongoing credit evaluations of its customers'
financial condition and limits the amount of credit extended when deemed
necessary, but generally does not require collateral. Management believes that
any risk of loss is significantly reduced due to the diversity of its customers
and geographic sales areas. The Company maintains a provision for potential
credit losses, and write-offs of accounts receivable were insignificant in each
of the three years in the period ended December 31, 2000. As of December 31,
2000, three customers accounted for approximately 15%, 10% and 7% of the
accounts receivable balance. As of December 31, 1999, three customers accounted
for approximately 33%, 12%, and 9% of the accounts receivable balance.

  INVENTORY

Inventories are stated at the lower of standard cost (which approximates actual
cost on a first-in, first-out basis) or market. Market is based on estimated net
realizable value.

  PROPERTY AND EQUIPMENT

Property and equipment are recorded at cost. Depreciation is computed using the
straight-line method over the estimated useful lives of three to five years.
Leasehold improvements are amortized on a straight-line basis over the shorter
of the estimated useful lives of the assets or the remaining term of the lease.

  GOODWILL AND OTHER INTANGIBLES

Acquired technology is amortized to expense on a straight-line basis over two to
three years. Goodwill and other intangible assets recorded in connection with
the acquisitions of PixelCam, Inc., and Nogatech, Inc., are amortized on a
straight-line basis over the estimated periods of benefit, which is
approximately three years.

  LONG-LIVED ASSETS

The Company periodically evaluates the recoverability of its long-lived
assets based on expected undiscounted cash flows and recognizes impairment
from the carrying value of long-lived assets, if any, based on the fair value
of such assets. To date, the Company has not recorded any impairment charges
against the value of its long-lived assets.

  INCOME TAXES

The Company follows the liability method of accounting for income taxes which
requires recognition of deferred tax liabilities and assets for the expected
future tax consequence of temporary differences between the financial statement
carrying amounts and the tax bases of assets and liabilities.

For the twelve month periods ended December 31, 2000 and 1999 the provision
for income taxes reflects the effective tax rate applied to earnings for the
periods. The effective tax rate differs from the U.S. statutory rate due to
utilization of net operating losses and State of Israel tax benefits on
foreign earnings. The provision includes primarily taxes on income in excess
of net operating loss carryover limitations and foreign withholding taxes.

  EARNINGS PER SHARE

In accordance with Statement of Financial Accounting Standards No. 128 ("SFAS
128") Zoran reports Earnings per Share ("EPS"), both basic and diluted, on the
statement of operations. Basic EPS is based upon the weighted average number of
common shares outstanding. Diluted EPS is computed using the weighted average
common shares outstanding plus any potential common stock, except when their
effect is anti-dilutive. Potential common stock includes stock options and
warrants. See Note 8.


                                      47
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  STOCK COMPENSATION

The Company accounts for stock-based compensation using the intrinsic value
method prescribed in Accounting Principles Board Opinion No. 25 ("APB 25"),
"Accounting for Stock Issued to Employees" and related interpretations. Under
APB No.25, compensation expense is recognized based on the difference, if any,
on the date of grant between the fair value of the Company's stock and the
amount an employee must pay to acquire the stock. The compensation expense is
recognized over the periods the employee performs the related services,
generally the vesting period of four years, consistent with the multiple option
method described in FASB Interpretation No. 28 ("FIN28"). The Company provides
additional pro forma disclosures as required under Statement of Financial
Accounting Standards No. 123 ("SFAS 123"), "Accounting for Stock-Based
Compensation." See Note7.

  SEGMENT REPORTING

In 1998, the Company adopted Statement of Financial Accounting Standards No. 131
("SFAS 131"), "Disclosures about Segments of an Enterprise and Related
Information." The management approach established by SFAS 131 designates the
internal organization that is used by management for making operating decisions
and assessing performance as the source of the Company's reportable segments.
SFAS 131 also requires disclosures about products and services, geographic
areas, and major customers. The Company operates in one industry segment
comprising the development and marketing of integrated circuits and software
products for use in a variety of video and audio products addressing PC and
consumer multimedia markets.

  COMPREHENSIVE INCOME

The Company applies Statement of Financial Accounting Standards No. 130 ("SFAS
130"), "reporting Comprehensive Income.

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

<TABLE>
<CAPTION>
                                               YEAR ENDED DECEMBER 31,
                                           --------------------------------
                                             2000         1999       1998
                                           --------     --------   --------
<S>                                        <C>         <C>        <C>
Net income                                 $(20,608)   $ 6,659    $    929
Unrealized gain on short-term investment     (3,853)     4,962          --
                                            --------   --------   --------

Comprehensive income                       $(24,461)   $11,621    $    929
                                            ========   ========   ========
</TABLE>


The components of accumulated other comprehensive income are as follows (in
thousands):

<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31,
                                           ----------------------------
                                             2000      1999    1998
                                             ------   ------   ----
<S>                                          <C>      <C>
Unrealized gain on short term-investment     $1,109   $4,962    --
</TABLE>


  RECENT ACCOUNTING PRONOUNCEMENTS

In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards No. 133, Accounting for Derivative Instruments
and Hedging Activities" ("SFAS 133"). SFAS 133 establishes a new model for
accounting for derivatives and hedging activities and supercedes and amends a
number of existing accounting standards. SFAS 133 requires that all derivatives
be recognized in the balance sheet at their fair market value, and the


                                      48
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

corresponding derivative gains or losses be either reported in the statement
of operations or as a deferred item depending on the type of hedge
relationship that exists with respect to such derivative. Adopting the
provisions of SFAS 133, as amended by SFAS 137, is effective for the
Company's fiscal year 2001, and will not have a material effect on the
Company's consolidated financial statements.


NOTE 3 - BALANCE SHEET COMPONENTS (IN THOUSANDS):

<TABLE>
<CAPTION>
                                                       DECEMBER 31,
                                                   --------------------
                                                       2000    1999
                                                    --------  --------
<S>                                                 <C>       <C>
ACCOUNTS RECEIVABLE, NET:
  Trade                                             $ 26,207  $ 22,367
  Unbilled                                             3,115       550
                                                    --------  --------
                                                      29,322    22,917
  Less:  allowance                                    (2,257)   (1,048)
                                                    --------  --------

                                                    $ 27,065  $ 21,869
                                                    ========  ========
</TABLE>


Unbilled accounts receivable consists of both development revenue recognized,
but not yet billed and research and development funding not yet received.
Unbilled development revenue represents revenue recognized under the
percentage-of-completion method prior to achievement of the related contract
milestones. The Company bills development revenue when contract milestones are
achieved. The Company recognizes research and development funding as
reimbursable expenses, under research and development agreements, as incurred.
This funding is offset against research and development expenses.

