Zoran (ZRAN) 10-Q 2005 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, 2005

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	(I.R.S. Employer
of incorporation or organization)	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

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act) Yes o No ý

As of November 7, 2005, there were outstanding 45,290,268 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, 2005

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

ZORAN CORPORATION
CONDENSED CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
(unaudited)

	September 30, 2005			December 31, 2004
ASSETS
Current assets:
Cash and cash equivalents	$	64,782		$	37,435
Short-term investments	65,412			32,978
Accounts receivable, net	80,735			59,863
Inventories	27,331			50,033
Prepaid expenses and other current assets	13,151			14,130
Total current assets	251,411			194,439
Property and equipment, net	16,627			17,190
Other assets and investments	12,461			68,619
Goodwill	185,456			150,151
Intangible assets, net	139,993			168,882
Total assets	$	605,948		$	599,281
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable	$	37,800		$	34,017
Accrued expenses and other liabilities	59,306			51,102
Total current liabilities	97,106			85,119
Other long-term liabilities	11,538			13,535
Stockholders’ equity:
Common stock, $0.001 par value; 105,000,000 shares authorized at September 30, 2005 and December 31, 2004; 45,011,293 shares issued and outstanding as of September 30, 2005; and 43,195,432 shares issued and outstanding as of December 31, 2004	45			43
Additional paid-in capital	723,671			705,661
Deferred stock-based compensation	(957		)	(2,791		)
Accumulated other comprehensive income	3,262			1,538
Accumulated deficit	(228,717		)	(203,824		)
Total stockholders’ equity	497,304			500,627
Total liabilities and stockholders’ equity	$	605,948		$	599,281

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,
	2005		2004			2005			2004
Revenues:
Hardware product revenues	$	104,208	$	99,427		$	244,107		$	257,137
Software and other revenues	13,276		20,320			42,340			46,963
Total revenues	117,484		119,747			286,447			304,100
Costs and expenses:
Cost of hardware product revenues	53,660		66,557			135,860			170,723
Research and development	23,469		21,620			64,890			61,402
Selling, general and administrative	21,817		18,819			69,309			50,121
Amortization of intangible assets	12,757		12,342			37,518			33,028
Deferred stock compensation	344		910			1,318			3,309
In process research and development	—		—			2,650			—
Total costs and expenses	112,047		120,248			311,545			318,583
Operating income (loss)	5,437		(501		)	(25,098		)	(14,483		)
Interest income	689		14			1,796			797
Other income (loss), net	32		(279		)	(391		)	(165		)
Income (loss) before income taxes	6,158		(766		)	(23,693		)	(13,851		)
Provision for income taxes	1,200		1,873			1,200			3,373
Net income (loss)	$	4,958	$	(2,639	)	$	(24,893	)	$	(17,224	)
Basic net income (loss) per share	$	0.11	$	(0.06	)	$	(0.57	)	$	(0.40	)
Diluted net income (loss) per share	$	0.11	$	(0.06	)	$	(0.57	)	$	(0.40	)
Shares used to compute basic net income (loss) per share	44,877		42,969			43,942			42,688
Shares used to compute diluted net income (loss) per share	46,622		42,969			43,942			42,688

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,
	2005			2004
Cash flows from operating activities:
Net loss	$	(24,893	)	$	(17,224	)
Adjustments to reconcile net loss to net cash provided by operations:
Depreciation, amortization and other	9,922			7,660
Amortization of intangible assets	37,518			33,028
Amortization of stock based compensation	1,432			3,309
In process research and development	2,650			—
Changes in current assets and liabilities:
Accounts receivable	(20,496		)	(18,503		)
Inventory	22,915			(44,649		)
Prepaid expenses and other current assets and other assets	179			(3,525		)
Accounts payable	3,238			41,933
Accrued expenses and other liabilities and long-term liabilities	2,909			7,236
Net cash provided by operating activities	35,374			9,265
Cash flows from investing activities:
Capital expenditures for property and equipment	(8,143		)	(7,208		)
Purchases of investments	(15,723		)	(132,835		)
Proceeds from sales and maturities of investments	37,808			172,840
Acquisition of Oren, net of cash acquired	(27,567		)	—
Acquisition of Emblaze Semiconductor, net of cash acquired	—			(54,161		)
Net cash used in investing activities	(13,625		)	(21,364		)
Cash flows from financing activities:
Proceeds from issuance of common stock	5,598			5,745
Net cash provided by financing activities	5,598			5,745
Net increase (decrease) in cash and cash equivalents	27,347			(6,354		)
Cash and cash equivalents at beginning of period	37,435			47,994
Cash and cash equivalents at end of period	$	64,782		$	41,640

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 its 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 “SEC”).  In the opinion of management, the condensed consolidated financial statements reflect all adjustments considered necessary, consisting only of normal recurring adjustments, for a fair statement 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, 2004, included in the Zoran Corporation 2004 Annual Report on Form 10-K filed with the SEC.

Restatement of Financial Results for the Quarters Ended March 31, June 30 and September 30, 2004

During the fourth quarter of 2004, in connection with the review and evaluation of the effectiveness of our internal control over financial reporting undertaken pursuant to Section 404 of the Sarbanes-Oxley Act of 2002, management discovered that excess stock compensation expenses had been recognized during the quarters ended March 31, June 30 and September 30, 2004.  The compensation expense was related to options that we had assumed as part of our acquisition of Oak Technology, Inc. in 2003.  Under purchase accounting, part of the cost relating to the acquisition was attributed to the assumed options and was to be recognized over time as the options continued to vest, based on each option holder’s continued employment with Zoran.  If an option holder’s employment terminated before the option was fully vested, vesting would cease, and we would no longer recognize compensation expense related to that option.  At the time of the acquisition, a schedule was prepared detailing the terms of each assumed option; however, the names of the option holders were omitted from the schedule for reasons of confidentiality.  After the acquisition was completed, we did not update our personnel or financial records to include the omitted information. As a result, the Company improperly recognized deferred stock compensation expenses relating to options that had been held by former Oak employees after the vesting of such options had ceased, and did not reverse stock based compensation expense recognized in excess of amounts that actually vested.

