SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2003

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

For the transition period from to

Commission File No. 0-27246

ZORAN CORPORATION

(Exact name of registrant as specified in its charter)

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

1390 Kifer Road
Sunnyvale, California 94086

(Address of principal executive offices, including zip code)

(408) 523-6500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange 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 ý No o

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

Yes ý No o

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

ZORAN CORPORATION AND SUBSIDIARIES

FORM 10-Q

INDEX

For the Quarter Ended September 30, 2003

PART I. FINANCIAL INFORMATION

Item 1.	Financial Statements (Unaudited):

	Condensed Consolidated Balance Sheets as of September 30, 2003 and December 31, 2002	3

	Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2003 and September 30, 2002	4

	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2003 and September 30, 2002	5

	Notes to Condensed Consolidated Financial Statements	6

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures About Market Risk	31

Item 4.	Control and Procedures	32


PART II. OTHER INFORMATION

Item 4.	Submission of Matters to a Vote of Security Holders	33

Item 6.	Exhibits and Reports on Form 8-K	34

Signatures		35

ZORAN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	September 30, 2003			December 31, 2002

ASSETS
Current assets:
Cash and cash equivalents	$	52,462		$	31,607
Short-term investments	100,475			105,468
Accounts receivable, net	71,272			34,652
Inventory	11,058			12,686
Prepaid expenses and other current assets	24,884			6,479
Total current assets	260,151			190,892

Property and equipment, net	21,202			5,848
Other assets	39,342			78,334
Goodwill	122,655			59,131
Intangible assets, net	198,318			8,411

	$	641,668		$	342,616


LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	29,882		$	9,639
Accrued expenses and other liabilities	55,810			21,965
Total current liabilities	85,692			31,604

Other long-term liabilities	9,910			—

Stockholders’ equity:
Common stock, $0.001 par value; 105,000,000 shares authorized at September 30, 2003 and 55,000,000 shares authorized at December 31, 2002; 42,114,552 shares issued and outstanding as of September 30, 2003; and 27,395,117 shares issued and outstanding as of December 31, 2002	42			27
Additional paid-in capital	701,720			399,052
Deferred stock-based compensation	(16,849		)	(83		)
Accumulated other comprehensive income (loss)	(297		)	508
Accumulated deficit	(138,550		)	(88,492		)
Total stockholders’ equity	546,066			311,012

	$	641,668		$	342,616

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

ZORAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002

Revenues:
Product revenues	$	64,654		$	43,814		$	143,261		$	105,118
Software and other revenues	2,766			243			6,723			4,023
Total revenues	67,420			44,057			149,984			109,141

Costs and expenses:
Cost of product revenues	40,394			25,349			93,331			64,740
Research and development	12,179			5,880			22,889			16,922
Selling, general and administrative	11,293			6,697			26,031			18,342
Amortization of intangible assets	6,516			2,309			8,403			6,927
Deferred stock compensation	2,426			10			2,446			282
In-process research and development	50,100			—			50,100			—
Total costs and expenses	122,908			40,245			203,200			107,213

Operating income (loss)	(55,488		)	3,812			(53,216		)	1,928

Interest income	1,297			1,684			4,325			5,507
Other income (loss), net	212			(8		)	41			(520		)

Income (loss) before income taxes	(53,979		)	5,488			(48,850		)	6,915

Provision for income taxes	505			781			1,208			1,413

Net income (loss)	$	(54,484	)	$	4,707		$	(50,058	)	$	5,502

Basic net income (loss) per share	$	(1.53	)	$	0.17		$	(1.66	)	$	0.20

Diluted net income (loss) per share	$	(1.53	)	$	0.17		$	(1.66	)	$	0.19

Shares used to compute basic net income (loss) per share	35,718			27,150			30,188			27,018

Shares used to compute diluted net income (loss) per share	35,718			28,089			30,188			28,687

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

ZORAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2003			2002
Cash flows from operating activities:
Net loss	$	(50,058	)	$	5,502
Adjustments to reconcile net loss to net cash provided by operations:
Depreciation, amortization and other	3,642			1,804
Amortization of intangible assets	8,403			6,927
Amortization of deferred stock compensation	2,446			282
In-process research and development	50,100			—
Realized loss on exchange of marketable securities	—			696
Changes in current assets and liabilities:
Accounts receivable	(28,534		)	(970		)
Inventory	5,304			(6,014		)
Prepaid expenses and other current assets and other assets	(1,165		)	(141		)
Accounts payable	12,786			(3,665		)
Accrued expenses and other liabilities	4,614			3,063
Deferred income taxes, deferred revenue and other long-term liabilities	1,055			(65		)
Net cash provided by operating activities	8,593			7,419

Cash flows from investing activities:
Capital expenditures for property and equipment	(6,717		)	(1,308		)
Purchases of investments	(114,909		)	(129,488		)
Proceeds from sales and maturities of investments	163,217			119,587
Acquisition of Oak Technology, Inc., net of cash acquired	(44,404		)	—
Net cash used in investing activities	(2,813		)	(11,209		)

Cash flows from financing activities:
Proceeds from issuance of common stock	17,775			4,181
Installment payment on purchased core technology	(2,700		)	—
Net cash provided by financing activities	15,075			4,181

Net increase in cash and cash equivalents	20,855			391

Cash and cash equivalents at beginning of period	31,607			20,287

Cash and cash equivalents at end of period	$	52,462		$	20,678

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

ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. Basis of Presentation

The accompanying unaudited condensed consolidated financial statements of Zoran Corporation and subsidiaries (“Zoran” or the “Company”) have been prepared in conformity with accounting principles generally accepted in the United States of America. However, certain information or footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to the rules and regulations of the Securities and Exchange Commission (the “Commission”). In the opinion of management, the condensed consolidated financial statements reflect all adjustments considered necessary for a fair presentation of the consolidated financial position, operating results and cash flows for the periods presented. The results of operations for the interim periods presented are not necessarily indicative of the results that may be expected for the full fiscal year or in any future period. This quarterly report on Form 10-Q should be read in conjunction with the audited consolidated financial statements and notes thereto for the year ended December 31, 2002, included in the Zoran Corporation 2002 Annual Report on Form 10-K filed with the Commission.