<TABLE>
<CAPTION>
                                                           DECEMBER 31,
                                                       --------------------
                                                          2000         1999
                                                        --------     --------
<S>                                                     <C>          <C>
INVENTORY:
     Work-in-process                                    $   6,913    $  1,135
     Finished goods                                        10,540       6,024
                                                        ---------    --------
                                                        $  17,453    $  7,159
                                                        =========    ========

PROPERTY AND EQUIPMENT:
     Computer equipment                                 $  14,769    $ 10,265
     Office equipment and furniture                           961         729
     Machinery and equipment                                1,148       1,391
     Leasehold improvements                                   968         567
                                                        ---------    --------
                                                           17,846      12,952
     Less:  accumulated depreciation and amortization     (10,874)     (7,290)
                                                        ---------    --------
                                                        $   6,972    $  5,662
                                                        =========    ========


                                      49
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


                                                             DECEMBER 31,
                                                        ---------------------
                                                          2000         1999
                                                        ---------   ---------

INTANGIBLES AND OTHER ASSETS:
   Goodwill                                             $  99,527    $   --
   Other identifiable intangibles                          23,160        --
                                                        ---------    --------
                                                          122,687        --
   Less: amortization                                      (9,823)       --
                                                        ---------    --------

                                                        $ 112,864    $   --
                                                        ---------    --------

ACCRUED EXPENSES AND OTHER LIABILITIES:
     Accrued payroll and related expenses               $   5,410    $  2,880
     Accrued royalties                                      1,381         673
     Taxes payable                                          3,323       3,682
     Deferred revenue                                       1,062       1,051
     Other accrued liabilities                              5,680       2,750
                                                        ---------    --------
                                                        $  16,856    $ 11,036
                                                        =========    ========
</TABLE>

NOTE 4 - RESEARCH AND DEVELOPMENT ARRANGEMENTS:

The Company is a party to certain research and development agreements with the
Chief Scientist in Israel's Ministry of Industry and Trade Department (the
"Chief Scientist") and the Israel-United States Binational Industrial Research
and Development Foundation ("BIRDF"), which fund up to 50% of incurred project
costs for approved products up to specified contract maximums. The Company is
not obligated to repay funding regardless of the outcome of its development
efforts; however, these agreements require the Company to use its best efforts
to achieve specified results and require the Company to pay royalties at rates
of 3% to 5% of resulting products sales, and up to 30% of resulting license
revenues, up to a maximum of 100% to 150% of the total funding received.
Reported research and development expenses are net of these grants, which
fluctuate from period to period.

Gross research and development expenses and the related grants are as follows:

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                                  -----------------------
                                                2000        1999         1998
                                               --------   --------     ---------
<S>                                            <C>         <C>         <C>
Research and development expenses:
     Gross research and development expenses   $ 18,961    $ 13,135    $ 14,399
     Less: grants earned                           (333)       (484)       (851)
                                               --------    --------    --------

                                               $ 18,628    $ 12,651    $ 13,548
                                               ========    ========    ========
</TABLE>


Royalty expenses related to these grants were $299,000, $5,000, and $196,000 in
2000, 1999 and 1998, respectively.


                                      50
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOTE 5 - DEVELOPMENT CONTRACTS:

The Company has generated a portion of its total revenues from development
contracts, primarily with key customers. These development contracts have
provided the Company with partial funding for the development of certain of its
products. The Company classifies costs related to these development contracts as
research and development expenses. The Company is not obligated to repay funding
regardless of the outcome of its development efforts; however, the agreements
require the Company to use its best efforts to achieve specified results as per
the agreements. The Company retains ownership of the intellectual property
developed under the contracts; however, some contracts limit the product markets
in which the Company may directly sell the developed product. Revenues generated
under these contracts were $5,080,000, $1,185,000 and $2,960,000 in 2000, 1999
and 1998, respectively.


NOTE 6 - COMMITMENTS AND CONTINGENCIES:

From time to time, the Company may have certain contingent liabilities that
arise in the ordinary course of its business activities. The Company accrues
contingent liabilities when it is probable that future expenditures will be made
and such expenditures can be reasonably estimated. In the opinion of management,
there are no pending claims of which the outcome is expected to result in a
material adverse effect in the financial position or results of operations of
the Company.


  LEASE COMMITMENTS

The Company rents facilities and equipment under various lease agreements
expiring through 2005. Rent expense for 2000, 1999 and 1998 totaled
approximately $1,239,000, $1,010,000 and $887,000 respectively. Future minimum
lease payments required under noncancelable leases at December 31, 2000 are as
follows:

<TABLE>
<CAPTION>
                 YEAR ENDING
                 DECEMBER 31,
                 ------------
                 <S>                                    <C>
                 2001                                   $1,198,000
                 2002                                    1,167,000
                 2003                                      591,000
                 2004                                      410,000
                 2005                                      410,000
                                                        ----------
                 Total minimum lease payments           $3,776,000
                                                        ==========
</TABLE>


NOTE 7 - STOCKHOLDERS' EQUITY:

  COMMON STOCK

In December 1995, the Company issued shares of common stock in conjunction
with the Company's initial public offering ("IPO"). In January 1996, the
underwriters exercised their over-allotment option to purchase additional
shares of common stock. In December 1999, the Company issued 2,917,800 shares
of common stock in conjunction with a follow-on public offering that also
included underwriters' exercise of their over-allotment option. Gross
proceeds from this offering were $119.6 million with underwriters' discount
and offering expenses of $6.7 million. In June 2000, the Company acquired
PixelCam, Inc. in exchange for 370,832 shares of Zoran common stock and
options to purchase 4,168 shares of Zoran common stock. In October 2000, the
Company acquired Nogatech, Inc. in exchange for 2,534,559 shares of Zoran
common stock and options to purchase 168,472 shares of Zoran common stock.
Both acquisitions were accounted for under the purchase method of accounting
(see Note 11).

                                      51
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  WARRANTS

In September 1997, in connection with a software license agreement, the Company
issued a warrant to purchase 75,000 shares of its Common Stock at an exercise
price of $24.31 per share. The warrant is exercisable for a period of four years
from a date beginning one year after the issuance date of the warrant. The
$717,000 estimated value of the warrant, is being amortized over the four-year
period of the license agreement. The unamortized balance at December 31, 2000 of
$117,000 is included in prepaid expenses and other current assets.


                                      52
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

STOCK OPTION PLANS

  1993 STOCK OPTION PLAN

The Company's 1993 Stock Option Plan (the "1993 Option Plan") was adopted by the
Board of Directors of the Company and approved by the stockholders of the
Company in July 1993. A total of 4,420,000 shares of common stock have been
reserved for issuance under the 1993 Option Plan. The 1993 Option Plan provides
for grants of options to employees, non-employee directors and consultants. The
1993 Option Plan is currently being administered by the Compensation Committee
of the Board of Directors of the Company, which determines the optionees and the
terms of the options granted, including the exercise price, number of shares
subject to the option plan and the exercisability thereof. The option price for
shares granted under the 1993 Option Plan is typically equal to the fair market
value of the common stock at the date of grant. The 1993 Option Plan will
terminate in July 2003, unless terminated sooner by the Board of Directors.