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

The following tables show the effect of the restatement:

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

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	Nine Months Ended September 30, 2004
	As reported			As restated
	(In Thousands, Except Per Share Data)
Deferred stock compensation expense	$	6,438		$	3,309
Operating loss	$	(17,612	)	$	(14,483	)
Net loss	$	(20,353	)	$	(17,224	)
Basic net loss per share	$	(0.48	)	$	(0.40	)
Diluted net loss per share	$	(0.48	)	$	(0.40	)

Recent Accounting Pronouncements

In December 2004, the Financial Accounting Standards Board (“FASB”), issued Statement of Financial Accounting Standards No. 123R, “Share-Based Payment, an Amendment of Statement of Financial Accounting Standards 123 (“SFAS 123R”).  On April 14, 2005, the SEC adopted a new rule extending the compliance dates for SFAS 123R.  In accordance with the new rule, the accounting provisions of SFAS 123R will be effective for the Company in 2006.  SFAS 123R requires companies to recognize in the statement of operations the grant-date fair value of stock options and other equity-based compensation issued to employees.  SFAS 123R requires the use of an option pricing model for estimating fair value, which is amortized to expense over the service periods.  SFAS 123R allows for either prospective recognition of compensation expense or retrospective recognition, which may be back to the original issuance of SFAS No. 123, or only to interim periods in the year of adoption.  Management is currently evaluating the impact of adopting SFAS 123R; however, it believes the adoption of SFAS 123R will have a significant impact on net income (loss) and net income (loss) per share.  The impact on our financial statements will be dependent on the transition method, the option-pricing model used to compute fair value and the inputs to that model such as volatility and expected life.  The pro-forma disclosures of the impact of SFAS 123 provided in Note 2 to the Consolidated Financial Statements may not be representative of the impact of adopting SFAS 123R.

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

In May 2005, the FASB issued Statement of Financial Accounting standards No. 154, “Accounting Changes and Error Corrections” (“SFAS 154”).  SFAS 154 replaces APB Opinion No. 20, “Accounting Changes”, and SFAS No. 3, “Reporting Accounting Changes in Interim Financial Statements”. SFAS 154 requires retrospective application to prior periods’ financial statements of changes in accounting principles, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change. SFAS 154 will be effective for all periods beginning after December 15, 2005. The impact of adopting SFAS 154 will depend on the nature and amount of any future accounting change or error, if any.

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.  As a result of stock options granted in connection with 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 was $344,000 and $1,318,000 during the three and nine month periods ended September 30, 2005, respectively, and $910,000 (as restated) and $3,309,000 (as restated) during the three and nine month periods ended September 30, 2004, respectively.

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

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Compensation” (“SFAS 123”), the Company’s net loss and net loss per share for the three month and nine month periods ended September 30, 2005 and 2004 would have been as follows (in thousands, except per share data):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Net income (loss) attributable to common stockholders, as reported	$	4,958		$	(2,639	)	$	(24,893	)	$	(17,224	)
Add:
Employee stock-based compensation expense included in income (loss)	458		*	910			1,432		*	3,309
Total employee stock-based compensation expense determined under the fair value method	(5,849		)	(9,491		)	(20,089		)	(30,563		)
Pro forma net loss attributable to common stockholders	$	(433	)	$	(11,220	)	$	(43,550	)	$	(44,478	)
Pro forma net loss per share attributable to common stockholders:
Basic	$	(0.01	)	$	(0.26	)	$	(0.99	)	$	(1.04	)
Diluted	$	(0.01	)	$	(0.26	)	$	(0.99	)	$	(1.04	)
Net income (loss) per share as reported attributable to common stockholders:
Basic	$	0.11		$	(0.06	)	$	(0.57	)	$	(0.40	)
Diluted	$	0.11		$	(0.06	)	$	(0.57	)	$	(0.40	)

(*)  Amount includes a charge of $114,000 related to the issuance of 65,333 restricted stock units during the quarter ended September 30, 2005 which is reported as part of selling, general and administrative expense.  These restricted stock units vest over a 48 month period and were outstanding as of September 30, 2005.

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, 2005		Three Months Ended September 30, 2004		Nine Months Ended September 30, 2005		Nine Months Ended September 30, 2004
Expected life (years)	3.8		5.2		3.9		5.2
Expected volatility	66	%	81	%	69	%	83	%
Risk-free interest rate	4.0	%	3.5	%	3.8	%	3.4	%

	Employee Stock Purchase Plans
	Three Months Ended September 30, 2005		Three Months Ended September 30, 2004		Nine Months Ended September 30, 2005		Nine Months Ended September 30, 2004
Expected life (years)	0.5		0.5		0.5		0.5
Expected volatility	45	%	64	%	47	%	75	%
Risk-free interest rate	3.7	%	1.8	%	3.3	%	1.4	%

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

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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.

2005 Equity Incentive Plan

At the Company’s 2005 Annual Meeting of Stockholders held on July 29, 2005, the stockholders approved the 2005 Equity Incentive Plan (the “2005 Plan”).  The 2005 Plan was adopted by the Board of Directors on May 26, 2005 and is intended to replace the 1993 Stock Option Plan, which expired in 2003, and the 2000 Nonstatutory Stock Option Plan, which was terminated by the Board of Directors upon stockholder approval of the 2005 Plan.  A total of 1,800,000 shares of the Company’s common stock is authorized for issuance pursuant to awards granted under the 2005 Plan.  Such awards may include stock options, stock appreciation rights, restricted stock, restricted stock units, performance shares, performance units, deferred stock units and other stock-based or cash-based awards.  Up to an additional 1,250,000 shares may be issued upon settlement of restricted stock units issued under the 2005 Plan in replacement of stock options cancelled in an option exchange program approved by the stockholders.  The 2005 Plan is generally administered by the Compensation Committee of the Board of Directors and has a term of 10 years.  Participation in the 2005 Plan is limited to employees and consultants of Zoran and its subsidiaries and other affiliates.

Options and stock appreciation rights granted under the 2005 Plan must have exercise prices per share not less than the fair market value of Zoran common stock on the date of grant and may not be repriced without stockholder approval.  Such awards will vest and become exercisable upon conditions established by the Compensation Committee and may not have a term exceeding 10 years.

Except with respect to 5% of the number of shares authorized under the 2005 Plan, awards of restricted stock, restricted stock units, performance shares, performance units and other full value awards granted under the 2005 Plan generally must have service-based vesting schedules of at least three years or a performance period of at least 12 months.  However, restricted stock units issued pursuant to a stockholder-approved option exchange program which vest based on service must have a vesting schedule of at least two years.  Performance share and performance unit awards vest to the extent that pre-established performance goals based on one or more measures of business and financial performance authorized by the 2005 Plan are attained during a performance period established by the Compensation Committee.  The grant or vesting of other types of awards under the 2005 Plan may similarly be based on the attainment of one or more such performance goals.  The 2005 Plan provides that the number of shares remaining available for issuance will be reduced by 1.3 shares for each one share of Zoran common stock subject to a full value award granted under the 2005 Plan.