Reclassifications

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

Recently Issued Accounting Standards

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

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities, an Interpretation of ARB No. 51.” FIN 46 requires certain variable interest entities to be consolidated by the primary beneficiary of the entity if the equity investors in the entity do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective immediately for all new variable interest entities created or acquired after January 31, 2003. For variable interest entities created or acquired prior to February 1, 2003, the provisions of FIN 46 must be applied for the first interim or annual period beginning after June 15, 2003. The adoption of this standard will not have a material impact on the Company's financial statements.

During October 2003, the FASB issued FSP 46-6 which is effective for financial statements issued after October 9, 2003, and provides a broad deferral of the latest date by which all public entities must apply FIN 46 to certain variable interest entities, to the first reporting period ending after December 15, 2003.

2. Stock Based Compensation

Zoran applies Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees,” and related interpretations in accounting for its stock plans. Stock options are generally granted with exercise prices equivalent to fair market value of the underlying common stock on the date of grant, and no compensation cost is recognized. In connection with stock options granted through the acquisition of Nogatech, Inc. during 2000 and Oak Technology, Inc. during 2003, the Company recorded deferred stock-based compensation which is being amortized over the vesting periods of the options. Deferred stock compensation expense recognized as a result of the amortization of these options during the quarter ended September 30, 2003 and the nine-month period ended September 30, 2003 was approximately $2,426,000 and $2,446,000, respectively.

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

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002


Net loss as reported	$	(54,484	)	$	4,707		$	(50,058	)	$	5,502

Adjustments:
Stock-based employee compensation expense included in net loss	2,426			10			2,446			282

Stock-based employee compensation expense determined under the fair value method	(15,692		)	(6,714		)	(28,770		)	(17,899		)

Pro forma net loss	$	(67,750	)	$	(1,997	)	$	(76,382	)	$	(12,115	)


Pro forma net loss per share:
Basic	$	(1.90	)	$	(0.07	)	$	(2.53	)	$	(0.45	)
Diluted	$	(1.90	)	$	(0.07	)	$	(2.53	)	$	(0.45	)

Net income (loss) per share as reported:
Basic	$	(1.53	)	$	0.17		$	(1.66	)	$	0.20
Diluted	$	(1.53	)	$	0.17		$	(1.66	)	$	0.19

For purposes of the disclosure required under SFAS 123, 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 periods.

	Stock Option Plans				Stock Purchase Plan
	Three and nine month periods ended September 30, 2003		Three and nine month periods ended September 30, 2002		Three and nine month periods ended September 30, 2003		Three and nine month periods ended September 30, 2002

Expected life (years)	5.0		5.0		0.50		0.50
Expected volatility	92	%	92	%	92	%	92	%
Risk-free interest rate	3.4	%	4.7	%	2.3	%	2.9	%

The Black-Scholes option pricing model was developed for use in estimating the value of traded options that have no vesting restrictions and are fully transferable. In addition, option pricing models require the input of highly subjective assumptions including the expected stock price volatility. The Company uses projected data for expected volatility and expected life of its stock options based upon historical and other economic data trended into future years. Because the Company’s employee stock options have characteristics significantly different from those of traded options, and because changes in the subjective input assumptions can materially affect the estimate, in management’s opinion, existing valuation models, including the Black-Scholes model, do not necessarily provide a reliable measure of the fair value of the Company’s stock options.

3. Comprehensive Income (Loss)

The following table presents the calculation of comprehensive income (loss) as required by SFAS 130. The components of comprehensive income (loss), net of tax, are as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2003			2002			2003			2002

Net income (loss)	$	(54,484	)	$	4,707		$	(50,058	)	$	5,502
Change in unrealized gain (loss) on investments, net	(589		)	(953		)	(805		)	(2,623		)
Total comprehensive income (loss)	$	(55,073	)	$	3,754		$	(50,863	)	$	2,879

The components of accumulated other comprehensive income (loss) are unrealized gain (loss) on short-term and long-term marketable securities.

4. Inventories

Inventories are stated at the lower of cost (first in, first out) or market and consisted of the following (in thousands):

	September 30, 2003		December 31, 2002

Purchased parts and work in process	$	4,440	$	6,365
Finished goods	6,618		6,321
	$	11,058	$	12,686

5. Goodwill and Other Intangible Assets

The Company adopted Statement of Financial Accounting Standards No. 142, “Goodwill and Other Intangible Assets”, or SFAS 142, as of January 1, 2002. SFAS 142 superseded Accounting Principles Board Opinion No. 17, Intangible Assets, and discontinued the amortization of goodwill. In addition, SFAS 142 includes provisions regarding: 1) the

reclassification between goodwill and identifiable intangible assets in accordance with the new definition of intangible assets set forth in Statement of Financial Accounting Standards No. 141, Business Combinations; 2) the reassessment of the useful lives of existing recognized intangibles; and 3) the testing for impairment of goodwill and other intangibles.