Generally, options granted under the 1993 Option Plan are fully exercisable on
and after the date of grant, subject to the Company's right to repurchase from
an optionee, at the optionee's original per share exercise price, any unvested
shares which the optionee has purchased and holds in the event of the
termination of the Optionee's employment, with or without cause. The Company's
right lapses as shares subject to the option become vested. Such shares
generally vest in monthly installments over two or four years following the date
of grant (as determined by the Compensation Committee of the Board of
Directors), subject to the optionee's continuous service. Options expire ten
years from the date of grant and an option shall generally terminate three
months after termination of employment

In August 1998, substantially all options with an exercise price in excess of
$5.94 were cancelled and replaced with new options having an exercise price of
$5.94, the market price on the date that the employees accepted the repricing. A
total of 924,164 shares were repriced.

At December 31, 2000, shares available for grant under this plan were 840,000.

  2000 STOCK OPTION PLAN

The Company's 2000 Nonstatutory Stock Option Plan (the "2000 Option Plan")
was adopted by the Board of Directors of the Company in October 2000. A total
of 300,000 shares of preferred stock were initially reserved for issuance
under the 2000 Option Plan. The 300,000 options to purchase preferred stock
automatically converted to options to purchase common stock however, upon the
filing of an amendment of the certificate of incorporation of the Company
with the Secretary of State of Delaware to effect an increase in the number
of authorized shares of common stock to 55,000,000 in October 2000. The 2000
Option Plan provides for grants of options to employees or consultants. The
2000 Option Plan is currently being administered by the Compensation
Committee of the Board of Directors of the Company, which determines the
optionees and the terms of the options granted, including the exercise price,
number of shares subject to the option plan and the exercisability thereof.
The option price for shares granted under the 2000 Option Plan is typically
equal to the fair market value of the common stock at the date of grant.
Options expire ten years from the date of grant and an option shall generally
terminate three months after termination of employment. The 2000 Option Plan
will terminate in October 2010, unless terminated sooner by the Board of
Directors.

At December 31, 2000, shares available for grant under this plan were 68,000.


                                      53
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

 1995 OUTSIDE DIRECTORS STOCK OPTION PLAN

The Company's Outside Directors Stock Option Plan (the "Directors Plan") was
adopted by the Company's Board of Directors in October 1995, and was approved by
its stockholders in December 1995. A total of 300,000 shares of Common Stock
have been reserved for issuance under the Directors Plan. The Directors Plan
provides for the grant of nonstatutory stock options to nonemployee directors of
the Company. The Directors Plan provides that each new nonemployee director will
automatically be granted an option to purchase 20,000 shares on the date the
optionee first becomes a nonemployee director (the "Initial Grant"). Thereafter,
on the date immediately following each annual stockholders' meeting, each
nonemployee director who is reelected at the meeting to an additional term shall
be granted an additional option to purchase 4,800 shares of Common Stock if, on
such date, he or she shall have served on the Company's Board of Directors for
at least six months (the "Annual Grant"). The Initial Grant is exercisable in
four equal annual installments, and each Annual Grant shall become exercisable
in full one year after the date of grant, subject to the director's continuous
service. The exercise price of all stock options granted under the Directors
Plan is equal to the fair market value of the Company's Common Stock on the date
of grant. Options granted under the Directors Plan have a term of ten years.

At December 31, 2000 shares available for future issuance under this plan were
116,000.

The following table summarizes the Company's stock option activity for the years
ended December 31, 2000, 1999 and 1998. The weighted average exercise price for
each category presented is also shown in the table below:

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                      -----------------------------------------------------------------------------
                                                2000                      1999                     1998
                                      -------------------------   -----------------------   -------- --------------
                                                       Weighted                 Weighted                Weighted
                                                       Average                   Average                Average
                                                       Exercise                 Exercise                Exercise
                                         Shares        Price     Shares          Price      Shares       Price
                                      ----------       -------  ----------      ---------   ---------   ---------
<S>                                   <C>             <C>        <C>            <C>         <C>          <C>
Outstanding at beginning of period    1,932,556       $ 11.22    2,226,265      $   5.11    2,053,171    $ 8.62
Assumed                                 168,472         11.38         --                           --
Granted                               1,307,050         38.23      698,803         20.49    1,665,491      7.23
Exercised                              (484,863)         6.84     (700,854)         2.87     (329,963)     0.56
Canceled                               (283,498)        24.96     (291,658)         6.43   (1,162,434)    15.64
                                      ---------                  ---------                  ---------

Options outstanding at period end     2,639,717         23.95    1,932,556         11.22    2,226,265      5.11
                                      =========                  =========                  =========

Options exercisable at period end     2,408,100
                                      =========
</TABLE>


                                      54
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

Significant option groups outstanding as of December 31, 2000 and the related
weighted average exercise price and contractual life information, are as
follows:

<TABLE>
<CAPTION>
                                      Options Outstanding     Options Exercisable
                                    -----------------------  ---------------------
                                                  Weighted                Weighted      Weighted
                                                   Average                 Average      Average
                                                  Exercise                Exercise    Contractual
Exercise Price                        Number        Price      Number       Price     Life (Years)
--------------                      -----------   ---------  ----------   ---------   -----------
<S>                                 <C>            <C>        <C>          <C>          <C>
 $0.13 - $ 4.32                       134,471      $ 1.30     134,471      $ 1.30       3.8
 $4.69 - $ 5.94                       631,748        5.89     631,748        5.89       6.5
 $8.50 - $20.13                       257,578       14.89     257,578       14.89       7.5
$20.38 - $40.94                       734,401       24.25     535,784       23.62       9.0
$41.00 - $62.00                       881,519       42.75     848,519       42.50       9.5
                                   ---------                ----------
                                    2,639,717       23.95   2,408,100       23.44       8.3
                                   ==========               =========

</TABLE>

The weighted average grant date fair value of options granted during the years
ended December 31, 2000, 1999 and 1998 as defined by SFAS 123, were $34.18,
$17.05 and $3.41 per share, respectively.


                                      55
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

  1995 EMPLOYEE STOCK PURCHASE PLAN

The Company's 1995 Employee Stock Purchase Plan ("ESPP") was adopted by the
Company's Board of Directors in October 1995, and approved by its stockholders
in December 1995. The ESPP enables employees to purchase shares through payroll
deductions at approximately 85% of the lesser of the fair value of Common Stock
at the beginning of a 24-month offering period or the end of each six-month
segment within such offering period. The ESPP is intended to qualify as an
"employee stock purchase plan" under Section 423 of the U.S. Internal Revenue
Code. During the years ended December 31, 2000 and 1999, 89,831 and 87,222
shares were purchased by employees under the terms of the plan agreements at a
weighted average price of $10.37 and $8.73 per share, respectively. At December
31, 2000, 171,727 shares were reserved and available for issuance under this
plan.