2005 Outside Directors Equity Plan

At the Company’s 2005 Annual Meeting, the stockholders also approved the 2005 Outside Directors Equity Plan (the “Directors Plan”).  The Directors Plan was adopted by the Board of Directors on May 26, 2005 and is intended to replace the 1995 Outside Directors Stock Option Plan, which was terminated by the Board of Directors upon stockholder approval of the Directors Plan.  A total of 600,000 shares of the Company’s common stock is authorized for issuance pursuant to awards granted under the Directors Plan.  Such awards may include stock options, stock appreciation rights, restricted stock units and deferred stock units.  The Directors Plan is generally administered by the Board of Directors and has a term of 10 years.  Participation in the Directors Plan is limited to non-employee members of the Zoran Board of Directors (“outside directors”).  The Directors Plan provides that the number of shares remaining available for issuance will be reduced by 1.3 shares for each one share of Zoran common stock subject to a full value award granted under the Directors Plan.

Awards under the Directors Plan are granted by the Board of Directors to all outside directors on a periodic, nondiscriminatory basis within limits prescribed by the Directors Plan.  Subject to appropriate adjustment for any change in the Company’s capital structure, awards granted to any outside director in any fiscal year may not exceed 20,000 shares, increased by one or more of the following: 40,000 shares upon an outside director’s initial election, 10,000 shares for service as Chairman of the Board or Lead Director, 5,000 shares for service on a Board committee as chairman and 2,500 shares for service on a Board committee other than as chairman.  Stock options, stock appreciation rights, restricted stock units and deferred stock units granted under the Directors Plan are generally subject to terms substantially similar to those applicable to the same type of award granted under the 2005 Plan.

3.Comprehensive Income (Loss)

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

	Three Months Ended September 30,					Nine Months Ended September 30,
	2005		2004			2005			2004
Net income (loss)	$	4,958	$	(2,639	)	$	(24,893	)	$	(17,224	)
Change in unrealized gain on investments, net of tax	174		265			1,724			1,050
Total comprehensive income (loss)	$	5,132	$	(2,374	)	$	(23,169	)	$	(16,174	)

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

4.Inventories

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

	September 30,		December 31,
	2005		2004
Purchased parts and work in process	$	10,384	$	23,959
Finished goods	16,947		26,074
	$	27,331	$	50,033

5.Goodwill and Other Intangible Assets

In accordance with SFAS 142, goodwill is not amortized.  The Company monitors the recoverability of goodwill recorded in connection with acquisitions, by reporting unit, annually, or sooner if events or changes in circumstances indicate that the carrying amount may not be recoverable.  The Company performed the annual analysis as of September 30, 2005 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, 2005							December 31, 2004
	Life (Years)	Gross Carrying Amount		Accumulated Amortization			Net Balance		Gross Carrying Amount		Accumulated Amortization			Net Balance
Amortized intangible assets:
Purchased technology	2-3	$	195,505	$	(95,475	)	$	100,030	$	188,505	$	(67,139	)	$	121,366
Patents	3-5	40,265		(17,599		)	22,666		40,265		(10,457		)	29,808
Customer base	3-5	13,860		(6,508		)	7,352		13,010		(4,739		)	8,271
Tradename and others	3-5	3,350		(1,432		)	1,918		2,100		(1,161		)	939
Purchased core technology *	4-5	14,403		(6,376		)	8,027		12,679		(4,181		)	8,498
Total		$	267,383	$	(127,390	)	$	139,993	$	256,559	$	(87,677	)	$	168,882

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

Estimated future intangible amortization expense, based on current balances, as of September 30, 2005 is as follows (in thousands):

Remaining three months of 2005	$	13,469
Year ending December 31, 2006	52,843
Year ending December 31, 2007	45,909
Year ending December 31, 2008	24,730
Year ending December 31, 2009	2,232
Year ending December 31, 2010	810
	$	139,993

Goodwill by reporting units was as follows (in thousands):

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

6.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 nondeductible acquisition related items and income tax rate differences on foreign earnings.  The Company has also provided for tax on its foreign earnings.

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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.

Subsequent to the acquisition of Oak Technology, Inc. in 2003, the Company determined it had four reportable segments: Digital Versatile Disc (DVD), Imaging, Digital Camera (DC) and Digital Television (DTV).  Subsequent to the acquisition of Emblaze Semiconductor Ltd. in July 2004, the Digital Camera segment was combined with the Emblaze Mobile business unit and renamed the Mobile segment.  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, Imaging and DTV segments 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 and digital camera products.  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 and nine months ended September 30, 2005 and 2004 (in thousands):

	Three Months Ended September 30,						Nine Months Ended September 30,
	2005			2004			2005			2004
Total revenues:
DVD	$	44,070		$	77,284		$	113,202		$	191,660
Imaging	21,659			23,841			65,536			63,723
Mobile	35,299			10,420			71,925			25,559
DTV	16,456			8,202			35,784			23,158
	$	117,484		$	119,747		$	286,447		$	304,100
Operating expenses:
DVD	$	39,427		$	67,704		$	117,614		$	176,976
Imaging	13,989			13,831			44,698			37,672
Mobile	24,671			12,521			57,582			28,438
DTV	20,859			12,940			50,165			39,160
	$	98,946		$	106,996		$	270,059		$	282,246
Contribution margin:
DVD	$	4,643		$	9,580		$	(4,412	)	$	14,684
Imaging	7,670			10,010			20,838			26,051
Mobile	10,628			(2,101		)	14,343			(2,879		)
DTV	(4,403		)	(4,738		)	(14,381		)	(16,002		)
	$	18,538		$	12,751		$	16,388		$	21,854

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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 and nine months ended September 30, 2005 and 2004 is as follows (in thousands):

	Three Months Ended September 30,					Nine Months Ended September 30,
	2005		2004			2005			2004
Contribution margin from operating segments	$	18,538	$	12,751		$	16,388		$	21,854
Amortization of intangibles	12,757		12,342			37,518			33,028
Amortization of deferred stock compensation	344		910			1,318			3,309
In process research and development	—		—			2,650			—
Total operating income (loss)	$	5,437	$	(501	)	$	(25,098	)	$	(14,483	)

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

The distribution of total revenues for the three and nine months ended September 30, 2005 and 2004 was as follows (in thousands):

	Three Months Ended September 30,				Nine Months Ended September 30,
	2005		2004		2005		2004
Revenue from unaffiliated customers originating from:
China	$	46,330	$	49,471	$	114,879	$	115,711
Japan	31,415		31,180		83,128		83,544
Taiwan	19,519		9,006		34,851		31,219
Korea	7,267		5,503		15,611		27,412
United States	5,598		9,860		17,978		22,823
North America (other than the United States)	63		1,014		1,175		2,613
Other	7,292		13,713		18,825		20,778
	$	117,484	$	119,747	$	286,447	$	304,100

For the three months ended September 30, 2005, no customer accounted for more than 10% of total revenues.  For the same period of 2004, one customer accounted for 10% of total revenues.  For the nine months ended September 30, 2005 and 2004, no customer accounted for more than 10% of total revenues.