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

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

		September 30, 2003							December 31, 2002
	Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Balance		Gross Carrying Amount		Accumulated Amortization			Net Balance

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

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

Estimated future intangible amortization expense, based on current balances, as of September 30, 2003 is as follows (in thousands):

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

Changes in the carrying amount of goodwill for the nine months ended September 30, 2003 are as follows (in thousands):

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

6. Other Income (Loss)

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

7. Income Taxes

The provision for income taxes reflects the estimated annualized effective tax rate applied to earnings excluding charges for amortization of goodwill and other intangibles for the interim periods. The effective tax rate differs from the U.S. statutory rate due to utilization of net operating losses, adjustments for the nondeductible amortization of goodwill and other intangibles and income tax rate differences on foreign earnings. The Company has provided for tax on income in excess of net operating loss carryforwards for U.S. federal and state earnings. The Company has also provided for tax on its foreign earnings.

8. Acquisition

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

The transaction is accounted for under SFAS No. 141, “Business Combinations,” using the purchase method of accounting and accordingly the results of operations of Oak have been included in the Company’s financial statements since the date of acquisition.

Zoran’s primary objective in acquiring Oak was based on the Company’s belief that the combined company would benefit from the following:

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

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

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

• the opportunity to achieve synergies and realize significant cost savings, including operational efficiencies, such as acceleration of various product development activities by leveraging Oak’s intellectual property, reduced overhead and, in geographic areas where the two companies overlap, increased efficiency in the combined company’s sales channels; and

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

The purchase price exceeded the net assets acquired resulting in the recognition of goodwill and other intangible assets.

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

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

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

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

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

The purchase price allocation was as follows (in thousands):

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

The following table summarizes the estimated fair value of the tangible assets acquired and liabilities assumed at the date of acquisition (in thousands):

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

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

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

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

Approximately $50.1 million of the purchase price was allocated to in-process research and development which had not yet reached technological feasibility and had no alternative future use. Accordingly, this amount was immediately expensed upon the acquisition date. This amount was determined using management’s estimates including consultation with an independent appraiser. The in-process research and development was determined using a discounted cash flow method and factors including projected financial results, relative risk of successful development, time-value of money and level of completion.

The Company expects that the in-process technologies will be successfully completed by the second quarter of calendar 2005 with approximately $30.0 million in remaining costs. At the time of acquisition, Oak had five material development projects in process as follows:

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

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

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

• Generation 9 - an integrated SOC that integrates a previous generation of HDTV digital video technology with a new Audio-DSP Core as well as a MIPS 64 bit processor and certain other video processing features.

• A new lower cost highly integrated HDTV decoder – the first in a family of highly integrated HDTV decoders specifically designed for the FCC mandated digital television chassis market. This device includes all the required interfacing to support digital cable applications and is applicable to existing CRT and flat panel display devices.

The value of in-process research and development was determined using the multi-period excess earnings method by estimating the expected net cash flows from the projects once commercially viable and discounting the net cash flows back to their present value using a discount rate of 22%. This rate was based on the industry segment for the technology, nature of the products to be developed, length of time to complete the project and overall maturity and history of the development team. The net cash flows from the identified projects were based on estimates of revenue, cost of revenue, research and development expenses, selling general and administrative expenses, and applicable income taxes. These estimates did not take into account any potential synergies that could be realized as a result of the acquisition. Revenues for the incremental core technologies developed are expected to commence in the fourth quarter of 2005 and extend through 2011. Revenue projections were based on estimates of market size and growth, expected trends in technology and the expected timing of new product introductions.

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

The following unaudited pro forma financial information presents the combined results of operations of Zoran and Oak as if the acquisition had occurred as of the beginning of fiscal 2002 and 2003, after giving effect to certain adjustments, including amortization of intangibles. The in-process research and development charge of $50.1 million is not reflected in the unaudited pro forma combined condensed statement of operations. The unaudited pro forma financial information does not necessarily reflect the results of operations that would have occurred had the combined companies constituted a single entity during such periods, and is not necessarily indicative of results which may be obtained in the future.

	Three Months Ended September 30,						Nine Months Ended September 30,
In thousands except for per share data:	2003			2002			2003			2002

Pro forma revenues	$	78,677		$	74,266		$	209,113		$	216,394

Pro forma net loss	$	(43,858	)	$	(14,039	)	$	(86,693	)	$	(59,885	)

Pro forma net loss per share:
Basic	$	(1.06	)	$	(0.35	)	$	(2.13	)	$	(1.50	)
Diluted	$	(1.06	)	$	(0.35	)	$	(2.13	)	$	(1.50	)

9. Net Income (Loss) Per Share

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2003			2002		2003			2002

Net income (loss)	$	(54,484	)	$	4,707	$	(50,058	)	$	5,502

Basic common shares	35,718			27,150		30,188			27,018
Effect of dilutive securities:
Common stock options and warrants	—			939		—			1,669
Dilutive weighted average shares	35,718			28,089		30,188			28,687

Net income (loss) per share:
Basic	$	(1.53	)	$	0.17	$	(1.66	)	$	0.20
Diluted	$	(1.53	)	$	0.17	$	(1.66	)	$	0.19

10. Stock Split

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

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

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

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. Prior to the acquisition of Oak Technology, Inc. on August 11, 2003, our products consisted of integrated circuits and related products used in digital versatile disc players, or DVDs, movie and home theater systems, filmless digital cameras and video editing systems. As a result of the acquisition of Oak, we now provide integrated circuits, software and platforms for digital television applications that enable the delivery and display of digital video content through a set top box or television as well as digital imaging products consisting of semiconductor hardware and software that enable users to print, scan, process and transmit documents to computer peripherals that perform printing functions.

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 resellers 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 revenues 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 revenues 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 resellers 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 reseller in Japan. Fujifilm provides more sales and marketing support than our other resellers. 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 substantially 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 a material amount 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 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 2003 and 2020, and the benefits from our subsidiary’s Approved Enterprise status expire at various times beginning in 2003.

