Zoran (ZRAN) 10-Q 2004 Q3 Quarterly report

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

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

For the Quarterly Period Ended September 30, 2004

OR

oTRANSITION 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 5, 2004, there were outstanding 43,160,155 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, 2004

PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited):
	Condensed Consolidated Balance Sheets as of September 30, 2004 and December 31, 2003
	Condensed Consolidated Statements of Operations for the Three Months and Nine Months Ended September 30, 2004 and 2003
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2004 and 2003
	Notes to Condensed Consolidated Financial Statements
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations
Item 3.	Quantitative and Qualitative Disclosures About Market Risk
Item 4.	Controls and Procedures
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings
Item 6.	Exhibits
Signatures

ZORAN CORPORATION

CONDENSED CONSOLIDATED BALANCE SHEETS

(in thousands, except share data)

(unaudited)

	September 30, 2004			December 31, 2003
ASSETS
Current assets:
Cash and cash equivalents	$	41,640		$	47,994
Short-term investments	31,763			78,372
Accounts receivable, net	83,729			65,224
Inventories	62,340			16,805
Prepaid expenses and other current assets	12,282			12,151
Total current assets	231,754			220,546
Property and equipment, net	19,650			20,029
Other assets and investments	81,665			69,311
Goodwill	150,151			119,091
Intangible assets, net	180,657			188,885
	$	663,877		$	617,862
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	71,355		$	29,038
Accrued expenses and other liabilities	57,673			45,182
Total current liabilities	129,028			74,220
Long-term liabilities	7,690			9,363
Stockholders’ equity:
Common stock, $0.001 par value; 105,000,000 shares authorized at September 30, 2004 and December 31, 2003; 42,902,278 shares issued and outstanding as of September 30, 2004; and 42,347,584 shares issued and outstanding as of December 31, 2003	43			42
Additional paid-in capital	709,556			703,812
Deferred stock-based compensation	(6,576		)	(13,014		)
Accumulated other comprehensive income (loss)	959			(91		)
Accumulated deficit	(176,823		)	(156,470		)
Total stockholders’ equity	527,159			534,279
	$	663,877		$	617,862

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

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ZORAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(in thousands, except per share data)

(unaudited)

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Revenues:
Hardware product revenues	$	99,427		$	64,654		$	257,137		$	143,261
Software and other revenues	20,320			2,766			46,963			6,723
Total revenues	119,747			67,420			304,100			149,984
Costs and expenses:
Cost of hardware product revenues	66,557			40,394			170,723			93,331
Research and development	21,620			12,179			61,402			22,889
Selling, general and administrative	18,819			11,293			50,121			26,031
Amortization of intangible assets	12,342			6,516			33,028			8,403
Deferred stock compensation	1,790			2,426			6,438			2,446
In-process research and development	—			50,100			—			50,100
Total costs and expenses	121,128			122,908			321,712			203,200
Operating loss	(1,381		)	(55,488		)	(17,612		)	(53,216		)
Interest income	14			1,297			797			4,325
Other income (loss), net	(279		)	212			(165		)	41
Loss before income taxes	(1,646		)	(53,979		)	(16,980		)	(48,850		)
Provision for income taxes	1,873			505			3,373			1,208
Net loss	$	(3,519	)	$	(54,484	)	$	(20,353	)	$	(50,058	)
Basic net loss per share	$	(0.08	)	$	(1.53	)	$	(0.48	)	$	(1.66	)
Diluted net loss per share	$	(0.08	)	$	(1.53	)	$	(0.48	)	$	(1.66	)
Shares used to compute basic net loss per share	42,969			35,718			42,688			30,188
Shares used to compute diluted net loss per share	42,969			35,718			42,688			30,188

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

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ZORAN CORPORATION

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(unaudited)

	Nine Months Ended September 30,
	2004			2003
Cash flows from operating activities:
Net loss	$	(20,353	)	$	(50,058	)
Adjustments to reconcile net loss to net cash provided by operations:
Depreciation, amortization and other	7,660			3,642
Amortization of intangible assets	33,028			8,403
Amortization of deferred stock compensation	6,438			2,446
In-process research and development	—			50,100
Changes in current assets and liabilities:
Accounts receivable	(18,503		)	(28,534		)
Inventory	(44,649		)	5,304
Prepaid expenses and other current assets and other assets and investments	(3,525		)	(1,165		)
Accounts payable	41,933			12,786
Accrued expenses and other liabilities and long-term liabilities	7,236			5,669
Net cash provided by operating activities	9,265			8,593
Cash flows from investing activities:
Capital expenditures for property and equipment	(7,208		)	(6,717		)
Purchases of investments	(132,835		)	(114,909		)
Proceeds from sales and maturities of investments	172,840			163,217
Acquisition of Oak Technology, Inc., net of cash acquired	—			(44,404		)
Acquisition of Emblaze Semiconductor, net of cash acquired	(54,161		)	—
Net cash used in investing activities	(21,364		)	(2,813		)
Cash flows from financing activities:
Proceeds from issuance of common stock	5,745			17,775
Installment payment on purchased core technology	—			(2,700		)
Net cash provided by financing activities	5,745			15,075
Net increase (decrease) in cash and cash equivalents	(6,354		)	20,855
Cash and cash equivalents at beginning of period	47,994			31,607
Cash and cash equivalents at end of period	$	41,640		$	52,462

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

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ZORAN CORPORATION

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1.Basis of Presentation

The accompanying unaudited condensed consolidated financial 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, consisting only of normally occurring adjustments, 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, 2003, included in the Zoran Corporation 2003 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.

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 period of the options.  Amortization of deferred stock compensation expense recognized as a result of the amortization of these options during the quarter ended September 30, 2004 and 2003 was approximately $1,790,000 and $2,426,000, respectively.  Deferred stock compensation expense of these options for the nine months ended September 30, 2004 and 2003 was approximately $6,438,000 and $2,446,000, respectively.