The weighted average grant date fair value of rights granted during the year
ended December 31, 2000, 1999 and 1998 as defined by SFAS 123, was $17.27, $3.91
and $3.55 per share, respectively.

  FAIR VALUE DISCLOSURES

Had compensation cost for the Company's option and stock purchase plans been
determined based on the fair value at the grant dates, as prescribed in FAS 123,
the Company's net income (loss) and net income (loss) per share for each of the
three years ended December 31, 2000 would have been as follows (in thousands,
except per share data):

<TABLE>
<CAPTION>

                                       YEAR ENDED DECEMBER 31,
                                --------------------------------------
                                    2000          1999         1998
                                -----------   ------------ ----------
<S>                              <C>           <C>        <C>
Net income (loss)
     As reported                 $(20,608)     $ 6,659    $    929
     Pro forma                   $(33,851)     $ 1,212    $ (4,144)

Net income (loss) per share:
     As reported
        Basic                    $  (1.37)     $  0.61    $   0.09
        Diluted                  $  (1.37)     $  0.54    $   0.08
     Pro forma
        Basic                    $  (2.25)     $  0.11    $  (0.41)
        Diluted                  $  (2.25)     $  0.10    $  (0.41)

</TABLE>

The fair value of each option grant is estimated on the date of grant using the
Black Scholes model with the following assumptions used for options and purchase
grants during the applicable period.


                                      56
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<CAPTION>
                                       YEAR ENDED DECEMBER 31,
                            -------------------------------------------
                                 2000           1999           1998
                            -------------   ------------   ------------
<S>                         <C>             <C>            <C>
Dividend rate                       0.0%            0.0%           0.0%
Risk-free interest rates    5.2% to 6.7%    4.6% to 6.2%   4.2% to 5.6%
Volatility                         91.0%           93.0%          61.0%
Expected life
     Option plans               5 years         5 years        5 years
     Purchase plan            0.5 years       0.5 years      0.5 years
</TABLE>

The pro forma amounts reflect compensation expense related to stock options and
purchase rights granted during the years ended December 31, 2000, 1999 and 1998.

NOTE 8 - EARNINGS PER SHARE:

A reconciliation of the numerators and the denominators of the basic and diluted
per share computation are as follows (in thousands):

<TABLE>
<CAPTION>
                              2000                                  1999                                 1998
               ------------------------------------ -------------------------------------- --------------------------------------
                  INCOME     SHARES      PER SHARE     INCOME      SHARES       PER SHARE    INCOME       SHARES        PER SHARE
                Numerator) (Denominator) AMOUNT     (Numerator) (Denominator)   AMOUNT    (Numerator)  (Denominator)     AMOUNT
               ----------- ------------ ---------- ------------ -------------  ---------  -----------  -------------  -----------
<S>            <C>         <C>          <C>        <C>          <C>            <C>        <C>          <C>            <C>
Basic EPS:
 Net income
  (loss)        $(20,608)       15,070   $  (1.37)      $6,659        10,844   $   0.61      $929           10,042        $  0.09
                                         =========                             ========                                   =======
Effects of
 Dilutive
 Securities:
Stock Options         --            --                     --          1,405                  --             1,064
Warrants              --            --                     --            --                   --                13

Diluted EPS:
                --------        ------                  ------        ------                 ----           ------
Net income
 (loss)         $(20,608)       15,070   $  (1.37)      $6,659        12,249   $   0.54      $929           11,119        $  0.08
                ========        ======   ========       ======        ======   ========      ====           ======        =======
</TABLE>

Stock options and a warrant to purchase 2,715,000, 603,000, and 1,224,000
shares of common stock were outstanding at December 31, 2000, 1999 and 1998,
respectively but were not included in the weighted average diluted earnings
per share calculation as they were antidilutive.


NOTE 9 - INCOME TAXES:

The components of income before income taxes are as follows:

<TABLE>
<CAPTION>
                                                  YEAR ENDED DECEMBER 31,
                                             --------------------------------
                                                 2000       1999      1998
                                             ----------- ---------  ---------
                                                     (in thousands)
<S>                                             <C>         <C>      <C>
U.S.                                            $(25,941)   $2,156   $  475
Foreign                                            7,303     5,678      686
                                                --------    ------   ------
                                                $(18,638)   $7,834   $1,161
                                                ========    ======   ======
</TABLE>


                                      57
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The components of the provision for income taxes are as follows:

<TABLE>
<CAPTION>
                                     YEAR ENDED DECEMBER 31,
                                -------------------------------
                                  2000        1999      1998
                                ---------  ---------   ---------
                                         (in thousands)
<S>                              <C>        <C>        <C>
    U.S                          $    267   $     50   $    106
    State                             827        454         26
    Foreign                           876        671        100
                                 --------   --------   --------
       Total current                1,970      1,175        232
    Deferred                         --         --         --
                                 --------   --------   --------

             Total               $  1,970   $  1,175   $    232
                                 ========   ========   ========
</TABLE>


The tax provision differs from the amounts obtained by applying the statutory
U.S. Federal Income Tax Rate to income taxes as shown below.

  TAX PROVISION DIFFERENCE

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                           -------------------------------
                                             2000        1999       1998
                                           ---------  ---------   ---------
                                                    (in thousands)
<S>                                         <C>        <C>        <C>
Tax at U.S. statutory rate                  $(6,337)   $ 2,663      $ 395
Utilization of net operating loss
  carryforwards                              (2,075)      (856)       (35)
Foreign Earnings                               (635)    (1,612)      (156)
State taxes net of federal benefit              443        302         --
Other differences not benefited                 433        513         --
Permanent differences                           (72)        85         --
Alternative minimum tax                         122         50         --
In-process research and development           7,428       --           --
Non-deductible goodwill amortization          2,663       --           --
Other                                          --           30         28
                                            -------    -------      -----
                                            $ 1,970    $ 1,175      $ 232
                                            =======    =======      =====
</TABLE>


                                      58
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


          Deferred income tax assets comprise the following:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                                       ----------------------------------
                                                           2000       1999         1998
                                                       ----------   ----------   ---------
                                                                  (in thousands)
<S>                                                    <C>          <C>          <C>
Deferred tax assets
   Federal and state net operating loss carryforwards   $ 18,605    $ 16,417    $ 12,279
   Capitalized research and development expenses             543         497         372
   Nondeductible reserves and accruals                     1,841       1,653         951
                                                        --------    --------    --------
Total deferred tax assets                                 20,989      18,567      13,602
                                                        --------    --------    --------
Deferred tax liabilities
   Intangible assets                                      (8,468)        --          --
                                                        --------    --------    --------
Total deferred tax assets                                 (8,468)        --          --
                                                        --------    --------    --------
Net deferred tax assets                                   12,521      18,567      13,602
Valuation allowance                                      (12,521)    (18,567)    (13,602)
                                                        --------    --------    --------
                                                        $    --     $    --     $    --
                                                        ========    ========    ========
</TABLE>


                                      59
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

As of December 31, 2000, the Company has NOLs of approximately $55 million for
federal tax reporting purposes. The federal NOLs expire on various dates between
2001 and 2020. Management has recorded a full valuation allowance against all
U.S. deferred tax assets on the basis that significant uncertainty exists
regarding the realizability of the assets.