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

Recent Developments

On August 11, 2003, we completed our acquisition of Oak through the merger of Oak with a wholly-owned subsidiary of Zoran. The acquisition was accounted for under the purchase method of accounting.

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

Results of Operations

Revenues

Total revenues increased 53% to $67.4 million for the three months ended September 30, 2003 compared to the $44.1 million for the three months ended September 30, 2002. This increase includes $9.9 million of revenues attributable to the inclusion of revenues as a result of the completion of the Oak acquisition. An additional $3.9 million of software license revenues that would have been reported by Oak on a stand alone basis for the period from August 11 through September 30, 2003 were excluded from reported revenues due to purchase accounting rules. Excluding the Oak revenues from August 11, 2003 through September 30, 2003, total revenues from Zoran’s historical operations increased $13.4 million or 30%. For the nine months ended September 30, 2003 and 2002, total revenues were $150.0 million and $109.1 million, respectively, representing an increase of 37%. Excluding the Oak revenue from August 11, 2003 through September 30, 2003, total revenues increased by $30.9 million, or 28%.

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

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

Software and other revenues were $2.8 million and $0.2 million for the three months ended September 30, 2003 and 2002, respectively. The increase included $1.3 million of revenues attributable to the inclusion of Oak operations from August 11 through September 30, 2003, but excludes $3.9 million of software license revenues that would have been reported by Oak on a stand alone basis for the period from August 11 through September 30, 2003 but were excluded from reported revenues due to purchase accounting rules. Without the inclusion of Oak operations, software and other revenues increased by $1.3 million over these comparable periods. For the nine months ended September 30, 2003 and 2002, software and other revenues were $6.7 million and $4.0 million, respectively. The increase excluding the operations of Oak from August 11, 2003 was $1.4 million, or 35%.

Product Gross Margin

Product gross margins were 38% and 35% for the three and nine months ended September 30, 2003, compared to 42% and 38% for the same periods of 2002. Excluding the operations of Oak from August 11 through September 30, 2003, product gross margins were 37% and 34% for the three and nine months ended September 30, 2003. The decreases in product gross margins were due to a number of factors including market driven competition and the erosion of average selling prices for our DVD products which was offset in part by the introduction of new more highly integrated product with higher relative selling prices.

Research and Development

Research and development (“R&D”) expenses were $12.2 million and $22.9 million for the three and nine months ended September 30, 2003, compared to $5.9 million and $16.9 million for the same periods of 2002. Excluding the Oak operations from August 11 to September 30, 2003, R&D expenses were $5.8 and $16.5 million for the three and nine months ended September 30, 2003. Excluding the Oak operations, R&D expenses remained consistent quarter-over-quarter and year-over-year. As a percentage of revenues, R&D expenses, excluding the impact of Oak, were 10% and 12% for the three and nine month periods ended September 30, 2003, compared to 13% and 16% for the same periods of 2002.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses were $11.3 million and $26.0 million for the three and nine months ended September 30, 2003, compared to $6.7 million and $18.3 million for the same periods of 2002. Excluding the impact of Oak from August 11, 2003, SG&A expenses were $8.3 million and $23.1 million for the three and nine months ended September 30, 2003. These increases were principally due to the continued increase in marketing and application expenses to support planned revenue growth in our Asia Pacific markets. As a percentage of revenues, SG&A expenses, excluding the impact of Oak, were 14% and 17% for the three and nine months ended September 30, 2003, compared to 15% and 17% for the comparable periods in the prior year.

Amortization of Intangibles Assets

During the three and nine months ended September 30, 2003, we incurred charges of $6.5 million and $8.4 million, respectively, related to the amortization of intangible assets. This compares to $2.3 million and $6.9 million in amortization of intangible assets for the three and nine months ended September 30, 2002. The increases were primarily due to the addition of approximately $198 million of amortizable intangible assets as a result of the acquisition of Oak during the quarter. These increases also reflect the full amortization by the end of 2002 of the completed technology acquired as part of the Nogatech Inc. acquisition in 2000.

Interest and Other Income

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

Provision for Income Taxes

We have booked a tax rate commensurate with the jurisdictional distribution of profits between the U.S. and Israel and the underlying tax positions as a result of our approved enterprise status in Israel. Management does not currently believe it is more likely than not that sufficient future taxable income will be generated to realize all of our deferred tax assets. Accordingly, a valuation allowance existed against substantially all of the deferred tax assets as of December 31, 2002 and September 30, 2003. No income tax benefit was recognized with respect to operating losses incurred in the third quarter of 2003 or for the nine months ended September 30, 2003.

Liquidity and Capital Resources

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

Our operating activities provided cash of $8.6 million during the nine months ended September 30, 2003, primarily due to our net income of $10.9 million excluding amortization expense, deferred stock compensation and in-process research and development charge. This amount was reduced by the impact associated with an increase of $28.5 million in accounts receivable, an increase of $1.2 million in prepaid expenses and other assets, offset by depreciation expense of $3.6 million, an inrease in accounts payable, accrued expenses and other liabilities of $17.4 million, an increase in deferred income taxes, deferred revenue and long-term liabilities of $1.1 million and a decrease in inventory of $5.3 million.

Cash provided by investing activities was $2.8 million during the nine months ended September 30, 2003. This reflects the net purchases and sales of investments of $48.3 million which was offset by the use of $44.4 million in the acquisition of Oak Technology, net of cash acquired, and purchases of property and equipment of $6.7 million.

