DSP Group Inc.
Annual Report 2013

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SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549 FORM 10-KANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)OF THE SECURITIES EXCHANGE ACT OF 1934 For the Fiscal Year Ended December 31, 2013 Commission File Number 001-35256 DSP GROUP, INC.(Exact name of registrant as specified in its charter) Delaware 94-2683643 (State or other jurisdiction of (I.R.S. Employer Identification No.) incorporation and organization) 161 S. San Antonio Road, Suite 10, Los Altos, CA 94022(Address of principal executive offices, including zip code) (408) 986-4300(Registrant’s telephone number) Securities registered pursuant to Section 12(b) of the Act:NoneSecurities registered pursuant to Section 12(g) of the Act:Common Stock, $.001 per share(Title of class) Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No ☒ Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Exchange Act. Yes ☐ No ☒ 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 of1934 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 suchfiling requirements for the past 90 days. Yes ☒ No ☐ Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data Filerequired to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for suchshorter period that the registrant was required to submit and post such files). Yes ☒ No ☐ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained,to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or anyamendment to this Form 10-K. ☐ Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.See definitions of “large accelerated filer,” “accelerated filer,” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. Large accelerated filer ☐Accelerated filer ☒ Non-accelerated filer ☐Smaller reporting company ☐(Do not check if a smaller reporting company) Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒ As of June 30, 2013, the aggregate market value of voting stock held by non-affiliates of the Registrant, based on the closing price of theCommon Stock on June 28, 2013 as reported on the NASDAQ Global Select Market, was approximately $95,095,074. Shares of Common Stock heldby each officer and director and by each person who owns 5% or more of the outstanding Common Stock (other than Starboard Value LP and itsaffiliates) have been excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is notnecessarily a conclusive determination for other purposes. As of March 7, 2014, the Registrant had outstanding 22,552,463 shares of Common Stock. Documents incorporated by reference: Portions of the Registrant’s proxy statement to be filed pursuant to Regulation 14A within 120 days afterRegistrant’s fiscal year end of December 31, 2013 are incorporated herein by reference into Item 5 of Part II and Items 10, 11, 12, 13 and 14 of Part III ofthis annual report. INDEXDSP GROUP, INC. Page No.PART I Item 1.BUSINESS.3 Item 1A.RISK FACTORS.12 Item 1B.UNRESOLVED STAFF COMMENTS.27 Item 2.PROPERTIES.27 Item 3.LEGAL PROCEEDINGS.27 Item 4.MINE SAFETY DISCLOSURES.27 PART II Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS ANDISSUER PURCHASES OF EQUITY SECURITIES.28 Item 6.SELECTED FINANCIAL DATA31 Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTSOF OPERATIONS.32 Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK49 Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.50 Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING ANDFINANCIAL DISCLOSURE.108 Item 9A.CONTROLS AND PROCEDURES.108 Item 9B.OTHER INFORMATION.108 PART III Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.109 Item 11.EXECUTIVE COMPENSATION.109 Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT ANDRELATED STOCKHOLDER MATTERS.109 Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTORINDEPENDENCE.109 Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES.109 PART IV Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.110 SIGNATURES This report and certain information incorporated herein by reference contain forward-looking statements, which are provided under the“safe harbor” protection of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in thisreport, other than statements that are purely historical in nature, are forward-looking statements. Forward-looking statements are generallywritten in the future tense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,”“anticipate,” “intend,” “plan,” or other similar words. Forward-looking statements include statements regarding: ●Our belief that sales of our DECT products will continue to represent a substantial percentage of our revenues for 2014; ●Our belief that our past research and development investments in new technologies are beginning to materialize; ●Our belief that the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and otherconnectivity, the traditional cordless telephony market using fixed-line telephony is declining and will continue to decline, which willreduce our revenues derived from, and unit sales of, cordless telephony products; ●Our belief that the market will remain price sensitive for 2014 for our traditional cordless telephony products and expect that priceerosion and the decrease in the average selling prices of such products to continue; ●Our anticipation that annual revenues generated from our next generation products to increase significantly in 2014 as compared to2013; ●Our belief that commercial shipments of products incorporating our next generation products will continue during 2014; and ●Our belief that our available cash and cash equivalents at December 31, 2013 should be sufficient to finance our operations for theforeseeable future. This Annual Report on Form 10-K includes trademarks and registered trademarks of DSP Group. Products or service names of othercompanies mentioned in this Annual Report on Form 10-K may be trademarks or registered trademarks of their respective owners. DSP Group, Inc. is referred to in this Annual Report as “DSP Group,” “we,” “us” “our” or “company.” 2 PART I Item 1. BUSINESS. Introduction DSP Group, Inc. (NASDAQ: DSPG) is a leading global provider of wireless chipset solutions for converged communications. Deliveringsemiconductor system solutions with software and reference designs, DSP Group enables original equipment manufacturers (OEMs), original designmanufacturers (ODMs), consumer electronics (CE) manufacturers and service providers to cost-effectively develop new revenue-generating products withfast time to market. At the forefront of semiconductor innovation and operational excellence for over two decades, DSP Group provides a broad portfolio ofwireless chipsets integrating DECT (Digital Enhanced Cordless Telecommunications) and CAT-iq (Cordless Advanced Technology - Internet Quality),ULE (Ultra Low Energy), Wi-Fi, PSTN (Public Switched Telephone Network), HDClear™ (previously BoneTone™) intelligent voice enhancement,background noise elimination and speech recognition accuracy enhancement, video and VoIP (Voice over Internet Protocol) technologies. DSP Group enables converged voice, audio and data connectivity across diverse mobile, consumer and enterprise products - including connectedmultimedia terminals, mobile devices, home automation & security, cordless phones, VoIP systems and home gateways. Leveraging industry-leadingexperience and expertise, DSP Group partners with CE manufacturers and service providers to shape the future of converged communications at home, inthe office and on the go. We were incorporated in California in 1987 and reincorporated in Delaware in 1994. We completed our initial public offering in February 1994. In November 2002, we transferred the assets and liabilities of our DSP cores licensing business to one of our then wholly-owned subsidiaries andimmediately after the separation, the subsidiary affected a combination with Parthus Technologies plc to form CEVA, Inc. (NASDAQ: CEVA). In September 2007, we acquired the cordless and VoIP terminals business (the “CIPT Business”) of NXP B.V. (“NXP”), then a part of NXP’sMobile and Personal Business Unit. The CIPT Business products have been fully integrated within DSP Group’s product offerings. In December 2011, we exercised our option from 2009 to acquire all of the equity interests of BoneTone Communications Ltd. (“BoneTone”), aprovider of innovative bone conduction technology for intelligent voice enhancement and noise elimination that redefine audio quality and voiceintelligibility in mobile devices and headsets, and thereby enabling us to enter new markets. Industry Environment and Our Business Over the past two decades, the desire to leverage existing telecommunications infrastructure, compounded by the increased use of new data-intensive computing, communication and video applications, is driving the convergence of voice, audio, data and video. Our focus on the design of highly-integrated, mixed-signal devices that combine complex RF (radio frequency), analog and digital functionsenables us to address the complex challenges of integrating various technologies, platforms and processes posed by these emerging trends in thecommunications industry. Our integrated circuit (IC) products are customizable, achieve high functionality and performance at reduced powerconsumption, especially for cordless telephony, IP telephony, multimedia mobile and home automation devices that require very low power consumption,and can be manufactured in high volumes using cost-effective process technologies. Our systems architecture provides an open design environment forODMs to design and market their own end products with maximum differentiation. Our expertise and investment in software development, including Board Support Package (BSP) and drivers layer, telephony, communicationand power management stacks, application layer in Real-time Operating System (RTOS) and Full Featured Operating System (FFOS) frameworks, enableour customers fast time to market with cost- and performance-optimized solutions. 3 In response to the growing trend towards wireless residential and business connectivity in the past few years, we developed and are offeringleading wireless voice and data transmission solutions for various applications. Since 1999, we have developed various technologies, including DirectSequence Spread Spectrum (DSSS), Frequency Hopping Spread Spectrum (FHSS), Orthogonal Frequency Digital Modulation (OFDM), Digital NarrowBand, Complementary Metal Oxide Semiconductor (CMOS), Gallium Arsenide (GaAs) technology, and Silicon Germanium (SiGe) RF chips for900MHz, 2.4GHz and 5.8GHz Industry Scientific and Medical (ISM) bands, European DECT (1.9GHz), DECT 6.0 (1.8GHz), Korean DECT(1.7GHz), Bluetooth (2.4GHz) and Wi-Fi (802.11, 2.4GHz/5GHz). With the acquisition of the CIPT Business in 2007, we added both BiCMOS (BipolarCMOS) and deep sub-micron CMOS technologies to our portfolio of technologies. Moreover, we have expanded our DECT solutions beyond cordless telephony to address the burgeoning Internet of Things (IoT) market via anultra low energy version of DECT called DECT ULE, DECT ULE offers numerous technological benefits due to its licensed and interference-free,frequency bands, long range, RF robustness, propagation through multiple walls, voice and visual support, while using very low power consumption. During the past few years, we expanded into chips and phones for office and business applications, and have quickly gained market share inthis growing segment. Today, DSP Group offers comprehensive systems-on-a-chip (SoC) and solution for VoIP, home, SoHo and office IP phones. VoIP isa technology that enables users to make voice calls via a broadband Internet connection rather than an analog phone line. Furthermore, with mobile devices playing an increasingly significant role in peoples’ lives, in February 2013, we unveiled our revolutionaryHDClear solution, a comprehensive voice enhancement product for mobile devices. There is a clear emerging market trend of mobile units incorporatingtechnology to eliminate background noise, HDClear leverages this trend by incorporating proprietary noise cancellation algorithms, thereby dramaticallyimproving user experience and delivering unparalleled voice quality and better voice call intelligibility. This technology will enable people to use their cellphones for conversations in virtually any environment, whether in a car, on a train or in any noisy surroundings. HDClear will also facilitate the use ofspeech recognition and voice commands by eliminating background noise. Our HDClear product family was developed through the acquisition ofBoneTone and the addition of their innovative intelligent noise cancellation algorithms to our SoC. Committed to advancing technology across the CE and telecommunications markets, DSP Group is actively involved in prominent industryassociations, including the DECT Forum, the European Telecommunications Standards Institute and the Wi-Fi Alliance. DSP Group is also deeplyinvolved in all stages of defining DECT CAT-iq as well as DECT ULE standards and ULE Alliance and is building full eco-systems to support thesesolutions. We are an active member of the Home Gateway Initiative (HGI), and support the specification activities of CableLabs, which is contributing tothe evolution and implementation of CAT-iq in various markets and applications. Such involvement enables us to define standards and keep abreast of thelatest innovations and requirements. We also maintain close relationships with many world-leading telecommunication service providers, therebyproviding us with insight into future plans across the industry. With our in-house innovations and acquired intellectual property, we are now able to bring additional value to our existing market verticals andaddress new market verticals, including markets for IoT, office phones, mobile devices and headsets, thus expanding our market opportunities. Target Markets and DSP Group Products In response to market trends, we are concentrating our development efforts on new products and opportunities to leverage our strong technology baseand customer relationships to address evolving market opportunities and take advantage of the current market trends in our domain. Our new productsinclude three main groups of products: (i) home segment products consisting of ULE ICs targeting the growing markets of smart home devices andDECT/CAT-iq ICs for residential gateway devices supplied by telecommunication service providers and which integrate the DECT/CAT-iq functionalityand address the newly evolving market of home phones supporting high definition voice (HD Voice) and smart home applications; (ii) office segmentproducts consisting of VoIP SoC products for Enterprise, SMB and SoHo; and (iii) mobile segment products consisting of products targeted for mobileand wearable markets that incorporate our noise suppression and voice quality enhancement HDClear technology. 4 Home Segment - Products Targeted for Cordless Telephony, Home Gateways and Home Automation Market Our DECT, 2.4 GHz and 5.8 GHz technologies are targeted at three broad categories of products: (a) digital cordless telephony, (b) gateways,both home gateways and fixed mobile convergence and (c) smart home & IoT applications. As a market leader in DECT and next-generation CAT-iq cordless technology, we offer a wide range of cost-effective, highly integrated SoCsolutions. Delivering high-quality audio with notably low power consumption, our field-proven chipset solutions are ideal for highly integrated digitalcordless telephony, DECT-enabled gateways and home automation and security. Our chipsets provide a total integrated digital solution and include allrequired digital baseband, analog interface and RF functionality. Our Home chipset solutions enable worldwide coverage, supporting all RF bands and cordless protocols, such as: 1.7GHz -1.9GHz DECT – used in Europe, U.S. (DECT6.0), Korea, Japan and Latin America; 2.4GHz – used in Japan, China, India and the U.S.; the dominant protocols for this RF band is our proprietary EDCT (Enhanced DigitalCordless Technology) and WDCT (Wireless Digital Cordless Technology) protocols; and 5.8GHz – used in the U.S., Australia and several other countries with our proprietary EDCT cordless protocol. This chipset portfolio combines wireless communications technology with a range of telephony features, and audio and voice-processingalgorithms to provide the industry a low cost and small footprint solution. Enhanced with our hardware and software packages, these chipsets are highlyversatile and enable the development of an array of cordless telephony solutions, DECT home gateways and smart-home applications and devices at alower effort and faster time to market than alternative silicon offerings. This portfolio supports cordless phones, cordless headsets, remote controls, home gateways, fixed-mobile convergence solutions and home securityand automation devices. Our home chipset solutions are available in three chipset families: ●The DCE family is a highly integrated, low-power ROM-based chipset solution, delivering enhanced audio and extended range for entry-levelapplications. The chipset is used to develop fully integrated cordless telephone systems, digital voice recorders (DVRs), digital baby monitors,and other low-to-mid-range audio applications. Including the industry's most advanced digital cordless solutions, the DCE family maintainsmulti-line, multi-handset and digital answering machine capabilities, while supporting various RF protocols such as DECT (1.7GHz-1.9GHz), FHSS DECT 2.4GHz, EDCT 2.4GHz and 5.8GHz. Integration of the TeakLite™ RISC DSP core into the DE56, DCE58 andDCE59 baseband chip enables software implementation of a variety of voice coders, and provides a flexible platform for developing a widerange of solutions. With its DSP-based architecture, the chipset enables cost-effective incorporation of the most advanced audio and telephonyfeatures. ●The DCX family is a low-power, Flash and ROM-based chipset solution targeting mid-to-high-range cordless applications. Built on an openplatform with powerful ARM9™ core processing capabilities, the cost-effective DCX family delivers unsurpassed telephony coverage and HDvoice features. Combining state-of-the-art RF and ARM9 baseband functions in a single package with a rich set of telephony features andadvanced audio-processing capabilities, the DCX provides the best cost-performance solution for mid-to-high-range DECT/DECT6.0/CAT-iqand WDCT cordless applications, home gateway applications, fixed mobile convergence applications and ULE gateways and devices.Supporting all RF bands and comprised of Flash-based chips and a full set of ROM-based products with various memory configurations, theDCX chipset family offers a total integrated solution that includes a digital baseband controller, analog interface, RF transceiver and poweramplifier. 5 ●The DHX family is a low-power chipset solution for home automation and security. Equipped with audio capabilities and a powerfulARM926™ processor, it implements hibernation features to deliver advanced ULE. The ULE base utilizes existing and proven cordlessSoCs, functioning as a standalone ULE over the top box (DVF99) and embedded module for home gateways (DCX81). We achieved a number of significant milestones in 2013, including launching commercial shipments of DCX81 SoC featuring advanced QSPIFlash architecture and 208MHz ARM926 core targeted for digital cordless telephony and DECT connectivity for home gateway products, as well asinitiating field trial with a leading operator to enable smart-home services, and securing design-wins for DHX91, a DECT ULE SoC targeting homeautomation and security applications. Office As a leading silicon vendor for enterprise voice, we offer a comprehensive portfolio of solutions for VoIP terminals. Our DVF SoCs family is acomprehensive solution for developing affordable, scalable and green VoIP home and office products. DVF facilitates rapid introduction of embeddedfeatures into residential devices such as cordless IP and instant messaging (IM) phones. DVF enables development of low-power enterprise IP, analogterminal adapters (ATAs) and home VoIP phones that offer superb acoustic echo cancellation, high-quality HD voice, multi-line capabilities, and anenhanced user interface (UI). Built on an open platform with ARM processors running on Linux OS, DVF includes IPfonePro™, an extensive SDK for IPphones and ATAs. DVF99, the latest member of the DVF family, provides outstanding cost/performance value for mid-range to high-end IP phones. Designedspecifically to meet Tier 1 requirements, DVF99 fully complements existing solutions, including DVFD818 VoIP processors for low- and mid-rangeapplications, and the XpandR® media processor for video IP devices. Products Targeted for the Office Market Since 2008, we have been selling products for the VoIP market while developing a new platform based on ARM9, the VegaFireBird and VegaOneSoC products, to the advanced IAD (Integrated Access Device) market. During 2010, we launched a new VoIP chipset based on the VegaFireBird SoC and our RF products combining ARM9 and VoIP processingbaseband functions in a single package with a rich set of telephony features targeting Corded IP phones for home and office, Analog Terminal Adaptorsand Cordless IP Phones. These products support multi line and multi HD voice channels, superior audio processing capabilities including acoustic echocancellation and superior full duplex speakerphone technologies. In 2012, we taped-out a new VoIP SoC DVF99xx, which commercially launched in Janaury 2013. Built with two ARM926EJ-S™ cores, thisnew VoIP SoC provides combined processing speed of 1.1 GHz, and is designed to support IP phone processing needs - from basic single-line IP phones tohigh-end multi-line gigabit Ethernet IP phones with large color display and advanced GUI. The DVF99 also integrates multiple hardware accelerators,including a hardware security engine which enables a new class of secure IP phones, an LCD controller, a 2D graphics engine, a high-speed USB 2.0port, DDR3/DDR2 memory and minimal power consumption. This product was designed to meet the needs of the enterprise IP telephony market. In 2013, we started commercial shipments of DVF99xx with two leading customers and continued to secure additional design wins with leadingcustomers. 6 Products Targeted for Multimedia Connected Screens To capitalize on the increasing convergence of voice, data, audio and video, we offer a family of multimedia chipset solutions. These SoCsolutions are based on dual-core and integrating application processors, Wi-Fi and DECT baseband and comprehensive multimedia peripherals, alongwith companion analog front-end and power management units as well as Wi-Fi and cordless RF chips, to enable the development of always-on, portable,connected multimedia products. These solutions support an array of telephony and non-telephony connected applications, including smart home phone, video/media phone, Wi-Fi VoIP phone, media/streaming set-top box, smart universal remote control, mobile Internet device, portable media player and Internet radio, based on openplatform frameworks such as Android. In 2008, 2009 and 2011, we introduced XpandR-I, XpandR-II and XpandR-III, respectively, the first, second and third generations of theXpandR product family. XpandR-III is a state-of-the-art system-on-a-chip that complements a full offering for converged voice, data, audio and videoprocessor. XpandR-III has a wide range of interfaces, including display up HD resolution and dual camera sensors. Target applications include smarthome telephony, video telephony, home security, media/streaming set-top box and portable multimedia. Products Targeted for Mobile Phones and Wearable Devices As a result of the acquisition of BoneTone, we enhanced our product portfolio with technology of intelligent voice enhancement and noiseelimination. This technology supports two solutions: HDClear and HDMobileSurround™ which are offered as part of the HDClear product line. HDClear-based solutions offer mobile voice quality and intelligibility, while completely removing background noise. Delivering clearer voice callsmade from noisy environments, HDClear also maximizes accuracy of Automatic Speech Recognition (ASR) applications in noisy environments byleveraging robust and powerful noise cancellation algorithms. HDClear more effectively isolates voice from ambient noise, thereby drastically loweringWord Error Rate (WER) and dramatically improves the user experience for speech-enabled applications like virtual assistants, voice search, and speech-to-text on mobile and wearable devices, tablets and other consumer devices. HDMobileSurround™ solution provides true 5.1 surround true sound on the go. As a result, users of tablets, smartphones and other mobiledevices can enjoy either HD movies with a true sense of sound, or gaming with natural surround sound. HDClear enables a new experience for mobile users. Our technology fully removes background noise for far-end users, while maintainingprivacy for near-end speakers. As such, our mobile chipset offerings enable high voice quality and intelligibility for calls made in the noisiestenvironments. The solutions are anchored by the DBM family – DBMD11 (BTHD100) and DBMD12, mixed-signal DSP-based processor for voicecommunication applications. They also feature a superior background noise cancellation algorithm, on-chip ADC, and diverse digital interfaces forseamless integration into current dense mobile device systems. Offered in a low-power, small footprint package, HDClear is the ultimate noise-cancellationchip solution for mobile phones, wearable devices, tablets, Bluetooth and DECT wireless headsets, wired headsets and fixed-line phones. In 2012, we taped-out a new DBMD2, which we believe is one of the most efficient voice enhancement processors in the market. It is measuredjust 3.0 x 3.0 x 0.65mm. Offered with a 36-pin BGA and 0.4mm ball pitch, DBMD2 embeds a programmable 32-bit DSP, incorporates advancedconnectivity options, including four TDM/I2S ports and SLIMbus, and equipped with a comprehensive software framework that enables rapiddevelopment and fast time-to-market, thereby overcoming the challenges of portable design, real estate and power consumption. DBMD2 enables mobile OEMs to offload voice and audio tasks from mobile device CPUs, in addition to running HDClear to enhance ASRaccuracy. OEMs can leverage DBMD2’s open and flexible architecture to differentiate their products by utilizing the free DSP MIPS headroom andmemory to run their own or third party voice/audio enhancement software for pre- and post-processing. 7 The DBMD2 supports a rich set of voice processing features to significantly enhance voice call quality, intelligibility and speech recognitionaccuracy, including: •Noise suppression for the far-end listener •Noise reduction and speech conditioning for the near-end listener •Acoustic Echo Cancellation (AEC) •Flexispeech – variable speech playback for the hearing impaired •Flexible Listening Experience (FLE) – automatic adjustment of incoming voice when the near-end listener is in a noisy environment •Ultra-low power always on voice activation and voice command Customers We are a flexible customer-centric company that proactively partners with our broad base of CE manufacturer customers and service providers.As a reliable long-term industry supplier, We maintain a proven track record of operational excellence and successful delivery. With over 10 offices acrossAsia, Europe and North America, we deliver outstanding local service and support worldwide. We sell our products primarily through distributors anddirectly to OEMs and ODMs who incorporate our products into consumer products for the worldwide residential wireless communications market andenterprise products for the worldwide office communications market. In 2013, we continued expanding our customer base, and in some cases, increasedour share of business with existing customers. Our blue-chip customer base features leading international CE manufacturers, including the world’s topconsumer brands, which have deployed our chipset solutions at prominent tier-one telecom operators across the globe, and include: Aprotech, AEG,Alcatel, AT&T, Arris, Atlink, Arcadyan, Askey, Audioline, Ayecom, Baycom, Belgacom, Binatone, British Telecom, Brother, CCT Tech, Cetis, ChinaTelecom, Cisco, Cybertan, Grandstream, Deutsche Telekom, Doro, Escene, France Telecom, Freebox, Giant, Gaoxinqi, Gemtek, Global ChinaTechnologies, Grandstream, Hagenuk, Huawei, Innomedia, Intelbras, Invoxia, JXE, Kocom, Korea Telecom, KPN, LG Electronics, Matsushita, Mitac,Mitrastar, Motorola, Moimstone, NEC, NTT, OnReal, Ooma, Panasonic, Philips, Pioneer, Plantronics, Sagemcom, Samsung, Sanyo, Sercomm, SGW,Sharp, Siemens (Gigaset), SK Telecom, Sony, Spracht, Sumitomo, Swissvoice, Swisscom, TCL, Tecom, Telecom Italia, Telefonica, Telstra,Technicolor, Telefield (RCA), Topcom, Uniden, Unihan, Urmet, Uwin, Turkcell, Verizon, VTech, WNC, Xingtel, Yamaha, Yealink and ZTE. International Sales and Operations Export sales accounted for 97% of our total revenues for 2013 and 99% of our total revenues for both 2012 and 2011. Although most of oursales to foreign entities are denominated in United States dollars, we are subject to risks of conducting business internationally. These risks includeunexpected changes in regulatory requirements, fluctuations in exchange rates that could increase the price of our products in foreign markets, delaysresulting from difficulty in obtaining export licenses for certain technology, tariffs, other barriers and restrictions and the burden of complying with avariety of foreign laws. See Note 16 of the attached Notes to Consolidated Financial Statements for the year ended December 31, 2013, for a summary ofthe geographic breakdown of our revenues and location of our long-lived assets. Moreover, a portion of our expenses in Israel is paid in the Israeli currency (New Israeli Shekel (NIS)), which subjects us to the risks of foreigncurrency fluctuations between the U.S. dollar and the NIS. Our primary expenses paid in NIS are employee salaries and lease payments on our Israelifacilities. As a result, an increase in the value of Israeli currency in comparison to the U.S. dollar could increase the cost of our technology development,research and development expenses and general and administrative expenses. From time to time, we use derivative instruments to minimize the effects ofcurrency fluctuations, but our hedging positions may be partial, may not exist at all in the future or may not succeed in minimizing our foreign currencyfluctuation risks. 8 In addition, a portion of our expenses in Europe is paid in Euro, which subjects us to the risks of foreign currency fluctuations between the U.S.dollar and the Euro. Our primary expenses paid in Euro are employee salaries and lease and operational payments on our European facilities. As a result,an increase in the value of the Euro in comparison to the U.S. dollar also could increase the cost of our technology development, research and developmentexpenses and general and administrative expenses. Sales, Marketing and Distribution We market and distribute our products through our direct sales and marketing offices, as well as through a network of distributors. Our salesand marketing team, working out of our sales offices in Hong Kong, China; Nierenberg, Germany; Los Altos, California; Tokyo, Japan; HerzeliaPituach, Israel, Edinburgh, Scotland; and Shenzhen, China; pursues business with our customers in North and South America, Europe and Asia. Interritories where we do not have sales offices, we operate solely through a network of distributors and representatives. Revenues derived from sales throughour Japanese distributor, Tomen Electronics, represented 19% of our total revenues for 2013, 21% for 2012 and 19% for 2011. We also derive asignificant amount of revenues from a limited number of customers. Sales to VTech represented 36% of our total revenues for 2013, 35% for 2012 and33% for 2011. Sales to Panasonic through Tomen Electronics represented 14%, 15% and 13% of our revenues for 2013, 2012 and 2011, respectively.Sales to Uniden represented 4%, 11% and 10% of our total revenues for 2013, 2012 and 2011, respectively. Sales to CCT Telecom represented 9%, 8%and 11% of our total revenues for 2013, 2012 and 2011, respectively. The loss of any of our significant customers or distributors could harm ourbusiness, financial condition and results of operations. In addition, our customers and distributors are not subject to minimum purchase requirementsand can cease making purchases of our products at any time. As our products are generally incorporated into consumer products sold by our OEM customers, our revenues may be affected by seasonalbuying patterns of consumer products sold by our OEM customers. Manufacturing and Design Methodology We contract product wafer fabrication services from TSMC. A majority of our integrated circuit products at this time are manufactured byTSMC. We intend to continue to use independent foundries to manufacture our products. Our reliance on independent foundries involves a number ofrisks, including the foundries’ ability to achieve acceptable manufacturing yields at competitive costs and their allocation of sufficient capacity to us tomeet our needs. While we currently believe we have adequate capacity to support our current sales levels, we may encounter capacity issues in the future.In the event of a worldwide shortage in foundry capacity, we may not be able to obtain a sufficient allocation of foundry capacity to meet our productneeds. Shortage or lack of capacity at the foundries we use to manufacture our products may lead to increased operating costs and lower gross margins. Inaddition, such a shortage could lengthen our products’ manufacturing cycle and cause a delay in the shipment of our products to our customers.Moreover, as TSMC produces a significant portion of our wafer supply, earthquakes, aftershocks or other natural disasters in Asia could preclude usfrom obtaining an adequate supply of wafers to fill customer orders. Unforeseen difficulties with our independent foundries could harm our business,financial condition and results of operations. As part of the acquisition of the CIPT Business, we entered into a Manufacturing Services Collaboration Agreement, as amended, with NXPpursuant to which NXP agreed to provide us with specified manufacturing, pre-testing, assembling and final-testing services relating to CIPT Businessproducts. The services under the agreement are provided by NXP on a purchase order basis and will expire by December 31, 2014. The agreement setsforth specified capacity guarantees by NXP, logistics for our provision of production schedules, penalties for late/non delivery by NXP for specifiedproducts, our purchase obligations and various technical specifications for the manufacturing services. Products from the CIPT Business that are stillmanufactured by NXP currently do not represent a substantial portion of our total revenues. However, our business could be still harmed if NXP fails toachieve acceptable manufacturing yields, quality levels or allocate to us a sufficient portion of its foundry capacities to meet our needs for the CIPTBusiness products. We use independent subcontractors located in Asia, to assemble and test certain of our products. We develop detailed testing procedures andspecifications for each product and require each subcontractor to use these procedures and specifications before shipping us the finished products. We testand/or assemble our products at ASE, ASEN, KYEC, SPIL and Giga Solutions. 