Pursuant to the Tax Reform Act of 1986, the amounts of and the benefit from NOLs
that can be carried forward may be impaired or limited in certain circumstances,
including a cumulative stock ownership change of more than 50% over a three-year
period. The Company's IPO resulted in a cumulative change of ownership of
greater than 50%. Accordingly, the Company's NOLs incurred prior to the
completion of the IPO that can be utilized to reduce future taxable income for
federal tax purposes will be limited to approximately $3.0 million per year.

The Company's Israeli subsidiary has been granted the status of an "Approved
Enterprise" pursuant to the Israeli law for the Encouragement of Capital
Investments, 1959, as amended. The Company has four approved programs pursuant
to this law. The first program was approved in 1984. Income subject to this
program is taxed at an annual rate of 10% from the first year in which the
enterprise generates taxable income (net of NOLs). Benefits under the first
program expired in 1997. The second program was approved in 1991. Income subject
to this program is exempt from tax for two years from the first year in which
the Company has taxable income (net of NOLs) and is taxed at a rate of 10%
thereafter. Benefits under the second program expire in 2003. The third program
was approved in 1995. Income subject to this program is exempt from tax for four
years from the first year in which the Company has taxable income (net of NOLs)
and is taxed at a rate of 10% during the remaining period of six years. The
fourth program was approved in 1997. Income subject to this program is exempt
from tax for two years from the first year in which the Company has taxable
income (net of NOLs) and is taxed at a rate of 10% during the remaining period
of eight years. Benefits under the third and the fourth program are limited to
fourteen years from approval or twelve years from commencement of production.
The net impact of the tax holidays was an increase in net income of $635,000
in fiscal 2000 and an increase in net income per share of $0.45.

NOTE 10 - SEGMENT REPORTING:

The Company operates in one industry segment comprising the design, development,
manufacture and sale of integrated circuits. The following is a summary of the
Company's operations:

      Sales to customers located in:

<TABLE>
<CAPTION>
                                                 YEAR ENDED DECEMBER 31,
                                           -------------------------------------
                                              2000         1999         1998
                                           ----------   ----------   ----------
                                                       (in thousands)
<S>                                        <C>          <C>          <C>
United States                              $   14,735   $   12,671   $   17,935
Pacific Rim                                    51,985       41,870       15,850
Europe                                         12,951        7,133       10,440
                                           ----------   ----------   ----------
                                           $   79,671   $   61,674   $   44,225
                                           ==========   ==========   ==========

</TABLE>

<TABLE>
<CAPTION>
                                               DECEMBER 31,
                                           ---------------------
                                               2000       1999
                                           ----------   --------
                                              (in thousands)
<S>                                        <C>        <C>
Identifiable assets:

    U.S                                    $276,563   $157,374
    Israel                                   82,903     25,094
                                           --------   --------
       Total                               $359,466   $182,468
                                           ========   ========
</TABLE>


                                      60
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

      Significant customers are as follows:

<TABLE>
<CAPTION>
                                             YEAR ENDED DECEMBER 31,
                                           --------------------------
                                            2000     1999     1998
                                           ------   ------   ------
<S>                                         <C>      <C>       <C>
Customers comprising 10% or more of the
Company's total revenues for the
    period indicated:

       A                                    25%       37%       23%
       B                                    --        --        14%

</TABLE>

NOTE 11 - ACQUISITION AND DISPOSITION OF ASSETS:

SOFT DVD PRODUCT LINE: In June 1999, the Company sold to MGI Software of
Canada the intellectual property related to its SoftDVD product line and
transferred to MGI certain related software development and support resources
in exchange for cash, MGI common stock and future royalties. The Company's
results for the second quarter of 1999 include a $732,000 gain realized from
this transaction which is reported as part of interest and other income or
expense. In connection with this transaction, the Company also recorded a
charge that reduced software, licensing and development revenue for the
quarter by $517,000 for possible issues related to receivables associated
with the SoftDVD product line. The net impact of the MGI transaction on the
Company's results was an after-tax gain of $172,000, or $0.01 per share on a
diluted basis. This gain does not reflect the potential future economic
benefit that may be derived from this transaction and realized in future
periods in the form of royalties. The Company does not currently expect,
however, that these royalties will have a material impact on quarterly
revenues for the foreseeable future. In addition, the shares of MGI stock
received by the Company as part of this transaction are subject to future
appreciation or depreciation. The Company believes that its software revenues
will decline significantly as a result of the sale of the SoftDVD product
line.

PIXELCAM: On June 29, 2000, the Company acquired PixelCam, Inc. ("PixelCam"), a
manufacturer of megapixel CMOS image sensors and integrated lens/sensor modules,
in exchange for 370,832 shares of Zoran common stock and options to purchase
4,168 shares of Zoran common stock with an aggregate value of $24.6 million. The
common stock issued includes 123,612 shares of restricted stock subject to
repurchase by the Company exchanged for restricted stock of PixelCam. The
restrictions and vesting periods of the PixelCam shares were maintained and will
apply to the converted shares of the Company. The agreement also includes shares
that are contingently issuable to former PixelCam shareholders upon achievement
of certain milestones. Any contingent consideration will be valued and recorded
as of the date the lifting of the contingency becomes probable. The common stock
issued was valued using the average of the market price per share of the
Company's common stock for the three trading days prior to the date the
acquisition was consummated. The options were valued using the Black-Scholes
valuation model. The results of operations of PixelCam are included in the
Company's financial statements from the date of acquisition.

The acquisition was accounted for under the purchase method of accounting. The
Company had a valuation performed of the in-process research and development and
the intangible assets acquired. The allocation of the purchase price based on
independent appraisal and estimates of fair value and including acquisition
costs of $575,000, is as follows (in thousands):



                                      61
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

<TABLE>
<S>                                     <C>
Net tangible assets                     $   419
In-process research and development       6,769
Goodwill and other intangible assets:
            Goodwill                     15,956
            Covenant not to compete         800
            Patents                         900
            Acquired employees              380
                                        -------
                                        $18,036
                                        -------
            Net assets acquired         $25,224
                                        =======
</TABLE>

The net tangible assets acquired were comprised primarily of property and
equipment, inventory, and cash offset by accrued liabilities. The acquired
in-process research and development was written-off in the second quarter of
2000. The estimated weighted average useful life of the intangible assets for
purchased technology, covenant not to compete, acquired employees, patents and
residual goodwill, created as a result of the acquisition of PixelCam, is
approximately three years.