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

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

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 the next 12 months. Nonetheless, our future capital requirements may vary materially from those now planned and will depend on many factors including, but not limited to:

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

• the market acceptance of our products;

• unanticipated expenses associated with the recently completed acquisition of Oak;

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

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

• volume pricing concessions;

• capital improvements to new and existing facilities;

• technological advances;

• the response of competitors to our products; and

• 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 additional 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 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.

Future Performance and Risk Factors

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

We are subject to a number of special risks as a result of our recent acquisition of Oak Technology, Inc.

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

• We will face a number of significant challenges in integrating the technologies, operations and personnel of Zoran and Oak in a timely and efficient manner, and our failure to do so effectively could have a material adverse effect on the business and operating results of the combined company.

• We may not achieve the strategic objectives, cost savings and other anticipated potential benefits of the merger, and our failure to achieve these strategic objectives could have a material adverse effect on our revenues, expenses and operating results.

• Transaction costs associated with the merger were included as part of the total purchase cost for accounting purposes. In addition, we incurred charges to operations in the quarter in which the merger was completed. We may incur additional charges in amounts not currently estimable in future quarters, to reflect costs associated with integrating the two companies. These costs could adversely affect our future liquidity and operating results.

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

optical storage business, Oak’s digital imaging and digital television businesses will represent the primary source of revenue from the ongoing Oak operations, and revenues from these emerging businesses are difficult to forecast. As a result, it is not possible to use Oak’s historical financial information to predict its contribution to the future operating results of the combined company.

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

Our historical operating results, and those of Oak, have varied significantly from quarter to quarter due to a number of factors, including:

• fluctuation in demand for their products;

• the timing of new product introductions or enhancements by Zoran, Oak and their competitors;

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

• the timing or cancellation of large customer orders;

• the length and variability of the sales cycle for their products;

• pricing policy changes by Zoran, Oak and their competitors and suppliers;

• the cyclical nature of the semiconductor industry;

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

• changes in the mix of products sold;

• seasonality in demand for their products;

• increased competition in product lines, and competitive pricing pressures; and

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

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

• the cost and availability of adequate foundry capacity;

• fluctuations in manufacturing yields;

• changes in or the emergence of new industry standards;

• failure to anticipate changing customer product requirements;

• the loss or gain of important customers;

• product obsolescence; and

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

The operating results of the combined company could also be harmed by:

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

• acts of terrorism and international conflicts or crises, such as the recent outbreak of Severe Acute Respiratory Syndrome, or SARS;

• other conditions affecting the timing of customer orders;

• changes in governmental regulations that could affect our products; or

• 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 with independent foundries several months in advance of the scheduled delivery date, often in advance of receiving non-cancelable orders from our customers. This limits our ability to react to fluctuations in demand for their products. If anticipated shipments in any quarter are canceled or do not occur as quickly as expected, or if we fail to foresee a technology change that could render a product obsolete, 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.

Product supply and demand fluctuations common to the semiconductor industry are historically characterized by periods of manufacturing capacity shortages immediately followed by periods of overcapacity, which are caused by the addition of manufacturing capacity in large increments. The industry has moved from a period of capacity shortages in 2000 to the current condition of excess capacity. We cannot predict whether we will achieve timely, cost-effective access to that capacity when needed, or if there will be a capacity shortage again in the future.

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

Our customers experience fluctuating product cycles and seasonality, which causes their sales to fluctuate.

Because the markets that 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 the 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 second half of the calendar year represents a disproportionate percentage of sales for our customers due to the holiday shopping period for consumer electronics products, 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.

Our success for the foreseeable future will be dependent on growth in demand for integrated circuits for a limited number of applications.

In recent years, we have derived a substantial majority of our product revenues from the sale of integrated circuits for DVD and digital camera applications. We expect that sales of our products for these applications will continue to account for a significant portion of our revenues for the foreseeable future. As a result of Oak’s recent sale of its optical storage business, the future financial performance of the former Oak operations will depend on our ability to successfully develop and market new products in the digital television, HDTV and digital imaging markets. 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 financial performance is highly dependent on the timely and successful introduction of new and enhanced products.

Our financial performance depends in large part on our ability to successfully develop and market next-generation and new products in a rapidly changing technological environment. If we fail to successfully identify new product opportunities and timely develop and introduce new products that achieve market acceptance, we may lose our market share and our future revenue and earnings may suffer. In recent years, our success has been dependent on our successful development and timely introduction of integrated circuits for DVD players, DVD recorders and digital cameras. These markets are characterized by the incorporation of a steadily increasing level of integration and numbers of features on a chip at the same or lower system cost, enabling original equipment manufacturers, or OEMs, to continually improve the features or reduce the prices of the systems they sell. If we are unable to continually develop and introduce integrated circuits with increasing levels of integration and new features at competitive prices, our operating results will suffer.

In the consumer electronics market, Oak’s performance has been highly dependent upon the successful development and timely introduction of new products and solutions for broadband digital television and HDTV. In the digital office market, Oak’s performance has been dependant on its ability to successfully develop embedded image processing system on a chip, or SOC, solutions for the digital office market, in particular, embedded digital color copier technology and image processing chips for a variety of imaging peripherals, including printers and multi-function peripherals, or MFPs. Among other technological changes, embedded PDF and color capability are rapidly emerging as market requirements for printers and other imaging devices. Some of Oak’s competitors have the capacity to supply these solutions, and some of their solutions have been well received in the marketplace. We face the challenge of continuing Oak’s development of digital television and HDTV solutions as well as developing new imaging products with the capability to handle greater color and image complexity, including web-based documents, and work with higher-performing devices in networked environments. If we are unable to meet these challenges with the development of products that can effectively compete in the OEM software and solutions market, our future operating results could suffer.