9 Furthermore, our Digital Cordless products require an external component in the finished product, which is supplied by a third party, to provideflash memory. Temporary fluctuations in the pricing and availability of this component could negatively impact sales of our Digital Cordless products,which could in turn harm our business, financial condition and results of operations. Competition The principal competitive factors in the cordless telephony market include price, performance, system integration level, range, voice quality,customer support and the timing of product introductions by us and our competitors. We believe that we are competitive with respect to most of thesefactors. Our principal competitors in the cordless market include Lantiq and Dialog Semiconductors, and we have also noted efforts by Beken, a Chinesesupplier of basebands for analog cordless phones, to penetrate the DECT market. Similar principal competitive factors affect the VoIP market. We alsobelieve that we are competitive with respect to most of these factors. Our principal competitors in the VoIP market include Broadcom, DialogSemiconductors, Infineon, Texas Instruments and new Taiwanese IC vendors. Our principal competitors in the multimedia market include Wi-Fi andmultimedia application processor IC vendors like Atheros, Broadcom, CSR, Freescale, Intel, Marvel, Ralink, Samsung and Texas Instruments. Similar principal competitive factors affect the Home Automation (DECT ULE) market. We also believe that we are competitive with respect tomost of these factors. Our principal competitors are developers of different wireless home automation technologies, including Analog, Z-wave and Zigbee.Among those, the major competition in digital home automation is Zigbee and the principal competitors are Freescale, NXP, Texas Instruments and SiliconLab. Similar principal competitive factors affect the mobile audio noise reduction market. An additional competitive factor relating to this market isthat we are a newcomer to this market and this market already has a number of dominant, well-established companies with significant existing marketshares. Nonetheless, we believe that we are competitive in this market with HDClear’s outstanding performance. Competitors in this market includeAudience, Wolfson and Cirrus Logic and developers of noise cancellation software running on mobile phones such as ForteMedia. Price competition in the markets in which we currently compete and propose to compete is intense and may increase, which could harm ourbusiness, financial condition and results of operations. We have experienced and will continue to experience increased competitive pricing pressures for ourICs. We were able to partially offset price reductions which occurred during 2013 through manufacturing cost reductions, improvements in our yieldpercentages and by achieving a higher level of product integration. However, we cannot assure that we will be able to further reduce production costs, or beable to compete successfully with respect to price or any other key competitive factors in the future. In future periods, due to various new developments in the residential telephony, enterprise telephony, home automation and mobile markets, weintend to enter into new markets with competitors that have more established presence, and significantly greater financial, technical, manufacturing,marketing, sales and distribution resources than we do. Furthermore, there is a growing threat from alternative technologies accelerating the decline of the fixed-line telephony market. This competitioncomes from mobile telephony, including emerging dual-mode mobile Wi Fi phones, and other innovative applications, such as Skype and iChat. Giventhat we derive a significant amount of revenues from chipsets incorporated into fixed-line telephony products, if we are unable to develop new technologiesin the face of the decline of this market, our business could be materially adversely affected. Research and Development We believe that timely development and introduction of new products are essential to maintain our competitive position. We currently conductmost of our product development at our facilities. At December 31, 2013, we had a staff of 183 research and development personnel, of which 138 werelocated in Israel. We also employ independent contractors to assist with certain product development and testing activities. We spent $35.0 million in 2013,$42.5 million in 2012 and $53.2 million in 2011 on research and development activities. 10 As noted above, due to various new developments in the home residential market, including the rapid deployment of new communication accessmethods and the rise of alternative technologies in lieu of fixed-line telephony, we are expanding our current product lines and develop products andservices targeted at wider markets, including the intensively competitive mobile device market. We will need to continue to invest in research anddevelopment, and our research and development expenses may increase in the future, including the addition of new research and development personnel, tokeep pace with new and rapidly changing trends in our industry. Licenses, Patents and Trademarks As of December 31, 2013, we have been granted a total of 145 patents and 137 patents are pending. We actively pursue foreign patent protection in countries of interest to us. Our policy is to apply for patents or for other appropriate statutoryprotection when we develop valuable new or improved technology. The status of any patent involves complex legal and factual questions, and the breadthof claims allowed is uncertain. Accordingly, we cannot assure that any patent application filed by us will result in a patent being issued, or that ourpatents, and any patents that may be issued in the future, will afford adequate protection against competitors with similar technology; nor can we provideassurance that patents issued to us will not be infringed or designed around by others. In addition, the laws of certain countries in which our products areor may be developed, manufactured or sold, including China, Hong Kong, Japan, Korea and Taiwan, may not protect our products and intellectualproperty rights to the same extent as the laws of the United States. We attempt to protect our trade secrets and other proprietary information through agreements with our customers, suppliers, employees andconsultants, and through other security measures. Although we intend to protect our rights vigorously, we cannot assure that these measures will besuccessful. The technology industry is subject to frequent litigation regarding patent and other intellectual property rights. While any material claimsinvolving patent or other intellectual property rights have not been brought against us to date, we cannot provide assurance that third parties will not assertclaims against us or our customers with respect to existing or future products, or that we will not need to assert claims against third parties to protect ourproprietary technology. In addition, patent infringement claims are increasingly being asserted by patent holding companies (so-called patent “trolls”),which do not use technology and whose sole business is to enforce patents against companies, such as us, for monetary gain. Because such patent holdingcompanies do not provide services or use technology, the assertion of our own patents by way of counter-claim may be ineffective. We have received claimsthat our products infringe upon the proprietary rights of such patent holding companies. In addition, third parties have asserted and may in the futureassert intellectual property infringement claims against our customers, which we have agreed in certain circumstances to indemnify and defend againstsuch claims. If litigation becomes necessary to determine the validity of any third party claims or to protect our proprietary technology, it could result insignificant expense to us and could divert the efforts of our technical and management personnel, whether or not the claim has any merit andnotwithstanding that the litigation is determined in our favor. In the event of an adverse result in any litigation, we could be required to expend significantresources to develop non-infringing technology or to obtain licenses to the technology that is the subject of the litigation. We cannot provide assurance thatwe would be successful in developing non-infringing technology or that any licenses would be available on commercially reasonable terms. While our ability to compete may be affected by our ability to protect our intellectual property, we believe that because of the rapid pace oftechnological change in our industry, our technical expertise and ability to innovate on a timely basis and in a cost-effective manner will be more importantin maintaining our competitive position than the protection of our intellectual property. In addition, we believe that due to rapid technological changes inresidential telephony, computer telephony and personal computer markets, patents and trade secret protection are important but must be supported by otherfactors, including expanding the knowledge, ability and experience of our personnel, new product introductions and frequent product enhancements.Although we continue to implement protective measures and intend to defend our intellectual property rights vigorously, we cannot assure that thesemeasures will be successful. 11 Backlog At December 31, 2013, our backlog was approximately $25.1 million, compared to approximately $32.7 million and $36.7 million atDecember 31, 2012 and 2011, respectively. We include in our backlog all accepted product purchase orders with respect to which a delivery schedule hasbeen specified for product shipment within one year. Our business is characterized by short-term order and shipment schedules. Product orders in ourcurrent backlog are subject to change, sometimes on short notice, due to changes in delivery schedules or cancellation by a purchaser. Accordingly,although useful for scheduling production, backlog as of any particular date may not be a reliable measure of our sales for any future period. Employees At December 31, 2013, we had 297 employees, including 183 in research and development, 53 in marketing and sales and 61 in corporate,administration and manufacturing coordination. Competition for personnel in the semiconductor industry in general is intense. We believe that our futureprospects will depend, in part, on our ability to continue to attract and retain highly-skilled technical, marketing and management personnel, who are indemand. In particular, there is a limited supply of RF chip designers and highly-qualified engineers with digital signal processing experience. We believethat our relations with our employees are good. Web Site Access to Company’s Reports Our Internet Web Site address is www.dspg.com. Our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act are available free of charge through our Website as soon as reasonably practicable after they are electronically filed with, or furnished to, the Securities and Exchange Commission. We will alsoprovide the reports in electronic or paper form free of charge upon request. Our website and the information contained therein or connected thereto are not intended to be incorporated into this Annual Report on Form 10-K. Item 1A. RISK FACTORS. The following risk factors, among others, could in the future affect our actual results of operations and could cause our actual results todiffer materially from those expressed in forward-looking statements made by us. These forward-looking statements are based on currentexpectations and we assume no obligation to update this information. Before you decide to buy, hold, or sell our common stock, you shouldcarefully consider the risks described below, in addition to the other information contained elsewhere in this report. The following risk factors arenot the only risk factors facing our company. Additional risks and uncertainties not presently known to us or that we currently deem immaterialmay also affect our business. Our business, financial condition, and results of operation could be seriously harmed if any of the events underlyingany of these risks or uncertainties actually occurs. In that event, the market price for our common stock could decline, and you may lose all or partof your investment. We generate a significant amount of our total revenues from the sale of digital cordless telephony products and our business and operatingresults may be materially adversely affected if we do not continue to succeed in this highly competitive market or if sales within the overallcordless digital market decrease. Sales of our digital cordless telephony products comprised a significant majority of our total revenues for 2013. Specifically, sales of our DECT,2.4GHz, and VoIP products comprised 94% of our total revenues for both 2013, 2012 and 2011. Revenues from our DECT products represented 84% ofour total revenues for 2013, 82% for 2012 and 82% for 2011. 12 Any adverse change in the digital cordless market or in our ability to compete and maintain our competitive position in that market would harmour business, financial condition and results of operations. The digital cordless telephony market is extremely competitive and is facing intense pricingpressures, and we expect that competition and pricing pressures may increase. Our existing and potential competitors in this market include large andemerging domestic and foreign companies, many of whom have significantly greater financial, technical, manufacturing, marketing, sales anddistribution resources and management expertise than we do. It is possible that we may one day be unable to respond to increased pricing competition fordigital cordless telephony processors or other products through the introduction of new products or reduction of manufacturing costs. This inability tocompete would have a material adverse effect on our business, financial condition and results of operations. Likewise, any significant delays by us indeveloping, manufacturing or shipping new or enhanced products in this market also would have a material adverse effect on our business, financialcondition and results of operations. In addition to general market competitiveness, the digital cordless telephony market is undergoing a challenging period. With the rapiddeployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity, the traditional cordless telephonymarket using fixed-line telephony is declining and will continue to decline, which reduces our revenues derived from, and unit sales of, cordless telephonyproducts. Macro-economic trends in the consumer electronics industry may adversely impact our future revenues. Furthermore, the decline in fixed line telephony together with the rapid deployment of new communication access methods, including mobile,wireless broadband, cable and other connectivity will decrease sales of products using fixed-line telephony. Our business also may be affected by theoutcome of the competition between cellular phone operators and fixed-line operators for the provision of residential communication. A significant majorityof our revenues are currently generated from sales of chipsets used in cordless phones that are based on fixed-line telephony, and the continued decline infixed-line telephony would reduce our revenues derived from, and unit sales of, our digital cordless telephony products. We rely significantly on revenue derived from a limited number of customers. We expect that a limited number of customers, varying in identity from period-to-period, will account for a substantial portion of our revenues inany period. Our five largest customers – VTech, Panasonic (through Tomen), Uniden, CCT Telecom and Shenzhen Guo Wei Electronics Ltd. (“Guo WeiElectronics”) accounted for approximately 70% of our total revenues for 2013, 73% for 2012 and 70% for 2011. Sales to VTech represented 36% of ourtotal revenues for 2013, 35% for 2012 and 33% for 2011. Sales to Panasonic through our distributor represented 14% of our total revenues for 2013, 15%for 2012, and 13% for 2011. Sales to Uniden represented 4% of our total revenues for 2013, 11% for 2012 and 10% for 2011. Sales to CCT Telecomrepresented 9% of our total revenues for 2013, 8% for 2012 and 11% for 2011. Typically, our sales are made on a purchase order basis, and none of ourcustomers has entered into a long-term agreement requiring it to purchase our products. Moreover, we do not typically require our customers to purchase aminimum quantity of our products, and our customers can generally reschedule the delivery date of their orders on short notice without significantpenalties. A significant amount of our revenues will continue to be derived from a limited number of large customers. Furthermore, the primary customersfor our products are original equipment manufacturers (OEMs) and original design manufacturers (ODMs) in the cordless digital market. This industryis highly cyclical and has been subject to significant economic downturns at various times, particularly in recent periods. These downturns arecharacterized by production overcapacity and reduced revenues, which at times may affect the financial stability of our customers. Therefore, the loss ofone of our major customers, or reduced demand for products from, or the reduction in purchasing capability of, one of our major customers, could have amaterial adverse effect on our business, financial condition and results of operations. 13 Our future success is dependent on market acceptance of our HDClear product family targeted for the mobile device market, which is anintensively competitive market with dominant and established players. Our ability to increase our revenues and offset declining revenues from our cordless product family are substantially dependent on our ability togain market share for our HDClear product family, a comprehensive voice enhancement and noise cancellation product targeted for mobile devices.Although a number of potential customers have expressed interest, we do not currently have any design wins for this product family, which is the initialstep to incorporating this product with an OEM, and we cannot assure you that we will be successful in doing so. Even if we achieve design wins, thedesign-in process is labor intensive, long and often delayed. Therefore, the period from design-in to revenue generation may be long, and during the interimperiod, we would be expending significant time and resources through our sales and development cycles, potentially without achieving any economicreturn. Moreover, we are targeting a new market with our HDClear product family, a market with dominant and established players selling to OEMcustomers with whom they have established relationships. We will need to win over such customers, with whom we do not have established relationships,to gain market share. If we are unable to generate revenues from our HDClear product family and gain significant market share in the mobile devicemarket, our operating results would be adversely affected. The market for mobile device components is highly competitive and we expect competition to intensify in the future. The market for mobile device components is highly competitive and characterized by the presence of large companies with significantly greaterresources than we have. Our HDClear product family relates only to the voice and audio subsystem of a mobile device and there are only a limited numberof OEMs targeted for this market. Our main competitors include Audience and Cirrus Logic. We also face competition from smaller, privately heldcompanies and could face competition from new market entrants. We also compete against solutions internally developed by OEMs, as well as combinedthird-party software and hardware systems. If we are unable to compete effectively, we may not succeed in achieving any design wins and may have tolower our pricing to gain design wins, both of which would adversely impact our operating results. Because our products are components of end products, if OEMs do not incorporate our products into their end products or if the endproducts of our OEM customers do not achieve market acceptance, we may not be able to generate adequate sales of our products. Our products are not sold directly to the end-user; rather, they are components of end products. As a result, we rely upon OEMs to incorporate ourproducts into their end products at the design stage. Once an OEM designs a competitor’s product into its end product, it becomes significantly moredifficult for us to sell our products to that customer because changing suppliers involves significant cost, time, effort and risk for the customer. As aresult, we may incur significant expenditures on the development of a new product without any assurance that an OEM will select our product for designinto its own product and without this “design win” it becomes significantly difficult to sell our products. This is especially the case for our HDClearproduct family. Moreover, even after an OEM agrees to design our products into its end products, the design cycle is long and may be delayed due tofactors beyond our control which may result in the end product incorporating our products not to reach the market until long after the initial “design win”with the OEM. From initial product design-in to volume production, many factors could impact the timing and/or amount of sales actually realized fromthe design-in. These factors include, but are not limited to, changes in the competitive position of our technology, our customers’ financial stability, andour ability to ship products according to our customers’ schedule. Moreover, the continued uncertainty about the sustainability of the global economicrecovery and outlook may further prolong an OEM customer’s decision-making process and design cycle. Furthermore, we rely on the end products of our OEM customers that incorporate our products to achieve market acceptance. Many of our OEMcustomers face intense competition in their markets. If end products that incorporate our products are not accepted in the marketplace, we may not achieveadequate sales volume of our products, which would have a negative effect on our results of operations. We rely on a primary distributor for a significant portion of our total revenues and the failure of this distributor to perform as expected wouldmaterially reduce our future sales and revenues. In addition to direct sales, we use a network of distributors to sell our products. Particularly, revenues derived from sales through our Japanesedistributor, Tomen Electronics, accounted for 19% of our total revenues for 2013, 21% for 2012 and 19% for 2011. Our future performance will depend,in part, on this distributor to continue to successfully market and sell our products. Furthermore, Tomen Electronics sells our products to a limitednumber of customers. One customer, Panasonic, has continually accounted for a majority of the sales through Tomen Electronics. Sales to Panasonicthrough Tomen Electronics generated approximately 14% of our total revenues for 2013, 15% for 2012 and 13% for 2011. The loss of Tomen Electronicsas our distributor and our inability to obtain a satisfactory replacement in a timely manner would materially harm our sales and results of operations.Additionally, the loss of Panasonic and Tomen Electronics’ inability to thereafter effectively market our products would also materially harm our sales. 14 Because our quarterly operating results may fluctuate significantly, the price of our common stock may decline. Our quarterly results of operations may vary significantly in the future for a variety of reasons, many of which are outside our control, including thefollowing: ●fluctuations in volume and timing of product orders; ●timing, rescheduling or cancellation of significant customer orders and our ability, as well as the ability of our customers, to manageinventory; ●changes in demand for our products due to seasonal consumer buying patterns and other factors; ●timing of new product introductions by us and by our customers or competitors; ●changes in the mix of products sold by us or our competitors; ●fluctuations in the level of sales by our OEM customers and other vendors of end products incorporating our products; ●timing and size of expenses, including expenses to develop new products and product improvements, and expenses resulting fromrestructuring activities; ●entry into new markets, including China, Korea and South America; ●our ability to scale our operations in response to changes in demand for our existing products and services or demand for new productsrequested by our customers; ●mergers and acquisitions by us, our competitors and our existing and potential customers; and ●general economic conditions, including current economic conditions in the United States and worldwide, and the adverse effects on thesemiconductor and consumer electronics industries. Each of the above factors is difficult to forecast and could harm our business, financial condition and results of operations. Also, we sell our products toOEM customers that operate in consumer markets. As a result, our revenues are affected by seasonal buying patterns of consumer products sold by ourOEM customers that incorporate our products and the market acceptance of such products supplied by our OEM customers. Our revenues, gross margins and profitability may be materially adversely affected by the continued decline in average selling prices of ourproducts and other factors, including increases in assembly and testing expenses, and raw material and commodity costs. We have experienced and will continue to experience a decrease in the average selling prices of our products. Decreasing average selling prices could resultin decreased revenues even if the volume of products sold increases. Decreasing average selling prices may also require us to sell our products at muchlower gross margin than in the past and reduce profitability. Although we have to date been able to partially offset on an annual basis the declining averageselling prices of our products through general operational efficiencies and manufacturing cost reductions by achieving a higher level of product integrationand improving our yield percentages, there is no guarantee that our ongoing efforts will be successful or that they will keep pace with the anticipated,continued decline in average selling prices of our products. Moreover, we believe there are significant pressures in the supply chain as a result principally of the uncertainty relating to the sustainability ofthe global economic recovery, which has negatively affected the consumer electronics industry. The pressures in the supply chain make it very difficult forus to increase or even maintain our product pricing, which further adversely affects our gross margins. 15 In addition to the continued decline in the average selling prices of our products, our gross profit may decrease in the future due to other factors,including the roll-out of new products in any given period and the penetration of new markets which may require us to sell products at a lower margin, ourfailure to introduce new engineering processes and mix of products sold. Our gross margins also are affected by the product mix. For example, DECT products have lower average gross margins than other products.The DECT product line represented 84% of our total revenues for 2013. Therefore, increased sales of our DECT products would lower our gross margins. Furthermore, increases in the price of silicon wafers, testing costs and commodities such as gold and oil, which may result in increasedproduction costs, mainly assembly and packaging costs, may result in a decrease in our gross margins. Moreover, our suppliers may pass the increase inraw materials and commodity costs onto us which would further reduce the gross margin of our products. In addition, as we are a fabless company,global market trends such as “over-capacity” problems so that there is a shortage of capacity to fulfill our fabrication needs also may increase our rawmaterial costs and thus decrease our gross margin. There are several emerging market trends that may challenge our ability to continue to grow our business. New technological developments in the home connectivity market may adversely affect our operating results. For example, the rapid deploymentof new communication access methods, including mobile, wireless broadband, cable and other connectivity, as well as the lack of growth in productsusing fixed-line telephony would reduce our total revenues derived from, and unit sales of, cordless fixed-line telephony products. Our ability to maintainour growth will depend on the expansion of our product lines to capitalize on the emerging access methods and on our success in developing and selling aportfolio of “system-on-a-chip” solutions targeted at wider markets, including the intensively competitive mobile devices market. We cannot assure youthat we will succeed in expanding our product lines or portfolio of “system-on-a-chip” solutions, or that they would receive market acceptance. Furthermore, there is a growing threat from alternative technologies accelerating the decline of the fixed-line telephony market. This competitioncomes from mobile telephony, including emerging dual-mode mobile Wi Fi phones and other innovative applications, such as Skype and iChat. Giventhat we derive a significant amount of revenues from chipsets incorporated into fixed-line telephony products, if we are unable to develop new technologiesin the face of the decline of this market, our business could be materially adversely affected. Our future business growth depends on the growth in demand for mobile devices with improved sound quality. Our HDClear product family is designed to enhance the sound quality and eliminate background voices for mobile device users. OEMs andODMs may decide that the costs of improving sound quality outweigh the benefits which could limit demand for our HDClear product family. Moreover,users may also be satisfied with existing sound quality or blame poor quality on their phone carriers. The market that we are targeting is evolving rapidlyand is technologically challenging. New mobile devices with different components or software may be introduced that provide the same functionality asHDClear product family. Alternatively, wireless network technology may be improved to serve the same functionality. Our future business growth willdepend on the growth of this market and our ability to adapt to technological changes, user preferences and OEM demands. Our business could bematerially adversely affected if we fail to do so. 16 Because we have significant international operations, we may be subject to political, economic and other conditions relating to ourinternational operations that could increase our operating expenses and disrupt our business. Although the majority of end users of the consumer products that incorporate our products are located in the U.S., we are dependent on sales toOEM customers, located outside of the U.S., that manufacture these consumer products. Also, we depend on a network of distributors to sell our productsthat also are primarily located outside of the U.S. Export sales, primarily consisting of digital cordless telephony products shipped to manufacturers inEurope and Asia, including Japan and Asia Pacific, represented 97% of our total revenues for 2013 and 99% for both 2012 and 2011. Furthermore,pursuant to the acquisition of the CIPT Business from NXP, we established new foreign subsidiaries, and currently have material operations in Germany,Hong Kong and India and employ a number of individuals within those foreign operations. As a result, the occurrence of any negative internationalpolitical, economic or geographic events, as well as our failure to mitigate the challenges in managing an organization operating in various countries, couldresult in significant revenue shortfalls and disrupt our workforce within our foreign operations. These shortfalls and disruptions could cause ourbusiness, financial condition and results of operations to be harmed. Some of the risks of doing business internationally include: ●unexpected changes in foreign government regulatory requirements; ●fluctuations in the exchange rate for the United States dollar; ●import and export license requirements; ●imposition of tariffs and other barriers and restrictions; ●burdens of complying with a variety of foreign laws, treaties and technical standards; ●uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property; ●difficulty in collecting accounts receivable and longer payment cycles for international customers than existing customers; ●difficulty in staffing and managing foreign operations and maintaining the morale and productivity of employees within foreign operations; ●multiple and possibly overlapping tax structures and potentially adverse tax consequences; ●political and economic instability; and ●changes in diplomatic and trade relationships. One or more of these factors may have a material adverse effect on our future operations and consequently, on our business, financial conditionsand operating results. In order to sustain the future growth of our business, we must penetrate new markets and our new products must achieve widespread marketacceptance. In order to increase our sales volume and expand our business, we must penetrate new markets and introduce new products, especially ourHDClear product family. We are exploring opportunities to expand sales of our products in China, Japan, Korea and South America. However, there are noassurances that we will gain significant market share in those competitive markets. In addition, due to the cyclical nature of manufacturing capacityissues, the increasing cost of silicon integrated circuits, the continued decline of average selling prices of chipsets and other industry-wide factors, manyNorth American, European and Japanese OEMs are moving their manufacturing sites to Asia. This trend may cause the mix of our OEM customers tochange in the future, thereby further necessitating our need to penetrate new markets. Furthermore, to sustain the future growth of our business, we need tointroduce new products as sales of our older products taper off. Moreover, the penetration of new competitive markets and introduction of new productscould require us to reduce the sale prices of our products or increase the cost per product and thus reducing our total gross profit in future periods. Ourfuture growth is dependent on market acceptance and penetration of our new products, especially our HDClear product family, for which we can provideno assurances. Our revenue growth is also dependent on the successful deployment of our new VoIP and BoneTone products. Our inability to penetrate themarket or lack of customer acceptance of these products may harm our business and potential growth. 17 Because the markets in which we compete are subject to rapid changes, our products may become obsolete or unmarketable. The markets for our products and services are characterized by rapidly changing technology, short product life cycles, evolving industrystandards, changes in customer needs, demand for higher levels of integration, growing competition and new product introductions. This is especially thecase for the mobile device market. Our future growth is dependent not only on the continued success of our existing products but also successfulintroduction of new products. Our ability to adapt to changing technology and anticipate future standards, and the rate of adoption and acceptance of thosestandards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. If new industry standards emerge,our products or our customers’ products could become unmarketable or obsolete, and we could lose market share. We may also have to incur substantialunanticipated costs to comply with these new standards. If our product development and improvements take longer than planned, the availability of ourproducts would be delayed. Any such delay may render our products obsolete or unmarketable, which would have a negative impact on our ability to sellour products and our results of operations. Because of changing customer requirements and emerging industry standards, we may not be able to achieve broad market acceptance of ourproducts. Our success is dependent, in part, on our ability to: ●successfully develop, introduce and market new and enhanced products at competitive prices and in a timely manner in order to meetchanging customer needs; ●convince leading OEMs to select our new and enhanced products for design into their own new products; ●respond effectively to new technological changes or new product announcements by others; ●effectively use and offer leading technologies; and ●maintain close working relationships with our key customers. There are no assurances that we will be successful in these pursuits, that the demand for our products will continue or that our products willachieve market acceptance. Our failure to develop and introduce new products that are compatible with industry standards and that satisfy customerrequirements, and the failure of our products to achieve broad market acceptance, could have a negative impact on our ability to sell our products and ourresults of operations. Because we depend on independent foundries and other third party suppliers to manufacture and test all of our integrated circuit products, weare subject to additional risks that may materially disrupt our business. All of our integrated circuit products are manufactured and tested by independent foundries and other third party suppliers. While thesefoundries and other third party suppliers have been able to adequately meet the demands of our increasing business, we are and will continue to bedependent upon these foundries and third party suppliers to achieve acceptable manufacturing yields, quality levels and costs, and to allocate to us asufficient portion of their foundry, assembly and test capacity to meet our needs in a timely manner. While we currently believe we have adequate capacity to support our current sales levels pursuant to our arrangement with our foundries andother third party suppliers, we may encounter capacity shortage issues in the future. In the event of a worldwide shortage in foundry, assembly and/or testcapacity, we may not be able to obtain a sufficient allocation of such capacity to meet our product needs or we may incur additional costs to ensurespecified quantities of products and services. Over-capacity at the current foundries and other third party suppliers we use, or future foundries or otherthird party suppliers we may use, to manufacture and test our integrated circuit products may lead to increased operating costs and lower gross margins.In addition, such a shortage could lengthen our products’ manufacturing and testing cycle and cause a delay in the shipment of our products to ourcustomers. This could ultimately lead to a loss of sales of our products, harm our reputation and competitive position, and our revenues could bematerially reduced. Our business could also be harmed if our current foundries or other third party suppliers terminate their relationship with us and weare unable to obtain satisfactory replacements to fulfill customer orders on a timely basis and in a cost-effective manner. Moreover, we do not have longterm capacity guarantee agreements with our foundries and with other third party suppliers. 