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Had compensation cost for the Company’s option and stock purchase plans been determined based on the fair value of the options at the grant date, as prescribed in Statement of Financial Accounting Standards No. 123 “Accounting for Stock Based Compensation” (“SFAS 123”), the Company’s net loss and net loss per share for the three month and nine month periods ended September 30, 2004 and 2003 would have been as follows (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Net loss attributable to common stockholders, as reported	$	(3,519	)	$	(54,484	)	$	(20,353	)	$	(50,058	)
Add:
Employee stock-based compensation expense included in net loss, net of tax	1,790			2,426			6,438			2,446
Total employee stock-based compensation expense determined under the fair value method, net of tax	(10,371		)	(15,692		)	(33,735		)	(28,770		)
Pro forma net loss attributable to common stockholders	$	(12,100	)	$	(67,750	)	$	(47,650	)	$	(76,382	)
Pro forma net loss per share attributable to common stockholders:
Basic	$	(0.28	)	$	(1.90	)	$	(1.12	)	$	(2.53	)
Diluted	$	(0.28	)	$	(1.90	)	$	(1.12	)	$	(2.53	)
Net loss per share as reported attributable to common stockholders:
Basic	$	(0.08	)	$	(1.53	)	$	(0.48	)	$	(1.66	)
Diluted	$	(0.08	)	$	(1.53	)	$	(0.48	)	$	(1.66	)

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 option pricing model with the following assumptions used for options and purchase grants during the applicable periods.

	Stock Option Plans
	Three Months Ended September 30, 2004		Three Months Ended September 30, 2003		Nine Months Ended September 30, 2004		Nine Months Ended September 30, 2003
Expected life (years)	5.2		5.0		5.2		5.0
Expected volatility	81	%	92	%	83	%	92	%
Risk-free interest rate	3.5	%	3.4	%	3.4	%	3.4	%

	Employee Stock Purchase Plans
	Three Months Ended September 30, 2004		Three Months Ended September 30, 2003		Nine Months Ended September 30, 2004		Nine Months Ended September 30, 2003
Expected life (years)	0.5		0.5		0.5		0.5
Expected volatility	64	%	92	%	75	%	92	%
Risk-free interest rate	1.8	%	2.3	%	1.4	%	2.3	%

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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 Loss

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

	Three Months Ended September 30,								Nine Months Ended September 30,
	2004				2003				2004				2003
Net loss	$	(3,519		)	$	(54,484		)	$	(20,353		)	$		(50,058	)
Change in unrealized gain (loss) on investments, net of tax	265				(589			)	1,050				(805			)
Total comprehensive loss	$		(3,254	)	$		(55,073	)	$		(19,303	)	$	(50,863		)

The components of accumulated other comprehensive 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, 2004		December 31, 2003
Purchased parts and work in process	$	31,192	$	5,701
Finished goods	31,148		11,104
	$	62,340	$	16,805

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. In accordance with SFAS 142, goodwill is not amortized, but is required to be reviewed periodically for impairment on at least an annual basis.  The Company performed the annual analysis as of September 30, 2004 and concluded that goodwill was not impaired, as the fair value of each reporting unit exceeded its carrying value, including goodwill.

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Components of Acquired Intangible Assets (in thousands):

		September 30, 2004							December 31, 2003
	Life	Gross Carrying Amount		Accumulated Amortization			Net Balance		Gross Carrying Amount		Accumulated Amortization				Net Balance
	(Years)
Amortized intangible assets:
Purchased technology	2-3	$	188,505	$	(57,826	)	$	130,679	$	176,720	$		(31,792	)	$	144,928
Patents	3-5	40,265		(8,076		)	32,189		27,900		(2,996			)	24,904
Customer base	3-5	13,010		(4,166		)	8,844		13,010		(2,450			)	10,560
Tradename and others	3-5	2,100		(1,096		)	1,004		2,100		(900			)	1,200
Purchased core technology *	4-5	10,035		(2,094		)	7,941		8,799		(1,506			)	7,293
Total		$	253,915	$	(73,258	)	$	180,657	$	228,529	$	(39,644		)	$		188,885

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

Estimated future intangible amortization expense, based on current balances, as of September 30, 2004 is as follows (in thousands):

	Amount
Remaining three months of 2004	$		12,965
Year ending December 31, 2005	52,081
Year ending December 31, 2006	50,316
Year ending December 31, 2007	42,866
Year ending December 31, 2008	22,429
Total	$	180,657

Changes in the carrying amount of goodwill for the nine months ended September 30, 2004 were as follows (in thousands):

	Amount
Balance at December 31, 2003	$	119,091
Adjustment to goodwill related to acquisition of Oak.	181
Acquisition of Emblaze Semiconductor	30,879
Balance at September 30, 2004	$	150,151

Goodwill by reporting unit at September 30, 2004 and December 31, 2003 was as follows:

	September 30, 2004		December 31, 2003
DVD	$	63,855	$	63,855
Imaging	6,177		5,996
Mobile	62,131		31,252
DTV	17,988		17,988
	$	150,151	$	119,091

6.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

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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.

7.Segment Reporting

SFAS No. 131 establishes standards for the reporting by public business enterprises of information about operating segments, products and services, geographic areas, and major customers. The method for determining what information to report is based on the way that management organizes the operating segments within the Company for making operational decisions and assessments of financial performance. The Company’s chief operating decision-maker is considered to be the Chief Executive Officer (“CEO”).

Subsequent to the acquisition of Oak Technology, Inc. in 2003, the Company determined it has four reportable segments: Digital Versatile Disc (DVD), Imaging, Digital Camera (DC) and Digital Television (DTV).  Subsequent to the Emblaze acquisition in July 2004, the Digital Camera group was combined with the Emblaze Mobile segment and was renamed the Mobile group.  Each segment’s primary products are based on highly integrated application-specific integrated circuits, or ASICs, and system-on-a-chip, or SOC, solutions.  The DVD segment and Imaging segment also license certain software and other intellectual property.  The DVD group provides products for use in DVD players and recordable DVD players.  The Imaging group provides products used in digital copiers, laser and inkjet printers as well as multifunction peripherals. The Mobile group focuses on solutions for multimedia mobile phone products, digital camera products as well as CMOS sensors.  The DTV group provides products for standard and high definition digital television products including televisions, set top boxes and personal video recorders.