We must keep pace with rapid technological changes and evolving industry standards to remain competitive.

Our future success will depend on our ability to anticipate and adapt to changes in technology and industry standards and our customers’ changing demands. The consumer electronics market, in particular, is characterized by rapidly changing technology, evolving industry standards, frequent new product introductions, short product life cycles and increasing demand for higher levels of integration. Our ability to adapt to these changes and to anticipate future standards, and the rate of adoption and acceptance of those standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. If new industry standards emerge, our products or the products of our customers could become unmarketable or obsolete, and we could lose market share or be required to incur substantial unanticipated costs to comply with these new standards.

Our success will also depend on the successful development of new markets and the application and acceptance of new technologies and products in those new markets. For example, our success will depend on the ability of our customers to develop new products and enhance existing products in the recordable DVD player market and products for the broadband digital television and HDTV markets and to introduce and promote those products successfully. These markets may not continue to develop to the extent or in the time periods that we currently anticipate due to factors outside our control, such as delays in implementation of FCC 02-320 requiring all new televisions to include a digital receiver. If new markets do not develop as we anticipate, or if our products do not gain widespread acceptance in these markets, our business, financial condition and results of operations could be materially and adversely affected. 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 this content is not available, manufacturers may not be able to sell products incorporating our products, and our sales would suffer.

We rely on independent foundries and contractors for the manufacture, assembly and testing of our integrated circuits and other hardware products, 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 and our other suppliers are 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:

• the inability to obtain adequate manufacturing capacity;

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

• lack of control over delivery schedules;

• lack of control over quality assurance;

• lack of control over manufacturing yields and cost; and

• potential misappropriation of our intellectual property.

In addition, TSMC and some of our other foundries are located in areas of the world that 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 their 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 a limited number of independent contractors for the assembly and testing of our products. 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 them 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 financial results.

Because foundry capacity is limited from time to time, 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 may in the future need to consider, various arrangements with suppliers, which could include, among others:

• option payments or other prepayments to a foundry;

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

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

• issuance of our equity securities to a foundry;

• investment in a foundry;

• joint ventures; or

• 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.

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.

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

Competition in Zoran’s core 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 and Matsushita. As this market continues to develop, we face competition from other large semiconductor vendors, including:

• ALi Corporation;

• Atmel Corporation;

• Cirrus Logic (Crystal Semiconductor);

• ESS Technology, Inc.;

• Fujitsu;

• LSI Logic;

• MediaTek Inc.;

• Motorola;

• Omnivision Technologies, Inc.;

• Sunplus Technology; and

• Texas Instruments.

The DVD market continues to expand, 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.

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

• ATI Technologies;

• Broadcom;

• Conexant;

• NEC;

• Sigma Designs;

• ST Microelectronics; and

• in-house, captive suppliers.

We expect competition to continue to increase in these markets as industry standards become well known and as other competitors enter these markets.

Oak’s principal competitors in the digital office market include:

• Adobe;

• Agilent;

• Electronics for Imaging, Inc.

• Oasis Semiconductor;

• Peerless Systems Corporation;

• TAK ASIC; and

• in-house, captive suppliers.

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

Many of these existing competitors, as well as OEM customers that are expected to compete with us in the future have substantially greater financial, manufacturing, technical, marketing, distribution and other resources, broader product lines and longer standing relationships with customers than Zoran or Oak. In addition, much of our future success is dependent on the success of our OEM customers. If we or our OEM customers are unable to compete successfully against current and future competitors, we could experience price reductions, order cancellations and reduced gross margins, any one of which could harm our business.

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 will suffer.

Average selling prices for our products decline over relatively short time periods, while many of our manufacturing costs are fixed. When our average selling prices decline, our revenues decline unless we are able to 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 have experienced these problems, and we expect to continue to experience them in the future, although we cannot predict when they may occur or how severe they will be.

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.

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

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

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 processes are 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. Customers generally purchase our products subject to cancelable short-term purchase orders. We cannot predict whether our current customers will continue to place orders, whether existing orders will be canceled, or whether customers who have ordered products will pay invoices for delivered products. When we do enter into a long-term contract, the contract is generally terminable at the convenience of the customer. In the event of an early termination by 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.

Regulation of our customers’ products may slow the process of introducing new products and could impair our ability to compete.

The Federal Communications Commission, or FCC, has broad jurisdiction over our target markets in the digital television business we acquired from Oak. Various international entities or organizations may also regulate aspects of our business or the business of our customers. Although our products are not directly subject to regulation by any agency, the transmission pipes, as well as much of the equipment into which our products are incorporated, are subject to direct government regulation. For example, before they can be sold in the United States, advanced televisions and emerging interactive displays must be tested and certified by Underwriters Laboratories and meet FCC regulations. Accordingly, the effects of regulation on our customers or the industries in which our customers operate may in turn harm our business. FCC regulatory policies affecting the ability of cable operators or telephone companies to offer certain services and other terms on which these companies conduct their business may impede sales of our products. In addition, our digital television business may also be adversely affected by the imposition of tariffs, duties and other import restrictions on our suppliers or by the imposition of export restrictions on products that we sell internationally. Changes in current laws or regulations or the imposition of new laws or regulations in the United States or elsewhere could harm our business. For example, any delays by the FCC in imposing its requirement that all new televisions have a digital receiver could have an adverse effect on our HDTV business.

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 2002, 97% of our total revenues and 89% of Oak’s 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. 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:

• unexpected changes in regulatory requirements;

• fluctuations in exchange rates;

• political and economic instability;

• imposition of tariffs and other barriers and restrictions;

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

• health risks in a particular region.

A material amount of our research and development personnel and facilities and a portion of our sales and marketing 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.

