SAN FRANCISCO -- Just as the space age brought forth Tang, the years of bloated defense budgets produced the technology now used in DVD chips. Not until recently has that technology become a bonanza for Levy Gerzberg, CEO and founder of Zoran (ZRAN) , a onetime maker of chips for defense equipment that now specializes in DVD.

Shares of Zoran rose 16% to close at 39 13/16 Monday after the company announced a secondary offering of 3 million shares and after an analyst at

Individual Investor

predicted that shares could rise to 47 in the next 12 to 18 months. The stock is now up 127% this year, and investors are betting on even more growth. Its two key markets, chips that power DVD players and chips in digital cameras, are expected to explode this Christmas as those products gain popularity with consumers.

Zoran embeds complex mathematical algorithms in semiconductors that power digital cameras and fits more pixels in a video player, allowing a DVD disk to do the work of hundreds of CDs and hold four full-length movies. It also lets speakers replicate sound-wave patterns that simulate 360-degree sound, the technology that makes a

Sony

(SNE) - Get Report

Digital

theater roar with sound.

While other companies like

STMicro

(STM) - Get Report

,

C-Cube

(CUBE) - Get Report

and

LSI Logic

(LSI) - Get Report

make similar chips, only Zoran has been able to come out with a one-chip solution that can crunch the math fast enough for high-quality sound and fast photo-taking.

"It takes a lot of calculations, which is what we learned to do in our military days," Gerzberg says. "It's sophisticated technology, but you have to be able to do it and sell the chip for $10."

Zoran is able to do it, and that dramatically lowers costs for its customers, says Brian Alger, an analyst with

Preferred Capital Markets

. A Zoran chip can cut the retail cost of a camera by a third without dimming its quality, Alger says.

And Zoran chips are faster than those of its rivals, able to process 30 frames a second while most cameras now on the market take four seconds to reload between shots. "High speed, high quality, that's something that flat out no one else can do," says Alger, whose firm has no underwriting relationship with Zoran. Alger rates the stock a buy with a 12-month price target of 45.

Zoran's customers can also tinker with the chips to give their products distinct features, a trick that will help protect Zoran when more chip companies enter the market. The combination of low cost and programmability has already won the company unannounced contracts with several Korean companies that are planning to introduce cameras into the market next year, says Alger.

Both digital video players and cameras are expected to be hot sellers, not just this Christmas but for the next few years.

Cahners In-Stat Group

forecasts that $733 million worth of chips will be sold this year for digital cameras and that total sales should increase 65% next year and 31% more in 2001. Meanwhile, $93 million worth of chips for DVD players will be sold this year, Cahners estimates, and that figure will increase 69% next year and 34% in 2001.

Zoran, as the only supplier of these chips to

Toshiba

and

Sharp

(SHCAY)

, is the undisputed leader of outsourced chips, behind only

Matsushita

and Sony, which make their own chips for their own products.

These market numbers please investors like Jerome Heppelmann, manager of

Pilgrim Baxter's

(PBSVX)

Small Cap Value fund. His fund picked up a small position in Zoran in February, when the stock was trading at 16. But he picked up a much larger position in June when it sunk to 9, after

Israel Corp.

, which owned an 11% stake in the company, said it would sell its shares in tech companies to concentrate on its chemical and shipping concerns. Heppelmann stuck with Zoran when the stock took a sharp dip on temporary concerns about damage from earthquakes in Taiwan.

Zoran is the only chip company that focuses almost exclusively on digital audio and video chips. For STMicro and LSI, audio and video chips are only a small part of their business. And Zoran's closest competitor, C-Cube, announced Oct. 27 it will be bought by

Harmonic

(HLIT) - Get Report

, which will keep C-Cube's networking products but spin off its chip division.

After posting earnings of 8 cents a share in 1998, Zoran is expected to post a 49-cents-a-share profit this year and $1.05 in 2000, according to

First Call/Thomson Financial

consensus estimates. "I'd be surprised if they didn't do over $1.10" in 2000, Heppelmann says. "That's still a value play in a space that's exploding."

According to

Zacks Investment Research

, the Street expects Zoran's earnings to grow 40% a year for the next five years, compared with five-year annual growth rates of 23% for C-Cube, 18% for STMicro and 20% for LSI Logic.

As far as Gerzberg is concerned, the company's future is clear because the market shift from VHS to DVD has already begun and there's no going back. "Eventually you will have it," he says. "You will have no choice."

Zoran means silicon in Hebrew. In Kryptonian it means:

The true value of an

M.I. Hummel

figurine sold on

QVC

.

A bodily organ that causes people to laugh at moronic jokes.

The substance that makes a hot dog plump when you cook it.

The compulsion to show strangers pictures of your dog.

The ability to tap your head while rubbing your belly.