The Company evaluates operating segment performance based on net revenues and operating expenses of these segments. The accounting policies of the operating segments are the same as those described in the summary of accounting policies. No reportable segments have been aggregated.

Information about reported segment income or loss is as follows for the three months and nine months ended September 30, 2004 and 2003 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Total revenues:
DVD	$	77,284		$	48,341		$	191,660		$	117,935
Imaging	23,841			3,548			63,723			3,548
Mobile	10,420			9,130			25,559			22,084
DTV	8,202			6,401			23,158			6,417
	$	119,747		$	67,420		$	304,100		$	149,984
Operating expenses:
DVD	$	67,704		$	41,622		$	176,976		$	104,257
Imaging	13,831			6,761			37,672			6,761
Mobile	12,521			6,766			28,438			20,357
DTV	12,940			8,717			39,160			10,876
	$	106,996		$	63,866		$	282,246		$	142,251
Contribution margin:
DVD	$	9,580		$	6,719		$	14,684		$	13,678
Imaging	10,010			(3,213		)	26,051			(3,213		)
Mobile	(2,101		)	2,364			(2,879		)	1,727
DTV	(4,738		)	(2,316		)	(16,002		)	(4,459		)
	$	12,751		$	3,554		$	21,854		$	7,733

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A reconciliation of the totals reported for the operating segments to the applicable line items in the consolidated financial statements for the three months and nine months ended September 30, 2004 and 2003 is as follows (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2004			2003			2004			2003
Contribution margin from operating segments	$	12,751		$	3,554		$	21,854		$	7,733
Amortization of intangible assets	12,342			6,516			33,028			8,403
Amortization of deferred stock compensation	1,790			2,426			6,438			2,446
In-process research and development	—			50,100			—			50,100
Total operating loss	$	(1,381	)	$	(55,488	)	$	(17,612	)	$	(53,216	)

Zoran maintains operations in the United States, Canada, China, Germany, Israel, Japan, Korea, Taiwan and the United Kingdom. Activities in the United States and Israel consist of corporate administration, product development, logistics and worldwide sales management. Other foreign operations consist of product development, technical support and sales support.

The distribution of total revenues for the three months and nine months ended September 30, 2004 and 2003 was as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2004		2003		2004			2003
Revenue from unaffiliated customers originating in:
China	$	49,471	$	24,157	$		115,711	$	54,534
Japan	31,180		17,021		83,544			34,856
Taiwan	9,006		7,943		31,219			18,433
Korea	5,503		9,976		27,412			28,552
North America	10,874		6,307		25,436			9,367
Other	13,713		2,016		20,778			4,242
	$	119,747	$	67,420	$	304,100		$	149,984

For the three months ended September 30, 2004, one customer accounted for 10% of total revenues.  For the same period of 2003, two customers accounted for 16% and 13% of total revenues, respectively.  For the nine months ended September 30, 2004, no customer accounted for more than 10% of total revenues.  For the same period of 2003, two customers accounted for 18% and 17% of total revenues, respectively.

As of September 30, 2004, one customer accounted for 11% of total net accounts receivable, and as of December 31, 2003, two customers accounted for 14% and 10% of total net accounts receivable, respectively.

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8.Acquisitions

Emblaze Semiconductor Ltd.

On July 8, 2004, Zoran acquired Emblaze Semiconductor Ltd. (“Emblaze”), a subsidiary of Emblaze Ltd. and a provider of semiconductor-based solutions for high volume multimedia mobile phones.  Under the terms of the agreement, Zoran’s wholly-owned Israel based subsidiary, Zoran Microelectronics Ltd., acquired all of the outstanding common shares of Emblaze for approximately $54.2 million in cash.

The primary purpose of this acquisition was to gain high performance, low-power application processors, technology and products for the fast growing multimedia mobile phone market.  This technology will be combined with Zoran’s image processing technology to deliver reliable, cost-effective system solutions for mobile phone makers.

The transaction was accounted for under SFAS No. 141, “Business Combinations,” using the purchase method of accounting.  We incurred approximately $180,000 for acquisition-related expenses resulting from financial advisory, legal and other consulting services.  The Company completed a valuation analysis and purchase price allocation with the assistance of a third party appraiser.  The results of operations of Embaze have been included in the results of Zoran’s consolidated financial statements from the date of acquisition.  The historical operations of Emblaze are not material to the financial position or results of operations of the Company; therefore, no pro forma information is presented.  The acquisition resulted in goodwill of approximately $30.9 million.  In accordance with SFAS 142, goodwill will not be amortized and will be tested for impairment at least annually.

Allocation of the purchase price is as follows (in thousands):

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

The amounts allocated to intangible assets include developed technology totaling $11.8 million and patents totaling $12.4 million which are being amortized over their useful lives of three years.

Oak Technology, Inc.

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 was 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 and digital imaging 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;

•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; and

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•Oak’s existing market position as a leading supplier of Digital Imaging related integrated circuit and software products.

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

The financial statements reflect a 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 using the multiple option approach.

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	$		65,644
Deferred stock compensation	19,212
In-process research and development	50,100
Intangible assets	197,650
Goodwill	60,141
	$	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	$	71,325
Accounts receivable	8,086
Other current assets	17,090
Inventory	3,676
Property, plant and equipment	13,075
Other assets	816
Current liabilities	(38,196		)
Non-current liabilities	(10,228		)
Net assets acquired	$	65,644

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 five years with no residual values.

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During the period August 11, 2003 through March 31, 2004, we revised estimates related to certain assets and liabilities, and as a result, we decreased the purchase price and goodwill by $3.4 million.