As of September 30, 2005, one customer accounted for 16% of total net accounts receivable, and as of December 31, 2004, two customers accounted for 27% and 13% of total net accounts receivable, respectively.

8.Acquisitions

Oren Semiconductor, Inc.

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

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The primary purpose of the acquisition was to obtain Oren’s demodulator IC technology for the global high definition television market.  The Company intends to combine this technology with Zoran’s digital television technology to deliver a complete and cost-effective system solution for digital television makers.

The transaction was accounted for under SFAS No. 141, “Business Combinations,” using the purchase method of accounting.  The Company incurred approximately $375,000 for acquisition-related expenses consisting of financial advisory, legal and other consulting services.  The Company completed a valuation analysis and purchase price allocation.  The results of operations of Oren have been included in the consolidated financial statements from the date of acquisition.  The acquisition resulted in goodwill of approximately $35.3 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	$	(941	)
In process research and development	2,650
Intangible assets	9,100
Goodwill	35,305
	$	46,114

The purchase price exceeded the net assets acquired resulting in the recognition of goodwill.  The amounts allocated to intangible assets include purchased technology totaling $7.0 million, trade name and others totaling $1.25 million and customer base totaling $850,000 which are being amortized over their estimated useful lives of five years.

Emblaze Semiconductor Ltd.

On July 8, 2004, Zoran acquired Emblaze Semiconductor Ltd.  (“Emblaze”), a subsidiary of Emblaze Ltd. and a provider of semiconductor-based solutions for high volume manufacturers of multimedia mobile telephones.  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 the 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.  The Company incurred approximately $180,000 for acquisition-related expenses consisting of financial advisory, legal and other consulting services.  The Company completed a valuation analysis and purchase price allocation.  The results of operations of Emblaze have been included in the consolidated financial statements from the date of acquisition.  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 purchase price exceeded the net assets acquired resulting in the recognition of goodwill.  The amounts allocated to intangible assets include purchased technology totaling $11.8 million and patents totaling $12.4 million which are being amortized over their estimated useful lives of three years.

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Pro Forma Financial Information

The following unaudited pro forma financial information presents the combined results of operations of Zoran, Oren and Emblaze as if the acquisitions had occurred as of the beginning of each of the previous periods presented, after giving effect to certain adjustments, including amortization of intangibles.  The in-process research and development charge of $2.65 million related to the Oren acquisition 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.

	Nine Months Ended September 30,			Year Ended December 31,
	2005			2004
In thousands except for per share data:
Pro forma revenues	$	287,426		$	383,131
Pro forma net loss	$	(27,863	)	$	(62,453	)
Pro forma net loss per share:
Basic	$	(0.62	)	$	(1.46	)
Diluted	$	(0.62	)	$	(1.46	)

9.Net Income (Loss) Per Share

Basic and diluted net income (loss) per share have been computed using the weighted average number of shares of common stock and dilutive potential 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,
	2005		2004			2005			2004
Net income (loss) from continuing operations	$	4,958	$	(2,639	)	$	(24,893	)	$	(17,224	)
Basic common shares	44,877		42,969			43,942			42,688
Effect of dilutive securities:
Common stock options	1,745		—			—			—
Dilutive weighted average shares	46,622		42,969			43,942			42,688
Net income (loss) per share:
Basic	$	0.11	$	(0.06	)	$	(0.57	)	$	(0.40	)
Diluted	$	0.11	$	(0.06	)	$	(0.57	)	$	(0.40	)

Options to purchase 7,411,861 and 7,613,000 shares of common stock were excluded from the computation of diluted net loss per share for the three months ended September 30, 2005 and 2004 respectively, as these shares would have had an anti-dilutive effect.

Options to purchase 10,024,582 shares and 65,333 restricted stock units were excluded from the computation of diluted net loss per share for the nine months ended September 30, 2005 as these shares would have had an anti-dilutive effect.

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

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10.Legal Proceedings

Zoran and its subsidiary, Oak Technology, Inc., 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 a number of other proposed respondents that sell products, including DVD players and PC optical storage devices that use MediaTek’s chips and chipsets.  The complaint requested that the ITC institute an 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.  The hearing on Zoran’s complaint took place in February 2005.  On September 28, 2005, the ITC issued its final ruling finding one of Zoran’s patents to be valid and infringed by optical disk controller chips and chipsets sold by MediaTek and by products using the infringing chips and chipsets sold by a number of MediaTek customers.  The ITC also issued an exclusion order prohibiting MediaTek and specified MediaTek customers from importing into the United States any optical disk controller chip or chipset that infringes the Zoran patent, or any optical disk storage product containing such a chip or chipset.  The ITC’s exclusion order covered products using MediaTek chips manufactured by Artronix Technology, Inc., ASUSTek Computer, Inc., ASUS Computer International, EPO Science & Technology Co., Inc., LITE-ON Information Technology Corp., Micro-Star International Co., Ltd., MSI Computer Corporation, TEAC America, Inc., TEAC Corp., Ultima Electronics Corp., and any of these companies’ contractors or related or affiliated companies.  The ITC also issued cease and desist orders to the affected companies located in the United States prohibiting them from importing or selling infringing products in the United States.