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. This growth may decrease and any slowdown may have a negative effect on our business. During 2000 and 2001, we also opened offices in Taipei, Taiwan, Hong Kong and Seoul, Korea, and our operations are subject to the economic and political uncertainties affecting these countries as well.

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

Our business and future operating results could be harmed by terrorist activity or armed conflict.

Our business and operating results are subject to uncertainties arising out of possible terrorist attacks on the United States and other regions of the world including locations where we maintain operations and by armed conflict in the Middle East and related economic instability. Our operations could be harmed due to:

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

• reduced demand for consumer electronic products due to a potential extension of the global economic slowdown;

• tightened immigration controls that may adversely affect the residence status of key non-U.S. managers and technical employees in our U.S. facilities or our ability to hire new non-U.S. employees in such facilities; or

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

The recent outbreak of SARS may adversely affect our business.

The recent outbreak of severe acute respiratory syndrome, or SARS, in a number of Asian countries could have a negative effect on our manufacturing production capabilities, on our ability to effectively market and sell our products due to SARS-related travel restrictions and on the general financial markets and business activity in Asia. The SARS outbreak has been significantly focused on Asia, where many of our current and prospective customers are located. In addition, most of our manufacturing activities are carried out by third party foundries in Taiwan and Singapore. Should the SARS illness spread to new regions in Asia or elsewhere or intensify in severity in areas already affected, causing reduced demand by current and prospective customers or disrupting the manufacture of those companies’ products, our operating results could be harmed.

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.

Our success and ability to compete depend in large part upon protection of our proprietary technology. We rely on a combination of patent, trade secret, copyright and trademark laws, non-disclosure and other contractual agreements and technical measures 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 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.

The protection offered by patents is subject to numerous uncertainties. For example, our competitors may be able to effectively design around our patents, or the patents may be challenged, invalidated or circumvented. Those competitors may also independently develop technologies that are substantially equivalent or superior to our technology. Moreover, while we hold, or have applied for, patents relating to the design of our products, some of our products are based in part on standards, for which we do not hold patents or other intellectual property rights.

Oak has generally limited access to and distribution of the source and object code of its software and other proprietary information. With respect to its page description language software and drivers for the digital office market and in limited circumstances with respect to firmware and platforms for its HDTV products, Oak has granted licenses that give its customers access to and restricted use of the source code of Oak’s software. This access increases the likelihood of misappropriation or misuse of our technology.

Oak is a defendant in several lawsuits.

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

We could become subject to claims and litigation regarding intellectual property rights, which could seriously harm its business and require it 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, Zoran and Oak have been subject to claims and litigation regarding alleged infringement of other parties’ intellectual property rights, and Oak is currently a party to a number of patent-related lawsuits. We could become subject to additional 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 or 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:

• stop selling products that incorporate the challenged intellectual property;

• 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;

• pay damages; or

• redesign those products that use such technology.

Although patent disputes in the semiconductor industry have often been settled through cross-licensing arrangements, we may not be able in any or every instance, to settle an alleged patent infringement claim through a cross-licensing arrangement. We have a more limited patent portfolio than many of our competitors. If a successful claim is made against us or any of our customers and a license is not made available to us on commercially reasonable terms or we are required to pay substantial damages or awards, our business, financial condition and results of operations would be materially adversely affected.

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 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.

Certain technology used in our products is licensed from third parties, and in connection with these licenses, we are required to fulfill confidentiality obligations and, in some cases, pay royalties. Some of our products require various types of copy protection software that we must license from third parties. If we are unable to obtain or maintain our right to use the necessary copy protection software, we would be unable to sell and market these 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, or NOLs, against taxable income in future periods. Our NOLs totaled approximately $34.0 million for federal and $4.0 million for state tax reporting purposes as of December 31, 2002. Oak’s NOLs totaled approximately $212.0 million for federal and $60.0 million for state tax reporting purposes as of December 31, 2002. As a result of the change of control resulting from Zoran’s initial public offering in 1995, the amount of NOLs that Zoran can use to reduce future taxable income for federal tax purposes is limited to approximately $3.0 million per year. The Internal Revenue Code contains a number of provisions that could limit the use of NOLs against income of the combined company as a result of the merger or as a result of the combination of these transactions. Our utilization of Oak’s NOLs may be further limited due to prior Oak transactions. No opinion or IRS ruling has been sought regarding the potential application of any of these provisions. Changes in tax laws in the United States may further limit our ability to utilize these NOLs. Any further limitation on our ability to utilize these respective NOLs could harm our financial condition.

Any additional acquisitions we make could disrupt our business and severely harm our financial condition.

We have made investments in, and acquisitions of, other complementary companies, products and technologies. We have recently completed the acquisition of Oak. 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:

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

• incur debt;

• assume liabilities;

• incur expenses related to the future impairment of goodwill and the amortization of other intangible assets; or

• incur other large write-offs immediately or in the future.

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

• problems combining the purchased operations, technologies or products;

• unanticipated costs;

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

• adverse effects on existing business relationships with customers;

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

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

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

In addition, we have made minority equity investments in early-stage companies, and we expect to continue to review opportunities to make additional investments in such companies where we believe such investments will provide us with opportunities to gain access to important technologies or otherwise enhance important commercial relationships. We have little or no influence over the early-stage companies in which we have made or may make strategic, minority equity investments. Each of these investments involves a high degree of risk. We may not be successful in achieving the technological or commercial advantage upon which any given investment is premised, and failure by the early-stage company to achieve its own business objectives could result in a loss of all or part of our invested capital and require us to write off all or a portion of such investment.