Approximately $60.0 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 value of 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 $5.4 million in remaining costs as of September 30, 2004.  At the time of acquisition, Oak had five material development projects in process as follows:

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

•Quatro 4230—a programmable SOC solution that will complement the Quatro-4110 and Quatro-4100 in the inkjet market. Quatro 4230 will provide a fully scalable solution platform to cover much of the performance and feature range of an OEM’s laser 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, 2004, 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.

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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 2003 and 2002, 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.

	Year Ended December 31,
	2003			2002
In thousands except for per share data:
Pro forma revenues	$	275,658		$	284,770
Pro forma net loss	$	(73,247	)	$	(83,628	)
Pro forma net loss per share:
Basic	$	(1.77	)	$	(2.08	)
Diluted	$	(1.77	)	$	(2.08	)

9.Net Loss Per Share

Basic and diluted net 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 loss per share computations (in thousands, except per share data):

	Three Months Ended September 30,								Nine Months Ended September 30,
	2004					2003			2004			2003
Net loss from continuing operations	$			(3,519	)	$	(54,484	)	$	(20,353	)	$	(50,058	)
Basic common shares	42,969					35,718			42,688			30,188
Effect of dilutive securities:
Common stock options	—					—			—			—
Dilutive weighted average shares	42,969					35,718			42,688			30,188
Net loss per share:
Basic	$		(0.08		)	$	(1.53	)	$	(0.48	)	$	(1.66	)
Diluted	$	(0.08			)	$	(1.53	)	$	(0.48	)	$	(1.66	)

Options to purchase 7,613,000 shares and 2,376,000 shares of common stock were excluded from the computation of diluted net loss per share for the three months ended September 30, 2004 and 2003, respectively, as these shares would have had an anti-dilutive effect.

Options to purchase 5,202,000 shares and 2,388,000 shares of common stock were excluded from the computation of diluted net loss per share for the nine months ended September 30, 2004 and 2003, respectively, as these shares would have had an anti-dilutive effect.

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

This report includes a number of forward-looking statements which reflect the Company’s current views with respect to future events and financial performance. These forward-looking statements are subject to certain risks and uncertainties, including those discussed below under the heading “Future Performance and Risk Factors” and in “Item 7—Management’s Discussion and Analysis of Financial Condition and Results of Operations—Future Performance and Risk Factors” included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2003. In this report, the words “anticipates,” “believes,” “expects,” “intends,” “future” and similar expressions identify forward-looking statements. Readers are cautioned not to place undue reliance on these forward-looking statements, which speak only as of the date hereof.

Overview

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, digital cameras and video editing systems.  As a result of the acquisition of Oak, we now also 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.  Subsequent to the Emblaze acquisition on July 8, 2004, we now also provide high performance, low-power application processors, technology and products for the multimedia mobile phone market.

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 periodically 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 hardware 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 hardware product revenues to offset anticipated decreases in average selling prices, our product gross margins will decrease. Our hardware product gross margin is also dependent on product mix and on the proportion of products sold directly to our OEM customers versus indirectly through our marketing partners.  These marketing partners 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. As a result, lower gross margins on sales to these resellers are partially offset by reduced selling and marketing expenses related to such sales.  Our DVD hardware product sales in Japan are primarily made through Fujifilm, our strategic partner and reseller in Japan.  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. Quarterly licensing revenue can be significantly affected by the timing of a small number of licensing transactions, each accounting for substantial revenues. Accordingly, licensing revenues have fluctuated, and will continue to fluctuate, on a quarterly basis. In addition, we have historically generated a portion 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.

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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 Israel based subsidiary.  As a result, some of our expenses are incurred in New Israeli Shekels. To date, substantially all of our hardware product revenues and our software and other revenues have been denominated in U.S. dollars and most costs of hardware product revenues have been incurred in U.S. dollars. We expect that most of our revenues and costs of revenue 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 Israel based 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 2004 and 2020, and the benefits from our subsidiary’s Approved Enterprise status expire at various times beginning in 2004.

Statement Regarding Use of Non-GAAP Financial Measures

To supplement the consolidated financial results prepared under generally accepted accounting principles (“GAAP”) we include non-GAAP financial measures in our Management’s Discussion and Analysis, our quarterly press releases regarding operating results and our presentations to investors.  These non-GAAP financial measures consist of GAAP financial measures adjusted to include or exclude certain revenues, costs, expenses and gains associated with acquisitions.  The purpose of such adjustment is to give an indication of our baseline performance before gains, losses or other charges that are considered by management to be outside of our core operating results.  In some instances, we use financial measures that exclude the effects of the Oak acquisition to provide a meaningful comparison of results in periods occurring before and after that acquisition.  Management uses these non-GAAP measures as a basis for planning and forecasting future periods.  These non-GAAP measures may differ materially from the non-GAAP measures used by other companies and should not be regarded as a replacement for corresponding GAAP measures.

Acquisitions

Emblaze Semiconductor Ltd.

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

Following the completion of the acquisition, the results of operations of Emblaze have been included in our consolidated financial statements.  Accordingly, our results of operations for the three month and nine month periods ended September 30, 2004 each include Emblaze’s operations from July 8, 2004, while our results of operations for the three month and nine month periods ended September 30, 2003 reflect only Zoran’s historical operations.  The historical operations of Emblaze are not material to the financial position or results of operations of the Company.

Oak Technology, Inc.

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 month and nine month periods ended September 30, 2004 each include Oak’s operations for the full period, while our results of operations for the three month and nine month periods ended September 30, 2003 only reflect Oak’s results of operations between August 12, 2003 and September 30, 2003.