The allocation of $6.8 million of the purchase price to the acquired in-process
research and development has been determined by identifying the research project
which technological feasibility had not been established and no alternative
future uses existed. The value was determined by estimating the expected cash
flows from the project once commercially viable, discounting the net cash flows
back to their present value, and then applying a percentage of completion to the
calculated value as defined below.

NET CASH FLOWS. The net cash flows from the identified project was based on
estimates of revenues, cost of sales, research and development costs, selling,
general and administrative costs, and income taxes from the project. These
estimates were based on the assumptions discussed below. The research and
development costs excluded costs to bring the acquired in-process project to
technological feasibility.

The estimated revenues were based on management projections of the acquired
in-process project. The business projections were compared with and found to be
in line with industry analysts' forecasts of growth in substantially all of the
relevant markets. Estimated total revenues from the acquired in-process research
and development product are expected to peak in fiscal 2002 and decline in
fiscal 2003 as other new products are expected to become available. These
projections were based on estimates of market size and growth, expected trends
in technology, and the nature and expected timing of new product introductions
by the Company and its competitors.

Projected gross margins as well as selling, general and administrative costs
were based on management's estimates.

DISCOUNT RATE. Discounting the net cash flows back to their present value was
based on the cost of capital for well managed venture capital funds which
typically have similar risks and returns on investments. The cost of capital
used in discounting the net cash flows from acquired in-process research was
25%.

PERCENTAGE OF COMPLETION. The percentage of completion was determined using
costs incurred by PixelCam prior to the acquisition date compared to the
remaining research and development to be completed to bring the project to
technological feasibility. The Company estimated, as of the acquisition date,
the project was 62% complete and the estimated costs to complete the project
were approximately $4.1 million.

The Company expects to complete the project within 12 months from the
acquisition date. However, development of this project remains a significant
risk to the Company due to the remaining effort to achieve technical
feasibility, rapidly changing customer markets and significant competitive
threats from numerous companies. Failure to bring these products to market in a
timely manner could adversely impact sales and profitability of the Company in
the future. Additionally, the value of the intangible assets acquired may become
impaired.


                                      62
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

NOGATECH: On October 26, 2000, the Company acquired Nogatech, Inc.
("Nogatech"), a manufacturer of integrated circuits that establish
connections between video devices and computers as well as connections
between video devices across a variety of networks, in exchange for 2,534,559
shares of Zoran common stock with a fair value of $154.4 million and options
to purchase 168,472 shares of Zoran common stock with a fair value of $9.2
million. The common stock issued was valued using the average of the market
price per share of the Company's common stock on the date the proposed merger
was announced and the three trading days before and two trading days
subsequent to the date of the announcement. The options were valued using the
Black-Scholes valuation mode. The results of operations of Nogatech are
included in the Company's financial statements from the date of acquisition.

The acquisition was accounted for under the purchase method of accounting.
The Company had a valuation performed of the in-process research and
development and the intangible assets acquired. The allocation of the
purchase price based on independent appraisal and estimates of fair value
including acquisition costs of approximately $1.5 million is as follows (in
thousands):

<TABLE>
<S>                                          <C>
Net tangible assets                          $ 44,246
In-process research and development            15,078
Deferred compensation for unvested options      1,018
Goodwill and other intangible assets:
            Goodwill                           83,571
            Core Technology                     8,060
            Completed Technology               10,760
            Assembled workforce                   700
            Customer base                       1,560
                                             --------
                                             $104,651
                                             --------
            Net assets acquired              $164,993
                                             ========
</TABLE>


                                      63
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

The net tangible assets acquired were comprised primarily of cash, inventory,
and prepaid expense offset by accrued liabilities. The acquired in-process
research and development was written-off in the fourth quarter of 2000. The
intangible assets for core technology, assembled workforce, customer base and
residual goodwill, created as a result fo the acquisition of Nogatech will be
amortized on a straight line basis over their estimated useful lives of three
years. The completed technology will be amortized on a straight line basis over
its estimated useful life of two years.

The allocation of $15.1 million of the purchase price to the acquired
in-process research and development has been determined by identifying the
research project which technological feasibility had not been established and
no alternative future uses existed. The value was determined by estimating
the expected cash flows from the project once commercially viable,
discounting the net cash flows back to their present value, and then applying
a percentage of completion to the calculated value as defined below.

NET CASH FLOWS. The net cash flows from the identified project was based on
estimates of revenues, cost of sales, research and development costs, selling,
general and administrative costs, and income taxes from the project. These
estimates were based on the assumptions discussed below. The research and
development costs excluded costs to bring the acquired in-process project to
technological feasibility.

The estimated revenues were based on management projections of the acquired
in-process project. The business projections were compared with and found to be
in line with industry analysts' forecasts of growth in substantially all of the
relevant markets. Estimated total revenues from the acquired in-process research
and development product are expected to peak in fiscal 2006 and decline in
fiscal 2007 as other new products are expected to become available. These
projections were based on estimates of market size and growth, expected trends
in technology, and the nature and expected timing of new product introductions
by the Company and its competitors.

Projected gross margins as well as selling, general and administrative costs
were based on management's estimates.

DISCOUNT RATE. Discounting the net cash flows back to their present value was
based on the cost of capital for well managed venture capital funds which
typically have similar risks and returns on investments. The cost of capital
used in discounting the net cash flows from acquired in-process research was
25%.

PERCENTAGE OF COMPLETION. The percentage of completion was determined using
costs incurred by Nogatech prior to the acquisition date compared to the
remaining research and development to be completed to bring the project to
technological feasibility. The Company estimated, as of the acquisition date,
the project was 60% complete and the estimated costs to complete the project
were approximately $1.2 million.

The Company expects to complete the project within 12 months from the
acquisition date. However, development of this project remains a significant
risk to the Company due to the remaining effort to achieve technical
feasibility, rapidly changing customer markets and significant competitive
threats from numerous companies. Failure to bring these products to market in a
timely manner could adversely impact sales and profitability of the Company in
the future. Additionally, the value of the intangible assets acquired may become
impaired.


                                      64
<PAGE>

                                ZORAN CORPORATION
             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

UNAUDITED PRO FORMA RESULTS

The unaudited pro forma information below assumes that PixelCam and Nogatech
had been acquired at the beginning of each period presented and includes the
effect of amortization of goodwill and other identified intangibles from
those dates. The impact of charges for in-process research and development
has been excluded. This is presented for informational purposes only and is
not necessarily indicative of the results of future operations or results
that would have been achieved had the acquisition taken place at the
beginning of any of the periods presented.