18 In addition, as TSMC produces a significant portion of our integrated circuit products and ASE tests and assembles a significant portion ofthem, earthquakes, aftershocks or other natural disasters in Asia, or adverse changes in the political situation in Taiwan, could preclude us fromobtaining an adequate supply of wafers to fill customer orders. Such events could harm our reputation, business, financial condition, and results ofoperations. Because NXP still manufactures certain of the CIPT Business products, we are subject to additional risks that may materially disrupt ourbusiness. As part of the Acquisition of the CIPT Business, we entered into a Manufacturing Services Collaboration Agreement (“MSCA”), as amended,with NXP pursuant to which NXP agreed to provide us with specified manufacturing, pre-testing, assembling and final-testing services relating to theCIPT Business products. The services under the MSCA were to be provided by NXP at agreed upon prices initially for up to seven years following theclosing of the acquisition and will expire by the end of 2014. Our business could be harmed if NXP, or third parties NXP has contracted, fails to achieveacceptable manufacturing yields, quality levels or allocate to us a sufficient portion of its foundry, and assembly and testing capacities to meet our needsfor the CIPT Business products. Our operating results are affected by general economic conditions and the highly cyclical nature of the semiconductor industry. Notwithstanding improvements in business conditions since the global downturn in 2008 and 2009, recovery is slow and general worldwideeconomic conditions remain uncertain which continues to make it difficult for our customers, the end-product customers, our vendors and us toaccurately forecast and plan future business activities and make reliable projections. Moreover, we operate within the semiconductor industry whichexperiences significant fluctuations in sales and profitability. Downturns in the semiconductor industry are characterized by diminished product demand,excess customer inventories, accelerated erosion of prices and excess production capacity. These factors could cause substantial fluctuations in ourrevenues and in our results of operations. If global economic and market conditions remain uncertain or deteriorate, we could experience a material adverseimpact on our business and results of operations. Because the manufacture of our products is complex, the foundries on which we depend may not achieve the necessary yields or productreliability that our business requires. The manufacture of our products is a highly complex and precise process, requiring production in a highly controlled environment. Changes inmanufacturing processes or the inadvertent use of defective or contaminated materials by a foundry could adversely affect the foundry’s ability to achieveacceptable manufacturing yields and product reliability. If the foundries we currently use do not achieve the necessary yields or product reliability, ourability to fulfill our customers’ needs could suffer. This could ultimately lead to a loss of sales of our products and have a negative effect on our grossmargins and results of operations. Furthermore, there are other significant risks associated with relying on these third-party foundries, including: ●risks due to the fact that we have reduced control over production cost, delivery schedules and product quality; ●less recourse if problems occur as the warranties on wafers or products supplied to us are limited; and ●increased exposure to potential misappropriation of our intellectual property. 19 As we depend on independent subcontractors, located in Asia, to assemble and test our semiconductor products, we are subject to additionalrisks that may materially disrupt our business. Independent subcontractors, located in Asia, assemble and test our semiconductor products. Because we rely on independent subcontractors toperform these services, we cannot directly control our product delivery schedules or quality levels. We are dependent on these subcontractors to allocate tous a sufficient portion of their capacity to meet our needs in a timely manner. Our future success also depends on the financial viability of our independentsubcontractors. If the capital structures of our independent subcontractors weaken, we may experience product shortages, production delays, qualityassurance problems, increased manufacturing costs, and/or supply chain disruption. All of this could ultimately lead to a loss of sales of our products,harm our reputation and competitive position, and our revenues could be materially harmed. Moreover, the economic, market, social, and political situations in countries where some of our independent subcontractors are located areunpredictable, can be volatile, and can have a significant impact on our business because we may not be able to obtain product in a timely manner.Market and political conditions, including currency fluctuation, terrorism, political strife, war, labor disruption, and other factors, including natural orman-made disasters, adverse changes in tax laws, tariff, import or export quotas, power and water shortages, or interruption in air transportation, in areaswhere our independent subcontractors are located also could have a severe negative impact on our operating capabilities. We are subject to order and shipment uncertainties and if we are unable to accurately predict customer demand, our business may be harmed. We typically sell products pursuant to purchase orders rather than long-term purchase commitments. Customers can generally change or deferpurchase orders on short notice without incurring a significant penalty. Given current market conditions, we have less ability to accurately predict what orhow many products our customers will need in the future. In addition, we have little visibility into and no control of the demand by our customer’scustomers – generally consumer electronics retailers. Furthermore, based on discussions with our customers, we understand that our customers also haveless visibility into their product demands. A decrease in the consumer electronics retailers’ demand or a build-up of their inventory, both of which are outof the control of our customers and us, may cause a cancellation, change or deferral of purchase orders on short notice by our customers. Anticipatingdemand is difficult because our customers and their customers face volatile pricing and unpredictable demand for their own products, and areincreasingly focused on cash preservation and tighter inventory management. Based on these trends, our customers are reluctant to place orders withnormal lead times, and we are seeing a shift to shorter lead-times and rush orders. However, we place orders with our suppliers based on forecasts of ourcustomers’ demand and, in some instances, may establish buffer inventories to accommodate anticipated demand. Our forecasts are based on multipleassumptions, each of which may introduce error into our estimates. If we overestimate our customers’ demand or our customers overestimate theirdemand, we may allocate resources to manufacturing products that we may not be able to sell when we expect to, if at all. As a result, we could hold excessor obsolete inventory, which would reduce our profit margins and adversely affect our financial results. Conversely, if we underestimate our customers’demand or our customers underestimate their demand and insufficient manufacturing capacity is available, we could forego revenue opportunities andpotentially lose market share and damage our customer relationships. 20 As a result of the acquisition of the CIPT business, we now maintain inventory, or hubbing, arrangements with certain of our customers.Pursuant to these arrangements, we deliver products to a customer or a designated third party warehouse based upon the customer’s projected needs, butdo not recognize product revenue unless and until the customer reports that it has removed our product from the warehouse to incorporate into its endproducts. Since we own inventory that is physically located in a third party’s warehouse, our ability to effectively manage inventory levels may beimpaired, causing our total inventory turns to decrease, which could increase expenses associated with excess and obsolete product and negatively impactour cash flow. We are dependent on a small number of OEM customers, and our business could be harmed by the loss of any of these customers orreductions in their purchasing volumes. We sell our products to a limited number of OEM customers directly or through a network of distributors. Moreover, many North American,European and Japanese OEMs are moving their manufacturing sites to Southeast Asia, as a result of the cyclical nature of manufacturing capacity issuesand cost of silicon integrated circuits, the continued decline of average selling prices of chipsets and other industry-wide factors. In addition, OEMslocated in Southeast Asia are growing and gaining competitive strength. As a result, the mix of our OEM customers may change in the future. However, wemay not succeed in attracting new customers as these potential customers may have pre-existing relationships with our current or potential competitors.This trend also may promote the consolidation of OEMs located in North America, Europe and Japan with OEMs located in Southeast Asia, which mayreduce the number of our potential customers and reduce the volume of chipsets the combined OEM customer may purchase from us. However, as iscommon in our industry, we typically do not enter into long term contracts with our customers in which they commit to purchase products from us. Theloss of any of our OEM customers may have a material adverse effect on our results of operations. To attract new customers, we may be faced with intenseprice competition, which may affect our revenues and gross margins. The possible emerging trend of our OEM customers outsourcing their production may cause our revenue to decline. We believe there may be an emerging trend of our OEM customers outsourcing their production to third parties. We have invested substantialresources to build relationships with our OEM customers. However the outsourcing companies whom our OEM customers may choose to outsourceproduction may not have prior business relationship with us or may instead have prior or ongoing relationships with our competitors. The emergence ofthis trend may require us to expend substantial additional resources to build relationships with these outsourcing companies, which would increase ouroperating expenses. Even if we do expend such resources, there are no assurances that these outsourcing companies will choose to incorporate our chipsetsrather than chipsets of our competitors. Our inability to retain an OEM customer once such customer chooses to outsource production would have amaterial adverse effect on our future revenue. Third party claims of infringement or other claims against us could adversely affect our ability to market our products, require us to redesignour products or seek licenses from third parties, and seriously harm our operating results and disrupt our business. As is typical in the semiconductor industry, we and our customers have been and may from time to time be notified of claims that we may beinfringing patents or intellectual property rights owned by third parties. In addition, patent infringement claims are increasingly being asserted by patentholding companies (so-called patent “trolls”), which do not use technology and whose sole business is to enforce patents against companies, such as us,for monetary gain. Because such patent holding companies do not provide services or use technology, the assertion of our own patents by way of counter-claim may be ineffective. We have received claims that our products infringe upon the proprietary rights of such patent holding companies. In addition,third parties have asserted and may in the future assert intellectual property infringement claims against our customers, which we have agreed in certaincircumstances to indemnify and defend against such claims. If litigation becomes necessary to determine the validity of any third party claims, it couldresult in significant expense to us and could divert the efforts of our technical and management personnel, whether or not the claim has merit andnotwithstanding that the litigation is determined in our favor. 21 If it appears necessary or desirable, we may try to obtain licenses for those patents or intellectual property rights that we are allegedly infringing.Although holders of these types of intellectual property rights commonly offer these licenses, we cannot assure you that licenses will be offered or that theterms of any offered licenses will be acceptable to us. Our failure to obtain a license for key intellectual property rights from a third party for technologyused by us could cause us to incur substantial liabilities, suspend the manufacturing of products utilizing the technology or damage the relationship withour customers. Alternatively, we could be required to expend significant resources to develop non-infringing technology. We cannot assure you that wewould be successful in developing non-infringing technology. The occurrence of any of these events could harm our business, financial condition orresults of operations. Because we have significant operations in Israel, we may be subject to political, economic and other conditions affecting Israel that couldincrease our operating expenses and disrupt our business. Our principal research and development facilities are located in the State of Israel and, as a result, at December 31, 2013, 202 of our 297employees were located in Israel, including 138 out of 183 of our research and development personnel. In addition, although we are incorporated inDelaware, a majority of our directors and executive officers are residents of Israel. Although substantially all of our sales currently are being made tocustomers outside of Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel. Any major hostilitiesinvolving Israel, or the interruption or curtailment of trade between Israel and its present trading partners, could significantly harm our business, operatingresults and financial condition. Israel’s economy has been subject to numerous destabilizing factors, including a period of rampant inflation in the early to mid-1980s, lowforeign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest. In addition, Israel and companies doing businesswith Israel have been the subject of an economic boycott by the Arab countries since Israel’s establishment. Although they have not done so to date, theserestrictive laws and policies may have an adverse impact on our operating results, financial condition or expansion of our business. Since the establishment of the State of Israel in 1948, a state of hostility has existed, varying in degree and intensity, between Israel and the Arabcountries. Although Israel has entered into various agreements with certain Arab countries and the Palestinian Authority, and various declarations havebeen signed in connection with efforts to resolve some of the economic and political problems in the Middle East, hostilities between Israel and some of itsArab neighbors have recently escalated and intensified. We cannot predict whether or in what manner these conflicts will be resolved. Our results ofoperations may be negatively affected by the obligation of key personnel to perform military service. In addition, certain of our officers and employees arecurrently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called for active military duty at any time. Althoughwe have operated effectively under these requirements since our inception, we cannot predict the effect of these obligations on the company in the future.Our operations could be disrupted by the absence, for a significant period, of one or more of our officers or key employees due to military service. The tax benefits available to us under Israeli law require us to meet several conditions, and may be terminated or reduced in the future, whichwould increase our taxes. Our facilities in Israel have been granted Approved Enterprise and Beneficiary Enterprise status under the Law for the Encouragement of CapitalInvestments, 1959, commonly referred to as the “Investment Law,” as amended. The Investment Law provides that capital investments in a productionfacility (or other eligible assets) designated as an Approved Enterprise or Beneficiary Enterprise receive certain tax benefits in Israel. Our investmentprograms that generate taxable income are currently subject to an average tax rate of up to approximately 10% based on a variety of factors, includingpercentage of foreign ownership and approvals for the erosion of the tax basis of our investment programs. To be eligible for tax benefits, we must meetcertain conditions, relating principally to adherence to the investment program filed with the Investment Center of the Israeli Ministry of Economy andperiodic reporting obligations. Although we believe we have met such conditions in the past, should we fail to meet such conditions in the future, we wouldbe subject to corporate tax in Israel at the standard corporate tax rate (26.5% for 2014) and could be required to refund tax benefits (including with interestand adjustments for inflation based on the Israeli consumer price index) already received. Our average tax rate for our investment programs also maychange in the future due to circumstances outside of our control, including changes to legislation. For example, on July, 2013, the Investment Law wasamended whereby the reduction of corporate tax rate for preferred enterprises was eliminated such that such enterprises, which are subject to the new law,would be subject to a 16% tax rate. Therefore, we cannot provide any assurances that our average tax rate for our investment programs will continue in thefuture at their current levels, if at all. The termination or reduction of certain programs and tax benefits or a requirement to refund tax benefits (includingwith interest and adjustments for inflation based on the Israeli consumer price index) already received may have a material adverse effect on our business,operating results and financial condition. 22 We may engage in future acquisitions that could dilute our stockholders’ equity and harm our business, results of operations and financialcondition. We have pursued, and will continue to pursue, growth opportunities through internal development and acquisition of complementary businesses,products and technologies. We are unable to predict whether or when any other prospective acquisition will be completed. The process of integrating anacquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources and management’sattention. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquiredbusinesses into our operations, or expand into new markets. Further, once integrated, acquisitions may not achieve comparable levels of revenues,profitability or productivity as our existing business or otherwise perform as expected. The occurrence of any of these events could harm our business,financial condition or results of operations. Future acquisitions may require substantial capital resources, which may require us to seek additional debt orequity financing. Future acquisitions by us could result in the following, any of which could seriously harm our results of operations or the price of our stock: ●issuance of equity securities that would dilute our current stockholders’ percentages of ownership; ●large one-time write-offs; ●the incurrence of debt and contingent liabilities; ●difficulties in the assimilation and integration of operations, personnel, technologies, products and information systems of the acquiredcompanies; ●diversion of management’s attention from other business concerns; ●contractual disputes; ●risks of entering geographic and business markets in which we have no or only limited prior experience; and ●potential loss of key employees of acquired organizations. We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive position. Our success and ability to compete is in part dependent upon our internally-developed technology and other proprietary rights, which we protectthrough a combination of copyright, trademark and trade secret laws, as well as through confidentiality agreements and licensing arrangements with ourcustomers, suppliers, employees and consultants. In addition, we have filed a number of patents in the United States and in other foreign countries withrespect to new or improved technology that we have developed. However, the status of any patent involves complex legal and factual questions, and thebreadth of claims allowed is uncertain. Accordingly, we cannot assure you that any patent application filed by us will result in a patent being issued, orthat the patents issued to us will not be infringed by others. Also, our competitors and potential competitors may develop products with similar technologyor functionality as our products, or they may attempt to copy or reverse engineer aspects of our product line or to obtain and use information that we regardas proprietary. Moreover, the laws of certain countries in which our products are or may be developed, manufactured or sold, including Hong Kong,Japan, Korea and Taiwan, may not protect our products and intellectual property rights to the same extent as the laws of the United States. Policing theunauthorized use of our products is difficult and may result in significant expense to us and could divert the efforts of our technical and managementpersonnel. Even if we spend significant resources and efforts to protect our intellectual property, we cannot assure you that we will be able to preventmisappropriation of our technology. Use by others of our proprietary rights could materially harm our business and expensive litigation may be necessaryin the future to enforce our intellectual property rights. 23 Because our products are complex, the detection of errors in our products may be delayed, and if we deliver products with material defects, ourcredibility will be harmed, the sales and market acceptance of our products may decrease and product liability claims may be made against us. Our products are complex and may contain errors, defects and bugs when introduced. If we deliver products with material errors, defects orbugs, our credibility and the market acceptance and sales of our products could be significantly harmed. Furthermore, the nature of our products mayalso delay the detection of any such error or defect. If our products contain material errors, defects and bugs, then we may be required to expend significantcapital and resources to alleviate these problems. This could result in the diversion of technical and other resources from our other development efforts.Any actual or perceived problems or delays may also adversely affect our ability to attract or retain customers. Furthermore, the existence of any defects,errors or failures in our products could lead to product liability claims or lawsuits against us or against our customers. We generally provide ourcustomers with a standard warranty for our products, generally lasting one year from the date of purchase. Although we attempt to limit our liability forproduct defects to product replacements, we may not be successful, and customers may sue us or claim liability for the defective products. A successfulproduct liability claim could result in substantial cost and divert management’s attention and resources, which would have a negative impact on ourfinancial condition and results of operations. We are exposed to the credit risk of our customers and to credit exposures in weakened markets, which could result in material losses. Most of our sales are on an open credit basis. Because of current conditions in the global economy, our exposure to credit risks relating to saleson an open credit basis has increased. We expect demand for enhanced open credit terms, for example, longer payment terms, to continue and believe thatsuch arrangements are a competitive factor in obtaining business. Although we monitor and attempt to mitigate credit risks, including through insurancecoverage from time to time, there can be no assurance that our efforts will be effective. Moreover, even if we attempt to mitigate credit risks throughinsurance coverage, such coverage may not be sufficient to cover all of our losses and we would be subject to a deductible under any insurance coverage.As a result, our future credit risk exposure may increase. Although any losses to date relating to credit exposure of our customers have not been material,future losses, if incurred, could harm our business and have a material adverse effect on our operating results and financial condition. Moreover, the lossof a customer due to its financial default also could harm our future business and potential growth. Our executive officers and key personnel are critical to our business, and because there is significant competition for personnel in ourindustry, we may not be able to attract and retain such qualified personnel. Our success depends to a significant degree upon the continued contributions of our executive management team, and our technical, marketing,sales customer support and product development personnel. The loss of significant numbers of such personnel could significantly harm our business,financial condition and results of operations. We do not have any life insurance or other insurance covering the loss of any of our key employees. Becauseour products are specialized and complex, our success depends upon our ability to attract, train and retain qualified personnel, including qualifiedtechnical, marketing and sales personnel. However, the competition for personnel is intense and we may have difficulty attracting and retaining suchpersonnel. 24 We may have exposure to additional tax liabilities as a result of our foreign operations. We are subject to income taxes in the United States and various foreign jurisdictions. In addition to our significant operations in Israel, pursuantto the Acquisition, we currently have operations in Germany, Hong Kong and India. Significant judgment is required in determining our worldwideprovision for income taxes and other tax liabilities. In the ordinary course of a global business, there are many intercompany transactions and calculationswhere the ultimate tax determination is uncertain. We are regularly under audit by tax authorities and as an example, we are now under audit in both Israeland Germany, the outcome of which could have material adverse impact on our financial condition. Our intercompany transfer pricing may be reviewedby the U.S. Internal Revenue Service and by foreign tax jurisdictions. Although we believe that our tax estimates are reasonable, due to the complexity ofour corporate structure, the multiple intercompany transactions and the various tax regimes, we cannot assure you that a tax audit or tax dispute to whichwe may be subject will result in a favorable outcome for us. If taxing authorities do not accept our tax positions and impose higher tax rates on our foreignoperations, our overall tax expenses could increase. We are exposed to fluctuations in currency exchange rates. A significant portion of our business is conducted outside the United States. Export sales to manufacturers in Europe and Asia, including Japanand Asia Pacific, represented 97% of our total revenues for 2013 and 99% for both 2012 and 2011. Although most of our revenue and expenses aretransacted in U.S. dollars, we may be exposed to currency exchange fluctuations in the future as business practices evolve and we are forced to transactbusiness in local currencies. Moreover, part of our expenses in Israel are paid in Israeli currency, which subjects us to the risks of foreign currencyfluctuations between the U.S. dollar and the New Israeli Shekel (NIS) and to economic pressures resulting from Israel’s general rate of inflation. Ourprimary expenses paid in NIS are employee salaries and lease payments on our Israeli facilities. Furthermore, a portion of our expenses for our Europeanoperations are paid in the Euro, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the Euro. Our primaryexpenses paid in the Euro are employee salaries, lease and operational payments on our European facilities. As a result, an increase in the value of the NISand Euro in comparison to the U.S. dollar, which has been the trend in most of the year due to the devaluation of the U.S. dollar, could increase the costof our technology development, research and development expenses and general and administrative expenses, all of which could harm our operating profit.From time to time, we use derivative instruments in order to minimize the effects of currency fluctuations, but our hedging positions may be partial, maynot exist at all in the future or may not succeed in minimizing our foreign currency fluctuation risks. Our financial results may be harmed if the trendrelating to the devaluation of the U.S. dollars continues for an extended period. Because the markets in which we compete are highly competitive, and many of our competitors have greater resources than we do, we cannotbe certain that our products will be accepted in the marketplace or capture market share. The markets in which we operate are extremely competitive and characterized by rapid technological change, evolving standards, short productlife cycles and price erosion. We expect competition to intensify as current competitors expand their product offerings and new competitors enter themarket. Given the highly competitive environment in which we operate, we cannot be sure that any competitive advantages enjoyed by our currentproducts would be sufficient to establish and sustain our new products in the market. Any increase in price or competition could result in the erosion ofour market share, to the extent we have obtained market share, and would have a negative impact on our financial condition and results of operations. In each of our business activities, we face current and potential competition from competitors that have significantly greater financial, technical,manufacturing, marketing, sales and distribution resources and management expertise than we do. These competitors may also have pre-existingrelationships with our customers or potential customers. Further, in the event of a manufacturing capacity shortage, these competitors may be able tomanufacture products when we are unable to do so. Our principal competitors in the cordless market include Lantiq and Dialog Semiconductors, and wehave also noted efforts by Beken, a Chinese supplier of basebands for analog cordless phones, to penetrate the DECT market. Our principal competitorsin the VoIP market include Broadcom, Dialog Semiconductors, Infineon, Texas Instruments and new Taiwanese IC vendors. Our principal competitors inthe multimedia market include Wi-Fi and multimedia application processor IC vendors like Atheros, Broadcom, CSR, Freescale, Intel, Marvel, Ralink,Samsung and Texas Instruments. 25 As discussed above, various new developments in the home residential market may require us to enter into new markets with competitors thathave more established presence, and significantly greater financial, technical, manufacturing, marketing, sales and distribution resources andmanagement expertise than we do. The expenditure of greater resources to expand our current product lines and develop a portfolio of “system-on-a-chip”solutions that integrate video, voice, data and communication technologies in a wider multimedia market may increase our operating expenses and reduceour gross profit. We cannot assure you that we will succeed in developing and introducing new products that are responsive to market demands. An unfavorable government review of our federal income tax returns or changes in our effective tax rates could adversely affect our operatingresults. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutory ratesand higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, or bychanges in tax laws, regulations, accounting principles or interpretations thereof. In addition, we are subject to the periodic examination of our income taxreturns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine theadequacy of our provision for income taxes, as an example, we are now under audit in both Israel and Germany. The outcomes from these examinationsmay have an adverse effect on our operating results and financial condition. Our business operations would be disrupted if the information technology systems we rely on fail to function properly. We rely on complex information technology systems to manage our business which operates in many geographical locations. For example, toachieve short delivery lead times and superior levels of customer service while maintaining low levels of inventory, we constantly adjust our productionschedules with manufacturers and subcontractors. We develop and adjust these schedules based on end customer demand as communicated by ourcustomers and distributors and based on our inventory levels, manufacturing cycle times, component lead times, and projected production yields. Wecombine and distribute all of this information electronically over a complex global communications network. Our ability to estimate demand and to adjustour production schedules is highly dependent on this network. Any delay in the implementation of, or disruption in the transition to, new or enhancedprocesses, systems or controls, could adversely affect our ability to manage customer orders and manufacturing schedules, as well as generate accuratefinancial and management information in a timely manner. These systems are also susceptible to power and telecommunication disruptions and othersystem failures. Failure of our IT systems or difficulties in managing them could result in business disruption. Our business could be significantlydisrupted and we could be subject to third party claims associated with such disruptions. We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of design integration,which may result in reduced manufacturing yields, delays in product deliveries and increased expenses. A growing trend in our industry is the integration of greater semiconductor content into a single chip to achieve higher levels of functionality. Inorder to remain competitive, we must achieve higher levels of design integration and deliver new integrated products on a timely basis. This will require usto expend greater research and development resources, and may require us to modify the manufacturing processes for some of our products, to achievegreater integration. We periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to reduce ourcosts. Although this migration to smaller geometry process technologies has helped us to offset the declining average selling prices of our products, thiseffort may not continue to be successful. Also, because we are a fabless semiconductor company, we depend on our foundries to transition to smallergeometry processes successfully. We cannot assure you that our foundries will be able to effectively manage the transition. In case our foundries or weexperience significant delays in this transition or fail to efficiently implement this transition, our business, financial condition and results of operationscould be materially and adversely affected. New regulations related to “conflict minerals” may cause us to incur additional expenses and could limit the supply and increase the cost ofcertain metals used in manufacturing our products. On August 22, 2012, the U.S. Securities and Exchange Commission adopted a new rule requiring disclosures by public companies of specifiedminerals (tin, tantalum, gold and tungsten), known as conflict minerals, that are necessary to the functionality or production of products manufactured orcontracted to be manufactured. The new rule, which went into effect for calendar year 2013 and requires a disclosure report to be filed with the SEC byMay 31, 2014, requires companies to perform due diligence, disclose and report whether or not such minerals originate from the Democratic Republic ofCongo or an adjoining country. We may incur material costs associated with complying with the disclosure requirements, such as costs related to the duediligence process of determining the source of certain minerals used in our products, as well as costs of possible changes to products, processes, orsources of supply as a consequence of such verification activities. We anticipate filing a conflict minerals report for the year ended 2013. Since our supplychain is complex, we may not be able to sufficiently verify the origins of the relevant minerals used in components manufactured by third parties throughthe due diligence procedures that we implement, which may harm our reputation. 