Subsequent to the acquisition of Oak Technology, Inc. in 2003, we determined that Zoran has four reportable segments: Digital Versatile Disc (DVD), Imaging, Digital Camera (DC) and Digital Television (DTV).  Subsequent to the Emblaze acquisition in July 2004, the Digital Camera group was combined with the Emblaze Mobile segment and was renamed the Mobile group.  Each

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segment’s primary products are based on highly integrated application-specific integrated circuits, or ASICs, and system-on-a-chip, or SOC, solutions.  The DVD segment and Imaging segment also license certain software and other intellectual property.  The DVD group provides products for use in DVD players and recordable DVD players.  The Imaging group provides products used in digital copiers, laser and inkjet printers as well as multifunction peripherals. The Mobile group focuses on solutions for multimedia mobile phone products, digital camera products as well as CMOS sensors.  The DTV group provides products for standard and high definition digital television products including televisions, set top boxes and personal video recorders.

Results of Operations

Revenues

Total revenues were $119.7 million and $304.1 million for the three and nine month periods ended September 30, 2004, compared to $67.4 million and $150.0 million for the same periods of 2003, representing increases of 77.6% and 102.8% respectively.  The increase for the quarter was due to increased sales of $28.9 million, $20.3 million, $1.8 million and $1.3 million for the DVD segment, Imaging segment, DTV segment and the Mobile segment, respectively.  The increase in quarterly revenues for the DVD segment and DTV segment were due to increased unit shipments, partially offset by a decline in average selling prices for our older DVD products.  The increased quarterly revenues in the Imaging segment were due to increases in software and other revenues of $12.4 million and hardware product revenue of $7.9 million due to increased unit shipments.  The increase in the Mobile segment was associated with a $2.7 million increase in software and other revenues, partially offset by lower hardware product revenues of $1.4 million due to lower unit shipments.  The increase in year-to-date revenues was due to the increased sales of $73.7 million, $60.2 million, $16.7 million and $3.5 million for the DVD segment, Imaging segment, DTV segment and the Mobile segment, respectively.  The increase in DVD segment revenues was due to increased unit shipments. The increases in both the Imaging segment and DTV segment were due to the inclusion of revenues from the former Oak operations for the entire nine months in 2004 as compared to approximately half a quarter for the comparable period in 2003. The increase in the Mobile segment revenue was primarily due to an increase in software and other revenues of $2.5 million.  Total revenues by segment for the three months ended September 30, 2004 were 64% DVD, 20% Imaging, 9% Mobile and 7% DTV, compared to 72% DVD, 14% Mobile, 9% DTV and 5% Imaging for the same period in 2003.  Total revenues by segment for the nine months ended September 30, 2004 were 63% DVD, 21% Imaging, 8% DTV and 8% Mobile, compared to 79% DVD, 15% Mobile, 4% DTV and 2% Imaging for the same period in 2003.  Although we expect the DVD segment to continue to represent a significant portion of our revenues for the quarter ending December 31, 2004 we currently expect revenues in that segment to decline from the quarter ended September 30, 2004.  This anticipated reduction in DVD revenue is primarily due to a build-up of inventory in the manufacturing channels which will take approximately three to six months for our customers to deplete.

Hardware product revenues were $99.4 million and $257.1 million for the three and nine month periods ended September 30, 2004, compared to $64.7 million and $143.3 million for the same periods of 2003, representing increases of 53.8% and 79.5% respectively.  The increase for the quarter was due to a $25.9 million increase in hardware product sales for the DVD segment, a $7.9 million increase in hardware product revenue for the Imaging segment and a $2.3 million increase in hardware product sales for the DTV segment, partially offset by a $1.4 million decrease in hardware product revenues for the Mobile segment. The increase in hardware product revenues for the DVD, Imaging and DTV segments were due to increased unit shipments. Conversely, the reduction in hardware product revenue for the Mobile segment was due to lower unit shipments.  The increase in year-to-date revenue was due to a $72.0 million increase in hardware product revenues for the DVD segment, a $24.0 million increase in hardware product revenues for the Imaging segment, a $16.8 million increase in hardware product revenues for the DTV segment and a $1.0 million increase in hardware product revenues for the Mobile segment.  The increase in revenues for the DVD segment was due to increased unit shipments. The increases in hardware product revenues in both the Imaging and DTV segments were due to increased unit shipments primarily based on the inclusion of the former Oak operations for the entire nine months in 2004 as compared to half a quarter for the comparable period in 2003.  Hardware product revenues by segment for the three months ended September 30, 2004, were 73% DVD, 11% Imaging, 8% DTV and 8% Mobile, compared to 73% DVD, 14% Mobile, 9% DTV and 4% Imaging for the same period in 2003. Hardware product revenues by segment for the nine months ended September 30, 2004, were 72% DVD, 10% Imaging, 9% DTV and 9% Mobile, compared to 79% DVD, 15% Mobile, 4% DTV and 2% Imaging for the same period in 2003.

Software and other revenues were $20.3 million and $47.0 million for the three and nine month periods ended September 30, 2004, compared to $2.8 million and $6.7 million for the same periods of 2003, representing increases of 635% and 599% respectively.  The increase for the quarter was due to a $12.3 million increase in software and other revenues for the Imaging segment, an increase in software and other revenues in the DVD segment of $3.1 million, and an increase of $2.6 million in the Mobile segment, partially offset by a reduction of approximately $500,000 in the DTV segment. The increase in revenues for the Imaging segment was primarily due to increased software royalty revenues.  The revenue increase in the DVD segment includes $2.8 million in royalties for legacy product that had previously not been reported by the licensee which is related to a previously discontinued product line.  For the nine months ended September 30, 2004, the increase in revenues was primarily due to an

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increase of the Imaging segment revenues of $36.2 million, an increase in the Mobile segment revenues of $2.5 million and an increase of $1.6 million in the DVD segment. The increase in revenues for the Imaging segment was primarily due to the inclusion of the former Oak operations for the entire nine months in 2004 as compared to approximately half a quarter for the comparable period in 2003.