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 September 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, the 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 the 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.  On December 9, 2004, the Court granted Zoran and Oak’s motion, in part, and dismissed certain of defendant’s counterclaims and affirmative defenses.  The Court also denied MediaTek’s motion for summary judgment.  On October 15, 2004, MediaTek filed a second motion for summary judgment seeking summary judgment on alternate grounds as to the same two patents.  On October 17, 2005, the Court denied this motion.  On January 3, 2005, defendants Audiovox Corporation, Artronix Technology, Inc., ASUS Computer International, Inc., Initial Technology, Inc., Changzhou Shinco Digital Technology Co., Ltd., EPO Science and Technology Co., Inc., Micro-Star International, Co., Ltd., MSI Computer Corp., Shinco International AV Co. and Ultima Electronics Corp. were added to this case by stipulation of the parties.  On July 25, 2005, MediaTek filed a third motion for summary judgment seeking summary judgment of invalidity as to two of the Zoran patents based on alleged improper inventorship.  The Court has not ruled on this motion.  Discovery is currently underway, and trial of this case is presently set to begin May 15, 2006.

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.  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.  On February 16, 2005, MediaTek filed a motion for leave to amend the complaint and notice of investigation to assert additional claims of the MediaTek patents against Oak, Zoran and Sunext.  This motion was denied on March 4, 2005.  The hearing on MediaTek’s complaint took place in June and July 2005.  On September 30, 2005, the ITC Administrative Law Judge issued his initial determination finding that none of Zoran’s optical disk controller chips infringe any claim of the two patents asserted against Zoran; that one of the two patents is invalid; that Oak’s devices do not infringe one of the two patents asserted against Oak and that the other patent is invalid; and that MediaTek has failed to establish that it has a domestic

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industry in the United States related to the patents at issue – a basic requirement for obtaining relief from the ITC.  The initial determination is subject to review by the full ITC.  The target date for completion of the investigation is January 30, 2006.

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.

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

Based upon its preliminary review, Zoran believes that it has meritorious defenses to the three MediaTek complaints, which Zoran believes were filed in response to the proceedings that Zoran has been prosecuting against MediaTek and its customers.  Zoran intends to defend the MediaTek actions vigorously.  However, the litigation is in the preliminary stage, and Zoran cannot predict its outcome with certainty.  Patent litigation is particularly complex and can extend for a protracted time, which can substantially increase litigation expenses.

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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, 2004. 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.

Restatement of Financial Results for Quarters Ended March 31, June 30 and September 30, 2004

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

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

Overview

Our products consist 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.  We 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 our acquisition of Emblaze Semiconductor Ltd. on July 8, 2004, we also provide high performance, low-power application processors, technology and products for the multimedia mobile telephone market.  Through the acquisition of Oren Semiconductor, Inc. on June 10, 2005, Zoran obtained Oren’s demodulator IC technology for the global high definition television 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.  We expect both product and customer mix to continue to fluctuate in future periods, causing further fluctuations in margins.

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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.

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

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

Our selling, general and administrative expenses consist primarily of employee-related expenses, 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 our foreign subsidiary offices.  As a result, some of our expenses are incurred in foreign currency.  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 2005 and 2025, and the benefits from our subsidiary’s Approved Enterprise status expire at various times beginning in 2005.

Recent Acquisitions

Oren Semiconductor, Inc.

On June 10, 2005, we completed our acquisition of Oren Semiconductor, Inc. (“Oren”), a privately-held provider of demodulator ICs for the global high definition television market.  Prior to this acquisition, we had made investments in Oren that represented a 17% ownership interest. Under the terms of the acquisition agreement, we acquired the remaining 83% of Oren’s outstanding stock by means of a merger of Oren with a wholly-owned subsidiary of Zoran, in consideration for which we paid an aggregate of $28.4 million in cash and issued 1,188,061 shares of Zoran common stock valued at $12.9 million, for total consideration of $41.3 million, to the other stockholders of Oren and to employees holding Oren options.  The acquisition was accounted for under the purchase method of accounting.

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Following the completion of the acquisition, the results of operations of Oren have been included in our consolidated financial statements.  Accordingly, our results of operations for the three and nine month periods ended September 30, 2005 include Oren’s operations from acquisition date, while such operations are not reflected in our results of operations for the same periods of the prior year.

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 and nine month periods ended September 30, 2005 include Emblaze’s operations for the entire period, while such operations are reflected in our results of operations for the same periods of the prior year only from July 8, 2004 through September 30, 2004.

Segments

Prior to July 2004, we had 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 renamed the Mobile segment.  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, Imaging and DTV segments 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 and digital camera products.  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 decreased 1.8% to $117.5 million for the three months ended September 30, 2005 compared to $119.7 million for the same period of the prior year.  For the nine months ended September 30, 2005, total revenues decreased 5.8% to $286.4 million compared to $304.1 million recorded during the same period of 2004.  These decreases in total revenues were primarily the result of declining revenues in the DVD segment which recorded decreases of $33.2 million in revenues for the three months ended September 30, 2005 and $78.5 million for the nine month period ended September 30, 2005 compared to the same periods of the prior year.  These decreases were partially offset by increases of $24.9 million and $46.4 million in Mobile segment revenues for the three and nine month periods ended September 30, 2005, respectively, compared to the same periods of the prior year.   In addition, the DTV segment recorded increases of $8.3 million and $12.6 million in revenues for the three and nine month periods ended September 30, 2005, respectively, compared to the same periods in 2004.  The decreases in DVD segment revenues were primarily the result of lower hardware product revenues while the increases in Mobile and DTV segment revenues were associated with higher hardware product revenues.  Total revenues by segment for the three months ended September 30, 2005 were 37.6% DVD, 18.4% Imaging, 30.0% Mobile and 14.0% DTV, compared to 64.5% DVD, 19.9% Imaging, 8.7% Mobile and 6.9% DTV for the same period in 2004.  Total revenues by segment for the nine months ended September 30, 2005 were 39.5% DVD, 22.9% Imaging, 25.1% Mobile and 12.5% DTV, compared to 63.0% DVD, 21.0% Imaging, 8.4% Mobile and 7.6% DTV for the same period in 2004. We expect that total revenues for the quarter ending December 31, 2005 will decline slightly from the quarter ended September 30, 2005 due to normal seasonal factors that have historically affected our third and fourth quarter revenues.