26 The anti-takeover provisions in our certificate of incorporation and bylaws could prevent or discourage a third party from acquiring us. Our certificate of incorporation and bylaws contain provisions that may prevent or discourage a third party from acquiring us, even if theacquisition would be beneficial to our stockholders. Our board of directors also has the authority to fix the rights and preferences of shares of our preferredstock and to issue such shares without a stockholder vote. Our bylaws also place limitations on the authority to call a special meeting of stockholders. Ourstockholders may take action only at a meeting of stockholders and not by written consent. We have advance notice procedures for stockholders desiringto nominate candidates for election as directors or to bring matters before an annual meeting of stockholders. In addition, these factors may also adverselyaffect the market price of our common stock, and the voting and other rights of the holders of our common stock. Our stock price may be volatile so you may not be able to resell your shares of our common stock at or above the price you paid for them. Announcements of developments related to our business, announcements by competitors, quarterly fluctuations in our financial results, changesin the general conditions of the highly dynamic industry in which we compete or the national economies in which we do business, and other factors couldcause the price of our common stock to fluctuate, perhaps substantially. In addition, in recent years, the stock market has experienced extreme pricefluctuations, which have often been unrelated to the operating performance of affected companies. These factors and fluctuations could have a materialadverse effect on the market price of our common stock. Item 1B. UNRESOLVED STAFF COMMENTS. None.Item 2. PROPERTIES. Our principal offices in the United States are located in Los Altos, California, where we lease approximately 700 square feet under a lease thatexpires in January 2016. Portions of our U.S. operations are located in leased facilities in El Dorado Hills, California under a lease that expires in March2015. Our operations in Israel are located in leased facilities, with the primary leased facility of approximately 45,359 square feet located in HerzeliyaPituach, Israel. These facilities are leased through November 2018. Our subsidiary in Tokyo, Japan has a lease that terminates in October 2014. Oursubsidiary in Nuremberg, Germany has a lease that terminates in December 2015. Our subsidiary in Scotland has lease agreements for its facilities withautomatic renewals on a month-to-month basis. Our subsidiary in India has sublease agreements with NXP for its facilities that terminate in March 2017.Our subsidiary in Shenzhen, China has a lease that terminates in September 2014. Our subsidiary in Hong Kong entered into a lease agreement that iseffective until November 2016. We believe that our existing facilities are adequate to meet our needs for the immediate future. Item 3. LEGAL PROCEEDINGS. From time to time, we may become involved in litigation relating to claims arising from our ordinary course of business activities. Also, as istypical in the semiconductor industry, we have been and may from time to time be notified of claims that we may be infringing patents or intellectualproperty rights owned by third parties. We currently believe that there are no claims or actions pending or threatened against us, the ultimate disposition ofwhich would have a material adverse effect on us. Item 4. MINE SAFETY DISCLOSURES. Not applicable. 27 PART II Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASESOF EQUITY SECURITIES. Our common stock, par value $0.001, trades on the NASDAQ Global Select Market (NASDAQ symbol “DSPG”). The following table presentsfor the periods indicated the high and low sales prices for our common stock as reported by the NASDAQ Global Select Market: Year EndedDecember 31, 2012 High Low First Quarter 6.79 4.85 Second Quarter 6.95 5.77 Third Quarter 6.40 5.36 Fourth Quarter 6.02 5.05 Year EndedDecember 31, 2013 High Low First Quarter 8.33 5.63 Second Quarter 8.76 6.95 Third Quarter 8.75 6.3 Fourth Quarter 10.14 6.78 As of March 7, 2014, there were 22,552,463 shares of common stock outstanding. As of March 7, 2014, the company had approximately 35holders of record and we believe greater than 2,500 beneficial holders. We have never paid cash dividends on our common stock and presently intend tocontinue a policy of retaining any earnings for reinvestment in our business. Equity Compensation Plan Information Information relating to our equity compensation plans will be presented under the caption “Equity Compensation Plan Information” of ourdefinitive proxy statement pursuant to Regulation 14A in connection with the annual meeting of stockholders to be held on June 9, 2014. The definitiveproxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this report.Such information is incorporated herein by reference. 28 Issuer Purchases of Equity Securities During the fourth quarter of 2013, we repurchased 389,922 shares of our common stock at an average price of $8.95 per share forapproximately $3,490,000. The table below sets forth the information with respect to repurchases of our common stock during the three months endedDecember 31, 2013. Period (a) TotalNumber ofSharesPurchased (b) AveragePrice Paid perShare (c) TotalNumber ofSharesPurchased asPart ofPubliclyAnnouncedPlans orPrograms (d)MaximumNumber ofShares thatMayYet BePurchasedUnder thePlans orPrograms(1) Month #1 (October 1, 2013 to October 31, 2013) - - - 307,749 Month #2 (November 1, 2013 to November 30, 2013) 74,922 8.35 74,922 2,932,827 Month #3 (December 1, 2013 to December 31, 2013) 315,000 9.09 315,000 2,617,827(1) (1) The number represents the number of shares of our common stock that remain available for repurchase pursuant to our board’s authorizations as ofDecember 31, 2013. In November 2013, our board of directors authorized the company’s entry into a share repurchase plan, in accordance with Rule 10b5-1 of theSecurities Exchange Act of 1934, for the repurchase of up to 2,700,000 shares of our common stock. This authorization is in addition to the approximately308,000 shares that were available for repurchase under the Board’s prior authorizations. At December 31, 2013, 2,617,827 shares of our common stock remained available for repurchase under our board authorized share repurchaseprogram, including 2.7 million shares from November 2013 authorization. The repurchase program is being affected from time to time, depending onmarket conditions and other factors, through open market purchases and privately negotiated transactions as well as through entry into a share repurchaseplan in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934. The repurchase program has no set expiration or termination date. Information relating to our equity compensation plans will be presented under the caption “Equity Compensation Plan Information” of ourdefinitive proxy statement pursuant to Regulation 14A in connection with the annual meeting of stockholders to be held on June 9, 2014. The definitiveproxy statement will be filed with the Securities and Exchange Commission no later than 120 days after the end of the fiscal year covered by this report.Such information is incorporated herein by reference. 29 Stock Performance Graph Notwithstanding anything to the contrary set forth in any of the Company’s previous or future filings under the Securities Act of 1933, asamended, or the Securities Exchange Act of 1934, as amended, that might incorporate this proxy statement or future filings made by the Companyunder those statutes, the Stock Performance Graph shall not be deemed filed with the United States Securities and Exchange Commission and shallnot be deemed incorporated by reference into any of those prior filings or into any future filings made by the Company under those statutes. The graph below compares the cumulative total stockholder return on our common stock with the cumulative total return on the Standard &Poor’s 500 Index and Standard & Poor’s Information Technology Index. The period shown commences on December 31, 2008 and ends on December 31,2013, the end of our last fiscal year. The graph assumes an investment of $100 on December 31, 2008, and the reinvestment of any dividends. Comparisons in the graph above are based upon historical data and are not indicative of, nor intended to forecast, future performance of ourcommon stock. 30 Item 6. SELECTED FINANCIAL DATA. The selected historical consolidated financial data presented below is derived from our consolidated financial statements. The selectedconsolidated financial data set forth below is qualified in its entirety by, and should be read in conjunction with, our consolidated financial statements forthe year ended December 31, 2013, and the discussion of our business, operations and financial results in the section captioned, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations.” Year Ended December 31, 2013 2012 2011 2010 2009 (U.S. dollars in thousands) Statements of Operations Data: Revenues $151,063 $162,790 $193,861 $225,482 $212,186 Cost of revenues 91,237 101,660 123,734 137,571 133,590 Gross profit 59,826 61,130 70,127 87,911 78,596 Operating expenses Research and development, net 35,000 42,539 53,244 55,588 56,148 General, administrative, salesand marketing 23,085 24,875 29,417 31,561 33,117 Amortization of intangible assets 1,672 2,310 7,972 9,975 12,258 Restructuring cost (income) - 2,008 (170) 463 - Total operating expenses 59,757 71,732 90,463 97,587 101,523 Operating income (loss) 69 (10,602) (20,336) (9,676) (22,927)Financial and other income Financial income, net 2,457 2,388 1,885 1,468 2,857 Other income from remeasurement ofinvestment in a businessCombination - - 1,343 - - Income (loss) before taxes 2,526 (8,214) (17,108) (8,208) (20,070)Income tax benefit (150) (172) (866) (783) (11,634)Net income (loss) $2,676 $(8,042) $(16,242) $(7,425) $(8,436)Weighted average number of CommonStock outstanding during the periodused to compute basic net earnings(loss) per share 22,249 21,950 23,247 23,229 23,655 Weighted average number of CommonStock outstanding during the periodused to compute diluted net earnings(loss) per share 22,906 21,950 23,247 23,229 23,655 Basic net income (loss) per share $0.12 $(0.37) $(0.70) $(0.32) $(0.36)Diluted net income (loss) per share $0.12 $(0.37) $(0.70) $(0.32) $(0.36)Balance Sheet Data: Cash, cash equivalents, marketablesecurities and bank deposits,including restricted deposits $127,712 $120,339 $117,909 $139,761 $123,065 Working capital $42,301 $49,102 $60,010 $72,073 $68,013 Total assets $192,265 $185,182 $197,625 $222,555 $219,769 Total stockholders’ equity $147,411 $142,227 $148,624 $167,103 $165,489 31 Year EndedDecember 31,Fiscal Years byQuarter 2013 2012 QuarterlyData: 4th 3rd 2nd 1st 4th 3rd 2nd 1st (Unaudited, U.S. dollars in thousands, except per share amount)Revenues $35,340 $35,381 $40,692 $39,650 $38,429 $36,666 $44,191 $43,504 Gross profit $14,153 $13,805 $16,162 $15,706 $14,739 $13,902 $16,511 $15,978 Net income(loss) $356 $398 $750 $1,172 $(141) $(2,415) $(2,224) $(3,262)Net income(loss) pershare — Basic $0.02 $0.02 $0.03 $0.05 $(0.01) $(0.11) $(0.10) $(0.14)Net income(loss) pershare —Diluted $0.02 $0.02 $0.03 $0.05 $(0.01) $(0.11) $(0.10) $(0.14) Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of ourfinancial condition and results of operations. The discussion should be read in conjunction with our consolidated financial statements and notes thereto. Business Overview DSP Group is a leading global provider of wireless chipset solutions for converged communications, delivering system solutions that combinesemiconductors and software with reference designs. We provide a broad portfolio of wireless chipsets integrating DECT, Wi-Fi, PSTN and VoIPtechnologies with state-of-the-art application processors. We also enable converged voice, audio and data connectivity across diverse consumer products –from cordless and VoIP phones to home gateways and connected multimedia screens. Our current primary focus is digital cordless telephony with sales ofour in-house developed DECT, VoIP and 2.4GHz chipsets representing approximately 94% of our total revenues for 2013. Our revenues were $151.1 million for 2013, a decrease of 7.2% in comparison to 2012, mainly due to a decrease in sales, and reduction inaverage selling prices, of our cordless telephony products. Sales of our DECT 6.0 products for the U.S. market decreased from $69.1 million for 2012 to$54.5 million for 2013. Sales of our DECT products for the European market increased from $56.7 million for 2012 to $58.3 million for 2013.Revenues derived from the sale of DECT products represented 84% and 82% of our total revenues for 2013 and 2012, respectively. Our gross marginincreased to 39.6% of our total revenues for 2013 from 37.6% for 2012, primarily due to (i) a decrease in the provision for slow or obsolete inventories, (ii)an improvement in the production yield of certain of our products, (iii) different mix of products and customers, and (iv) a reduction in manufacturingand other related operational expenses such as shipping, engineering, depreciation and payroll expenses. Our operating income was $0.1 million for 2013, as compared to an operating loss of $10.6 million for 2012. The significant improvement fromoperating loss to operating income was mainly as a result of a decrease in research and development, and sales and marketing expenses, and animprovement in gross margins, offset to some extent by (i) a decrease in total revenues during 2013 as compared to 2012 and (ii) an increase in general andadministrative expenses during 2013 as compared to 2012, due to the proxy contest related expenses. Our operating expenses decreased by 16.7% to $59.8million for 2013, as compared to $71.7 million for 2012, mainly as a result of the two restructuring programs that we implemented during 2012. 32 Notwithstanding our success in reducing our operating expenses, revenues derived from our cordless products are continuing to decline. This isprimarily due to the lack of growth of the cordless telephony market, as well as the continuing decline in the average selling prices of all of our cordlessproducts. The cordless telephony market is undergoing a challenging period. With the rapid deployment of new communication access methods, includingmobile, wireless broadband, cable and other connectivity, the traditional cordless telephony market using fixed-line telephony will continue to decline,which will continue to reduce our revenues derived from, and unit sales of, cordless telephony products. Furthermore, our business also may besignificantly affected by the outcome of the competition between cellular phone operators and fixed-line operators for the provision of residentialcommunication. A significant majority of our revenues are currently generated from sales of chipsets used in cordless phones that are based on fixed-linetelephony. If we are unable to develop new technologies to address alternative connectivity methods, our business could be materially adversely affected. Therefore, in order to increase our revenues and offset the declining revenues generated from our cordless products, we need to introduce newproducts and penetrate new markets. We hope to leverage our strong technology base and customer relationships to maximize growth and revenueopportunities of these new products. We are seeing evidence that our past research and development investments in new technologies are beginning to materialize. We have achieved anumber of design wins for our next generation products. Commercial shipments for some products have begun with more shipments to occur during 2014.Aggregate revenues derived from our next generation products were 14.7%, 11.9% and 10.3% of our total revenues for 2013, 2012 and 2011, respectively.Based on a strong pipeline of design wins, our current mix of next generation products and anticipated commercialization schedules of customersincorporating our next generation products, we anticipate annual revenues generated from our next generation products to increase significantly in 2014 ascompared to 2013. However, we can provide no assurances about our success in introducing new products and penetrating new markets, as well as our predictionsregarding market trends. For example, although a number of potential customers have expressed interest, we have not yet achieved a design win for ourHDClear product for mobile devices. Furthermore, although next generation products targeted at the convergence of voice and data connectivity, enterpriseVoIP solutions and mobile device market are gradually being introduced into the market, market adoption of such products is at early stages. Although wehave achieved a number of design wins with top-tier OEMs for next-generation products, revenue generated from the commercialization of new products isa measured process as there is generally a long lead time from a design win to commercialization. From initial product design win to volume production,many factors could impact the timing and/or amount of sales actually realized from the design win. In addition to general price sensitive and price erosionin the markets we operate, the introduction of next-generation productions may accelerate price erosion of older products. As a result, we expect the marketto remain price sensitive for our traditional cordless telephony products and expect that price erosion and the decrease in the average selling prices of suchproducts to continue. Furthermore, various other factors, including increases in the cost of raw materials and commodities and our suppliers passing suchincreases onto us, increases in silicon wafer costs and increases in production, assembly and testing costs, and shortage of capacity to fulfill ourfabrication, assembly and testing needs, all may decrease our gross profit and harm our ability to grow our revenues in future periods. As of December 31, 2013, our principal source of liquidity consisted of cash and cash equivalents of $23.6 million and marketable securitiesand short term deposits of $104.1 million, totaling $127.6 million. Critical Accounting policies Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the financialstatements, we are required to make assumptions and estimates about future events, and apply judgment that affect the reported amounts of assets,liabilities, revenue, expenses and the related disclosure. We base our assumptions, estimates and judgments on historical experience, current trends andother factors that management believes to be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviewsour accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in accordance with U.S.GAAP. However, because future events and their effects cannot be determined with certainty, actual results could differ from our assumption andestimates, and such differences could be material. 33 Our significant accounting policies are discussed in Note 2, Significant Accounting Policies, of the notes to our consolidated financial statementsfor the year ended December 31, 2013. Management believes that the following accounting policies require management’s most difficult, subjective and complex judgments, resultingfrom the need to make estimates about the effect of matters that are inherently uncertain. Management has reviewed these critical accounting policies andrelated disclosures with our independent auditors and audit committee. DescriptionJudgments & UncertaintiesEffect if Actual Results Differ from AssumptionsTax Contingencies:Like most companies, domestic and foreigntax authorities periodically audit our incometax returns. These audits include questionsregarding our tax filing positions, including thetiming and amount of deductions and theallocation of income among various taxjurisdictions. In evaluating the exposureassociated with our various tax filingpositions, including state, foreign and localtaxes, we record reserves for probableexposures. A number of years may elapsebefore a particular matter, for which we haveestablished a reserve, is audited and fullyresolved. We report a liability for unrecognized taxbenefits resulting from uncertain tax positionstaken or expected to be taken in a tax return.We recognize interest and penalties, if any,related to unrecognized tax benefits in incometax expense.The estimate of our tax contingency reservecontains uncertainty because management mustuse judgment to estimate the exposure associatedwith our various tax filing positions. According to Financial Accounting StandardsBoard ("FASB") Accounting StandardsCodification ("ASC") No. 740, “Income Taxes,”the first step is to evaluate the tax position forrecognition by determining if the weight ofavailable evidence indicates it is more likely thannot that the position will be sustained on audit,including resolution of related appeals or litigationprocesses, if any. The second step is to measurethe tax benefit as the largest amount which is morethan 50% likely of being realized upon ultimatesettlement.Although management believes that its estimates andjudgments about tax contingencies are reasonable,actual results could differ, and we may be exposed togains or losses that could be material. To the extentwe prevail in matters for which reserve has beenestablished, or are required to pay amounts in excessof the reserve, our effective tax rate for a givenfinancial statement period could be materiallyaffected. An unfavorable tax settlement would requireuse of our cash and result in an increase in oureffective tax rate for the year of resolution. Afavorable tax settlement would be recognized as areduction in our effective tax rate for the year ofresolution. Tax Valuation Allowance:We have a valuation allowance for deferred taxassets based on the determination that it ismore likely than not that some of these assetswill not be realized.Our management inherently must make estimatesto determine the ultimate realization of theseassets. The estimate of our tax valuationallowance contains uncertainty becausemanagement must use judgment to estimate theexpected results for tax purposes.Although management believes that its estimates andjudgments about expected results for tax purposes arereasonable, actual results could differ, and we maybe required to record an additional valuationallowance for our deferred tax assets. 34 DescriptionJudgments & UncertaintiesEffect if Actual Results Differ fromAssumptionsValuation of Long-Lived Assets, IntangibleAssets and Goodwill :Goodwill represents the excess of purchase priceover the fair value of identifiable net assetsacquired in business combination. The goodwillon our consolidated balance sheet is a result of ouracquisition of BoneTone. Goodwill and theidentifiable intangible assets included on ourconsolidated balance sheet are current customerrelations, acquired from NXP in the Acquisitionand in-process R&D and non-competitionagreement acquired in the BoneTone acquisition. We perform our annual impairment analysis ofgoodwill and indefinite-lived intangible assets(such as in-process research and development) inthe fourth quarter of each fiscal year, or moreoften if there are indicators of impairment. Wereview intangible assets with finite useful life forpotential impairment when events or changes incircumstances indicate the carrying value of thoseintangible assets may be impaired. We may obtainan appraisal from an independent valuation firmto determine the amount of impairment, if any. Inaddition to the use of an independent valuationfirm, we perform internal valuation analyses andconsider other publicly available marketinformation.We determine fair value using widely acceptedvaluation techniques, including discounted cashflow and market multiple analyses. These typesof analyses require us to make assumptions andestimates regarding industry economic factors andthe profitability of future business strategies. It isour policy to conduct impairment testing based onour current business strategy in light of presentindustry and economic conditions, as well asfuture expectations.If management's estimates or related assumptionschange in the future, we may be required to recordimpairment charges for our intangible assets. 35 DescriptionJudgments & UncertaintiesEffect if Actual Results Differ fromAssumptionsContingencies and Other Accrued Expenses:We are from time to time involved in legalproceedings and other claims. We are required toassess the likelihood of any adverse judgments oroutcomes to these matters, as well as potentialranges of probable losses.A determination of the amount of reserve required,if any, for any contingencies and accruals ismade after careful analysis of each individualissue. The required reserve may change due tofuture developments, such as a change in thesettlement strategy in dealing with anycontingencies, which may result in higher netlosses.If actual results are not consistent withmanagement's assumptions and judgments, wemay be exposed to gains or losses that could bematerial.Inventory Write-Off:We value our inventory at the lower of the cost ofthe inventory or fair market value through theestablishment of write-off and inventory lossreserve. We have not made any changes in theaccounting methodology used to establish ourmarkdown or inventory loss reserves during thepast four fiscal years.Our write-off represents the excess of the carryingvalue, typically cost, over the amount we expect torealize from the ultimate sale or other disposal ofinventory based upon our assumptions regardingforecasted consumer demand, the promotionalenvironment, inventory aging and technologicalobsolescence.If management's estimates regarding consumerdemand are inaccurate or changes in technologyaffect demand for certain products in anunforeseen manner, we may be exposed to lossesor gains in excess of our established write-off thatcould be material.Equity-Based Compensation Expense:Equity-based compensation expense is measuredon the grant date based on the fair value of theaward and is recognized as an expense over therequisite service periods.Determining the fair value of equity-based awardson the grant date requires the exercise of judgment,including the amount of equity-based awards thatare expected to be forfeited. We consider manyfactors when estimating expected forfeitures,including types of awards, employee class, andhistorical experience. Actual results, and futurechanges in estimates, may differ substantiallyfrom our current estimates. We estimate the fair value of equity-based awardsusing a binomial option pricing model. The fairvalue of an award is affected by our stock priceon the date of grant as well as other assumptions,including expected stock price volatility and theexpected term of the equity-based award. Therisk-free interest rate is based on the yield fromU.S. treasury bonds with an equivalent term.Expected volatility is calculated based upon actualhistorical stock price movements. The expectedterm of the equity-based award granted is basedupon historical experience and represents theperiod of time that the award granted is expected tobe outstanding. Our expected dividend rate is zerosince we do not currently pay cash dividends anddo not anticipate doing so in the foreseeable future.Although management believes that their estimatesand judgments about equity-based compensationexpense are reasonable, actual results could differ. 36 DescriptionJudgments & UncertaintiesEffect if Actual Results Differ fromAssumptionsMarketable Securities:Management determines the appropriateclassification for our investments in debt andequity securities at the time of purchase and re-evaluates such determination at each balance sheetdate.The marketable securities are periodicallyreviewed for impairment. If it is concluded thatany of these investments are impaired,management determines whether such impairmentis “other-than-temporary.” Factors that areconsidered in making such a determinationinclude the duration and severity of theimpairment, the reason for the decline in valueand the potential recovery period, and our intent tosell, or whether it is more likely than not that wewill be required to sell, the investment beforerecovery of its cost basis. If any impairment isconsidered “other-than-temporary,” the investmentis written down to its fair value and acorresponding charge is recorded in financialincome, net.Although management believes that theirconsiderations and judgments about fair valueand whether a loss associated with a marketablesecurity is other-than-temporary, actual resultscould differ. Given current market conditions anduncertainty, management’s judgments could proveto be wrong, and companies with relatively highcredit ratings and solid financial conditions maynot be able to fulfill their obligations and therebycause other-than-temporary losses.Business Combination:In December 2011, we exercised our option toacquire the remaining 70% equity interest our, ona fully diluted basis, in BoneTone for a purchaseprice of $8.6 million. The acquisition wasrecorded in accordance with ASC 805, “BusinessCombination Accounting.” We have allocated thepurchase price of BoneTone to tangible andacquisition-related intangible assets acquired andliabilities assumed based on their estimated fairvalues.Management makes estimates of fair value usingreasonable assumptions based on historicalexperience and information obtained from theBoneTone management in order to allocate thepurchase price to the tangible and intangibleassets. The valuation requires significant estimates andassumptions, especially with respect toacquisition-related intangible assets. Althoughmanagement believes that their estimates andjudgments about the business combination arereasonable, actual results could differ. 37 Results of Operations: Total Revenues. Our total revenues were $151.1 million for 2013, $162.8 million for 2012 and $193.9 million for 2011. The decrease of 7.2%in revenues for 2013 as compared to 2012 and the decrease of 16% in revenues for 2012 as compared to 2011 were both primarily as a result of decreasedsales of our 2.4GHz and DECT products. Sales of DECT products were $126.3 million, $133.9 million and $159.4 million for the years ended 2013,2012 and 2011, respectively, representing approximately 84%, 82% and 82% of our total revenues for 2013, 2012 and 2011, respectively. The decrease of6% in absolute dollars of DECT sales in 2013 as compared to 2012 and the decrease of 16% in absolute dollars of DECT sales in 2012 as compared to2011 were mainly attributable to a decline in market demands and a decrease in average selling prices of our DECT products. Sales of our DECT 6.0products for the U.S. end market were $54.5 million, $69.1 million and $75.4 million for 2013, 2012 and 2011, respectively, representing 36%, 42%and 39% of our total revenues for 2013, 2012 and 2011, respectively. Sales of our DECT products for the European market increased in 2013 by $1.6million to $58.3 million, as compared to a decrease from $79.3 million in 2011 to $56.7 million for 2012. Sales of 2.4GHz products were $6.8 million, $12.1 million and $18.3 million for 2013, 2012 and 2011, respectively, representing 5%, 7% and9% of our total revenues for 2013, 2012 and 2011, respectively. This represents a decrease of 44% in absolute dollars when comparing sales for 2013 to2012, which resulted mainly from a decrease of sales of our 2.4 GHz products in the Japanese domestic and the U.S. markets. When comparing 2.4 GHzsales for 2012 to 2011, there was a decrease of 34% in absolute dollars which resulted mainly from the same factors as the 2013 decline. The following table shows the breakdown of revenues for all product lines for the periods indicated by geographic location based on thegeographic location of our customers (in thousands): Year Ended December 31, 2013 2012 2011 United States $4,342 $2,028 $1,836 Hong Kong 86,090 84,736 100,894 Japan 34,377 51,033 57,260 Europe 7,370 7,429 9,180 Korea 914 1,968 5,909 China 6,999 6,270 8,577 Taiwan 7,093 6,496 7,225 Other 3,878 2,830 2,980 Total revenues $151,063 $162,790 $193,861 Sales to our customers in Hong Kong increased for 2013 as compared to the same period of 2012, representing an increase of 2% in absolute dollars.The increase in our sales to Hong Kong for the comparable periods resulted mainly from the increase in sales to Shenzhen Guo Wei Electronics Ltd. (“GuoWei Electronics”) of 67% when comparing 2013 to 2012 and an increase in sales to CCT Telecom Holdings Ltd. (“CCT”) of 8% when comparing 2013 to2012. The increase in our sales to Hong Kong for the comparable periods was offset to some extent by a decrease in sales to Vtech Holding Ltd. (“Vtech”)of 6% when comparing 2013 to 2012. Sales to our customers in Japan decreased for 2013 as compared to the same period of 2012, representing a decreaseof 33% in absolute dollars. The decrease in our sales to Japan for the comparable periods resulted mainly from (i) a decrease in sales to PanasonicCommunications Co. Ltd. (“Panasonic”), representing a 14% decrease in absolute dollars for 2013 as compared to 2012, (ii) a decrease in sales to theJapanese domestic market, representing a 19% decrease in absolute dollars for 2013 as compared to 2012, and (iii) a decrease in sales to the UnidenAmerica Corporation (“Uniden”), representing a 67% decrease in absolute dollars for 2013, as compared to 2012. Sales to our customers in Hong Kongdecreased for 2012 as compared to the same period of 2011, representing a decrease of 16% in absolute dollars. The decrease in our sales to Hong Kongfor the comparable periods resulted mainly from the decrease in sales to Vtech of 10% when comparing 2012 to 2011 and a decrease in sales to CCT of40% when comparing 2012 to 2011. Sales to our customers in Japan decreased for 2012 as compared to the same period of 2011, representing a decreaseof 11% in absolute dollars. The decrease in our sales to Japan for the comparable periods resulted mainly from (i) a decrease in sales to Panasonic,representing a 7% decrease in absolute dollars for 2012 as compared to 2011, (ii) a decrease in sales to the Japanese domestic market, representing a 15%decrease in absolute dollars for 2012 as compared to 2011, and (iii) a decrease in sales to the Uniden, representing a 14% decrease in absolute dollars for2012, as compared to 2011. 38 As our products are generally incorporated into consumer electronics products sold by our OEM customers, our revenues are affected by seasonalbuying patterns of consumer electronics products sold by our OEM customers that incorporate our products. Significant Customers. The Japanese and Hong Kong markets and the OEMs that operate in those markets are among the largest suppliers ofresidential wireless products with significant market share in the U.S. market. The loss of any of our significant customers or distributors could have amaterial adverse effect on our business, financial condition and results of operations. VTech is a significant OEM customer based in Hong Kong. Sales to VTech represented 36%, 35% and 33% of our total revenues for 2013, 2012and 2011, respectively. Another significant customer of the company in Hong Kong is CCT, whose sales represented 9%, 8% and 11% of our totalrevenues for 2013, 2012 and 2011, respectively. Revenues derived from sales through our largest distributor, Japan-based Tomen Electronics Corporation (“Tomen Electronics”), accounted for19% of our total revenues for 2013, as compared to 21% for 2012 and 19% for 2011. Sales to Uniden represented 4%, 11% and 10% of our total revenuesfor 2013, 2012 and 2011, respectively. Tomen Electronics sells our products to a limited number of customers. One customer, Panasonic, has continually accounted for a majority ofsales through Tomen Electronics. Sales to Panasonic through Tomen Electronics generated approximately 14%, 15% and 13% of our total revenues for2013, 2012 and 2011, respectively. Significant Products. Revenues from our DECT products represented 84%, 82% and 82% of our total revenues for 2013, 2012 and 2011,respectively. Revenues from our 2.4GHz products represented 5%, 7% and 9% of our total revenues for 2013, 2012 and 2011, respectively. We believethat sales of DECT products will continue to represent a substantial percentage of our revenues for 2014. We believe that the rapid deployment of newcommunication access methods, as well as the lack of growth in fixed-line telephony, will reduce our total revenues derived from, and unit sales of,cordless telephony products, including our DECT products, for the short and long term. Gross Profit. Gross profit as a percentage of revenues was 39.6% for 2013, 37.6% for 2012 and 36.2% for 2011. The increase in our grossprofit for 2013 as compared to 2012 was primarily due to (i) a decrease in the provision for slow or obsolete inventories, (ii) an improvement in theproduction yield of certain of our products, (iii) different mix of products and customers, and (iv) a reduction in manufacturing and other relatedoperational expenses such as shipping, engineering, depreciation and payroll expenses. The increase in our gross profit for 2012 as compared to 2011 wasprimarily due to (i) a decrease in the provision for slow or obsolete inventories, (ii) an improvement in the production yield of certain of our products, (iii)a decrease in certain production costs such as gold due to the replacement of gold with copper in certain of our products, and (iv) a reduction in otheroperational expenses such as boards, materials and subcontractors. As gross profit reflects the sale of chips and chipsets that have different margins,changes in the mix of products sold have impacted and will continue to impact our gross profit in future periods. Our gross profit may decrease in thefuture due to a variety of factors, including the continued decline in the average selling prices of our products, changes in the mix of products sold, ourfailure to achieve cost reductions, roll-out of new products in any given period, our success in introducing new engineering processes to reducemanufacturing costs, increases in the cost of raw materials such as gold, oil and silicon wafers, and increases in production, assembly and testing costs.Moreover, our suppliers may pass the increase in the cost of raw materials and commodities onto us which would further reduce the gross margins of ourproducts. There are no guarantees that our ongoing efforts in cost reduction and yield improvements will keep pace with the anticipated continuing declinein average selling prices of our products. Cost of goods sold consists primarily of costs of wafer manufacturing and fabrication, assembly and testing of integrated circuit devices andrelated overhead costs, and compensation and associated expenses related to manufacturing and testing support, inventory obsolesce and logisticspersonnel. 