Cost of Hardware Product Revenues

Cost of hardware product revenues was $66.6 million and $170.7 million for the three and nine month periods ended September 30, 2004, compared to $40.4 million and $93.3 million for the same periods of 2003.  The increased costs were due to increased shipments for both periods. As a percent of hardware product revenues, hardware product costs were 66.9% and 66.4% for the three and nine month periods ended September 30, 2004, compared to 62.5% and 65.1% for the same periods of 2003.  The increase in hardware product costs as a percentage of hardware product revenues for both periods was due to erosion of average selling prices for our older DVD products.  Based on expected product mix we currently anticipate that hardware product costs as a percentage of hardware product revenues will diminish for the three months ending December 31, 2004 compared to the three months ended September 30 2004.

Research and Development

Research and development (“R&D”) expenses were $21.6 million and $61.4 million for the three and nine month periods ended September 30, 2004, compared to $12.2 million and $22.9 million for the same periods of 2003. The increases were primarily a result of the inclusion of the former Oak and Emblaze operations as well as continued investments in research and development across all of our segments. In addition, in the three and nine month periods ended September 30, 2004, we recorded approximately $500,000 and $860,000, respectively, in grants from the Chief Scientist in Israel’s Ministry of Industry and Trade as an offset to R&D expense, compared to $500,000 and $2.5 million, respectively, recorded in the same periods in 2003.  As a percentage of revenues, R&D expense remained flat at 18.1% of revenues for the three months ended September 30, 2004 compared to the same period of the prior year.  As a percentage of revenues, R&D expenses increased to 20.2% for the nine month period ended September 30, 2004, compared to 15.3% for the same period of 2003. We expect R&D expenses for the three months ending December 31, 2004 to be relatively unchanged from the three months ended September 30, 2004.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses were $18.8 million and $50.1 million for the three and nine month periods ended September 30, 2004, compared to $11.3 million and $26.0 million for the same periods of 2003.  This increase was primarily a result of the inclusion of the former Oak and Emblaze operations, increased legal fees related to our pending patent litigation with Mediatek, Inc., Sarbanes Oxley compliance costs and continued increases in marketing and field application support expenses to support planned revenue growth in our Asia Pacific markets.  As a percentage of revenues, SG&A expenses were 15.7% and 16.5% for the three and nine month periods ended September 30, 2004, compared to 16.8% and 17.4% for the same periods of 2003 primarily as a result of increased revenues.

Amortization of Intangible Assets

During the three months ended September 30, 2004, we incurred charges of $12.3 million related to the amortization of intangible assets compared to $6.5 million for the three months ended September 30, 2003.  For the nine months ended September 30, 2004, we recorded amortization of intangible assets of $33.0 million compared to $8.4 million during the same period of the prior year.  The increase for the nine month period was due to the addition of approximately $198 million of amortizable intangible assets acquired in the Oak acquisition during August 2003, and $24.2 million of amortizable intangible assets acquired in the Emblaze acquisition during July 2004.

Amortization of Deferred Stock Compensation

For the three months ended September 30, 2004, we recorded charges of $1.8 million related to the amortization of deferred stock compensation compared to $2.4 million during the same period of the prior year.  For the nine months ended September 30, 2004, these charges were $6.4 million compared to $2.5 million during the same period of the prior year.  The increase for the nine month period was due to the stock options granted in connection with the Oak acquisition during August 2003 resulting in a deferred stock compensation balance of $19.2 million at the time of acquisition which is being amortized over the remaining vesting period.  As of September 30, 2004, the Company had a remaining deferred stock compensation balance of $6.6 million which will be amortized over the remaining vesting period using the multiple option approach through the quarter ending September 30, 2007.

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In-Process Research and Development

For the three and nine months periods ended September 30, 2003, we recorded $50.1 million of in-process research and development expense as a result of the Oak acquisition.  There were no such charges for the same periods of 2004.

Operating Loss

The operating losses of $1.4 million and $17.6 million for the three and nine month periods ended September 30, 2004 were driven primarily by charges of $12.3 and $33.0 million, respectively, for the amortization of intangible assets and $1.8 million and $6.4 million, respectively, for the amortization of deferred stock compensation, each related primarily to the Oak acquisition.  Excluding these charges, our operating income would have been $12.8 million, or 10.6% of total revenues, and $21.9 million, or 7.2% of total revenues, for the three and nine months ended September 30, 2004.  On a comparable basis, excluding the amortization of intangible assets of $6.5 million and $8.4 million, deferred stock compensation of $2.4 million and $2.5 million and the in-process research and development charge of $50.1 million for the three and nine month periods ended September 30, 2003, respectively, we would have recorded operating income of $3.5 million, or 5.2% of total revenues, and $7.8 million or 5.2% of total revenues in the respective periods.  These improvements in adjusted operating income were primarily due to the net contribution of product segments acquired in the Oak acquisition. Continued investment in DVD recording technology, HDTV technology, multimedia mobile phone technology and advanced sensor technology adversely affected our profitability.

Interest and Other Income (Loss)

Interest and other income or loss was a loss of $265,000 and income of $632,000 for the three and nine months ended September 30, 2004, compared to interest and other income of $1.5 million and $4.4 million for the same periods of 2003. The decrease was primarily due to a decline in interest rates and a decrease in our cash balances due primarily to the use of cash in the Oak and Emblaze acquisitions.

Provision for Income Taxes

Excluding charges related to the amortization of goodwill and other intangibles, our estimated effective income tax rate was 15% for the third quarter of 2004.  We have recorded 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 the approved enterprise status in Israel.

At September 30, 2004, we continue to carry a full valuation allowance against our net deferred tax assets as management has determined that it is more likely than not that our deferred tax assets may not be realized.

Liquidity and Capital Resources

At September 30, 2004, we had $41.6 million of cash and cash equivalents, $31.8 million of short-term investments and $102.7 million of working capital. In addition, we had $71.5 million of investments in long-term marketable securities which are included in other assets on our consolidated balance sheet.