Hardware product revenues were $104.2 million for the three months ended September 30, 2005 compared to $99.4 million for the comparable period of the prior year and $244.1 million and $257.1 million for the nine month periods ended September 30, 2005 and 2004, respectively.  The increase in hardware product revenues for the three months ended September 30, 2005 was primarily due to the increase of $27.3 million in Mobile segment revenues coupled with an increase of $6.9 million in the DTV segment.  Partially offsetting these increases was a decrease of $28.9 million in hardware product revenues for the DVD segment for the three months ended September 30, 2005 compared to the same period of the prior year.  For the nine months ended September 30, 2005, DVD segment hardware product revenues decreased $72.8 million from the comparable 2004 period.  This decrease was partially offset by increases in the Mobile, DTV and Imaging segments’ hardware product revenues of $47.8 million, $9.2 million and $2.7 million, respectively.  The decrease in DVD segment hardware product revenues was due to decreased unit shipments. The increases in the Mobile, DTV and Imaging segment revenues were the result of increases in unit shipments.

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Software and other revenues were $13.3 million and $42.3 million for the three and nine month periods ended September 30, 2005, respectively, compared to $20.3 million and $47.0 million for the same periods in 2004.  These decreases were primarily due to decreases in license and royalty revenues.

Cost of Hardware Product Revenues

Cost of hardware product revenues was $53.7 million and $135.9 million, respectively, for the three and nine month periods ended September 30, 2005 compared to $66.6 million and $170.7 million for the same periods of 2004.  This decrease was primarily a result of changes in product mix.  In addition, we reduced our inventory allowance by $5.8 million and $8.8 million for the three and nine month periods ended September 30, 2005 as a result of the sale or disposal of inventory that had been fully written down in previous periods. The reduction in our inventory allowance was primarily the result of sales of our Vaddis 6 and an associated companion chip that had been previously written off. The revenue associated with selling these products written down in previous periods was $8.6 million and $17.9 million for the three and nine month periods ended September 30, 2005. As a percentage of hardware product revenues, hardware product costs were 51.5% and 55.7%, respectively, for the three and nine month periods ended September 30, 2005, compared to 66.9% and 66.4% for the three and nine month periods ended September 30, 2004. Excluding the benefit of the net reduction in the inventory allowance, hardware product costs as a percentage of hardware product revenues would have been 57.1% and 59.2%, respectively, for the three and nine month periods ended September 30, 2005. The decreases in hardware product costs as a percentage of hardware product revenues reflected a change in product mix as revenues from the lower margin DVD segment represented a smaller proportion of total hardware product revenue with a relative increase in revenue from the higher margin Mobile and DTV segments.

Research and Development

Research and development (“R&D”) expenses were $23.5 million and $64.9 million for the three and nine month periods ended September 30, 2005, respectively, compared to $21.6 million and $61.4 million for the same periods of 2004.  These increases were primarily a result of the inclusion of the Oren and Emblaze operations for the full periods presented as well as continued investments in research and development across all of our segments.  R&D expenses were 20.0% of total revenues for the three month period ended September 30, 2005 and 22.7% for the nine month period ended September 30, 2005, compared to 18.1% and 20.2% for the three and nine month periods ended September 30, 2004, respectively.  These increases were the result of the lower revenues recorded during the three and nine month periods ended September 30, 2005 compared to the same periods of the prior year.

Selling, General and Administrative

Selling, general and administrative (“SG&A”) expenses were $21.8 million and $69.3 million for the three and nine month periods ended September 30, 2005, respectively, compared to $18.8 million and $50.1 million for the three and nine month periods ended September 30, 2004, respectively.  These increases were primarily due to increased legal fees related to our pending patent litigation with Mediatek, Inc., the inclusion of the Emblaze and Oren operations for the full periods presented and the continued increases in marketing and field application support expenses to support our Asia Pacific markets.  SG&A expenses were 18.6% and 24.2% of total revenues for the three and nine months ended September 30, 2005, respectively, compared to 15.7% and 16.5% for the three and nine month periods ended September 30, 2004, respectively.

Amortization of Intangible Assets

During the three and nine month periods ended September 30, 2005, we incurred charges of $12.8 million and $37.5 million, respectively, related to the amortization of intangible assets compared to $12.3 million and $33.0 million for the three and nine months ended September 30, 2004, respectively.  These increases were the result of the addition of $24.2 million of amortizable intangible assets acquired in the Emblaze acquisition in July 2004 and $9.1 million of intangible assets as a result of the Oren acquisition in June 2005.  At September 30, 2005, we had approximately $140.0 million in net acquired intangible assets which will be amortized over various periods on a straight line basis through 2010.

Amortization of Deferred Stock Compensation

For the three and nine month periods ended September 30, 2005, we incurred charges of $344,000 and $1.3 million respectively, related to the amortization of deferred stock compensation compared to $910,000 and $3.3 million during the three and nine month periods ended September 30, 2004, respectively.  This deferred stock compensation expense was recorded primarily as a result of stock options granted in connection with the Oak acquisition.  These decreases in expense were due to the cancellation of options held by employees who terminated their employment during the year and the lower amortization associated with the graded vesting under the FIN 28 model.  As of September 30, 2005, the Company has a remaining deferred stock compensation balance of $957,000 which will continue to be amortized through the quarter ending September 30, 2007.

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Interest and Other Income

Interest and other income was $721,000 and $1.4 million, respectively, for the three and nine month periods ended September 30, 2005, compared to $(265,000) and $632,000 for the same periods of 2004.  These fluctuations were primarily due to changes in interest income as a result of fluctuations in interest rates as well as the change in translation gains and losses recorded due to the fluctuation in the value of the United States dollar relative to the currency of other countries in which we operate.

Provision for Income Taxes

The Company has recorded a tax provision of $1.2 million for the three and nine month periods ended September 30, 2005, compared to $1.9 million and $3.4 million for the three and nine month periods ended September 30, 2004, respectively.  The provision for income taxes reflects the estimated annualized effective tax rate applied to earnings excluding charges for amortization of intangible assets for the interim periods.  The effective tax rate differs from the U.S. statutory rate due to adjustments for nondeductible acquisition related items, changes in valuation allowance and income tax rate differences on foreign earnings. At September 30, 2005, 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, 2005, we had $64.8 million of cash and cash equivalents, $65.4 million of short-term investments and $154.3 million of working capital.

Net cash provided by operating activities during the first nine months of 2005 was $35.4 million.  While we recorded a net loss of $24.9 million, this loss included non-cash charges for depreciation of property and equipment of $9.9 million, amortization of intangible assets of $37.5 million and amortization of stock based compensation of $1.4 million.  Changes in current assets and liabilities resulted in additional cash totaling $8.7 million which included a $22.9 million decrease in inventory and a $6.1 million increase in accounts payable, accrued expenses and other liabilities, offset by a $20.5 million increase in accounts receivable. The changes in inventory and accounts receivable were primarily the result of an increase in shipments during the quarter ended September 30, 2005 due to normal seasonal factors.