<TABLE>
<CAPTION>
                                                        TWELVE MONTHS ENDED
                                                            DECEMBER 30,
                                                     -------------------------
(in thousands, except per share amounts)                2000          1999
                                                     ----------    -----------
<S>                                                  <C>           <C>
Net revenues                                         $   88,136    $    70,780
Net loss                                             $  (43,666)   $   (40,713)
Basic and diluted loss per common share              $    (2.43)   $     (2.97)
</TABLE>


NOTE 12 - RELATED-PARTY TRANSACTIONS:

In January 1996, the Company spun off its wholly-owned subsidiary, Oren
Semiconductor, to the Company's stockholders. Two of the Company's directors are
also members of Oren's board of directors. The Company has no ownership interest
in Oren.

In March 1999, the Company entered into a technology license agreement with
Oren. Under the license arrangement Oren agreed to pay to the Company license
and maintenance fees totaling $400,000 and royalties and maintenance fees
based on related products sold by Oren. License fees of approximately
$360,000 were recognized in the first quarter of 1999.

In April 1999, the Company loaned Oren $350,000. The loan plus interest,
computed at 7% per year, was repaid by Oren in July 1999. The Company has no
commitments or plans to loan additional amounts to Oren.


                                      65
<PAGE>

                                ZORAN CORPORATION
                    SELECTED QUARTERLY FINANCIAL INFORMATION
                                   (UNAUDITED)

<TABLE>
<CAPTION>
                                                                              QUARTERS ENDED
                                         -----------------------------------------------------------------------------------
                                           DEC 31,   SEPT 30,    JUNE 30,  MARCH 31,  DEC 31,   SEPT 30,  JUNE 30,   MARCH 31,
                                            2000       2000        2000      2000      1999       1999      1999     1999
                                         ---------- ---------- ---------- ---------- --------- --------- --------- ---------
                                                                 (in thousands, except per share data)
<S>                                        <C>         <C>       <C>         <C>       <C>       <C>       <C>       <C>
Revenues:

Product sales                              $ 16,793    $20,378   $ 16,389    $14,222   $18,159   $14,519   $10,927   $ 9,282
Software, licensing and development           2,361      3,636      2,472      3,420     1,896     1,577     2,704     2,610
                                           --------    -------   --------    -------   -------   -------   -------   -------
Total revenues                               19,154     24,014     18,861     17,642    20,055    16,096    13,631    11,892
                                           --------    -------   --------    -------   -------   -------   -------   -------

Cost and expenses:
  Cost of product sales                       9,650     11,138      9,069      8,136    10,026     7,720     5,684     5,093
  Research and development                    6,112      5,271      3,976      3,269     2,706     2,430     3,991     3,524
  Selling, general and administrative         5,494      5,074      4,443      4,137     4,019     3,683     3,302     3,247
  Amortization of goodwill and
    write-off of acquired in process
    research & development                   23,497      1,503      6,769       --        --        --        --        --
                                           --------    -------   --------    -------   -------   -------   -------   -------
      Total costs and expenses               44,753     22,986     24,257     15,542    16,751    13,833    12,977    11,864
                                           --------    -------   --------    -------   -------   -------   -------   -------
Operating income (loss)                     (25,599)     1,028     (5,396)     2,100     3,304     2,263       654        28
Interest and other income (expense), net      2,789      2,226      2,208      2,006       359       249       878        99
                                           --------    -------   --------    -------   -------   -------   -------   -------
Income (loss) before taxes                  (22,810)     3,254     (3,188)     4,106     3,663     2,512     1,532       127
Provision for income taxes                      103        714        537        616       342       502       306        25
                                           --------    -------   --------    -------   -------   -------   -------   -------
Net income (loss)                          $(22,913)   $ 2,540   $ (3,725)   $ 3,490   $ 3,321   $ 2,010   $ 1,226   $   102
                                           ========    =======   ========    =======   =======   =======   =======   =======
Net income (loss) per share:
Basic                                      $  (1.35)   $  0.17   $  (0.26)   $  0.25   $  0.29   $  0.19   $  0.12   $  0.01
                                           ========    =======   ========    =======   =======   =======   =======   =======
Diluted                                    $  (1.35)   $  0.16   $  (0.26)   $  0.23   $  0.26   $  0.17   $  0.10   $  0.01
                                           ========    =======   ========    =======   =======   =======   =======   =======
Shares used to compute basic net
income (loss) per share                      16,950     14,564     14,113     13,988    11,404    10,681    10,436    10,278
                                           ========    =======   ========    =======   =======   =======   =======   =======
Shares used to compute diluted net
income (loss) per share                      16,950     16,009     14,113     15,486    12,853    12,083    11,673    11,776
                                           ========    =======   ========    =======   =======   =======   =======   =======
</TABLE>


                                      66
<PAGE>

ITEM 9.     CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
            FINANCIAL DISCLOSURE.

        Not applicable.


                                      67
<PAGE>

                                   PART III

Certain information required by Part III is omitted from this report in that the
Company intends to file its definitive proxy statement pursuant to Regulation
14A (the "Proxy Statement") not later than 120 days after the end of the fiscal
year covered by this report and certain information therein is incorporated
herein by reference.

ITEM 10.    DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Proposal No. 1
-- Election of Directors" and in Part I of this Report under the heading
"Executive Officers of the Registrant."

The information required by this Item with respect to compliance with Section
16(a) of the Securities Exchange Act of 1934 is incorporated by reference to
information set forth in the Proxy Statement under the heading "Section 16(a)
Beneficial Ownership Reporting Compliance."

ITEM 11.    EXECUTIVE COMPENSATION.

The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Executive
Compensation."

ITEM 12.    SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Principal
Stockholders and Share Ownership by Management."

ITEM 13.    CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The information required by this Item is incorporated by reference to
information set forth in the Proxy Statement under the heading "Certain
Transactions."


                                      68
<PAGE>

                                     PART IV

ITEM 14.  EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K.

(a)     The following documents are filed as a part of this report:

        (1)    Financial Statements:

               See Index to Consolidated Financial Statements at page 39 of this
               report.

        (2)    Financial Statement Schedules:

               All financial statement schedules are omitted because they are
               not applicable or not required, or because the required
               information is included in the Consolidated Financial Statements
               and Notes thereto which are included herein.

         (3)   Exhibits:

               The exhibits listed on the accompanying Exhibit Index are filed
               as part of, or are incorporated by reference into, this report.

(b)      Reports on Form 8-K during the quarter ended December 31, 2000:

               On October 26, 2000, the Company filed a Report on Form 8-K,
               pursuant to item 2 thereof, reporting that it had completed the
               acquisition of Nogatech, Inc. pursuant to the Agreement and Plan
               of Reorganization dated August 23, 2000 among the Company,
               Nogatech and Zoom Acquisition Corporation, a wholly-owned
               subsidiary of the Company. .


                                      69
<PAGE>

                                   SIGNATURES

            Pursuant to the requirements of Section 13 or 15(d) of the
Securities Exchange Act of 1934, the registrant has duly caused this report to
be signed on its behalf by the undersigned, thereunto duly authorized.