Net cash provided by operating activities during the nine months ended September 30, 2004 was $9.3 million.  While we recorded a net loss of $20.4 million, this loss included non-cash charges of approximately $47.1 million comprised of depreciation of property and equipment of $7.7 million, amortization of intangible asset of $33.0 million and amortization of deferred stock compensation of $6.4 million, resulting in net income adjusted for non-cash charges of approximately $26.7 million for the nine months ended September 30, 2004.  Additional cash from operating activities was provided by a $41.9 million increase in accounts payable, offset by a $44.6 million increase in inventory and $18.5 million increase in accounts receivable.

Cash used in investing activities was $21.4 million during the nine months ended September 30, 2004, reflecting $54.2 million used in the acquisition of Emblaze, net of cash acquired, and purchases of $7.2 million of property and equipment.  This cash outflow was partially offset by $40.0 million in proceeds from the net sales of investments.

Cash provided by financing activities was $5.7 million during the nine months ended September 30, 2004, attributable to the issuance of common stock during the period under employee benefit plans.

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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 increase in accounts payable, accrued expenses and other liabilities of $18.4 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 net proceeds of $48.3 million from purchase and sale of investments 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, 2004, 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 acquisitions of Oak and Emblaze Semiconductor;

•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

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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 acquisitions of Oak Technology, Inc. and Emblaze Semiconductor Ltd.

On August 11, 2003, we completed the acquisition of Oak and on July 8, 2004, we completed the acquisition of Emblaze.  Although we have made substantial progress with the integration of the Oak and Emblaze operations, we remain subject to a number of risks and uncertainties, including the following:

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

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

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 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 and its 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 and its 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 integrated circuits and embedded software.

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

•the cost and availability of adequate foundry capacity;

•fluctuations in manufacturing yields;

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•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;

•terrorism and international conflicts or other crisis, such as the recent recurrence 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. 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 Oak and Emblaze with Zoran.  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 a 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 seasonal 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

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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 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 revenues 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.

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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

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•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 photo masks 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 our 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 ST Microelectronics, 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.

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.

We face competition from several large semiconductor companies in the broadband digital television and set-top box markets. We expect competition to continue to increase in these markets as industry standards become well known and as other competitors enter these markets.

We also face significant competition in the digital office market. 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 our OEM customers in this market 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 our 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 we have. 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.

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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 2003, sales to Fujifilm accounted for approximately 14% of Zoran’s total revenues, and Zoran’s four largest customers accounted for approximately 46% of its total revenues. Similarly, during Oak’s fiscal 2002, 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 six years. Fujifilm purchases our products primarily as a reseller. Fujifilm acts as the primary reseller in Japan of DVD related 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 pending requirement that all new televisions have a digital receiver could have an adverse effect on our HDTV business.

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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 2003, 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 account for the majority 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 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. We also maintain 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 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.

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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.

We are involved in several lawsuits.

Zoran and Oak are parties to various legal proceedings, including a number of patent-related lawsuits, both as plaintiff and defendant. In connection with these lawsuits, management time has been, and will continue to be, expended. In addition, both Oak and Zoran have incurred, and we expect to continue to incur, substantial legal and other expenses in connection with these pending lawsuits. No provision for any liability that may result upon adjudication of these lawsuits 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 us to incur significant costs.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights. In the past, Zoran and Oak have been subject to claims and litigation regarding alleged infringement of other parties’ intellectual property rights, and both Oak and Zoran are currently parties to a number of patent-related lawsuits, both as plaintiff and defendant.  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.

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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.

The new requirements of Section 404 of the Sarbanes-Oxley Act will increase our operating expenses, and our potential inability to fully comply with the requirements of Section 404 could adversely affect the market price of our common stock.

Rules adopted by the Securities and Exchange Commission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual review and evaluation of our internal control systems, and attestation of these systems by our independent auditors.  We are currently undergoing a thorough review of our internal control systems and procedures and implementing improvements that will be necessary in order for us to comply with the requirements of Section 404 by the end of our fiscal year ending December 31, 2004.  This evaluation process has required us to hire additional personnel and engage outside advisory services and will result in additional accounting and legal expenses, all of which will cause our operating expenses to increase.  In addition, the evaluation and attestation processes required by Section 404 are new and untested, and we have encountered a number of problems and delays in completing the implementation of improvements in our internal controls.  As a result, we may be unable to fully comply with the requirements of Section 404 by the December 31, 2004 deadline.  Our acquisition of Oak in August 2003 required us to rationalize the internal systems of the two companies and implement uniform standards, procedures and policies, including a uniform management information system.  These tasks have required substantial effort and time to complete, have delayed our efforts to comply with the requirements of Section 404 and increased the risk of our achieving timely compliance.  Our inability to complete the implementation of required improvements in our internal controls by the December 31, 2004 deadline or to obtain a timely and favorable attestation by our independent auditors could result in a loss of investor confidence in our financial management and the reliability of our financial statements.

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 $261 million for federal and $83 million for state tax reporting purposes as of December 31, 2003. As a result of the change of control resulting from our initial public offering in 1995, the amount of NOLs that we 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 acquisitions of Oak and Emblaze, 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.

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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 portion 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 2004. 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;

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

•any additional acquisitions that we may make.

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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 earn such proceeds in 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 provisions:

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•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 January 1, 2003 and September 30, 2004, the closing sale price of our common stock, as reported on The Nasdaq National Market, ranged from a low of $10.85 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;

•any announcement that we may be required to make regarding our inability to fully comply with the requirements of Section 404 of the Sarbanes-Oxley Act by the December 31,2004 deadline;

•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, 2004, 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

Disclosure 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

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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 Officerconcluded that our disclosure controls and procedures were effective as of the end of the period covered by this quarterly report.