Cash used in investing activities was $13.6 million during the nine months ended September 30, 2005, reflecting $27.6 million used in the acquisition of Oren and purchases of property and equipment totaling $8.1 million, partially offset by the net sales and maturities of investments of $22.1 million.

Cash provided by financing activities was $5.6 million during the nine months ended September 30, 2005 attributable to the issuance of common stock during the period.

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 $17.2 million, this loss included non-cash charges of approximately $43.9 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 $3.3 million.  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 flow was partially offset by $40 million in proceeds from the net sale 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.

At September 30, 2005, 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

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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;

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

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

•volume pricing concessions;

•capital improvements to new and existing facilities;

•technological advances;

•the response of competitors to our products; and

•our relationships with our suppliers and customers.

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

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

Future Performance and Risk Factors

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

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 our products;

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

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

•the timing or cancellation of large customer orders;

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

•pricing policy changes by us and by our 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 our products;

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

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

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

•the cost and availability of adequate foundry capacity;

•fluctuations in manufacturing yields;

•changes in or the emergence of new industry standards;

•failure to anticipate changing customer product requirements;

•the loss or gain of important customers;

•product obsolescence; and

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

Our operating results 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 crises, such as the outbreak of Severe Acute Respiratory Syndrome, or SARS, several years ago;

•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 when 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.  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.

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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 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.  Our future financial performance will also 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 the consumer electronic market, our performance has been dependent on our successful development and timely introduction of integrated circuits for DVD players, DVD recorders, digital cameras, broadband digital television and HDTV.  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 digital office market, our performance has been dependant on our 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 our 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 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.

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

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

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

We rely on independent foundries and contractors for the manufacture, assembly and testing of our integrated circuits and other hardware products, and the failure of any of these third parties to deliver products or otherwise perform as requested could damage our relationships with our customers and harm our sales and financial results.

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

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

•the inability to obtain adequate manufacturing capacity;

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

•lack of control over delivery schedules;

•lack of control over quality assurance;

•lack of control over manufacturing yields and cost; and

•potential misappropriation of our intellectual property.

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

We also rely on a limited number of independent contractors for the assembly and testing of our products.  Our reliance on independent assembly and testing houses limits our control over delivery schedules, quality assurance and product cost.  Disruptions in the services provided by our assembly or testing houses or other circumstances that would require them to seek alternative sources of

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

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

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

•option payments or other prepayments to a foundry;

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

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

•issuance of our equity securities to a foundry;

•investment in a foundry;

•joint ventures; or

•other partnership relationships with foundries.

We may not be able to make any such arrangement in a timely fashion or at all, and such arrangements, if any, may not be on terms favorable to us.  Moreover, if we are able to secure foundry capacity, we may be obligated to utilize all of that capacity or incur penalties.  Such penalties may be expensive and could harm our financial results.

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

The fabrication of silicon wafers is a complex process.  Minute levels of contaminants in the manufacturing environment, defects in 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.

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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.

We derive most of our revenue from sales to a small number of large customers, and if we are not able to retain these customers, or they reschedule, reduce or cancel orders, our revenues would be reduced and our financial results would suffer.

Our largest customers have accounted for a substantial percentage of our revenues.  In 2004, one customer accounted for 11% of our total revenues while sales to our four largest customers accounted for 35% of our total revenues.   In 2003, two customers accounted for 17% and 14% of our total revenues, respectively, while our four largest customers accounted for 46% of our 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.

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.

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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.  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.

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 2004, only 9% of our total revenues were derived from North America 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 a variety of 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

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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 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.

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.

We have generally limited access to and distribution of the source and object code of our 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 and Imaging, Zoran has granted licenses that give its customers access to and restricted use of the source code of Zoran’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, substantial 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.

Claims and litigation regarding intellectual property rights could seriously harm our business and require us to incur significant costs.

In recent years, there has been significant litigation in the United States involving patents and other intellectual property rights.  In the past, 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.  Pending and future litigation against us, if successful, could subject us to significant liability for damages or invalidation of our proprietary rights.  These lawsuits, regardless of their success, are

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time-consuming and expensive to resolve and require significant management time and attention.  Pending or future intellectual property litigation could force us to do one or more of the following:

•stop selling products that incorporate the challenged intellectual property;

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

•pay damages; or

•redesign those products that use such technology.

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

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

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

Certain technology used in our products is licensed from third parties, and in connection with these licenses, we are required to fulfill confidentiality obligations and, in some cases, pay royalties.  Some of our products require various types of copy protection software that we must license from third parties.  If we are unable to obtain or maintain our right to use the necessary copy protection software, we would be unable to sell and market these products.

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

Our future net income and cash flow will be affected by our ability to apply our net operating losses, or NOLs, against taxable income in future periods.  Our NOLs totaled approximately $271 million for federal and $93 million for state tax reporting purposes as of December 31, 2004.  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, 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 2005.  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.

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

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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.  We earned proceeds from such grants in 2003 and 2004 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:

•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;

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•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, 2004 and September 30, 2005, the closing sale price of our common stock, as reported on The Nasdaq National Market, ranged from a low of $8.97 to a high of $22.20.  The market price of our common stock is subject to significant fluctuations in the future in response to a variety of factors, including:

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

•quarterly variations in operating results;

•changes in analysts’ earnings estimates;

•announcements of technological innovations;

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

•loss of key personnel;

•proprietary rights or other litigation;

•general conditions in the semiconductor industry; and

•developments in the financial markets.

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

Item 3.Quantitative and Qualitative Disclosures About Market Risk

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

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

A majority of our revenue and capital spending is transacted in U.S. dollars, although a portion of the cost of our operations, relating mainly to our personnel and facilities in Israel, is incurred in New Israeli Shekels.  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.  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, 2005, a near-term 10% appreciation or depreciation of the New Israeli Shekel would have an immaterial affect on our financial condition.