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 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 customers or could damage market acceptance of such 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 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 if 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 2003. Our capital requirements will depend on many factors, including:

• acceptance of and demand for our products;

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

• 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 growth successfully will also require us to expand and improve administrative, operational, management and financial systems and controls. Many of our key operations, including a material portion of our 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 manage growth effectively. If we are unable to manage growth effectively, our business will 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. Management and other employees may voluntarily terminate their employment with us at any time upon short notice. The loss of key personnel could delay product development cycles or otherwise harm our business. 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, located in the United States, Israel and China. 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 United States 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 United States dollar, which will increase our costs as expressed in United States 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 United States dollar against the new Israeli shekel. These measures may not adequately protect us from the impact of inflation in Israel.

The government programs in which we participate 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.

Historically, we have financed a portion of our research and development activities with grants for research and development from the Chief Scientist in Israel’s Ministry of Industry and Trade. Although we did not receive proceeds from such grants in 2001 or 2002, we did receive such proceeds in the first and second quarters of 2003, and we plan to seek additional grants from the Chief Scientist in the future. 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 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.

Provisions in our charter documents and Delaware law could prevent or delay a change in control of Zoran.

Our certificate of incorporation and 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 prohibitions:

• 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;

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

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

• 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 September 30, 2002 and September 30, 2003, the closing sale price of our common stock, as reported on The NASDAQ National Market, ranged from a low of $9.11 to a high of $27.28. The market price of our common stock is subject to significant fluctuations in the future in response to a variety of factors, including:

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

• quarterly variations in operating results;

• changes in analysts’ earnings estimates;

• announcements of technological innovations;

• the introduction of new products or changes in product pricing policies by Zoran or its competitors;

• loss of key personnel;

• proprietary rights or other litigation;

• general conditions in the semiconductor industry; and

• 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.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

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 September 30, 2003, a near-term 10% appreciation or depreciation of the New Israeli Shekel would have an immaterial affect on our financial condition.

Item 4. Controls and Procedures

Under the supervision and with the participation of our management, including our Chief Executive Officer and our Chief Financial Officer, we evaluated the effectiveness of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

There has been no change in our internal control over financial reporting during the quarter ended September 30, 2003 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

PART II. OTHER INFORMATION

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

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

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

The following additional items were voted upon at the meeting:

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

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

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

4. A proposal to ratify the appointment of PricewaterhouseCoopers LLP as our independent accountants for the fiscal year ending December 31, 2003 was approved by a vote of 23,943,672 shares for; 935,056 shares against; and 56,340 shares abstaining.

Item 6. Exhibits and Reports on Form 8-K

(a) Exhibits:

3.3		Certificate of Amendment of Restated Certificate of Incorporation.
10.42		Sublease dated June 18, 2001 between Yahoo! Inc. and Oak Technology, Inc.
10.43		Amended and Restated 1995 Employee Stock Purchase Plan.
10.44		Oak Technology, Inc. 1994 Stock Option Plan (as amended and restated). (1)
10.45		Oak Technology, Inc. 1994 Outside Directors’ Stock Option Plan - (As Amended and Restated November 21, 2002) (2)
10.46		Form of Oak Technology, Inc. Outside Directors’ Non-Qualified Stock Option Agreement for the 1994 Stock Option Plan and 1994 Outside Director's Stock Option Plan entered into by David Rynne and Peter Simone.
10.47		Asset purchase agreement between Oak Technology, Inc, and Sunplus Technology, Co. LTC. dated April 3, 2003. (3)
31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1		Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.
32.2		Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.

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

(b) Reports on Form 8-K:

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

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

SIGNATURES

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

			ZORAN CORPORATION



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

Positive
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Legalese
Litigous
Readability	8th grade Good

Zoran (ZRAN) Inactive 10-Q2003 Q3 Quarterly report

Content analysis

We are subject to a number of special risks as a result of our recent acquisition of Oak Technology, Inc.

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

Our customers experience fluctuating product cycles and seasonality, which causes their sales to fluctuate.

Product supply and demand in the semiconductor industry is subject to cyclical variations.

Our success for the foreseeable future will be dependent on growth in demand for integrated circuits for a limited number of applications.

Our financial performance is highly dependent on the timely and successful introduction of new and enhanced products.

We must keep pace with rapid technological changes and evolving industry standards to remain competitive.

Because foundry capacity is limited from time to time, we may be required to enter into costly long-term supply arrangements to secure foundry capacity.

If our independent foundries do not achieve satisfactory yields, our relationships with our customers may be harmed.

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.

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 will suffer.

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 products generally have long sales cycles and implementation periods, which increases our costs in obtaining orders and reduces the predictability of our operating results.

We are not protected by long-term contracts with our customers.

Regulation of our customers’ products may slow the process of introducing new products and could impair our ability to compete.

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.

Our business and future operating results could be harmed by terrorist activity or armed conflict.

The recent outbreak of SARS may adversely affect our business.

The prices of our products may become less competitive due to foreign exchange fluctuations.

Our ability to compete could be jeopardized if we are unable to protect our intellectual property rights.

Oak is a defendant in several lawsuits.

We could become subject to claims and litigation regarding intellectual property rights, which could seriously harm its business and require it to incur significant costs.

If necessary licenses of third-party technology are not available to us or are very expensive, our products could become obsolete.

If we are not able to apply our net operating losses against taxable income in future periods, our financial results will be harmed.

Any additional acquisitions we make could disrupt our business and severely harm our financial condition.

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

If we do not maintain current development contracts or are unable to enter into new development contracts, our business could 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.

If we fail to manage our future growth, if any, 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.

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

The government programs in which we participate 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.

Provisions in our charter documents and Delaware law could prevent or delay a change in control of Zoran.

Our stock price has fluctuated and may continue to fluctuate widely.