39 Operating Expenses. Our operating expenses were $59.8 million for 2013, $71.7 million for 2012 and $90.5 million for 2011. The decreasein operating expenses for 2013 as compared to 2012 was primarily attributable to (i) a decrease in research and development expenses in the amount of$7.5 million in 2013 as compared to 2012, (ii) a decrease in sales and marketing expenses in the amount of $3.0 million in 2013 as compared to 2012,(iii) a decrease in restructuring expenses in the amount of $2.0 million, which were related to our operational restructuring plans that were initiated duringthe second and third quarters of 2012, and (iv) a decrease in the amortization cost for intangible assets related mostly to the acquisition of the CIPTBusiness in the amount of $0.6 million. These decreases were offset to some extent by an increase in general and administrative expenses in the amount of$1.2 million in 2013 as compared to 2012 relating primarily to the proxy contest. The decrease in operating expenses for 2012 as compared to 2011 was primarily attributable to a decrease in research and development expensesin the amount of $10.7 million in 2012 as compared to 2011 which was attributed mainly to (x) the restructuring of our U.S. operations, implementedduring the third quarter of 2011, which reduced our research and development expenses for 2012, (y) a decrease in projects-related expenses, mainly tape-out, materials, subcontractors and travel expenses, and (z) a decrease in labor and employee-related expenses, (in addition to the savings from therestructuring of our U.S. operations that was initiated during the third quarter of 2011). This decrease in labor and employee-related expenses was mainlydue to (a) a decrease in the number of employees, (b) the devaluation of the New Israeli Shekel (“NIS”) against the U.S. dollar, which decreased the Israeliemployee labor expenses, and (c) the restructuring of our operations that was initiated during the second and third quarters of 2012. Other factors thatcontributed to the decrease in our operating expenses in 2012 as compared to 2011 are: (i) a decrease in general and administrative expenses such as legaland stockholders and investors relations expenses in the amount of $1.2 million, (ii) a decrease in sales commission paid in 2012 as compared to 2011 inthe amount of $0.6 million due to a lower level of revenues subject to sales commissions, (iii) a decrease in equity-based compensation expenses in theamount of $1.2 million, and (iv) a decrease in the amortization cost for intangible assets related mostly to the acquisition of the CIPT Business in theamount of $5.7 million. These decreases were offset to some extent by an increase in restructuring expenses in the amount of $2.2 million, which wererelated to the above mentioned restructuring plans executed in 2012. Our operating income was $0.1 million for 2013, as compared to an operating loss of $10.6 million for 2012 and $20.3 million for 2011. Thedecrease in operating losses for 2013 as compared to 2012 was mainly due to an increase in gross margins and a decrease in operating expenses as notedabove, offset to some extent by a decrease in revenues in 2013 as compared to 2012. The decrease in operating losses for 2012 as compared to 2011 wasmainly as a result of a decrease in operating expenses in all expense categories, offset to some extent by a decrease in total revenues during 2012 ascompared to 2011. Research and Development Expenses. Our research and development expenses, net, were $35.0 million for 2013, $42.5 million for 2012 and$53.2 million for 2011. The decrease for 2013 in research and development expenses, net, as compared to 2012, was mainly due to (i) the execution of tworestructuring plans during the second and third quarters of 2012, which reduced the number of our research and development employees and laborcontractors, which reduced the related payroll expenses for 2013 by $3.3 million (net, after taking into consideration the effect of the devaluation of theU.S. dollar against the NIS for 2013, as compared to the same period of 2012, which increased our payroll expenses and offset to some extent thereductions mentioned above), (ii) a decrease in projects-related expenses (mainly IPs and CAD tools) in the amount of $1.3 million, (iii) a decrease inequity-based compensation expenses for 2013 in the amount of $0.6 million, (iv) a decrease in other expenses (mainly depreciation, facilities and ITexpenses allocated to our research and development expenses, net) in the amount of $1.4 million, and (v) an increase in funding received from the IsraeliOffice of the Chief Scientist (“OCS”) in 2013 in comparison to 2012 in the amount of $1.7 million following the receipt of an approval from the OCSduring the third and fourth quarters of 2013. The above mentioned OCS funding was recognized as a deduction of our research and developmentexpenses, net. The decrease in research and development expenses, net, for 2013, as compared to the comparable period of 2012, was offset to some extentby an increase in tape-out expenses in the amount of $1.3 million. As a result of receipt of OCS funding, royalties may be payable to the OCS in the futurebased on a percentage of revenues derived from sales of products whose development was facilitated by the OCS funding. The obligation to pay theseroyalties is contingent on actual sales of these products. 40 The decrease for 2012 in research and development expenses, as compared to 2011, was mainly due to (i) the restructuring of our U.S.operations, which was implemented during the third quarter of 2011 and reduced our research and development expenses for 2012 as compared to 2011 inthe amount of $2 million, (ii) a decrease in projects-related expenses (mainly tape-out, materials, subcontractors and travel expenses) in the amount of $3.7million, (iii) a decrease in equity-based compensation expenses in the amount of $0.3 million, and (iv) a decrease in labor and employee-related expenses inthe amount of $3.1 million (in addition to the savings from the planned restructuring of our U.S. operations initiated during the third quarter of 2011).This decrease in labor and employee-related expenses for 2012 was mainly due to (x) a decrease in the number of employees, (y) the devaluation of the NISagainst the U.S. dollar, which decreased our Israeli employee labor expenses, and (z) the restructuring of our operations that was initiated during thesecond and third quarters of 2012. In addition, during 2012, we recorded grants receivable in the amount of $0.4 million from the OCS in support of oneof our research and development projects, which also decreased our research and development expenses in comparison to 2011. Our research and development expenses, net, as a percentage of our total revenues were 23%, 26% and 27% for 2013, 2012 and 2011,respectively. The decreases in research and development expenses, net, as a percentage of total revenues for 2013 as compared to 2012 and 2012 ascompared to 2011 were mainly due to a decrease in research and development expenses, net, for the comparable periods, which was offset to some extentby a decrease in absolute dollars of our total revenues for the comparable periods. Research and development expenses consist mainly of payroll expenses to employees involved in research and development activities, expensesrelated to tapeout and mask work, subcontracting, labor contractors and engineering expenses, depreciation and maintenance fees related to equipment andsoftware tools used in research and development, and facilities expenses associated with and allocated to research and development activities. Sales and Marketing Expenses. Our sales and marketing expenses were $11.3 million for 2013, $14.2 million for 2012 and $16.5 million for2011. The decrease in sales and marketing expenses between 2013 and 2012 was mainly attributed to (i) a decrease in the number of sales and marketingemployees and labor expenses by $2.0 million, (ii) a decrease in commissions paid to distributers as a result of a decrease in revenues by $0.2 million,(iii) a decrease in overseas travel expenses and allocated depreciation, facilities and IT expenses by $0.5 million, and (iv) a decrease in equity-basedcompensation expenses by $0.3 million. The decrease in sales and marketing expenses between 2012 and 2011 was mainly attributed to (i) a decrease in the number of sales andmarketing employees and labor expenses in the amount of $1 million, (ii) a decrease in the amount of $0.6 million in sales commission paid due to a lowerlevel of revenues subject to sales commissions, (iii) a decrease in overseas travel expenses in the amount of $0.3 million, and (iv) a decrease in equity-based compensation expenses in the amount of $0.2 million. Our sales and marketing expenses as a percentage of our total revenues were 7%, 9% and 9% for 2013, 2012 and 2011, respectively. Thedecrease in sales and marketing expenses as a percentage of total revenues for 2013 as compared to 2012 was mainly due to a decrease in absolute dollarsof sales and marketing expenses, offset to some extent by the decrease in total revenues for 2013 as compared to 2012. Sales and marketing expenses consist mainly of sales commissions, payroll expenses to direct sales and marketing employees, travel, trade showexpenses, and facilities expenses associated with and allocated to sales and marketing activities. General and Administrative Expenses. Our general and administrative expenses were $11.8 million, $10.6 million and $12.9 million for2013, 2012 and 2011, respectively. The increase in general and administrative expenses for 2013 as compared to 2012 was mainly attributed to (i) anincrease in legal and shareholder relations related expenses by $0.9 million, mainly due to proxy contest related expenses we incurred during the secondquarter of 2013 (ii) an increase in other expenses (mainly expenses related to patent filings and board related expenses) by $0.3 million and (iii) an increasein payroll related expenses in the amount of $0.3 million. The increase in general and administrative expenses for 2013, as compared to the comparableperiod of 2012, was offset to some extent by (x) a decrease in depreciation, facilities and IT expenses allocated to our general and administrative expenses inthe amount of $0.2 million and (y) a decrease in accounting expenses by $0.1 million. 41 The decrease in general and administrative expenses for 2012 as compared to 2011 was mainly attributed to (i) a decrease in investor relations,legal and accounting expenses in the amount of $1.3 million, (ii) a decrease in equity-based compensation expenses in the amount of $0.6 million, and (iii)a decrease in payroll related expenses in the amount of $0.3 million mainly due to the devaluation of the NIS against the U.S. dollar, which decreased ourIsraeli employee payroll expenses in U.S. dollar. General and administrative expenses as a percentage of our total revenues were 8% for 2013 and 7% for both 2012 and 2011. The increase ingeneral and administrative expenses in 2013 as a percentage of total revenues as compared to 2012 was due to (i) an increase in absolute dollars of generaland administrative expenses for 2013 as compared to the same period of 2012, and (ii) a decrease in total revenues for 2013 as compared to 2012. Our general and administrative expenses consist mainly of payroll expenses for management and administrative employees, accounting and legalfees, expenses related to investor relations as well as facilities expenses associated with general and administrative activities. 42 Description of Segments. Until the second quarter of 2012, we operated under one reporting segment. During the third quarter of 2012, following a change in the mannerour management evaluates financial information, we determined that the company operates under three reportable segments in accordance withASC 280 “Disclosure about Segments of an Enterprise and Related Information.” Our operating segments are as follows: Home, Office and Mobile. The classification of our business segments is based on a number of factorsthat our management uses to evaluate, view and run the company’s business operations, which include, but are not limited to, customer base,homogeneity of products and technology. A description of the types of products provided by each business segment is as follows: Home - Wireless chipset solutions for converged communication at home. Such solutions include integrated circuits targeted for cordlessphones sold in retail or supplied by telecommunication service providers, residential gateway devices supplied by telecommunication serviceproviders which integrate the DECT/CAT-iq functionality and also integrated circuits addressing home automation applications, as well asfixed-mobile convergence solutions. Office - Comprehensive solution for Voice-over-IP (VoIP) office products, including office solutions that offer businesses of all size low-costVoIP terminals with converged voice and data applications. Mobile - Products for the mobile market that provides voice enhancement and far-end noise elimination targeted for mobile phone and mobileheadsets and wearable devices that incorporate our noise suppression and voice quality enhancement HDClear technology. Segment data: We derive the results of our business segments directly from our internal management reporting system and by using certain allocationmethods. The accounting policies we use to derive business segment results are substantially the same as those we use for consolidation of ourfinancial statements. Management measures the performance of each business segment based on several metrics, including earnings fromoperations. Management uses these results, in part, to evaluate the performance of, and to assign resources to, each of the business segments.We do not allocate to our business segments certain operating expenses, which we manage separately at the corporate level. These unallocatedcosts include primarily restructuring charges, amortization of purchased intangible assets, equity-based compensation expenses, proxy contestrelated expenses incurred during the second quarter of 2013 and certain corporate governance costs. We do not allocate any assets to segments and, therefore, no amount of assets is reported to management and disclosed in the financialinformation for segments. Selected operating results information for each business segment was as follows for the years ended December 31,2013, 2012 and 2011: Year ended December 31 Revenues Income (loss) from operations 2013 2012 2011 2013 2012 2011 Home $142,144 $155,211 $188,192 $25,367 $15,040 -* Office $8,849 $7,579 $5,669 $(4,656) $(5,156) -* Mobile $70 $- $- $(11,040) $(8,585) -* Total $151,063 $162,790 $193,861 $9,671 $1,299 $(2,830) *) It is impracticable to present 2011 income (loss) from operations by segments due to lack in internal management reporting and trackingsystem, which tracks and reports employees actual hours in the various projects. 43 Sales to our customers in the home segment decreased for 2013 as compared to the same period of 2012, representing a decrease of 8% in absolute dollarsand decreased for 2012 as compared to the same period of 2011, representing a decrease of 17% in absolute dollars. The decrease in our home segmentsales for the comparable periods was mainly attributable to the decline in market demands, and the decrease in the average selling prices, of cordlessphones over the comparative periods. Sales to our customers in the office segment increased for 2013 as compared to the same period of 2012, representing an increase of 17% in absolutedollars. Sales to our customers in the office segment increased for 2012 as compared to the same period of 2011, representing an increase of 34% inabsolute dollars. The increase in our office segment sales for both comparable periods was mainly due to an increase in market share in the marketsassociated with the office segment and an increase in market demand for our VoIP products. The reconciliation of segment operating results information to our consolidated financial information is as follows: Year ended December 31, 2013 2012 2011 Income (loss) from operations $9,671 $1,299 $(2,830)Unallocated corporate, general and administrative expenses * (2,368) (2,600) (3,484)Restructuring expenses - (2,008) 170 Proxy contest related expenses (1,403) - - Equity-based compensation expenses (4,159) (4,983) (6,220)Intangible assets amortization expenses (1,672) (2,310) (7,972)Other income from remeasurement of initial investment in an affiliated company - - 1,343 Financial income, net 2,457 2,388 1,885 Total consolidated income (loss) before taxes $2,526 $(8,214) $(17,108) *Includes mainly legal, accounting, board of directors and investors relation expenses. Amortization of Intangible Assets. During 2013, 2012 and 2011, we recorded an expense of $1.7 million, $2.3 million and $8.0 million,respectively, relating to the amortization of intangible assets associated with the acquisition of the CIPT Business and the acquisition of BoneTone in 2011.The sequential decrease is consistent with, and is based on, the original amortization schedule determined following the impairment of goodwill and otherintangible assets that took place in 2008 in relation to the acquisition of the CIPT Business, offset to some extent by an increase in 2013 in the amortizationof intangible assets associated with the acquisition of BoneTone in 2011, as compared to the same period in 2012. Restructuring Costs and Other. During 2012, we recorded an expense of $2.0 million in connection with the restructuring of our operations,which was composed of two restructuring plans executed during the second and third quarters of 2012. As part of these restructuring plans, we executedtermination agreements with certain of our employees and recorded an expense related to the future expected under-utilization of existing development toolagreements with expiry dates in 2013 and 2014. During 2011, as part of our plan to improve operational efficiencies and reduce our operating expenses forfiscal year 2012, we restructured our U.S. operations. As part of this restructuring plan, we executed termination agreements with certain of our U.S.employees and renegotiated the lease for our U.S. facilities. We recorded an income in the amount of $0.2 million during 2011 which was composed of anincome of $0.6 million associated with the restructuring plan that we initiated during the third quarter of 2010, offset by restructuring expenses in theamount of $0.4 million associated with the restructuring of our U.S. operations as noted above. The above referenced income resulted mainly from theclosure of our Swiss facilities and the termination of employment of the employees of our Swiss subsidiary, which resulted in a curtailment and settlementof our Swiss pension plan during the first quarter of 2011. 44 Financial income, net. Financial income, net, was $2.5 million for 2013, $2.4 million for 2012 and $1.9 million for 2011. The increase infinancial income, net, for 2013 as compared to 2012 was mainly due to a profit in the amount of $1.0 million resulting from the sale of certain marketablesecurities during 2013, as compared to a $0.7 million profit recorded during 2012. The increase in financial income, net, was offset to some extent by adecrease in interest income received in 2013 compared to 2012 in the amount of $0.2 million. The increase in financial income, net, for 2012 as comparedto 2011 was mainly due to a profit in the amount of $0.7 million resulting from the sale of certain marketable securities during 2012, as compared to a$0.2 million profit recorded during 2011. Our total cash, cash equivalents, marketable securities and short term deposits, including restricted deposits, were $127.7 million as ofDecember 31, 2013, as compared to $120.3 million as of December 31, 2012. Other income. We recorded other income in the amount of $1.3 million during the fourth quarter of 2011. Other income was derived from theremeasurement to fair value of our investment in BoneTone when we exercised our option to acquire the remaining 70% equity interest in BoneTone, on afully diluted basis, for a purchase price of $8.6 million in December 2011. We initially acquired 30% of BoneTone's then outstanding equity, on a fullydiluted basis, in November 2009. Provision for Income Taxes. Our income tax benefit was $0.2 million for 2013, as compared to a tax benefit of $0.2 million for 2012 and a taxbenefit of $0.9 million for 2011. The income tax benefit for 2013 was mainly attributed to (i) an amortization of deferred tax liability, net related to theintangible assets acquired in connection with Bonetone acquisition in the amount of $0.4 million, and (ii) a reversal of an income tax contingency reservethat was determined to be no longer needed due to the expiration of the applicable statute of limitations in the amount of $0.3 million. The above mentionedtax benefits were offset to some extent by current tax expenses that were recorded in the amount of $0.5 million. The income tax benefit for 2012 wasmainly attributed to a reversal of an income tax contingency reserve in the amount of $0.5 million that was determined to be no longer required due to theexpiration of the applicable statute of limitations during the third quarter of 2012. The income tax benefit for 2011 resulted mainly from a tax benefit of$0.6 million resulting from the reversal of an income tax contingency reserve that was determined to be no longer needed due to the expiration of theapplicable statute of limitations and from an approval that was received from the Israeli governmental authorities with respect to the recognition for taxpurposes of our research and development expenses for previous years. During 2013, we did not record any significant changes to the net deferred tax assets due to our current estimate of future taxable income. DSP Group Ltd., our Israeli subsidiary, was granted “Approved Enterprise” status by the Israeli government with respect to six separateinvestment plans. Approved Enterprise status allows our Israeli subsidiary to enjoy a tax holiday for a period of two or four years, and a reduced corporatetax rate of 10%-25% (based on the percentage of foreign ownership) for an additional six or eight years, on each investment plan’s proportionate share oftaxable income. The tax benefits under our Israeli subsidiary’s first five investment plans have expired and those under the sixth investment plan arescheduled to expire by 2015. On April 1, 2005, an amendment to the Israeli Investment Law came into effect (the “Amendment”). The Amendment revised the criteria forinvestments qualified to receive tax benefits. An eligible investment program under the Amendment qualifies for benefits as a Beneficiary Enterprise(previous terminology being Approved Enterprise). Among other things, the Amendment provides tax benefits to both local and foreign investors andsimplified the approval process. The Amendment does not apply to investment programs approved prior to December 31, 2004. The new tax regime appliesto new investment programs only. 45 For 2006 and 2009, DSP Group Ltd. elected the status of a Beneficiary Enterprise under the Amendment for its seventh and eight plans,respectively. The seventh and eight plans entitle DSP Group Ltd. to a corporate tax exemption for a period of two years and a reduced corporate tax rate of10%-25% (based on the percentage of foreign ownership) for an additional period of eight years from the first year it has taxable income. The tax benefitsunder the seventh and eighth investment plans are scheduled to gradually expire between 2016 and 2021. In December 2010, the Israeli Parliament passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), which, among otherthings, included an amendment to the Investment Law, effective as of January 1, 2011 (the “2011 Amendment”). In accordance with the 2011Amendment, the benefit tracks under the Investment Law were modified and a uniform tax rate would apply to companies eligible for the “PreferredEnterprise” status (rather than the previous terminology of “Beneficiary Enterprise” after the 2005 amendment). Companies may elect to irrevocablyimplement the 2011 Amendment (while waiving benefits provided under the Investment Law as then in effect). On July 30, 2013, the Israeli Parliament passed a law, which, among other things, was designated to amend the uniform tax rates that were set inthe 2011 Amendment, and to increase the tax levy for years 2013 and 2014 (the “New Law”). The New Law increases the Israeli corporate tax rate from25% to 26.5%, cancels the reduction of corporate tax rate for “Preferred Enterprises,”which will be set on 16% for 2014 and thereafter under the New Lawand increases the tax rate on dividends from sources under the Israeli Investment Law to 20% commencing on January 1, 2014. Regarding our investment plans under the Israeli Investment Law, we do not currently intend to implement the New Law; rather we intend tocontinue to comply with the Israeli Investment Law as it is in effect prior to enactment of the New Law until the earlier of such time that compliance withthe Israeli Investment Law prior to enactment of the New Law is no longer in our best interests or until the expiration of our current investment programs.We are required to comply with the New Law subsequent to the expiration of our current investment programs and for any new qualified investmentprogram after a transitional period. As a result, the New Law may increase our average tax rate in future years. To be eligible for tax benefits under the investment programs, we must meet certain conditions, relating principally to adherence to the investmentprogram filed with the investment Center of the Israeli Ministry of Industry and Trade and to periodic reporting obligations. We believe that our investmentprograms are currently in compliance with these requirements. However, if we fail to meet these requirements, we would be subject to corporate tax in Israelat the regular statutory rate (25% for 2013 and 26.5% for 2014). We also could be required to refund tax benefits, with interest and adjustments forinflation based on the Israeli consumer price index. In connection with the acquisition of the CIPT Business, we received a tax ruling from the Swiss tax authorities with respect to the taxable incomegenerated by our Swiss subsidiary, including the amortization period for tax purposes of goodwill and all other intangible assets acquired in theacquisition by our Swiss subsidiary. Pursuant to the tax ruling, our Swiss subsidiary is entitled to reduced tax rates of approximately 10% to 15%,depending on the source of income, and tax amortization period of up to 10 years for the goodwill and other intangible assets acquired in the acquisition byour Swiss subsidiary. 46 LIQUIDITY AND CAPITAL RESOURCES Operating Activities. We generated $13.3 million of cash and cash equivalents from our operating activities during 2013. In 2012, we generated$10.2 million of cash and cash equivalents from our operating activities, and in 2011, we used $0.6 million of cash and cash equivalents from operatingactivities. The increase in net cash generated by operating activities for 2013, as compared to 2012, was mainly as a result of (i) an increase in net income,excluding certain non-cash items such as depreciation, equity-based compensation expenses and amortization of intangible assets, during 2013 ascompared to 2012, in the amount of $7.3 million, (ii) an increase in accrued compensation and benefits during 2013 in the amount of $4.0 million, ascompared to an increase in accrued compensation and benefits in the amount of $1.3 million during 2012, and (iii) an increase in accounts payable during2013 in the amount of $0.1 million, as compared to a decrease in accounts payable during 2012 in the amount of $4.0 million. The increase in cashgenerated from operating activities when comparing the respective periods was offset to some extent by (a) an increase in accounts receivable during 2013 inthe amount of $0.8 million, as compared to a decrease in the amount of $5.3 million in accounts receivable during 2012, (b) a decrease in inventories inthe amount of $0.6 million during 2013, as compared to a decrease in inventories in the amount of $3.5 million during 2012, and (c) a decrease in otheraccounts receivable and prepaid expenses in the amount of $0.5 million during 2013, as compared to a decrease in other accounts receivable and prepaidexpenses in the amount of $2.2 million during 2012. The increase in net cash generated by operating activities for 2012, as compared to 2011, was mainlyas a result of (i) a decrease in net loss, excluding non-cash items such as depreciation, equity-based compensation expenses, amortization of intangibleassets and a gain from remeasurement to fair value of an investment as a result of a business combination, in the amount of $1.0 million, (ii) a decrease intrade receivable in the amount of $5.3 million during 2012, as compared to an increase in trade receivable in the amount of $0.6 million during 2011,(iii) a decrease in other accounts receivable and prepaid expenses in the amount of $2.2 million during 2012, as compared to a decrease in other accountsreceivable and prepaid expenses in the amount of $0.5 million during 2011, (iv) a decrease in inventories in the amount of $3.5 million during 2012, ascompared to a decrease in inventories in the amount of $2.4 million during 2011, and (v) an increase in accrued compensation and benefits in the amountof $1.3 million during 2012, as compared to a decrease in accrued compensation and benefits in the amount of $1.6 million during 2011. The increase inthe amount of cash generated from operating activities for 2012, as compared to 2011, was offset to some extent by a decrease in trade payable in theamount of $4.0 million during 2012, as compared to an increase in trade payable in the amount of $1.2 million during 2011. Investing Activities. We invest excess cash in marketable securities of varying maturities, depending on our projected cash needs for operations,capital expenditures and other business purposes. During 2013, we purchased $70.7 million of investments in marketable securities and deposits, ascompared to $78.2 million during 2012 and $86.0 million during 2011. During the same periods, $18.3 million, $25.9 million and $68.1 million,respectively, of investments in marketable securities matured and were called by the issuer. During the same periods, $43.0 million, $39.1 million and$11.9 million, respectively, of investments in marketable securities were sold. Additionally, during 2013, 2012 and 2011, $2.8 million, $15.7 millionand $10.0 million, respectively, of short term deposits matured. As of December 31, 2013, the amortized cost of our marketable securities and deposits was approximately $104.4 million and their stated marketvalue was approximately $104.1 million, representing an unrealized loss of approximately $0.4 million. During November 2013, we made an investment of $2.2 million in a private company in Asia in return for approximately 14% of the equity ofthe company on a fully diluted basis. We also have the option to acquire the remaining equity of this private company under agreed terms until December31, 2014. During November 2009, we made an investment of $2.2 million in BoneTone in return for approximately 30% of the then outstanding equity ofthe company, on a fully diluted basis. We also had the option to acquire the remaining equity of BoneTone within a 24-month period. In December 2011,we exercised our option to acquire the remaining 70% equity interest of BoneTone, on a fully diluted basis, for a net purchase price of $8.3 million ($8.6million was paid, net of cash and cash equivalents of $0.3 million that was in the company on the date of the acquisition). Our capital equipment purchases for 2013, consisting primarily of research and development software tools, computers and other peripheralequipment, engineering test and lab equipment, leasehold improvements, furniture and fixtures, totaled $1.1 million, as compared to $1.1 million for2012, and $2.3 million for 2011. Financing Activities. During 2013, we repurchased 0.4 million shares of our common stock at an average purchase price of $8.95 per share foran aggregate amount of $3.49 million. In addition, during 2013, we received $2.0 million upon the exercise of employee stock options. During 2012, we repurchased 1.3 million shares of our common stock at an average purchase price of $6.28 per share for an aggregate amountof $8.1 million. No exercises of employee stock options were executed during 2012. During 2011, we repurchased 1.3 million shares of our common stockat an average purchase price of $6.74 per share for an aggregate amount of $8.8 million. In addition, we received $0.4 million upon the exercise ofemployee stock options. We cannot predict cash flows from exercises of stock options for future periods. 47 In November 2013, we entered into a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934, for therepurchase of our common stock for up to 2.7 million shares. This was in addition to the approximately 308,000 shares that were available for repurchasepursuant to the Board’s prior authorizations. At December 31, 2013, approximately 2.6 million shares of our common stock are available for repurchase under our board authorized sharerepurchase program. As of December 31, 2013, we had cash and cash equivalents totaling approximately $23.6 million and marketable securities and time depositsof approximately $104.1 million. Our working capital at December 31, 2013 was approximately $42.3 million, as compared to $49.1 million as of December 31, 2012. Thedecrease in working capital was mainly due to (i) a replacement of short term marketable securities and cash and cash equivalents with long termmarketable securities, (ii) an investment of $2.2 million in an Asian private company, and (iii) the repurchase of 0.4 million shares of our common stockfor an aggregate amount of $3.49 million. Those factors were offset to some extent by the cash and cash equivalents generated during 2013 from ouroperating activities and cash received upon the exercise of employees stock options. In addition, as part of our business strategy, we may evaluate potential acquisitions of businesses, products and technologies. Accordingly, aportion of our available cash may be used at any time for the acquisition of complementary products or businesses. Such potential transactions mayrequire substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able tosuccessfully identify suitable acquisition candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into newmarkets. Furthermore, we cannot assure you that additional financing will be available to us in any required time frame and on commercially reasonableterms, if at all. See the section of the risk factors entitled “We may engage in future acquisitions that could dilute our stockholders’ equity and harm ourbusiness, results of operations and financial condition.” for more detailed information. Contractual Obligations The following table aggregates our material expected obligations and commitments as of December 31, 2013 (in thousands): Payment Due By Period Contractual Obligations Total Less Than 1Year 2-3 Years 4-5 Years More Than 5Years Operating Lease Commitments (1) $10,723 $2,860 $4,819 $3,044 - Net Pension Liability (2) 1,552 28 44 35 1,445 Development tools lease (3) 4,125 1,100 2,200 825 Total Contractual Obligations $16,400 $3,988 $7,063 $3,904 $1,445 (1)Represents mainly operating lease payments for facilities and vehicles under non-cancelable lease agreements. See Note 14 to notes to ourconsolidated financial statements for the year ended December 31, 2013. (2)Includes estimates of gross contributions and future payments required to meet the requirements of several defined benefit plans. Theamounts presented in the table are not discounted and do not take into consideration staff turnover assumptions. (3)Represents lease payments for development tools under non-cancelable lease agreements. At December 31, 2013, we had a liability for unrecognized tax benefits and an accrual for the payment of related interests totaling $1.9 million.Due to uncertainties related to those tax matters, we currently are unable to make a reasonably reliable estimate of when cash settlement with a taxingauthority will occur. We believe a change in the amount of unrecognized tax benefit is reasonably possible in the next 12 months due to the examination bythe Israeli tax authorities of our Israeli tax returns for 2006 – 2011 and the examination by the German tax authorities of our German tax returns for 2007 –2009. We currently cannot provide an estimate of the range of change in the amount of the unrecognized tax benefits due to the ongoing status of theexamination. 48 Off-Balance Sheet Arrangements. We do not have any off-balance sheet arrangements, as such term is defined in recently enacted rules by the Securities and ExchangeCommission, that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues orexpenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors. Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Interest Rate Risk. It is our policy not to enter into interest rate derivative financial instruments, except for hedging of foreign currencyexposures discussed below. We do not currently have any significant interest rate risk since we do not have any financial obligations. The majority of our cash and cash equivalents are invested in high grade certificates of deposits with major U.S., European and Israeli banks.Generally, cash and cash equivalents and short term deposits may be redeemed and therefore minimal credit risk exists with respect to them. Nonetheless,cash deposits with these banks exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits in the U.S. or similar limits in foreignjurisdictions, to the extent such deposits are even insured in such foreign jurisdictions. While we monitor on a systematic basis the cash balances andadjust the balances as appropriate, these balances could be impacted if one or more of the financial institutions with which we deposit our funds fails or issubject to other adverse conditions in the financial or credit markets. To date we have experienced no loss of principal or lack of access to our cash;however, we can provide no assurances that access to our cash will not be affected if the financial institutions that we hold our cash fail or the financialand credit markets continue to worsen. We hold an investment portfolio of marketable securities consisting principally of debentures of U.S. and European corporations, and state andpolitical subdivisions of the U.S. government. We intend, and have the ability, to hold investments in marketable securities with a decline in fair valueuntil an anticipated recovery of any temporary declines in their market value. We typically do not attempt to reduce or eliminate our market exposures onour investment securities because the majority of our investments are short-term. However, we can provide no assurances that we will recover presentdeclines in the market value of our investments. Interest rate fluctuations relating to our cash and cash equivalents and within our investment portfolio have not had, and we do not currentlyanticipate such fluctuations will have, a material affect on our financial position on an annual or quarterly basis. Foreign Currency Exchange Rate Risk. A significant part of our sales and expenses are denominated in U.S. dollars. Part of our expenses inIsrael is paid in NIS, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the NIS. Our primary expenses paid inNIS are employee salaries and lease payments on our Israeli facilities. Furthermore, due to the Acquisition, a portion of our expenses for our Europeanoperations are paid in the Euro, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the Euro. Our primaryexpenses paid in Euro are employee salaries, lease and operational payments on our European facilities. To partially protect the company against anincrease in value of forecasted foreign currency cash flows resulting from salary and lease payments denominated in NIS during 2013, we instituted aforeign currency cash flow hedging program. The option and forward contracts used are designated as cash flow hedges, as defined by FASB ASC No.815," Derivatives and Hedging," and are all effective as hedges of these expenses. For more information about our hedging activity, see Note 2 to our notesto our consolidated financial statement for the year ended December 31, 2013. An increase in the value of the NIS and the Euro in comparison to the U.S.dollar could increase the cost of our research and development expenses and general and administrative expenses, all of which could harm our operatingprofit. Although we currently are using a hedging program to minimize the effects of currency fluctuations relating to the NIS, our hedging position ispartial, may not exist at all in the future and may not succeed in minimizing our foreign currency fluctuation risks. 49 Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2013 IN U.S. DOLLARS INDEX Page Reports of Independent Registered Public Accounting Firm51 Consolidated Balance Sheets54 Consolidated Statements of Operations56 Consolidated Statements of Comprehensive Income (Loss)57 Statements of Changes in Stockholders' Equity58 Consolidated Statements of Cash Flows60 Notes to Consolidated Financial Statements62 - - - - - - - - - - 50 Kost Forer Gabbay &Kasierer3 Aminadav St.Tel-Aviv 6706703, Israel Tel: +972-3-6232525Fax: +972-3-5622555ey.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of DSP GROUP, INC. We have audited the accompanying consolidated balance sheets of DSP Group, Inc. (the "Company") as of December 31, 2013 and 2012, and therelated consolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the three years inthe period ended December 31, 2013. Our audits also included the financial statement schedule listed in the Index at Item 15(a). These financial statementsand schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and schedulebased on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An auditincludes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing theaccounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believethat our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position ofthe Company at December 31, 2013 and 2012, and the consolidated results of its operations and its cash flows for each of the three years in the periodended December 31, 2013, in conformity with U.S. generally accepted accounting principles. Also, in our opinion, the related financial statementschedule, when considered in relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forththerein. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), DSP Group, Inc.'sinternal control over financial reporting as of December 31, 2013, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission and our report dated March 17, 2014 expressed an unqualified opinion thereon. /s/ Kost Forer Gabbay & KasiererTel-Aviv, IsraelKOST FORER GABBAY & KASIERERMarch 17, 2014A Member of Ernst & Young Global 51 Kost Forer Gabbay &Kasierer3 Aminadav St.Tel-Aviv 6706703, Israel Tel: +972-3-6232525Fax: +972-3-5622555ey.com REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM The Board of Directors and Stockholders of DSP GROUP INC. We have audited DSP Group, Inc.'s (the "Company") internal control over financial reporting as of December 31, 2013, based on criteriaestablished in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (the "COSOcriteria"). The Company's management is responsible for maintaining effective internal control over financial reporting, and for its assessment of theeffectiveness of internal control over financial reporting included in the accompanying Management's Annual Report on Internal Control over FinancialReporting. Our responsibility is to express an opinion on the Company's internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standardsrequire that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintainedin all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a materialweakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such otherprocedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company'sinternal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail,accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recordedas necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expendituresof the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assuranceregarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a material effect on thefinancial statements. 52 Kost Forer Gabbay &Kasierer3 Aminadav St.Tel-Aviv 6706703, Israel Tel: +972-3-6232525Fax: +972-3-5622555ey.com Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of anyevaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degreeof compliance with the policies or procedures may deteriorate. In our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2013, basedon the COSO criteria. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidatedbalance sheets of the Company as of December 31, 2013 and 2012, and the related consolidated statements of operations, comprehensive income (loss),changes in stockholders' equity and cash flows for each of the three years in the period ended December 31, 2013 and our report dated March 17, 2014expressed an unqualified opinion thereon. /s/ Kost Forer Gabbay & KasiererTel-Aviv, IsraelKOST FORER GABBAY & KASIERERMarch 17, 2014A Member of Ernst & Young Global 53 DSP GROUP, INC. CONSOLIDATED BALANCE SHEETSU.S. dollars in thousands December 31, 2013 2012 ASSETS CURRENT ASSETS: Cash and cash equivalents $23,578 $21,684 Restricted deposits 77 121 Marketable securities and short-term deposits (Note 3) 13,895 20,201 Trade receivables, net 21,195 20,403 Other accounts receivable and prepaid expenses (Note 4) 2,733 3,757 Inventories (Note 5) 12,334 12,916 Total current assets 73,812 79,082 PROPERTY AND EQUIPMENT, NET (Note 6) 2,837 3,706 LONG-TERM ASSETS: Long-term marketable securities (Note 3) 90,162 78,333 Long-term prepaid expenses and lease deposits 100 208 Severance pay fund 11,168 10,197 Investment in other company (Note 9) 2,200 - Intangible assets, net (Note 7) 6,710 8,380 Goodwill 5,276 5,276 115,616 102,394 Total assets $192,265 $185,182 The accompanying notes are an integral part of the consolidated financial statements. 54 DSP GROUP, INC. CONSOLIDATED BALANCE SHEETSU.S. dollars in thousands, except share and per share data December 31, 2013 2012 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade payables $14,149 $14,027 Accrued compensation and benefits 9,845 7,545 Income tax accruals and payables 1,985 1,894 Accrued expenses and other accounts payable (Note 10) 5,532 6,514 Total current liabilities 31,511 29,980 LONG-TERM LIABILITIES: Deferred income taxes 1,183 1,569 Accrued severance pay 11,179 10,436 Accrued pensions (Note 11) 981 970 Total long-term liabilities 13,343 12,975 COMMITMENTS AND CONTINGENCIES (Note 14) STOCKHOLDERS' EQUITY (Note 13): Capital stock: Preferred stock, $0.001 par value - Authorized: 5,000,000 shares at December 31, 2013 and 2012;Issued and outstanding: none at December 31, 2013 and 2012 - - Common stock, $0.001 par value - Authorized: 50,000,000 shares at December 31, 2013 and 2012;Issued and outstanding: 22,349,780 and 21,673,779 shares at December 31, 2013 and 2012,respectively 22 22 Additional paid-in capital 350,494 346,335 Treasury stock (118,749) (125,724)Accumulated other comprehensive income (loss) (821) 988 Accumulated deficit (83,535) (79,394) Total stockholders' equity 147,411 142,227 Total liabilities and stockholders' equity $192,265 $185,182 The accompanying notes are an integral part of the consolidated financial statements. 55 DSP GROUP, INC. CONSOLIDATED STATEMENTS OF OPERATIONSU.S. dollars in thousands, except share and per share data Year ended December 31, 2013 2012 2011 Revenues $151,063 $162,790 $193,861 Costs of revenues (1) 91,237 101,660 123,734 Gross profit 59,826 61,130 70,127 Operating expenses: Research and development, net (2) 35,000 42,539 53,244 Sales and marketing (3) 11,273 14,237 16,497 General and administrative (4) 11,812 10,638 12,920 Amortization of intangible assets 1,672 2,310 7,972 Restructuring expenses (income) - 2,008 (170) Total operating expenses 59,757 71,732 90,463 Operating income (loss) 69 (10,602) (20,336)Financial income, net (Note 12) 2,457 2,388 1,885 Other income from remeasurement of investment in a business combination - - 1,343 Income (loss) before income tax benefit 2,526 (8,214) (17,108)Income tax benefit (150) (172) (866) Net income (loss) $2,676 $(8,042) $(16,242) Net income (loss) per share: Basic and diluted $0.12 $(0.37) $(0.70) Weighted average number of shares used in per share computations of: Basic net income (loss) per share 22,249 21,950 23,247 Diluted net income (loss) per share 22,906 21,950 23,247 (1)Includes equity-based compensation expense in the amount of $253, $330 and $403 for the years ended December 31, 2013, 2012 and 2011,respectively. (2)Includes equity-based compensation expense in the amount of $1,873, $2,425 and $2,767 for the years ended December 31, 2013, 2012 and2011, respectively. (3)Includes equity-based compensation expense in the amount of $478, $778 and $987 for the years ended December 31, 2013, 2012 and 2011,respectively. (4)Includes equity-based compensation expense in the amount of $1,555, $1,450 and $2,063 for the years ended December 31, 2013, 2012 and2011, respectively. The accompanying notes are an integral part of the consolidated financial statements. 56 DSP GROUP, INC. CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS(U.S. dollars in thousands) Year Ended December 31, 2013 2012 2011 Net income (loss): $2,676 $(8,042) $(16,242)Other comprehensive income (loss): Available-for-sale securities: Changes in unrealized gains (losses) (304) 2,621 (809)Reclassification adjustments for gains included in net income (loss) (1,009) (670) (155)Net change (1,313) 1,951 (964)Cash flow hedges: Changes in unrealized gains (losses) 372 635 (325)Reclassification adjustments for (gains) losses included in netincome (loss) (856) 325 (625)Net change (484) 960 (950)Change in unrealized components of defined benefit plans: Losses arising during the period (11) (161) (1)Amortization of actuarial loss and prior service benefit 11 2 2 Curtailments, settlements and other - - 36 Net change - (159) 37 Foreign currency translation adjustments, net (12) (8) (234)Other comprehensive income (loss) (1,809) 2,744 (2,111)Comprehensive income (loss) $867 $(5,298) $(18,353) 57 DSP GROUP, INC.STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYU.S. dollars and shares in thousands, except share data Number ofshares ofcommonstock Commonstockamount Additionalpaid-incapital Treasurystock Accumulatedothercomprehensiveincome (loss) Accumulateddeficit Totalstockholders'equity Balance at January 1, 2011 23,253 $23 $335,132 $(119,280) $355 $(49,127) $167,103 Issuance of treasury stock uponpurchase of common stockunder employee stock purchaseplan 423 1 - 4,483 - (2,448) 2,036 Issuance of treasury stock uponexercise of stock options andstock appreciation rights byemployees and directors 124 *) - - 1,309 - (942) 367 Purchase of treasury stock (1,298) (1) - (8,748) - - (8,749)Equity-based compensationexpenses - - 6,220 - - - 6,220 Net loss - - - - - (16,242) (16,242)Change in Accumulated othercomprehensive loss - - - - (2,111) - (2,111) Balance at December 31, 2011 22,502 23 341,352 (122,236) (1,756) (68,759) 148,624 *) Represents an amount lower than $1. The accompanying notes are an integral part of the consolidated financial statements. 58 DSP GROUP, INC.STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYU.S. dollars and shares in thousands, except share data Number ofshares ofcommonstock Commonstock amount Additionalpaid-incapital Treasurystock Accumulatedothercomprehensiveincome (loss) Accumulateddeficit Totalstockholders'equity Cont. Balance at December 31, 2011 22,502 23 341,352 (122,236) (1,756) (68,759) 148,624 Issuance of treasury stock uponpurchase of common stockunder employee stock purchaseplan 446 *) - - 4,485 - (2,507) 1,978 Issuance of treasury stock uponexercise of stock options andstock appreciation rights byemployees and directors 9 *) - - 86 - (86) - Purchase of treasury stock (1,283) (1) - (8,059) - - (8,060)Equity-based compensationexpenses - - 4,983 - - - 4,983 Net loss - - - - - (8,042) (8,042)Change in Accumulated othercomprehensive income - - - - 2,744 - 2,744 Balance at December 31, 2012 21,674 $22 $346,335 $(125,724) $988 $(79,394) $142,227 Issuance of treasury stock uponpurchase of common stockunder employee stock purchaseplan 374 *) - - 3,668 - (2,004) 1,664 Issuance of treasury stock uponexercise of stock options, stockappreciation rights and restrictedshare units by employees anddirectors 692 1 - 6,796 - (4,813) 1,984 Purchase of treasury stock (390) (1) - (3,489) - - (3,490)Equity-based compensationexpenses - - 4,159 - - - 4,159 Net loss - - - - - 2,676 2,676 Change in Accumulated othercomprehensive income - - - - (1,809) - (1,809) Balance at December 31, 2013 22,350 $22 $350,494 $(118,749) $(821) $(83,535) $147,411 *) Represents an amount lower than $1. The accompanying notes are an integral part of the consolidated financial statements. 59 DSP GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars in thousands Year ended December 31, 2013 2012 2011 Cash flows from operating activities: Net income (loss) $2,676 $(8,042) $(16,242)Adjustments required to reconcile net income (loss) to net cash provided by(used in) operating activities: Depreciation 1,994 3,168 4,244 Equity-based compensation expenses related to employees' stockoptions, SARs and RSUs 4,159 4,983 6,220 Capital loss (gain) from sale and disposal of property and equipment - (57) 22 Realized gain from sale of marketable securities (1,009) (670) (155)Amortization of intangible assets 1,672 2,310 7,972 Accrued interest and amortization of premium on marketable securitiesand short-term deposits 747 1,295 1,267 Gain from remeasurement to fair value of investment as a result ofbusiness combination - - (1,343)Change in operating assets and liabilities: Deferred income tax assets and liabilities, net (377) (12) 32 Trade receivables, net (767) 5,281 (562)Other accounts receivable and prepaid expenses 536 2,175 502 Inventories 587 3,535 2,395 Long-term prepaid expenses and lease deposits 153 264 175 Trade payables 121 (3,965) (1,216)Accrued compensation and benefits 3,952 1,277 (1,562)Income tax accruals and payables 54 (705) (1,179)Accrued expenses and other accounts payable (989) (567) (463)Accrued severance pay, net (228) (65) (783)Accrued pensions (31) - 78 Net cash provided by (used in) operating activities 13,250 10,205 (598) Cash flows from investing activities: Purchase of marketable securities (67,850) (75,483) (73,002)Purchase of short-term deposits (2,849) (2,670) (13,000)Proceeds from maturity of marketable securities 18,325 25,911 68,072 Proceeds from sales of marketable securities 42,949 39,063 11,910 Proceeds from redemption of short-term deposits 2,849 15,643 10,000 Proceeds from sales of property and equipment - 81 59 Purchases of property and equipment (1,118) (1,094) (2,317)Investment in other company (2,200) - - Acquisition of initially consolidated subsidiary (1) - - (8,320) Net cash provided by (used in) investing activities (9,894) 1,451 (6,598) The accompanying notes are an integral part of the consolidated financial statements. 60 DSP GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars in thousands Year ended December 31, 2013 2012 2011 Cash flows from financing activities: Issuance of common stock and treasury stock upon exercise of stockoptions and SARs 1,984 - 367 Purchase of treasury stock (3,490) (8,060) (8,749) Net cash used in financing activities (1,506) (8,060) (8,382) Increase (decrease) in cash and cash equivalents 1,850 3,596 (15,578)Cash and cash equivalents at the beginning of the year 21,684 18,109 33,912 Cash (erosion) due to exchange rate differences 44 (21) (225) Cash and cash equivalents at the end of the year $23,578 $21,684 $18,109 Supplemental disclosures of cash flows activities: Cash paid during the year for: Taxes on income $149 $145 $332 (1)The net fair value of the assets acquired and the liabilities assumed, on the date of acquisition of BoneTone Communications Ltd. ("BoneTone"),was as follows: Year endedDecember 31,2011 Working capital, excluding cash and cash equivalents $(91)Property and equipment 26 Long-Term deferred tax liabilities, net (1,569)In-process R&D 7,702 Non-competition agreement 519 Goodwill 5,276 11,863 The acquisition date fair value of the Company's previously held equity interest in BoneTone (3,543) $8,320 The accompanying notes are an integral part of the consolidated financial statements. 61 NOTE 1:- GENERAL DSP Group, Inc. (the "Company"), a Delaware corporation, and its subsidiaries, collectively, are a fabless semiconductor company offeringadvanced chipset solutions for a variety of applications. The Company is a worldwide leader in the short-range wireless communication market, enablinghome networking convergence for voice, audio, video and data. The Company sells its products primarily through distributors and directly to OEMs and original design manufacturers (ODMs) whoincorporate the Company's products into consumer and enterprise products. The Company's future performance will depend, in part, on the continuedsuccess of its distributors in marketing and selling its products. The loss of the Company's distributors and the Company's inability to obtainsatisfactory replacements in a timely manner may harm the Company's sales and results of operations. In addition, the Company expects that a limitednumber of customers, varying in identity from period-to-period, will account for a substantial portion of its revenues in any period. The loss of, orreduced demand for products from, any of the Company's major customers could have a material adverse effect on the Company's business, financialcondition and results of operations. Sales to Hong Kong-based VTech Holdings Ltd. ("VTech") represented 36%, 35% and 33% of the Company's total revenues for 2013, 2012 and2011, respectively. Revenues derived from sales through one distributor, Tomen Electronics Corporation ("Tomen Electronics"), accounted for 19%, 21%and 19% of the Company's total revenues for 2013, 2012 and 2011, respectively. Tomen Electronics sells the Company's products to a limited number ofcustomers. One customer, Panasonic Communications Co., Ltd. ("Panasonic"), has continually accounted for a majority of the sales of TomenElectronics. Sales to Panasonic through Tomen Electronics generated approximately 14%, 15% and 13% of the Company's total revenues for 2013, 2012and 2011, respectively. Additionally, sales to Uniden America Corporation ("Uniden") represented 4%, 11% and 10% of the Company's total revenues for2013, 2012 and 2011, respectively. Sales to CCT Telecom Holdings Ltd. represented 9%, 8% and 11% of the Company's total revenues for 2013, 2012and 2011, respectively. The Japanese and Hong Kong markets and the OEMs that operate in those markets are among the largest suppliers in the worldwith significant market share in the U.S. market for residential wireless products. The majority of the revenues derived from the above mentioned customers are included to the Home segment. All of the Company's integrated circuit products are manufactured and tested by independent foundries and test houses. While these foundriesand test houses have been able to adequately meet the demands of the Company's business, the Company is and will continue to be dependent upon thesefoundries and test houses to achieve acceptable manufacturing yields, quality levels and costs, and to allocate to the Company a sufficient portion offoundry and test capacity to meet the Company's needs in a timely manner. Revenues could be materially and adversely affected should any of thesefoundries and test houses fail to meet the Company's request for product manufacturing due to a shortage of production capacity, process difficulties, lowyield rates or financial instability. Additionally, certain of the raw materials, components, and subassemblies included in the products manufactured bythe Company's original equipment manufacturer (OEM) customers, which incorporate the Company's products, are obtained from a limited group ofsuppliers. Disruptions, shortages, or termination of certain of these sources of supply could occur and could negatively affect the Company's financialcondition and results of operations. 62 Acquisition of BoneTone Communications In November 2009, the Company made an investment of $2,200 in BoneTone Communications Ltd. ("BoneTone"), an Israeli private companyand provider of innovative chip solutions that redefine audio quality and voice intelligibility in mobile devices and headsets, in return for approximately30% of the equity of BoneTone, on a fully diluted basis. The Company also signed a call option agreement pursuant to which the Company had the optionto purchase from all holders of BoneTone all of the remaining outstanding securities for a period of 24 months commencing on the closing date of the initialinvestment. On December 1, 2011, the Company exercised the option and acquired the remaining equity of BoneTone for a net purchase price of $8,600 (the"BoneTone Acquisition"). The BoneTone Acquisition has been accounted for using the purchase method of accounting as determined by Financial Accounting StandardsBoard ("FASB") Accounting Standards Code ("ASC") 805, "Business Combinations." Accordingly, the purchase price has been allocated to the assetsacquired and the liabilities assumed based on the estimated fair value on the date of the acquisition. Subsequent to the BoneTone Acquisition and as a result of the remeasurement of the initial 30% equity interest in BoneTone in accordance withASC 805-25, the Company recorded other income in the amount of $1,343 that was calculated as follows: The acquisition-date fair value of the equity interest immediately before the acquisition date $3,543 Equity interest immediately before the acquisition date on a cost basis (2,200) Gain as a result of remeasuring the fair value of the equity interest $1,343 The Company used an income approach to measure the acquisition-date fair value of the equity interest in BoneTone held by the Companyimmediately before the acquisition date. The BoneTone Acquisition provides the Company with diversification and cutting-edge technology in the promising and fast-growing mobiledevices market. 63 The results of operations of BoneTone have been included in the Company's consolidated financial statements since December 1, 2011. Based upon a valuation of the tangible and intangible assets acquired and liabilities assumed, the Company has allocated the total purchase priceof the BoneTone Acquisition as follows: December 1, 2011 Cash $267 Other current assets 32 Property and equipment 26 Other non-current assets 68 Current liabilities (107)Long-term deferred tax liability, net (1,569)Accrued severance pay (73) Net liabilities assumed (1,356) Intangible assets: In-process research and development 7,702 Non-competition agreement 519 Total intangible assets 8,221 Goodwill - 5,276 Net assets acquired $12,141 In performing the purchase price allocation, the Company considered, among other factors, the intention for future use of the acquired assets,analyses of historical financial performance and estimates of future performance of BoneTone products. The fair value of the intangible assets was basedon a valuation completed by a third party valuation firm using an income approach and estimates and assumptions provided by management. The amount allocated to in-process research and development ("IPR&D") was determined using the income approach, on the basis of the presentvalue of cash flows attributable to the IPR&D. The guidance in ASC 350 "Intangibles – Goodwill and Other" specifies that intangible assets acquired in abusiness combination for use in a particular R&D project are considered indefinite-lived intangible assets until the completion or abandonment of theassociated R&D efforts. Accordingly, during the development period after the BoneTone Acquisition, these assets should not be amortized but, instead,should be subject to impairment review and testing provisions of ASC 350-30-35-18 and 35-18A for indefinite-lived intangibles. Upon completion of the development process for the acquired R&D, the associated assets will be considered to be finite-lived intangible assetsand amortized on a straight line basis over its expected future life. The expected future life period is estimated based on the duration of the cash flowassociated with the technologies created by the IPR&D once they are completed and start generating revenues. The amount assigned to the non-competition agreement relates to the non-competition agreement that the Company entered into with the founder ofBoneTone in connection with the BoneTone Acquisition, which was determined using the income approach and is amortized on a straight line basis overthree years, which represents the non-competition period between the Company and BoneTone founder. 64 The excess of the purchase price of $5,276 over the net tangible assets and identifiable intangible assets acquired in the BoneTone Acquisition isrecognized as goodwill. An acquired workforce and control premium that did not meet the separability criteria have been included in the amount assignedto goodwill. The goodwill recognized represents mainly the synergies the Company expects from the BoneTone Acquisition, both in revenues and expenses,and the expected benefits to the Company from the acquisition. The goodwill associated with the BoneTone Acquisition is expected not to be deductible fortax purposes. NOTE 2:- SIGNIFICANT ACCOUNTING POLICIES a. Use of estimates: The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to makeestimates, judgments and assumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable basedupon information available at the time that these estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affectthe reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements, and the reportedamounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. b. Financial statements in U.S. dollars: Most of the revenues of the Company and its subsidiaries are generated in U.S. dollars ("dollar"). In addition, a substantial portion of the costsof the Company and its subsidiaries are incurred in dollars. The Company's management believes that the dollar is the currency of the primary economicenvironment in which the Company and its subsidiaries operate. Thus, the functional and reporting currency of the Company and its subsidiaries is thedollar. Monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with ASC No. 830-30, "Translationof Financial Statements." All transaction gains and losses resulting from the remeasurement of monetary balance sheet items are reflected in theconsolidated statements of operations as financial income or expenses as appropriate. As a result of an acquisition of the Cordless and VoIP Terminals Business (the "CIPT Business") of NXP B.V. ("NXP") (the "CIPTAcquisition"), the financial statements of the Company's subsidiary – DSP Group Technologies GmbH whose functional currency is not the dollar, hasbeen translated into dollars. All amounts on the balance sheets have been translated into the dollar using the exchange rates in effect on the relevant balancesheet dates. All amounts in the consolidated statements of operations have been translated into the dollar using the average exchange rate for the relevantperiods. The resulting translation adjustments are reported as a component of accumulated other comprehensive income (loss) in changes in stockholders'equity. Accumulated other comprehensive loss related to foreign currency translation adjustments, net amounted to $193 and $181 as of December 31,2013 and 2012, respectively. 65 c. Principles of consolidation: The consolidated financial statements include the accounts of the Company and its subsidiaries. Intercompany transactions and balances havebeen eliminated in consolidation. d. Cash and cash equivalents: The Company and its subsidiaries consider all highly liquid investments, which are readily convertible to cash with a maturity of three monthsor less on the date of acquisition, to be cash equivalents. e. Restricted deposits: Restricted deposits include deposits which are used as security for one of the Company's lease agreements. f. Short-term deposits: Bank deposits with original maturities of more than three months and less than one year are presented at cost, including accrued interest. g. Marketable securities: The Company and its subsidiaries account for investments in debt securities in accordance with FASB ASC No. 320-10, "Investments in Debtand Equity Securities." Management determines the appropriate classification of the Company's investments in debt securities at the time of purchase andreevaluates such determinations at each balance sheet date. The Company classified all of its investments in marketable securities as available for sale. Available-for-sale securities are carried at fair value, with the unrealized gains and losses, reported in other comprehensive income (loss) using thespecific identification method. Unrealized losses determined to be other-than-temporary are recorded as a financial expense. The amortized cost ofmarketable securities is adjusted for amortization of premiums and accretion of discounts to maturity. Such amortization is included in financial income,net. Interest and dividends on securities are included in financial income, net. The marketable securities are periodically reviewed for impairment. If management concludes that any of these investments are impaired,management determines whether such impairment is other-than-temporary. Factors considered in making such a determination include the duration andseverity of the impairment, the reason for the decline in value and the potential recovery period, and the Company's intent to sell, or whether it is morelikely than not that the Company will be required to sell the investment before recovery of cost basis. For debt securities, only the decline attributable todeteriorating credit of an-other-than-temporary impairment is recorded in the consolidated statement of operations, unless the Company intends, or morelikely than not it will be forced, to sell the security. During the years ended December 31, 2013, 2012 and 2011, the Company did not record an-other-than-temporary impairment loss (see Note 3). 66 h. Fair value of financial instruments: Cash and cash equivalents, restricted deposits, short-term deposits, trade receivables, trade payables and accrued liabilities approximate fairvalue due to short term maturities of these instruments. Marketable securities and derivative instruments are carried at fair value. See Note 3 for moreinformation. Fair value is an exit price, representing the amount that would be received for selling an asset or paid to transfer a liability in an orderlytransaction between market participants. As such, fair value is a market-based measurement that should be determined based on assumptions that marketparticipants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering such assumptions and forinputs used in valuation methodologies to measure fair value: Level 1-Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets. Level 2-Include other inputs that are directly or indirectly observable in the marketplace. Level 3-Unobservable inputs which are supported by little or no market activity. The fair value hierarchy also requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs whenmeasuring fair value. i. Inventories: Inventories are stated at the lower of cost or market value. Inventory reserves are provided to cover risks arising from slow-moving items ortechnological obsolescence. The Company and its subsidiaries periodically evaluate the quantities on hand relative to historical, current and projected sales volume. Basedon this evaluation, an impairment charge is recorded when required to write-down inventory to its market value. Cost is determined as follows: Work in progress and finished products- on the basis of raw materials and manufacturing costs on an average basis. The Company regularly evaluates the ability to realize the value of inventory based on a combination of factors, including the following:historical usage rates and forecasted sales according to outstanding backlogs. Purchasing requirements and alternative usage are explored within theseprocesses to mitigate inventory exposure. When recorded, the reserves are intended to reduce the carrying value of inventory to its net realizable value.Inventory of $12,334 and $12,916 as of December 31, 2013 and 2012, respectively, is stated net of inventory reserves of $591 and $1,466 in eachyear, respectively. If actual demand for the Company's products deteriorates, or market conditions are less favorable than those projected, additionalinventory reserves may be required. 67 j. Property and equipment: Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line method over theestimated useful lives of the assets, at the following annual rates: % Computers and equipment 20-33 Office furniture and equipment 6-15 Leasehold improvements Over the shorter of the relatedlease period or the life of theasset Property and equipment of the Company and its subsidiaries are reviewed for impairment whenever events or changes in circumstances indicatethat the carrying amount of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison of the carryingamount of such assets to the future undiscounted cash flows expected to be generated by the assets. If such assets are considered to be impaired, theimpairment to be recognized is measured by the amount by which the carrying amount of the assets exceeds the fair value of the assets. During the years ended December 31, 2013, 2012 and 2011, no impairment losses were identified for property and equipment. The Company accounts for costs of computer software developed or obtained for internal use in accordance with FASB ASC No. 350-40, "TheInternal Use Software." FASB ASC 350-40 requires the capitalization of certain costs incurred in connection with developing or obtaining internal usesoftware. During 2013, 2012 and 2011, the Company capitalized $34, $22 and $253, respectively, of internal use software cost. Such costs areamortized using the straight-line method over their estimated useful life of three years. k. Goodwill and other intangible assets: The goodwill and certain other purchased intangible assets have been recorded as a result of the BoneTone Acquisition and the CIPT Acquisition.Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible and intangible assets acquired. Goodwillis not amortized, but rather is subject to an annual impairment test. The Company performs an annual impairment test during the fourth quarter of eachfiscal year, or more frequently if impairment indicators are present. For goodwill, the Company may first assess qualitative factors , in accordance with ASU 2011-08, to determine whether the existence of eventsor circumstances leads to a determination that it is “more likely than not” that the fair value of the reporting unit is less than its carrying amount andwhether the two-step impairment test on goodwill is required. If based upon qualitative factors it is “more likely than not” that the fair value of a reportingunit is greater than its carrying amount, it will not be required to proceed to a two-step impairment test on goodwill. However, the Company also has theoption to proceed directly to a two-step impairment test on goodwill. In the first step of the two-step impairment test, the Company compares the fair valueof each reporting unit to its carrying value. If the fair value exceeds the carrying value of the net assets, goodwill is considered not impaired and theCompany is not required to perform further testing. If the carrying value of the net assets exceeds the fair value, then the Company must perform thesecond step of the two-step impairment test in order to determine the implied fair value of goodwill. If the carrying value of goodwill exceeds its implied fairvalue, then the Company would record an impairment loss equal to the difference. 68 The Company's reporting units are consistent with the reportable segments identified in Note 16. Fair value is determined using discounted cash flows, market multiples and market capitalization. Significant estimates used in themethodologies include estimates of future cash-flows, future short-term and long-term growth rates, weighted average cost of capital and market multiplesfor the reporting unit. For the fiscal year ended December 31, 2013, the Company performed a quantitative assessment on its goodwill. Intangible assets that are not considered to have an indefinite useful life are amortized using the straight-line basis over their estimated usefullives, which range from 3 to 7.3 years. The carrying amount of these assets is reviewed whenever events or changes in circumstances indicate that thecarrying value of an asset may not be recoverable. Recoverability of these assets is measured by comparison of the carrying amount of the asset to thefuture undiscounted cash flows the asset is expected to generate. If the asset is considered to be impaired, the amount of any impairment is measured as the difference between the carrying value and the fairvalue of the impaired asset. During 2013, 2012 and 2011, no impairment losses were identified. l. Severance pay: DSP Group Ltd., the Company's Israeli subsidiary ("DSP Israel"), has a liability for severance pay pursuant to Israeli law, based on the mostrecent monthly salary of its employees multiplied by the number of years of employment as of the balance sheet date for such employees. DSP Israel'sliability is fully provided for by monthly accrual and deposits with severance pay funds and insurance policies. The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon the fulfillmentof the obligation pursuant to Israel's Severance Pay Law or labor agreements. Severance expenses for the years ended December 31, 2013, 2012 and 2011, were $1,494, $1,660 and $2,089, respectively. m. Employee benefit plan: The Company has a 401(K) deferred compensation plan covering all employees in the U.S. All eligible employees may elect to contribute up to75% of their compensation to the plan through salary deferrals, subject to IRS limits. The maximum deferral for calendar year 2013 was $17 ($22.5 ifthe employee reached the age of 50 by December 31, 2013). The Company currently offers an employer matching program. The matching contributioncurrently is 50% on the first 6% of compensation contributed per year. This matching contribution vests 25% per year over the first four years of theemployee's service in the Company. Employer contribution to the plan for the years 2013, 2012 and 2011 was $23, $28 and $56, respectively. 69 n. Revenue recognition: The Company and its subsidiaries generate their revenues from sales of products. The Company and its subsidiaries sell their products througha direct sales force and through a network of distributors. Product sales are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixed ordeterminable, collectability is reasonably assured, and no significant obligations remain. Persuasive evidence of an arrangement exists - The Company's sales arrangements with customers are pursuant to written documentation,either a written contract or purchase order. The actual documentation used is dependent on the business practice with each customer. Therefore, theCompany determines that persuasive evidence of an arrangement exists with respect to a customer when it has a written contract, or a written purchaseorder from the customer. Delivery has occurred - Each written documentation relating to a sale arrangement that is agreed upon with the customer specifically sets forthwhen risk and title are being transferred (based on the agreed International Commercial terms, or "INCOTERMS"). Therefore, the Company determinesthat risk and title are transferred to the customer when the terms of the written documentation based on the applicable INCOTERMS are satisfied and thusdelivery of its products has occurred. Separately, the Company has consignment inventory which is held for specific customers at the customers' premises. It recognizes revenue on theconsigned inventory when the customer consumes the products from the warehouse, as that is when per the consignment inventory agreements, risk andtitle passes to the customer and the products are deemed delivered to the customer. The fee is fixed or determinable - Pursuant to the customer agreements, the Company does not provide any price protection, stock rotation, rightof return and/or other discount programs and thus the fee is considered fixed and determinable upon execution of the written documentation with thecustomers. Additionally, payments that are due within the normal course of the Company's credit terms, which are currently no more than four monthsfrom the contract date, are deemed to be fixed and determinable based on the Company's successful collection history for such arrangements. 70 Collectibility is reasonably assured - The Company determines whether collectability is reasonably assured on a customer-by-customer basispursuant to its credit review policy. The Company typically sells to customers with whom it has a long-term business relationship and a history ofsuccessful collection. A significant number of the Company's customers are also large original equipment manufacturers with substantial financialresources. For a new customer, or when an existing customer substantially expands its commitments, the Company evaluates the customer's financialposition, the number of years the customer has been in business, the history of collection with the customer and the customer's ability to pay and typicallyassigns a credit limit based on that review. The Company increases the credit limit only after it has established a successful collection history with thecustomer. If the Company determines at any time that collectability is not reasonably assured under a particular arrangement based upon its credit reviewprocess, the customer's payment history or information that comes to light about a customer's financial position, it recognizes revenue under thatarrangement as customer payments are actually received. With respect to product sales through the Company's distributors, such product revenues are deferred until the distributors resell the Company'sproducts to the end-customers ("sell through") and recognized based upon receipt of reports from the distributors, provided all other revenue recognitioncriteria as discussed above are met. The Company views its distributor arrangements as that of consignment because, although the actual sales are conducted through thedistributors and legally title for the products passes to the distributors upon delivery to the distributors, in substance inventory is simply being transferredto another location for sale to the end-user customers as the Company's primary business relationships and responsibilities are directly with the end-usercustomers. Because the Company views its arrangements with its distributors as that of consignment relationships, delivery of goods is not deemed tohave occurred solely upon delivery to the distributors. Therefore, the Company recognizes revenues from distributors under the "sell-through" method. Asa result, revenue is deferred at the time of shipment to the distributors and is recognized only when the distributors sell the products to the end-usercustomers. o. Warranty: The Company warrants its products against errors, defects and bugs for generally one year. The Company estimates the costs that may beincurred under its warranty and records a liability in the amount of such costs. The Company periodically assesses the adequacy of its recorded warrantyliabilities and adjusts the amounts as necessary. Warranty costs and liability were immaterial for the years ended December 31, 2013, 2012 and 2011. p. Research and development costs: Research and development costs, net of grants received, are charged to the consolidated statement of operations as incurred. 71 q. Government grants: Government grants received by the Company’s Israeli subsidiary relating to categories of operating expenditures are credited to the consolidatedstatements of income during the period in which the expenditure to which they relate is charged. Royalty and non-royalty-bearing grants from the IsraeliOffice of the Chief Scientist ("OCS") for funding certain approved research and development projects are recognized at the time when the Company’sIsraeli subsidiary is entitled to such grants, on the basis of the related costs incurred, and are included as a deduction from research and developmentexpenses, net. The Company recorded grants (most of which are royalty bearing grants) in the amount of $2,116 for the year ended December 31, 2013. In2012, the Company recorded non-royalty-bearing grants from the OCS in the amount of $386. The Company’s Israeli subsidiary is obligated to pay royalties amounting to 5% of the sales of certain products the development of whichreceived grants from the OCS in previous years. The obligation to pay these royalties is contingent on actual sales of such products. Grants received fromthe OCS may become repayable if certain criteria under the grants are not met. The Israeli Research and Development Law provides that know-howdeveloped under an approved research and development program may not be transferred to third parties without the approval of the OCS. Such approvalis not required for the sale or export of any products resulting from such research or development. The OCS, under special circumstances, may approvethe transfer of OCS-funded know-how outside Israel, in the following cases: (a) the grant recipient pays to the OCS a portion of the sale price paid inconsideration for such OCS-funded know-how or in consideration for the sale of the grant recipient itself, as the case may be, which portion will notexceed six times the amount of the grants received plus interest (or three times the amount of the grant received plus interest, in the event that the recipient ofthe know-how has committed to retain the R&D activities of the grant recipient in Israel after the transfer); (b) the grant recipient receives know-how from athird party in exchange for its OCS-funded know-how; (c) such transfer of OCS-funded know-how arises in connection with certain types of cooperationin research and development activities; or (d) if such transfer of know-how arises in connection with a liquidation by reason of insolvency or receivershipof the grant recipient. r. Equity-based compensation: At December 31, 2013, the Company had three equity incentive plans from which the Company may grant future equity awards and two expiredequity incentive plans from which no future equity awards may be granted but had outstanding equity awards granted prior to expiration. The Companyalso had one employee stock purchase plan. See full description in Note 11. The Company accounts for equity-based compensation in accordance with FASB ASC No. 718, "Stock Compensation" ("FASB ASCNo. 718"). FASB ASC No. 718 requires companies to estimate the fair value of equity-based awards on the date of grant using an option-pricing model.The value of the portion of the award that is ultimately expected to vest is recognized as an expense over the requisite service periods in the Company'sconsolidated statements of operations. 72 The Company recognizes compensation expenses for the value of its awards granted based on the accelerated attribution method, rather than astraight-line method over the requisite service period of each of the awards, net of estimated forfeitures. FASB ASC No. 718 requires forfeitures to beestimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those estimates. Estimated forfeitures arebased on actual historical pre-vesting forfeitures. FASB ASC No. 718 requires cash flows resulting from tax deductions in excess of the compensation costs recognized for those equity-basedawards to be classified as financing cash flows. The Company selected the lattice option pricing model as the most appropriate fair value method for its equity-based awards and values optionsand stock appreciation rights (SARs) based on the market value of the underlying shares on the date of grant. The option-pricing model requires a numberof assumptions, of which the most significant are the expected stock price volatility and the expected term of the equity-based award. Expected volatility iscalculated based upon actual historical stock price movements. The expected term of the equity-based award granted is based upon historical experienceand represents the period of time that the award granted is expected to be outstanding. The risk-free interest rate is based on the yield from U.S. treasurybonds with an equivalent term. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. s. Basic and diluted income (loss) per share: Basic net income (loss) per share is computed based on the weighted average number of shares of common stock outstanding during the year.Diluted net income (loss) per share further include the dilutive effect of stock options, stock appreciation rights (SARs) and restricted stock units(“RSUs”) outstanding during the year, all in accordance with FASB ASC No. 260, "Earnings Per Share." The total weighted average number of shares related to the outstanding stock options, SARs and RSUs excluded from the calculation of dilutednet income (loss) per share due to their anti-dilutive effect was 2,730,867, 7,584,336 and 7,980,475 for the years ended December 31, 2013, 2012 and2011, respectively. t. Income taxes: The Company and its subsidiaries account for income taxes in accordance with FASB ASC No. 740, "Income Taxes." This topic prescribes theuse of the liability method, whereby deferred tax asset and liability account balances are determined based on differences between financial reporting andtax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when the differences are expected to reverse. TheCompany and its subsidiaries provide a valuation allowance, if necessary, to reduce deferred tax assets to their estimated realizable value. 73 Deferred tax liabilities and assets are classified as current or non-current based on the classification of the related asset or liability for financialreporting, or according to the expected reversal dates of the specific temporary differences if not related to an asset or liability for financial reporting. The Company reports a liability for unrecognized tax benefits resulting from uncertain tax positions taken or expected to be taken in a tax return.The Company recognizes interest and penalties, if any, related to unrecognized tax benefits in income tax expense. u. Concentrations of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cash equivalents,restricted deposits, short-term deposits, trade receivables and marketable securities. The majority of cash and cash equivalents and short-term deposits of the Company and its subsidiaries is invested in dollar deposits with majorU.S., European and Israeli banks. Such investments in U.S. banks may be in excess of insured limits and are not insured in other jurisdictions.Generally, cash and cash equivalents and short-term deposits may be redeemed on demand and therefore a minimal credit risk exists with respect to thesedeposits and investments. The Company's marketable securities consist of investment-grade corporate bonds and U.S. government-sponsored enterprise ("GSE")securities. As of December 31, 2013, the amortized cost of the Company's marketable securities was $101,537, and their stated market value was$101,146, representing an unrealized loss of $391. A significant portion of the products of the Company and its subsidiaries is sold to original equipment manufacturers of consumer electronicsproducts. The customers of the Company and its subsidiaries are located primarily in Japan, Hong Kong, Taiwan, China, Korea, Europe and the UnitedStates. The Company and its subsidiaries perform ongoing credit evaluations of their customers. A specific allowance for doubtful accounts isdetermined, based on management's estimates and historical experience. Under certain circumstances, the Company may require a letter of credit. TheCompany covers most of its trade receivables through credit insurance. As of December 31, 2013 and 2012, no allowance for doubtful accounts wasprovided. The Company and its subsidiaries have no off-balance-sheet concentration of credit risk, except for certain derivative instruments as mentionedbelow. v. Derivative instruments: FASB ASC No. 815,"Derivatives and Hedging", requires companies to recognize all of their derivative instruments as either assets or liabilitieson the balance sheet at fair value. For derivative instruments that are designated and qualify as a cash flows hedge (i.e., hedging the exposure to variability in expected future cashflows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument is reported as a component of othercomprehensive income and reclassified into earnings in the same period or periods during which the hedged transaction affects earnings. Any gain or losson a derivative instrument in excess of the cumulative change in the present value of future cash flows of the hedged item is recognized in current earningsduring the period of change. 74 To protect against the increase in value of forecasted foreign currency cash flows resulting from salary and rent payments in New Israeli Shekel("NIS") during the year, the Company instituted a foreign currency cash flow hedging program. The Company hedges portions of the anticipated payrolland rent of its Israeli facilities denominated in NIS for a period of one to 12 months with put and call options and forward contracts. These forwardcontracts and put and call options are designated as cash flow hedges and are all effective as hedges of these expenses. The fair value of the outstanding derivative instruments at December 31, 2013 and 2012 is summarized below: Fair value ofderivative instruments Derivative assets As of December 31, (liabilities) Balance sheet location 2013 2012 Foreign exchange forward contracts and putand call options Other accounts receivable and prepaidexpenses $- $484 Total $- $484 The effect of derivative instruments in cash flow hedging transactions on income and other comprehensive income ("OCI") for the years endedDecember 31, 2013, 2012 and 2011 is summarized below: Gains (losses) on derivativesrecognized in OCI Year ended December 31, 2013 2012 2011 Foreign exchange forward contracts and put and call options $372 $635 $(325) Gains (losses) on derivatives reclassifiedfrom OCI to income Year ended December 31, Location 2013 2012 2011 Foreign exchange forward contracts and putand call optionsOperating expenses $856 $(325) $625 As of December 31, 2013 and 2012, the Company had outstanding option contracts in the amount of $0 and $15,800, respectively. 75 w. Comprehensive income: The Company accounts for comprehensive income in accordance with FASB ASC No. 220, "Comprehensive Income." This topic establishesstandards for the reporting and display of comprehensive income and its components in a full set of general purpose financial statements. Comprehensiveincome generally represents all changes in stockholders' equity during the period except those resulting from investments by, or distributions to,stockholders. The Company determined that its items of comprehensive income relate to gains and losses on hedging derivative instruments, unrealizedgains and losses on available-for-sale securities, unrealized gains and losses from pension and unrealized gain and losses from foreign currency translationadjustments. The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for 2013: Unrealized gains(losses)onavailable-for-salemarketablesecurities Unrealized gains(losses) on CashFlow Hedges Unrealized gains(losses)oncomponents ofdefinded benefitplans Unrealized gains(losses) on foreigncurrencytranslation Total Beginning balance $922 $484 $(237) $(181) $988 Other comprehensive income (loss) beforereclassifications (304) 372 (11) (12) 45 Amounts reclassified from accumulatedother comprehensive income (loss) (1,009) (856) 11 - (1,854)Net current period other comprehensiveincome (loss) (1,313) (484) - (12) (1,809) Ending balance $(391) $- $(237) (193) $(821) 76 The following table provides details about reclassifications out of accumulated other comprehensive income (loss) for 2013:Details about Accumulated Other ComprehensiveIncome (Loss) Components Amount Reclassifiedfrom Accumulated OtherComprehensive Income(Loss) Affected Line Item in the Statementof Income (Loss) (In millions) Gains on available-for-sale marketable securities $(1009) Financial income, net - Provision for income taxes (1009) Total, net of income taxes Gains on cash flow hedges (672) Research and development (66) Sales and marketing (118) General and administrative (856) Total, before income taxes - Provision for income taxes (856) Total, net of income taxes Income on components of defined benefit plans 6 Research and development 5 Sales and marketing 11 Total, before income taxes - Provision for income taxes 11 Total, net of income taxes Total reclassifications for the period (1,854) Total, net of income taxes x. Treasury stock: The Company repurchases its common stock from time to time on the open market or in other transactions and holds such shares as treasurystock. The Company presents the cost to repurchase treasury stock as a reduction of stockholders' equity. From time to time, the Company reissues treasury shares under its employee stock purchase plan and equity incentive plans, upon purchases orexercises of equity awards under the plans. When treasury stock is reissued, the Company accounts for the re-issuance in accordance with FASB ASCNo. 505-30, "Treasury Stock" and charges the excess of the purchase cost over the re-issuance price (loss) to retained earnings. The purchase cost iscalculated based on the specific identification method. In case the purchase cost is lower than the re-issuance price, the Company credits the difference toadditional paid-in capital. 77 y. Investment in other company: Investment in other company is stated at cost. The Company followed ASC 323, "Investments - Equity and Joint Ventures", to determine whetherit should apply the equity method of accounting to investment in other than common stock with regard to a certain investment in preferred shares, anddetermined that the preferred shares are not in substance common stock. The Company's investment in other company is reviewed for impairment whenever events or changes in circumstances indicate that the carryingamount of an investment may not be recoverable, in accordance with ASC 325-20. As of December 31, 2013, no impairment loss was indicated (see alsoNote 9). NOTE 3: MARKETABLE SECURITIES AND TIME DEPOSITS The following is a summary of marketable securities and time deposits at December 31, 2013 and 2012 (see also Note 8): Amortized cost Unrealized gains(losses), net Fair value 2013 2012 2013 2012 2013 2012 Short term deposit $2,911 $2,708 $- $- $2,911 $2,708 U.S. GSE securities 3,093 1,506 (11) 4 3,082 1,510 Corporate obligations 98,444 93,398 (380) 918 98,064 94,316 $104,448 $97,612 $(391) $922 $104,057 $98,534 The amortized cost of marketable debt securities at December 31, 2013, by contractual maturities or anticipated dates of sale, are shown below: Amortized Unrealized gains (losses) Fair Cost Gains Losses value Due in one year or less $10,961 $23 $- $10,984 Due after one year to five years 90,576 162 (576) 90,162 $101,537 $185 $(576) $101,146 The amortized cost of marketable debt securities at December 31, 2012, by contractual maturities or anticipated dates of sale, are shown below: Amortized Unrealized gains (losses) Fair Cost Gains Losses value Due in one year or less $17,454 $40 $(1) $17,493 Due after one year to six years 77,450 1,018 (135) 78,333 $94,904 $1,058 $(136) $95,826 The actual maturity dates may differ from the contractual maturities because debtors may have the right to call or prepay obligations withoutpenalties. 78 The total fair value of marketable securities with outstanding unrealized losses as of December 31, 2013 amounted to $46,943, while theunrealized losses for these marketable securities amounted to $576. Of the $576 unrealized losses outstanding as of December 31, 2013, a portion ofwhich in the amount of $145 was related to marketable securities that were in a loss position for more than 12 months and the remaining portion of $431was related to marketable securities that were in a loss position for less than 12 months. The total fair value of marketable securities with outstanding unrealized losses as of December 31, 2012 amounted to $31,546 , while theunrealized losses for these marketable securities amounted to $136. Of the $136 unrealized losses outstanding as of December 31, 2012, a portion ofwhich in the amount of $13 related to marketable securities that were in a loss position for more than 12 months and the remaining portion of $123 wasrelated to marketable securities that were in a loss position for less than 12 months. Management believes that as of December 31, 2013, the unrealized losses in the Company's investments in all types of marketable securities weretemporary and no impairment loss was realized in the Company's consolidated statements of operations. The unrealized losses related to corporate obligations were primarily due to changes in interest rates. Because the Company does not intend to sellthe investments and it is not more likely than not that the Company will be required to sell the investments before recovery of their amortized cost bases,which may be maturity, the Company does not consider those investments to be other-than-temporarily impaired at December 31, 2013. Proceeds from maturity of available-for-sale marketable securities during 2013, 2012 and 2011 were $18,325, $25,911 and $68,072,respectively. Proceeds from sales of available-for-sale marketable securities during 2013, 2012 and 2011 were $42,949, $39,063 and $11,910,respectively. Realized gains from the sale of available-for sale marketable securities for 2013, 2012 and 2011 were $1,013, $708 and $181, respectively.Realized losses from the sale of available-for sale marketable securities for 2013, 2012 and 2011 were $4, $38 and $26, respectively. The Companydetermines realized gains or losses on the sale of available-for-sale marketable securities based on a specific identification method. NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES December 31, 2013 2012 Tax and governmental receivables $652 $508 Prepaid expenses 1,706 2,651 Deposits 201 419 Deferred income taxes 92 101 Others 82 78 $2,733 $3,757 79 NOTE 5:- INVENTORIES Inventories are composed of the following: December 31, 2013 2012 Work-in-progress $5,412 $6,821 Finished products (*) 6,922 6,095 $12,334 $12,916 (*) Included $298 and $390 inventory consigned to others as of December 31, 2013 and 2012, respectively. For the year ended December 31, 2013, the Company recorded $261 of income due to the utilization of inventory that was previously written off.Inventory write-downs amounted to $29 and $759 for the years ended December 31, 2012 and 2011, respectively. NOTE 6:- PROPERTY AND EQUIPMENT Composition of assets, grouped by major classifications, is as follows: December 31, 2013 2012 Cost: Computers and equipment $40,624 $39,647 Office furniture and equipment 1,590 1,574 Leasehold improvements 4,651 4,496 46,865 45,717 Less - accumulated depreciation 44,028 42,011 Depreciated cost $2,837 $3,706 During 2012, the Company recorded a disposal of equipment, which ceased to be used, in the amount of $4,503 (accumulated depreciation ofapproximately $4,493). The capital loss that was recorded due to this disposal of equipment in the consolidated statement of operations was $10. Depreciation expenses, which also include amortization expenses of assets recorded under capital leases, amounted to $1,994, $3,168 and$4,244 for the years ended December 31, 2013, 2012 and 2011, respectively. 80 NOTE 7:- INTANGIBLE ASSETS, NET The following table shows the Company's intangible assets for the periods presented: Useful life December 31, (years) 2013 2012 Cost: Current technology 4.2-5.3 $77,080 $77,080 Customer relations 7.3 23,477 23,477 Technology (completion of the development of in-process R&D) 6 7,702 7,702 Non-competition agreement 3 519 519 108,778 108,778 Accumulated amortization: Current technology 48,263 48,263 Customer relations 13,274 13,060 Technology (completion of the development of in-process R&D) 1,284 - Non-competition agreement 360 188 63,181 61,511 Impairment: (Note 7b) Current technology 28,817 28,817 Customer relations 10,070 10,070 38,887 38,887 Amortized cost $6,710 $8,380 a.Amortization expenses amounted to $1,672, $2,310 and $7,972 for the years ended December 31, 2013, 2012 and 2011, respectively. b.In 2008, as a result of circumstances which indicated that the carrying amount of certain intangible assets would not be recoverable, the Companyreassessed the fair value of its intangible assets, which resulted in impairment charges of approximately $39,084. c.Estimated amortization expenses for the years ending: Year ending December 31, 2014 $1,574 2015 1,284 2016 1,284 2017 1,284 2018 1,284 $6,710 81 NOTE 8:- FAIR VALUE MEASUREMENTS The Company measures its cash equivalents, short-term deposits, marketable securities and foreign currency derivative contracts at fair value.Cash equivalents, short-term deposits, marketable securities and foreign currency derivative contracts are classified within Level 1 or Level 2 valuehierarchies. This is because cash equivalents, short-term deposits and marketable securities are valued using quoted market prices or alternative pricingsources and models utilizing market observable inputs. Foreign currency derivative contracts are classified within Level 2 value hierarchy as the valuationinputs are based on quoted prices and market observable data of similar instruments. The following table provides information by value level for financial assets and liabilities that are measured at fair value on a recurring basis asof December 31, 2013 (see also Note 3): Balance as of Fair value measurementsDescription December 31,2013 Level 1 Level 2 Level 3 Assets Cash equivalents Time deposits $913 $913 Money market mutual funds $3,762 $3,762 Short-term marketable securities andtime deposits U.S. GSE securities $251 $251 Corporate debt securities $10,733 $10,733 Time deposits $2,911 $2,911 Long-term marketable securities U.S. GSE securities $2,831 $2,831 Corporate debt securities $87,331 $87,331 The following table provides information by value level for financial assets and liabilities that are measured at fair value on a recurring basis asof December 31, 2012: Balance as of Fair value measurementsDescription December 31,2012 Level 1 Level 2 Level 3 Assets Cash equivalents Time deposits $1,668 $1,668 Money market mutual funds $3,548 $3,548 Short-term marketable securities andtime deposits U.S. GSE securities $- $- Corporate debt securities $17,493 $17,493 Time deposits $2,708 $2,708 Long-term marketable securities U.S. GSE securities $1,510 $1,510 Corporate debt securities $76,823 $76,823 Derivative assets $484 $484 In addition to the assets and liabilities described above, the Company's financial instruments also include cash and cash equivalents, tradereceivables, other accounts receivable, trade payables, accrued expenses and other payables. The fair value of these financial instruments was notmaterially different from their carrying value at December 31, 2013 and 2012 due to the short-term maturity of these instruments. 82 NOTE 9:- INVESTMENT IN OTHER COMPANY On October 24, 2013, the Company made an investment of $2,200 in a private company in Asia which enables it to expand its reach andpresence as well as leverage a base of local professional experts. The investment was in return for approximately 14% of the equity of the company, on afully diluted basis. The Company also signed a buyout agreement pursuant to which the Company had the option to purchase from all holders of theAsian private company, under agreed terms, all of the remaining outstanding securities by no later than December 31, 2014. The investment is accountedunder the cost-method in accordance with ASC 325-20. NOTE 10:- ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE December 31, 2013 2012 Accrued expenses $3,324 $4,225 Legal, accounting and investors relation accrual 779 710 Royalties and commission 640 387 Others 789 1,192 $5,532 $6,514 NOTE 11:- PENSION LIABILITIES The Company acquired the CIPT Business on September 4, 2007. This business sponsors various defined benefits schemes for theiremployees, including pension funds, early retirement benefits, lump sum retirement indemnities and jubilee awards in several countries. As of December 31, 2013 and 2012, the defined benefits plans that the Company assumed in connection with the CIPT Acquisition that areaccounted for in the Company's consolidated financial statements are the pension plans in Germany and India. Consistent with the requirements of locallaw, the Company deposits funds for certain plans with insurance companies, third-party trustees, or into government-managed accounts, and/or accruesfor the unfunded portion of the obligation. The Company’s pension obligation in Germany relating to the unvested pension claims (i.e. future obligation that will result from future serviceperiod) of the employees were outsourced in November 2010 to an external insurance company ("Nuremberger Versicherung"). From and after theoutsourcing date, the Company is required to pay premiums to the external insurance company and in return the pension benefits earned by the Germanemployees are covered by the Company’s arrangement with the external insurance company. The Company legally is released from its obligations to theGerman employees once the premiums are paid, and it is no longer subject to any of the risks and rewards associated with the benefit obligations coveredand the plan assets transferred to the external insurance company. Since the outsourcing arrangement meets the requirements of a nonparticipating annuitycontract, the Company treats the costs of the outsourcing arrangement as the costs of the benefits being earned in accordance with ASC Paragraph 715-30-25-7 of ASC 715 "Compensation—Retirement Benefits." 83 The following tables provide a reconciliation of the changes in the pension plans' benefit obligation and fair value of assets for the years endedDecember 31, 2013 and 2012, and the statement of funded status as of December 31, 2013 and 2012: December 31, 2013 2012 Accumulated benefit obligation $1,227 $1,321 Change in benefit obligation Benefit obligation at beginning of year $1,334 $1,208 Service cost 5 61 Interest cost 35 47 Benefits paid from the plan (181) (172)Actuarial loss 1 165 Exchange rates and others 45 25 Benefit obligation at end of year $1,239 $1,334 Change in plan assets Fair value of plan assets at beginning of year 364 416 Actual return on plan assets 6 12 Employer contributions to plan - 28 Benefits paid from the plan (123) (100)Exchange rates 11 8 Fair value of plan assets at end of year $258 $364 The assumptions used in the measurement of the Company's pension expense and benefit obligations as of December 31, 2013, 2012 and 2011are as follows: Year ended December 31, 2013 2012 2011 Weighted-average assumptions Discount rate 3.5% 3.6% 5.4%Expected return on plan assets 2.88% 2.88% 1.54%Rate of compensation increase 2.5% 2.5% 2.5% The amounts reported for net periodic pension costs and the respective benefit obligation amounts are dependent upon the actuarial assumptionsused. The Company reviews historical trends, future expectations, current market conditions, and external data to determine the assumptions. Thediscount rate is determined considering the yield of government bonds. The rate of compensation increase is determined by the Company, based on itslong-term plans for such increases. 