Internal Controls Over Financial Reporting.  There has been no change in our internal control over financial reporting during the quarter ended September 30, 2004 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Sarbanes-Oxley Section 404 Compliance.  Rules adopted by the Securities and Exchange Commission pursuant to Section 404 of the Sarbanes-Oxley Act of 2002 require annual review and evaluation of our internal control systems, and attestation of these systems by our independent auditor.  We are currently undergoing a thorough review of our internal control systems and procedures and implementing improvements that will be necessary in order for us to comply with the requirements of Section 404 by the end of our fiscal year ending December 31, 2004.  The evaluation and attestation processes required by Section 404 are new and untested, and we have encountered a number of problems and delays in completing the implementation of improvements in our internal controls.  As a result, we may be unable to fully comply with the requirements of Section 404 by the December 31, 2004 deadline.  Our acquisition of Oak in August 2003 required us to rationalize the internal systems of the two companies and implement uniform standards, procedures and policies, including a uniform management information system.  These tasks have required substantial effort and time to complete, have delayed our efforts to comply with the requirements of Section 404 and increased the risk of our achieving timely compliance.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

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

On March 11, 2004, Zoran and Oak filed a complaint withthe United States International Trade Commission (“ITC”) alleging that certain MediaTek DVD player and optical disk controller chips and chipsets, and products in which they are used, infringe Zoran’s and Oak’s patents.  In addition to MediaTek, the complaint named 10 other proposed defendants that sell products, including DVD players and PC optical storage devices, that use MediaTek’s chips and chipsets.  The other proposed defendants were ASUSTek Computer. Inc., Creative Labs, Inc., Creative Technology, Ltd., Jiangsu Shinco Electronic Group Co., Ltd., LITE-ON Information Technology Corporation, Mintek Digital, Shinco International AV Co., Ltd., TEAC Corporation, TEAC America, Inc., Terapin Technology Corporation and Terapin Technology.  The complaint requested that the ITC institute an immediate investigation of the accused products and issue exclusion and cease and desist orders prohibiting the importation into the United States of the infringing MediaTek devices and products that contain them.  On April 8, 2004, the ITC instituted an investigation based on Zoran’s complaint.  On April 28, 2004, Zoran and Oak reached a settlement with respondents Creative Technology, Ltd. and Creative Labs, Inc., and these respondents were subsequently dismissed from the investigation pursuant to the terms of the settlement agreement.  On July 13, 2004, the ITC granted Zoran’s request that nine additional proposed defendants be added to the investigation.  These companies are Artronix Technology, ASUS Computer International, Audiovox Corporation, EPO Science and Technology, Inc., Initial Technology, Inc., Micro-Star International Co., Ltd., MSI Computer Corp., Shinco Digital Technology Ltd. and Ultima Electronics Corporation.  Discovery is currently underway.  The hearing is scheduled to begin on February 7, 2005, and the target date for completion of the investigation is September 14, 2005.  On October 26, 2004, MediaTek filed a motion for summary determination seeking an order that two of asserted patents were invalid.  Zoran has filed its opposition to the motion, and the motion is currently pending.

On March 15, 2004, Zoran and Oak filed a complaint against MediaTek and Mintek Digital in the United States District Court, Central District of California alleging similar facts regarding infringement by MediaTek’s chips and chipsets and products in which they are used.  The lawsuit seeks both monetary damages and an injunction to stop the importation and sale of infringing products.  Zoran subsequently amended the complaint to name ASUSTek Computer, Inc., Jiangsu Shinco Electronic Group Co., Ltd., LITE-ON Information Technology Corporation, Mintek Digital, Shinco International AV Co., Ltd., TEAC Corporation, TEAC America, Inc., Terapin Technology Corporation and Terapin Technology as defendants.  On June 17, 2004, pursuant to stipulation of the parties, the case was transferred to the United States District Court, Northern District of California.  On July 2, 2004, Defendants filed a First Amended Answer which included counterclaims for declaration of noninfringement, declaration of invalidity, declaration of unenforceability, breach of covenant not to sue, breach of covenant of good faith and fair dealing and unfair competition.  On July 22, 2004, Zoran and Oak moved to dismiss certain of defendants’ defenses and counterclaims and, on July 30, 2004, MediaTek filed a motion for summary judgment as to two of the three patents asserted by Zoran and Oak against MediaTek.  Following a hearing, the Court took these motions under submission and has not issued a ruling.  On October 15, 2004, MediaTek filed a second motion for summary judgment seeking summary judgment on alternate grounds as to the same two patents.  This motion is nearly identical to the motion filed by MediaTek on October 26, 2004 in the ITC.  The hearing on this motion is scheduled for December 10, 2004.  On October 29, 2004, Zoran and Oak voluntarily dismissed two of their three claims against defendants without prejudice and refiled those two claims as a separate lawsuit against the defendants.  The parties have stipulated, and the Court has agreed, that the newly filed action will be consolidated for all purposes with the first filed action, including for purposes of trial and all pre-trial scheduling.  No trial date has yet been set in these consolidated actions.

On July 23, 2004, MediaTek filed a complaint with the ITC alleging that certain Zoran and Oak DVD player and optical disk controller chips and chipsets infringe two MediaTek patents.  The complaint requested that the ITC institute an investigation into the accused products and issue exclusion and cease and desist orders prohibiting importation into the United States of allegedly infringing chips and products that contain them.  On August 26, 2004, the ITC instituted an investigation.  The hearing is scheduled to begin on June 20, 2005 and the target date for a completion of the investigation is November 30, 2005.  On September 24, 2004, MediaTek filed a motion to amend the complaint to add one additional patent and to name Sunext Technology Co., Ltd. as a respondent.  This motion was granted on October 7, 2004.

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

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Based upon our preliminary review, we believe we have meritorious defenses to the two MediaTek complaints, which we believe were filed in response to the proceedings that we have been prosecuting against MediaTek and its customers.  We intend to defend the MediaTek actions vigorously.  However, the litigation is in the preliminary stage, and we cannot predict its outcome with certainty.  Patent litigation is particularly complex and can extend for a protracted time, which can substantially increase litigation expenses.

Item 6.  Exhibits

31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.

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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 9, 2004	/s/ Karl Schneider
	Karl Schneider
	Senior Vice President, Finance
	and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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