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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 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, 2005 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

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PART II. OTHER INFORMATION

Item 1.Legal Proceedings

Zoran and its subsidiary, Oak Technology, Inc., 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 a number of other proposed respondents that sell products, including DVD players and PC optical storage devices that use MediaTek’s chips and chipsets.  The complaint requested that the ITC institute an 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.  The hearing on Zoran’s complaint took place in February 2005.  On September 28, 2005, the ITC issued its final ruling finding one of Zoran’s patents to be valid and infringed by optical disk controller chips and chipsets sold by MediaTek and by products using the infringing chips and chipsets sold by a number of MediaTek customers.  The ITC also issued an exclusion order prohibiting MediaTek and specified MediaTek customers from importing into the United States any optical disk controller chip or chipset that infringes the Zoran patent, or any optical disk storage product containing such a chip or chipset.  The ITC’s exclusion order covered products using MediaTek chips manufactured by Artronix Technology, Inc., ASUSTek Computer, Inc., ASUS Computer International, EPO Science & Technology Co., Inc., LITE-ON Information Technology Corp., Micro-Star International Co., Ltd., MSI Computer Corporation, TEAC America, Inc., TEAC Corp., Ultima Electronics Corp., and any of these companies’ contractors or related or affiliated companies.  The ITC also issued cease and desist orders to the affected companies located in the United States prohibiting them from importing or selling infringing products in the United States.

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 September 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, the 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 the 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.  On December 9, 2004, the Court granted Zoran and Oak’s motion, in part, and dismissed certain of defendant’s counterclaims and affirmative defenses.  The Court also denied MediaTek’s motion for summary judgment.  On October 15, 2004, MediaTek filed a second motion for summary judgment seeking summary judgment on alternate grounds as to the same two patents.  On October 17, 2005, the Court denied this motion.  On January 3, 2005, defendants Audiovox Corporation, Artronix Technology, Inc., ASUS Computer International, Inc., Initial Technology, Inc., Changzhou Shinco Digital Technology Co., Ltd., EPO Science and Technology Co., Inc., Micro-Star International, Co., Ltd., MSI Computer Corp., Shinco International AV Co. and Ultima Electronics Corp. were added to this case by stipulation of the parties.  On July 25, 2005, MediaTek filed a third motion for summary judgment seeking summary judgment of invalidity as to two of the Zoran patents based on alleged improper inventorship.  The Court has not ruled on this motion.  Discovery is currently underway, and trial of this case is presently set to begin May 15, 2006.

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.  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.  On February 16, 2005, MediaTek filed a motion for leave to amend the complaint and notice of investigation to assert additional claims of the MediaTek patents against Oak, Zoran and Sunext.  This motion was denied on March 4, 2005.  The hearing on MediaTek’s complaint took place in June and July 2005.  On September 30, 2005, the ITC Administrative Law Judge issued his initial determination finding that none of Zoran’s optical disk controller chips infringe any claim of the two patents asserted against Zoran; that one of the two patents is invalid; that Oak’s devices do not infringe one of the two patents asserted against Oak and that the other patent is invalid; and that MediaTek has failed to establish that it has a domestic

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industry in the United States related to the patents at issue – a basic requirement for obtaining relief from the ITC.  The initial determination is subject to review by the full ITC.  The target date for completion of the investigation is January 30, 2006.

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.

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

Based upon its preliminary review, Zoran believes that it has meritorious defenses to the three MediaTek complaints, which Zoran believes were filed in response to the proceedings that Zoran has been prosecuting against MediaTek and its customers.  Zoran intends to defend the MediaTek actions vigorously.  However, the litigation is in the preliminary stage, and Zoran 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 4.  Submission of Matters to a Vote of Security Holders

Our 2005 Annual Meeting of Stockholders was held on July 29, 2005.  At the meeting, the following eight persons nominated by management were elected to serve as members of our Board of Directors:

	Shares
Nominee	Voted For	Withheld
Levy Gerzberg	32,977,385	2,885,831
Uzia Galil	32,038,291	3,824,925
Raymond A. Burgess	33,169,564	2,693,652
James D. Meindl	32,050,741	3,812,475
James B. Owens, Jr.	33,113,412	2,749,804
David Rynne	33,165,725	2,697,491
Arthur B. Stabenow	31,961,815	3,901,401
Philip M. Young	32,928,970	2,934,246

The following additional proposals were voted upon at the meeting:

1.A proposal to approve the adoption of our 2005 Equity Incentive Plan to replace the 1993 Stock Option Plan and the 2000 Nonstatutory Stock Option Plan was approved.  The vote on this proposal was of 16,821,732 shares for; 6,834,665 shares against; 76,053 shares abstaining; and 20,156,632 broker non-votes.

2.A proposal to approve the exchange of outstanding stock options for a lesser number of restricted stock units to be granted under the 2005 Equity Incentive Plan was approved.  The vote on this proposal was 17,265,950 shares for; 6,395,296 shares against; 71,203 shares abstaining; and 20,156,633 broker non-votes.

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3.A proposal to approve the adoption of our 2005 Outside Directors Equity Plan to replace the 1995 Outside Directors Stock Option Plan was approved.  The vote on this proposal was 18,124,534 shares for; 5,519,928 shares against; 87,988 shares abstaining; and 20,156,632 broker non-votes.

4.A proposal to approve an amendment to our 1995 Employee Stock Purchase Plan to authorize the sale of an additional 1,500,000 shares was approved.  The vote on this proposal was of 22,546,945 shares for; 1,108,100 shares against; 77,406 shares abstaining; and 20,156,631 broker non-votes.

5.A proposal to ratify the appointment of PricewaterhouseCoopers LLP as our independent accountants for the fiscal year ending December 31, 2005 was approved by a vote of 35,292,814 shares for; 527,106 shares against; 43,295 shares abstaining; and 8,025,867 broker non-votes.

Item 6.  Exhibits

10.3(1)	Zoran Corporation 1995 Employee Stock Purchase Plan, As Amended
10.52(2)	Zoran Corporation 2005 Equity Incentive Plan
10.53(3)	Zoran Corporation 2005 Directors Equity Plan
31.1	Certification of Chief Executive Officer pursuant to Rule 13a-14(a).
31.2	Certification of Chief Financial Officer pursuant to Rule 13a-14(a).
32.1	Certification of Chief Executive Officer, pursuant to 18 U.S.C. Section 1350.
32.2	Certification of Chief Financial Officer, pursuant to 18 U.S.C. Section 1350.

(1) Incorporated by reference to Exhibit 99.3 to Registrant's Form 8-K filed on August 3, 2005.

(2) Incorporated by reference to Exhibit 99.1 to Registrant's Form 8-K filed on August 3, 2005.

(3) Incorporated by reference to Exhibit 99.2 to Registrant's Form 8-K filed on August 3, 2005.

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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 , 2005	/s/ Karl Schneider
	Karl Schneider
	Senior Vice President, Finance
	and Chief Financial Officer
	(Principal Financial and Accounting Officer)

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