Dated:  March 30, 2001               ZORAN CORPORATION


                                     By:  /s/ Levy Gerzberg
                                          ---------------------------------
                                          Levy Gerzberg, President and
                                          Chief Executive Officer



            Pursuant to the requirements of the Security Exchange Act of 1934,
this report has been signed by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.

<TABLE>
<CAPTION>
Signature                               Title                                            Date
---------                               -----                                            ----
<S>                      <C>                                                        <C>
/s/ Levy Gerzberg        President, Chief Executive Officer and Director            March 30, 2001
----------------------   (Principal Executive Officer)
Levy Gerzberg

/s/ Karl Schneider       Vice President, Finance and Chief Financial Officer        March 30, 2001
----------------------   (Principal Financial and Accounting Officer)
Karl Schneider

/s/ Uzia Galil           Chairman of the Board of Directors                         March 30, 2001
----------------------
Uzia Galil

/s/ James D. Meindl      Director                                                   March 30, 2001
----------------------
James D. Meindl

/s/ Arthur B. Stabenow   Director                                                   March 30, 2001
----------------------
Arthur B. Stabenow

/s/ Philip M. Young      Director                                                   March 30, 2001
----------------------
Philip M. Young

</TABLE>


                                      70
<PAGE>

                                  EXHIBIT INDEX
                                  Exhibit Title
                                  -------------

<TABLE>
<CAPTION>
 Exhibit
 Number
--------
<S>         <C>
  3.1       Form of Restated Certificate of Incorporation of the Registrant.

  3.2(1)    Amended Bylaws of the Registrant.

  4.1(2)    Amended and Restated Stock Rights Agreement dated July 30, 1993
            among the Registrant and certain of its stockholders, as amended.

*10.1       1993 Stock Option Plan, as amended.

*10.2(9)    1995 Outside Directors Stock Option Plan.

*10.3(9)    Amended and Restated 1995 Employee Stock Purchase Plan.

*10.4(2)    Form of Indemnity Agreement for officers and directors.

+10.5(2)    Agreement dated June 28, 1991 between the Registrant and Fujifilm
            Microdevices Co., Ltd. ("Fujifilm"), as amended.

+10.6(2)    Agreement dated July 27, 1992 between the Registrant and Fujifilm.

 10.7(2)    Letter Agreement dated December 16, 1991 between the Registrant and
            Dolby Laboratories Licensing Corporation, as amended.

 10.11(2)   Lease Agreement dated October 1, 1992 between the Registrant's
            subsidiary,  Zoran Microelectronics Ltd. ("ZML"), and Matam-Haifa
            Scientific Industries Center Ltd. ("Matam").

+10.12(2)   License Agreement for ZR33891 Digital Filter Processor dated June 8,
            1995 between the Registrant and Atmel Corporation ("Atmel").

+10.13(2)   License Agreement for ZR34325 Vector Signal Processor dated June 8,
            1995 between the Registrant and Atmel.

+10.14(2)   Cooperation and Project Funding Agreement dated June 16, 1991
            between ZML and the Israel-United  States Binational  Industrial
            Research and Development Foundation ("BIRDF").

+10.15(2)   Cooperation and Project Funding Agreement dated June 9, 1992 between
            ZML and BIRDF.

 10.16(2)   Note of Approval No. 17391 dated September 5, 1994 issued
            to ZML by the Office of Chief Scientist, Head of the
            Industrial Research and Development Administration of the
            Israeli Ministry of Industry and Trade (the "Chief
            Scientist"), together with ZML's Letter of Undertaking
            dated September 4, 1994.

 10.17(2)   Note of Approval No. 17337 dated September 5, 1994 issued to ZML by
            the Chief  Scientist,  together with ZML's Letter of Undertaking
            dated September 4, 1994.

 10.18(2)   Loan  Agreements  dated July 25, 1995,  August 1, 1995,  August 15,
            1995,  August 31, 1995 and November 1, 1995 between ZML and the
            Israel Discount Bank.


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<PAGE>

 10.29(4)   Summary of Discussion dated April 23, 1996 between ZML and Matam
            regarding Lease Agreement dated October 1, 1992 between ZML and
            Matam.

 10.30(5)   Memorandum of Understanding  Dated April 23, 1996 between ZML and
            IBM Israel Ltd. regarding Lease Agreement dated October 1, 1992
            between ZML and Matam.

 10.33(6)   Sub-Sublease dated April 1, 1997 between the Registrant and
            Integrated Silicon Solutions, Inc.

*10.34(7)   Confidential Separation Agreement dated August 4, 1997 between the
            Registrant and George T. Haber.

 10.35(8)   Agreement for Purchase and Sale of Assets between the Registrant
            and MGI Software Corp. dated June 15, 1999

 10.36(10)  Unprotected  Tenancy  Agreement  dated  September 16, 1997 between
            ZML and Matam,  together with Appendix  Addendum to Unprotected
            Tenancy Agreement of 16.9.97

 10.37      Addendum to sub-sublease dated April 1, 1997 between the Registrant
            Integrated Silicon Solution, Inc.

 21.1       List of subsidiaries of the Registrant.

 23.1       Consent of PricewaterhouseCoopers LLP.

      ------------------

        *       Constitutes a management contact or compensatory plan required
                to be filed pursuant to Item 14(c) of Form 10-K.

        +       Confidential treatment has been granted as to a portion of this
                Exhibit.

        (1)     Incorporated by reference to Exhibit 3.3 to Registrant's Form
                10-Q Quarterly Report for the quarter ended September 30, 1998.

        (2)     Incorporated by reference to identically numbered exhibit to the
                1995 Registration Statement.

        (3)     Incorporated by reference to identically  numbered  exhibit to
                Registrant's  Form 10-K Annual Report for the year ended
                December 31, 1995.

        (4)     Incorporated  by reference to Exhibit 10.1 to the  Registrant's
                Form 10-Q Quarterly  Report for the quarter ended June 30, 1996
                (the "June 1996 Form 10-Q").

        (5)     Incorporated by reference to Exhibit 10.2 to the June 1996 Form
                10-Q.

        (6)     Incorporated by reference to identically  numbered exhibit to
                Registrant's Form 10-Q Quarterly Report for the quarter ended
                March 31, 1997.

        (7)     Incorporated by reference to Exhibit 10.34 to Registrant's Form
                10-K Annual Report for the year ended December 31, 1997.

        (8)     Incorporated by reference to identically  numbered exhibit to
                Registrant's  Form 10-Q Quarterly Report for the quarter ended
                June 30, 1999.

        (9)     Incorporated by reference to identically  numbered exhibit to
                Registrant's Form 10-Q Quarterly Report for the quarter ended
                September 30, 2000.


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<PAGE>


        (10)    Incorporated by reference to identically  numbered  exhibit to
                Registrant's  Form 10-K Annual Report for the year ended
                December 31, 1999.


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</TABLE>