84 The following table provides the components of net periodic benefit cost for the years ended December 31, 2013, 2012 and 2011: December 31, 2013 2012 2011 Components of net periodic benefit cost Service cost $5 $61 $153 Interest cost 35 47 62 Expected return on plan assets (6) (12) (28)Amortization of net loss 11 2 39 Curtailment gain (1) - - (660) Net periodic benefit cost $45 $98 $(434) (1)The curtailment gain is derived from the closure of the Company's Swiss facilities and the termination of employment of the employees of theCompany's Swiss subsidiary, which resulted in a curtailment and settlement of the Swiss pension plan. December 31, 2013 2012 Net amounts recognized in the consolidated balance sheets as of December 31, 2013 and 2012 consist of: Current liabilities $- $- Noncurrent liabilities 981 970 Net amounts recognized in the consolidated balance sheets $981 $970 Net amounts recognized in accumulated other comprehensive income as of December 31, 2013 and 2012consist of: Net actuarial loss $(237) $(237)Other - - Net amounts recognized in accumulated other comprehensive loss $(237) $(237) The estimated amount that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2014 is asfollows: 2014 Net actuarial loss and other $11 85 Benefit payments are expected to be paid as follows: Year ending December 31, 2014 $159 2015 $117 2016 $68 2017 $25 2018 $10 2019-2023 $95 The plan asset allocations at December 31 of the relevant years are as follows: December 31, 2013 2012 Bonds - - Real estate - - Cash - - Shares - - Other 100% 100% 100% 100% The fair value of the Company's pension plan assets at December 31, 2013 by asset category, classified by the three levels of inputs described inNote 2, are as follows: Fair value measurements at December 31, 2013 using: Total fairvalue atDecember31, 2013 Quotedprices inactivemarkets(Level 1) Significantotherobservableinputs(Level 2) Significantunobservableinputs (Level 3) Cash $- $- $- $- Equity securities - - - - Real estate - - - - Corporate bonds - - - - Others 258 - 258 - Total assets measured at fair value $258 $- $258 $- Valuation techniques - For Level 2 inputs, the Company utilizes quoted market prices in markets that are not active, broker or dealerquotations, or alternative pricing sources with reasonable levels of price transparency. Regarding the policy for amortizing actuarial gains or losses for pension and post-employment plans, the Company has chosen the "corridor"option. This option consists of recognizing in the consolidated statements of operations, the part of unrecognized actuarial gains or losses exceeding 10% ofthe greater of the PBO or the market value of the plan assets. If amortization is required, the minimum amortization amount is that excess divided by theaverage remaining service period of the active employees expected to receive benefits under the plan. 86 Actuarial losses were recognized in other comprehensive income (loss) in the amount of $11, $160 and $1 for the years ended December 31,2013, 2012 and 2011, respectively. NOTE 12:- FINANCIAL INCOME, NET The components of financial income, net were as follows: Year ended December 31, 2013 2012 2011 Foreign exchange gains $- $120 $60 Interest income from marketable securities and deposits, net of amortizationof premium on marketable securities 1,656 1,859 2,014 Realized gains on marketable securities 1,013 708 181 Other 13 1 7 Financial income 2,682 2,688 2,262 Realized losses on marketable securities 4 38 26 Foreign exchange losses 86 88 95 Interest expenses 29 35 42 Other 106 139 214 Financial expense 225 300 377 Financial income, net $2,457 $2,388 $1,885 NOTE 13:- STOCKHOLDERS' EQUITY a. Preferred stock: The Company's Board of Directors has the authority, without any further vote or action by the stockholders, to provide for the issuance of up to5,000,000 shares of preferred stock in one or more series with such designations, rights, preferences, and limitations as the Board of Directors maydetermine, including the consideration received, the number of shares comprising each series, dividend rates, redemption provisions, liquidationpreferences, sinking fund provisions, conversion rights and voting rights. No shares of preferred stock are currently outstanding. 87 b. Common Stock: Currently, 50,000,000 shares of common stock are authorized. Holders of common stock are entitled to one vote per share on all matters to bevoted upon by the Company's stockholders. Subject to the rights of holders of preferred stock, if any, in the event of liquidation, dissolution or windingup, holders of common stock are entitled to share ratably in all of the Company's assets. The Company's Board of Directors may declare a dividend outof funds legally available therefore and, subject to the rights of holders of preferred stock, if any, the holders of common stock are entitled to receiveratably any such dividends. Holders of common stock have no preemptive rights or other subscription rights to convert their shares into any other securities. There are noredemption or sinking fund provisions applicable to common stock. c. Dividend policy: At December 31, 2013, the Company had an accumulated deficit of $83,535. The Company has never paid cash dividends on the commonstock and presently intends to follow a policy of retaining earnings for reinvestment in its business. d. Share repurchase program: In November 2013, the Company entered into a share repurchase plan, in accordance with Rule 10b5-1 of the Securities Exchange Act of 1934,for the repurchase of up to 2,700,000 shares of its common stock. This amount is in addition to the approximately 308,000 shares that were available forrepurchase under the board’s prior authorizations. In 2013, 2012 and 2011, the Company repurchased approximately 390,000, 1,283,000 and 1,298,000 shares, respectively, of common stock atan average purchase price of $8.95, $6.28 and $6.74 per share, respectively, for an aggregate purchase price of $3,490, $8,060 and $8,749,respectively. As of December 31, 2013, approximately 2,618,000 remained authorized for repurchase of shares of common stock under the Company'sboard-authorized share repurchase program. In 2013, 2012 and 2011, the Company issued 1,066,000, 455,000 and 547,000 shares, respectively, of common stock, out of treasury stock,to employees who exercised their equity awards under the Company's equity incentive plans or purchased shares from the Company's 1993 EmployeeStock Purchase Plan ("ESPP"). e. Stock purchase plan and equity incentive plans: The Company has various equity incentive plans under which employees, officers, non-employee directors of the Company and its subsidiariesand others, including consultants, may be granted rights to purchase the Company's common stock. The plans authorize the administrator, except for thegrant of RSUs, to grant equity incentive awards at an exercise price of not less than 100% of the fair market value of the common stock on the date theaward is granted. It is the Company's policy to grant stock options and SARs at an exercise price that equals the fair market value. Equity awards granted under all stock incentive plans that are cancelled or forfeited before expiration become available for future grant. During 2012 and 2011, the Company granted to employees and executive officers of the Company and its subsidiaries primarily shareappreciation rights ("SARs"), capped with a ceiling, under the various equity incentive plans. The SAR unit confers the holder the right to stockappreciation over a preset price of the Company's common stock during a specified period of time. When the unit is exercised, the appreciation amount ispaid through the issuance of shares of the Company's common stock. The ceiling limits the maximum income for each SAR unit and the maximumnumber of shares to be issued. SARs are considered an equity instrument as it is a net share settled award capped with a ceiling. 88 Starting in 2013, the Company granted to employees and executive officers of the Company and its subsidiaries primarily restricted stock units(“RSUs”) under the various equity incentive plans. An RSU award is an agreement to issue shares of our common stock at the time the award is vested.RSUs granted to employees and executive officers generally vest over a four year period from the grant date with 25% of the RSUs granted vesting on thefirst anniversary of the grant date and 6.25% vesting each quarter thereafter. A summary of the various plans is as follows: 1993 Director Stock Option Plan Upon the closing of the Company's initial public offering, the Company adopted the 1993 Director Stock Option Plan (the "Directors Plan").Under the Directors Plan, which expired in January 2014, the Company was authorized to issue nonqualified stock options to the Company's outside non-employee directors to purchase up to 1,980,875 shares of common stock at an exercise price equal to the fair market value of the common stock on thedate of grant. The Directors Plan, as amended, provides that each person who becomes an outside, non-employee director of the Board of Directors shallautomatically be granted an option to purchase 30,000 shares of common stock (the "First Option"). Thereafter, each outside director shall automaticallybe granted an option to purchase 15,000 shares of common stock (a "Subsequent Option") on January 1 of each year if, on such date, he shall haveserved on the Board of Directors for at least six months. In addition, an option to purchase an additional 15,000 shares of common stock (a "CommitteeOption") is granted on January 1 of each year to each outside director for each committee of the Board on which he shall have served as a chairperson forat least six months. Options granted under the Directors Plan generally had a term of 10 years. One-third of the shares were exercisable after the first year andthereafter one-third at the end of each twelve-month period. As of December 31, 2013, 738,011 shares of common stock remained available for grant under the Directors Plan. The Directors Plan expired inJanuary 2014 and therefore no further awards may be granted thereunder. 1998 Non-Officer Employee Stock Option Plan In 1998, the Company adopted the 1998 Non-Officer Employee Stock Option Plan (the "1998 Plan"). Under the 1998 Plan, employees maybe granted non-qualified stock options for the purchase of common stock. The 1998 Plan currently provides for the purchase of up to 5,062,881 sharesof common stock. As of December 31, 2013, 182,536 shares of common stock remained available for grant under the 1998 Plan. 89 The exercise price of options under the 1998 Plan shall not be less than the fair market value of common stock for nonqualified stock options,as determined by the Company's Board of Directors or a committee appointed by the Company's Board of Directors. Options under the 1998 Plan are generally exercisable over a 48-month period beginning 12 months after issuance, or as determined by theCompany's Board of Directors or a committee appointed by the Company's Board of Directors. Options under the 1998 Plan expire up to seven years afterthe date of grant. 2001 Stock Incentive Plan In 2001, the Company adopted the 2001 Stock Incentive Plan (the "2001 Plan"). The 2001 Plan expired in 2011 and no further grants of awardsmay be made thereunder. As of December 31, 2013, 2,194,847 shares of common stock were granted under the plan, stock options to acquire 10,000shares remained outstanding in the plan prior to its expiration. The 2001 Plan authorized the administrator to grant incentive stock options at an exercise price of not less than 100% of the fair market value ofthe common stock on the date the option is granted. Equity awards under the 2001 Plan were generally exercisable over a 48-month period beginning 12 months after issuance or as determined by theCompany's Board of Directors or a committee appointed by the Company's Board of Directors. Equity awards under the 2001 plan expired up to sevenyears after the date of grant. 2003 Israeli Share Incentive Plan In 2003, the Company adopted the 2003 Israeli Share Incentive Plan (the "2003 Plan"), which complied with the Israeli tax reforms. The 2003Plan terminated in 2012 upon approval of the Company's 2012 Equity Incentive Plan (the "2012 Plan"). As of December 31, 2013, 10,700,543 shares ofcommon stock had been granted under the plan and stock option and SARs to acquire 2,433,819 shares of common stock remained outstanding underthe plan. As the 2003 Plan expired in May 2012, no further awards may be granted thereunder. Equity awards under the 2003 Plan were generally exercisable over a 48-month period beginning 12 months after issuance, or as determined bythe Company's Board of Directors or a committee appointed by the Company's Board of Directors. Equity awards under the 2003 Plan expired up to sevenyears after the date of grant. 2012 Equity Incentive Plan In 2012, the Company adopted the 2012 Plan, which complies with the Israeli tax reforms. Under the 2012 Plan, employees, directors andconsultants may be granted incentive or non-qualified stock options, SARs, RSUs and other awards under the plan. The exercise price of the equityawards under the 2012 Plan shall not be less than the fair market value of common stock at the time of grant, unless otherwise determined by theCompany's Board of Directors or a committee appointed by the Company's Board of Directors. The 2012 Plan currently provides for the purchase of upto 1,450,000 shares of common stock. As of December 31, 2013, 922,500 shares of common stock remained available for grant under the 2012 Plan. 90 Stock options, SARs and RSUs awarded under the 2012 Plan to employees and executive officers are generally exercisable over a 48-monthperiod beginning 12 months after issuance, or as determined by the Company's Board of Directors or a committee appointed by the Company's Board ofDirectors Equity awards under the 2012 Plan expire up to seven years after the date of grant. A director subplan was established under the 2012 Plan. As of December 31, 2013, no options were granted under the director subplan. 1993 Employee Stock Purchase Plan (ESPP) Upon the closing of the Company's initial public offering, the Company adopted the ESPP. The Company has reserved an aggregate of 3,800,000shares of common stock for issuance under the ESPP. The ESPP provides that substantially all employees of the Company may purchase Companycommon stock at 85% of its fair market value on specified dates via payroll deductions. There were approximately 374,000, 446,000 and 423,000 sharesof common stock issued at a weighted average purchase price of $4.44, $4.42 and $4.81 per share under the ESPP in 2013, 2012 and 2011, respectively.As of December 31, 2013, 714,000 shares of common stock were reserved under the ESPP. Stock Reserved for Future Issuance The following table summarizes the number of shares available for future issuance at December 31, 2013 (after giving effect to the aboveincreases in the equity incentive plans): ESPP 714,000 Equity awards 1,843,000 Undesignated preferred stock 5,000,000 7,557,000 91 The following is a summary of activities relating to the Company's stock options, SARs and RSUs granted among the Company's variousplans: Year ended December 31, 2013 2012 2011 Amountofoptions/SARs/RSUs Weightedaverageexerciseprice Aggregateintrinsicvalue (4) Amountofoptions/SARs/RSUs Weightedaverageexerciseprice Aggregateintrinsicvalue (4) Amountofoptions/SARs/RSUs Weightedaverageexerciseprice Aggregateintrinsicvalue (4) in in in thousands thousands thousands Options outstanding atbeginning of year 9,622 $10.72 $- 10,564 $12.22 $- 11,305 $12.94 $- Changes during theyear: Options granted 524 $6.42 $- 310 $5.67 $- 250 $7.82 $- SARs granted (1) - $- $- 1,100 $6.16 $- 1,013 $7.52 $- RSUs granted 552 $- $- - $- $- - $- $- Exercised (2,105) $6.49 $3,795 (127) $5.97 $62 (339) $6.22 $647 Forfeited and cancelled (2,056) $17.56 $- (2,225) $15.14 $- (1,665) $14.86 $- Options/SARs/RSUsoutstanding at end ofyear (2) 6,537 $8.68 $16,673 9,622 $10.72 $98 10,564 $12.22 $- Options/SARs/RSUsexercisable at end ofyear (3) 4,623 $10.30 $7,230 7,223 $12.07 $28 7,669 $14.10 $- 92 (1)SAR grants made prior to January 1, 2009 are convertible for a maximum number of shares of the Company's common stock equal to 50% of theSAR units subject to the grant. SAR grants made on or after January 1, 2009 and before January 1, 2010 are convertible for a maximum number ofshares of the Company's common stock equal to 75% of the SAR units subject to the grant. SAR grants made on or after January 1, 2010 areconvertible for a maximum number of shares of the Company's common stock equal to 66.67% of the SAR units subject to the grant. SAR grantsmade on or after January 1, 2012 are convertible for a maximum number of shares of the Company’s common stock equal to 50% of the SAR unitssubject to the grant. (2)Due to the ceiling imposed on the SAR grants, the outstanding amount above can be exercised for a maximum of 4,631,000 shares of theCompany's common stock as of December 31, 2013. (3)Due to the ceiling imposed on the SAR grants, the exercisable amount above can be exercised for a maximum of 3,056,000 shares of the Company'scommon stock as of December 31, 2013. (4)Calculation of aggregate intrinsic value for options, RSUs and SARs outstanding and exercisable is based on the share price of the Company'scommon stock as of December 31, 2013, 2012 and 2011 which was $9.71, $5.76 and $5.21 per share, respectively. The intrinsic value foroptions, RSUs and SARs exercised during those years represents the difference between the fair market value of the Company's common stock onthe date of exercise and the exercise price of each option or SAR, as applicable. The stock options and SARs outstanding as of December 31, 2013, have been separated into ranges of exercise price as follows: Range of exercise price Outstanding Remainingcontractual life(years) (1) Weightedaverageexercise price Exercisable Remainingcontractual life(years) Weightedaverage exerciseprice $ thousands S thousands S 0 (RSUs) 520 - - - - - 5.21 -7.26 3,034 4.20 6.49 1,972 3.37 6.64 7.49 -10.23 2,144 2.60 9.15 1,813 2.03 9.41 11.60 -15.79 80 2.53 12.90 80 2.53 12.90 18.01 -25.06 759 0.35 21.64 758 0.35 21.64 6,537 2.87 8.68 4,623 2.34 10.30 (1)Calculation of weighted average remaining contractual term does not include the RSUs that were granted, which have an indefinite contractual term. 93 As of December 31, 2013, the outstanding number of SARs was 4,466,306 and based on the share price of the Company's common stock as ofDecember 31, 2013 ($9.71 per share), 2,730,546 of those SARs were in the money as of December 31, 2013. The weighted average estimated fair value of employee RSUs granted during 2013 was 6.17 per share (using the weighted average pre vestcancellation rate of 3.84% on an annual basis). The weighted-average estimated fair value of employee stock options and SARs granted during the years ended December 31, 2013, 2012 and2011 was $4.90, $2.39 and $3.26 per stock option and SAR, respectively, using the binomial model with the following weighted-average assumptions(annualized percentages): Year ended December 31, 2013 2012 2011 Volatility 46.24% 48.23% 54.60%Risk-free interest rate 1.39% 2.20% 2.23%Dividend yield 0% 0% 0%Pre-vest cancellation rate *) 3.48% 3.50% 3.37%Post-vest cancellation rate **) 2.52% 2.58% 2.21%Suboptimal exercise factor ***) 1.81 1.60 1.59 Expected life (years) 4.66 4.19 4.14 *)The pre-vest cancellation rate was calculated on an annual basis and is presented here on an annual basis. **)The post-vest cancellation rate was calculated on a monthly basis and is presented here on an annual basis. ***)The ratio of the stock price to strike price at the time of exercise of the option. The computation of volatility uses a combination of historical volatility and implied volatility derived from the Company's exchange tradedoptions with similar characteristics. The risk-free interest rate assumption is based on U.S. treasury bill interest rates appropriate for the term of the Company's employee equity-based awards. The dividend yield assumption is based on the Company's historical and expectation of future dividend payouts and may be subject tosubstantial change in the future. The expected term of employee equity-based awards represents the weighted-average period the awards are expected to remain outstanding and is aderived output of the binomial model. The expected life of employee equity-based awards is impacted by all of the underlying assumptions used in theCompany's model. The binomial model assumes that employees' exercise behavior is a function of the award's remaining contractual life and the extent towhich the award is in-the-money (i.e., the average stock price during the period is above the strike price of the award). The binomial model estimates theprobability of exercise as a function of these two variables based on the history of exercises and cancellations on past award grants made by the Company. 94 As equity-based compensation expense recognized in the consolidated statement of operations is based on awards ultimately expected to vest, itshould be reduced for estimated forfeitures. The forfeitures are estimated at the time of grant and revised, if necessary, in subsequent periods if actualforfeitures differ from those estimates. Pre and post-vesting forfeitures were estimated based on historical experience. The fair value for rights to purchase shares of common stock under the Company's ESPP was estimated on each enrollment date using the sameassumptions set forth above for the years ended 2013, 2012 and 2011 except the expected life and the volatility. The expected life was assumed to bebetween six to 24 months based on the contractual life of the plan, and the expected volatility was assumed to be in a range of 36.37%-44.19% in 2013,35.79%-42.02% in 2012 and 28.37%-61.02% in 2011. The Company's aggregate equity compensation expenses for the years ended December 31, 2013, 2012 and 2011 totaled $4,159, $4,983 and$6,220, respectively. The Company recognized no tax benefit in its consolidated statements of operations for the years ended December 31, 2013, 2012and 2011 for the Company's equity-based compensation arrangements. A summary of the status of the Company's non-vested stock options, SARs and RSUs as of December 31, 2013, and changes during the yearended December 31, 2013, is presented below: Non-vested Units Weightedaverage grantdate fair value (In thousands) Non-vested at January 1, 2013 2,399 2.76 Granted 1,076 5.55 Vested (1,250) 2.86 Forfeited (311) 3.53 Non-vested at December 31, 2013 1,914 4.14 As of December 31, 2013, equity-based compensation arrangements to purchase a maximum of approximately 4,307 shares of common stockwere vested and expected to vest (the calculation takes into consideration the forfeiture rate). As of December 31, 2013, there was a total unrecognized compensation expense of $3,338 related to non-vested equity-based compensationarrangements granted under the Company's various equity incentive plans. That expense is expected to be recognized during the period from 2014 through2017. 95 NOTE 14:- COMMITMENTS AND CONTINGENCIES Commitments a. The Company and its subsidiaries lease certain equipment and facilities under non-cancelable operating leases. The Company has significantleased facilities in Herzlia Pituach, Israel. The lease agreement for the Israeli facilities is effective until November 2018. The Company has variousagreements for its facilities in the U.S. that terminate in 2014 through 2016. The Company's subsidiaries in Scotland, Japan, Germany, China and Hong-Kong have lease agreements for their facilities that terminate in 2014, 2014, 2015, 2014 and 2016, respectively. The Company's subsidiary in India hassublease agreements with NXP for their facilities that terminate in 2017. The Company has operating lease agreements for its motor vehicles whichterminate in 2014 through 2016. At December 31, 2013, the Company is required to make the following minimum lease payments under non-cancelable operating leases for motorvehicles and facilities: Year ended December 31, 2014 $2,860 2015 2,627 2016 2,192 2017 and thereafter 3,044 $10.723 Facilities rental expenses amounted to $2,389, $2,891 and $3,375 for the years ended December 31, 2013, 2012 and 2011, respectively. b. The Company participated in programs (most of which are royalty bearing grants) sponsored by the Israeli government for the support ofresearch and development activities. Through December 31, 2013, the Company had obtained grants from the Israeli Office of the Chief Scientist (the“OCS”) for certain of the Company’s research and development projects. The Company is obligated to pay royalties to the OCS, amounting to 5% of thesales of the products and other related revenues (based on the dollar) generated from such projects, up to 100% of the grants received. The royalty paymentobligations also bear interest at the LIBOR rate. The obligation to pay these royalties is contingent on actual sales of the applicable products and in theabsence of such sales, no payment is required. As of December 31, 2013, the aggregate contingent liability to the OCS amounted to $1,822. The Israeli Research and Development Lawprovides that know-how developed under an approved research and development program may not be transferred to third parties without the approval ofthe OCS. Such approval is not required for the sale or export of any products resulting from such research or development. The OCS, under specialcircumstances, may approve the transfer of OCS-funded know-how outside Israel, in the following cases: (a) the grant recipient pays to the OCS a portionof the sale price paid in consideration for such OCS-funded know-how or in consideration for the sale of the grant recipient itself, as the case may be,which portion will not exceed six times the amount of the grants received plus interest (or three times the amount of the grant received plus interest, in theevent that the recipient of the know-how has committed to retain the R&D activities of the grant recipient in Israel after the transfer); (b) the grant recipientreceives know-how from a third party in exchange for its OCS-funded know-how; (c) such transfer of OCS-funded know-how arises in connection withcertain types of cooperation in research and development activities; or (d) if such transfer of know-how arises in connection with a liquidation by reason ofinsolvency or receivership of the grant recipient. 96 Claims a. The Company is involved in certain claims arising in the normal course of business. However, the Company believes that the ultimateresolution of these matters will not have a material adverse effect on its financial position, results of operations, or cash flows. b. From time to time, the Company may become involved in litigation relating to claims arising in the ordinary course of business activities. Also,as is typical in the semiconductor industry, the Company has been and, from time to time may be, notified of claims that it may be infringing on patentsor intellectual property rights owned by third parties. NOTE 15:- TAXES ON INCOME a. The provision for income taxes is as follows: Year ended December 31, 2013 2012 2011 Domestic taxes Federal taxes: Current $(271) $(465) $36 State taxes: Current (9) 1 (623) Foreign taxes: Current 507 304 (311)Deferred (377) (12) 32 130 292 (279) Income tax benefit $(150) $(172) $(866) There were no tax benefits associated with the exercise of non-qualified stock options in 2013, 2012 and 2011. b. Income (loss) before taxes is comprised as follows: Year ended December 31, 2013 2012 2011 Domestic $(3,525) $(844) $(3,162)Foreign 6,051 (7,370) (13,946) $2,526 $(8,214) $(17,108) 97 c. A reconciliation between the Company's effective tax rate assuming all income is taxed at statutory tax rate applicable to the income of theCompany and the U.S. statutory rate is as follows: Year ended December 31, 2013 2012 2011 Income (loss) before taxes on income $2,526 $(8,214) $(17,108) Theoretical tax at U.S. statutory tax rate (35%) $884 $(2,875) $(5,988)State taxes, net of federal benefit 2 2 2 Foreign income taxed at rates other than the U.S. rate (includingdeferred taxes that were not provided, valuation allowance andcurrent adjustment and interest on uncertain tax position liability) (3,015) 1,253 2,563 Nondeductible equity-based compensation expenses 1,456 1,744 2,177 Current adjustment and interest on uncertain tax position liability inU.S. (283) (465) (598)Valuation allowance in U.S. 804 154 957 Other 2 15 21 $(150) $(172) $(866) d. Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financialreporting purposes and the amounts used for income tax purposes. December 31, 2013 2012 Deferred tax assets (short-term): Reserves and accruals $92 $101 Total deferred tax assets (short-term) 92 101 Valuation allowance - - Total 92 101 Deferred tax assets (long-term): Reserves and accruals 1,074 1,070 Equity-based compensation 2,526 2,372 Intangible assets 1,453 1,621 Carryforward tax losses 31,817 31,449 Other 16 51 Total deferred tax assets (long-term) 36,886 36,563 Valuation allowance (36,886) (36,563) Total - - Total deferred tax assets $92 $101 Deferred tax liabilities, net (Long term): Acquired intangible assets 1,670 2,056 Acquired carryforward tax losses (487) (487) Total deferred tax liabilities, net $1,183 $1,569 98 Management believes that the deferred net tax assets will not be realized based on current levels of future taxable income and potentiallyrefundable taxes. Accordingly, a valuation allowance in the amount of $36,886 and $36,563 was provided as of December 31, 2013 and 2012,respectively. The Company does not have a provision for U.S. income taxes on the undistributed earnings of its international subsidiaries since theCompany intends to indefinitely reinvest these earnings outside the U.S. e. Uncertain tax positions: A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows: 2013 2012 Gross unrecognized tax benefits at January 1 $1,815 $1,115 Decrease in tax positions for previous years - - Increases in tax positions for previous years 59 1,220 Increases in tax positions for current year 109 - Increase in interest related to tax positions 193 102 Lapse in statute of limitations (284) (622) Gross unrecognized tax benefits at December 31 $1,892 $1,815 The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1,892 and $1,815 at December 31,2013 and 2012, respectively. The Company accrues interest and penalties relating to unrecognized tax benefits in its provision for income taxes. AtDecember 31, 2013 and 2012, the Company had accrued interest and penalties related to unrecognized tax benefits of $408 and $435, respectively. 99 The Company reversed income tax contingency reserves that were determined to be no longer required due to the expiration of applicable statute oflimitations. Pursuant to this reversal, the Company recorded a tax benefit of $284, $622 and $635 during 2013, 2012 and 2011, respectively. The Company and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreign jurisdictions.The last examination conducted by U.S. tax authorities was with respect to the Company's U.S. federal income tax returns for 2004. The statute oflimitations relating to the consolidated Federal income tax return is closed for all tax years up to and including 2009. With respect to DSP Israel, the tax returns up to and including 2005 are considered to be final and not subject to any audits due to the expirationof the statute of limitations. Currently, the income tax returns of DSP Israel for the years 2006-2011 are being audited by the Israeli tax authorities. With respect to the Company's Swiss subsidiary, the statute of limitations related to its tax returns is opened for all tax years since itsincorporation. A change in the amount of unrecognized tax benefit is reasonably possible in the next 12 months due to the examination by the Israeli taxauthorities of the Company’s Israeli tax returns for 2006 – 2011 and due to the examination by the German tax authorities of the Company’s German taxreturns for 2007 – 2009. The Company currently cannot provide an estimate of the range of change in the amount of the unrecognized tax benefits due tothe ongoing status of the examination. f. Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("Investment Law"): Six separate investment programs ofDSP Israel's production facilities have been granted "Approved Enterprise" status and two investment programs of DSP Israel's production facilities wasfiled under "Beneficiary Enterprise" status under the Investment Law. The Investment Law provides certain Israeli tax benefits for eligible capitalinvestments in a production facility, as discussed in greater detail below. On April 1, 2005, an amendment to the Investment Law came into effect (the "Amendment") and significantly changed the provisions of theInvestment Law. Generally, DSP Israel's investment programs that obtained approval for Approved Enterprise status prior to enactment of the Amendmentwill continue to be subject to the old provisions of the Investment Law. The Amendment enacted major changes in the manner in which tax benefits are awarded under the Investment Law so that companies are nolonger required to get the Investment Center's prior approval to qualify for tax benefits. An enterprise that receives tax benefits without the initial approvalfrom the Investment Center is called a "Beneficiary Enterprise," rather than the previous terminology of “Approved Enterprise”. The period of tax benefitsfor a new Beneficiary Enterprise commences in the "Year of Commencement," which is the later of: (1) the year in which taxable income is first generatedby the company, or (2) the year of election. In addition, under the Amendment, tax benefits are available to production facilities, which generally are required to derive more than 25% oftheir business income from export. Furthermore, in order to receive the tax benefits under the Amendment, a company must make an investment in theBenefited Enterprise exceeding a certain percentage or a minimum amount specified in the Investment Law. 100 DSP Israel has chosen the "alternative benefits" track for all of its investment programs. Accordingly, DSP Israel's income from an "ApprovedEnterprise" and "Beneficiary Enterprise" is tax-exempt for a period of two or four years and is subject to a reduced corporate tax rate of 10%-25% (basedon the percentage of foreign ownership) for an additional period of eight or six years, respectively. DSP Israel's first, second, third, fourth, fifth and sixth investment programs, which were completed and commenced operations in 1994,1996, 1998, 1999, 2002 and 2004, respectively, were tax exempt for a period of between two and four years, from the first year they had taxable incomeand were entitled to a reduced corporate tax rate of 10%-25% (based on the percentage of foreign ownership) for an additional period of between six to eightyears. As of 2013, the first, second, third ,fourth and fifth investment programs were no longer entitled to a reduced corporate tax rate. DSP Israel's seventh and eighth investment programs have been in operation since 2006 and 2009, respectively, and entitles DSP Israel to acorporate tax exemption for a period of two years and a reduced corporate tax rate of 10%-25% (based on the percentage of foreign ownership) for anadditional period of eight years from the first year it has taxable income. Since DSP Israel is operating under more than one approval, its effective tax rate is the result of a weighted combination of the various applicabletax rates and tax exemptions and the computation is made for income derived from each investment program on the basis and formulas specified in theInvestment Law and the approvals. During 2006, DSP Israel received an approval for the erosion of tax basis in respect to its fifth and sixth investment programs. During 2008,DSP Israel received an approval for the erosion of tax basis with respect to its second, third and fourth investment programs. Those approvals resulted inincreasing the taxable income attributable to the later investment programs, which are currently in operation and will be taxed at a lower tax rate than theprevious investment programs, which in turn will decrease the overall effective tax rate. The Company's investment programs that generate taxable income are currently subject to an average tax rate of up to approximately 10% basedon a variety of factors, including percentage of foreign ownership and approvals for the erosion of the tax basis of our investment programs. TheCompany's average tax rate for its investment programs may change in the future due to circumstances outside of its control and therefore, the Companycannot provide any assurances that its average tax rate for its investment programs will continue at an approximate rate of 10% in the future. In December 2010, the Israeli Parliament passed the Law for Economic Policy for 2011 and 2012 (Amended Legislation), which, among otherthings, included an amendment to the Investment Law, effective as of January 1, 2011 (the “2011 Amendment”). In accordance with the 2011Amendment, the benefit tracks under the Investment Law were modified and a uniform tax rate would apply to companies eligible for the “PreferredEnterprise” status (rather than the previous terminology of “Beneficiary Enterprise”). Companies may elect to irrevocably implement the 2011 Amendment(while waiving benefits provided under the Investment Law as then in effect). On July 30, 2013, the Israeli Parliament passed a law, which, among other things, was designated to amend the uniform tax rates that were set inthe 2011 Amendment, and to increase the tax levy for years 2013 and 2014 (the “New Law”). The New Law increases the Israeli corporate tax rate from25% to 26.5%, cancels the reduction of corporate tax rate for “Preferred Enterprises,”which will be set on 16% for 2014 and thereafter under the New Lawand increases the tax rate on dividends from sources under the Israeli Investment Law to 20% commencing on January 1, 2014. 101 The Company does not currently intend to implement the 2011 Amendment, rather it intends to continue to comply with the Investment Law as itwas in effect prior to enactment of the 2011 Amendment until the earlier of such time that compliance with the Investment Law prior to enactment of the2011 Amendment is no longer in the Company’s best interests or until the expiration of its current investment programs. The Company is required tocomply with the 2011 Amendment subsequent to the expiration of the Company’s current investment programs and for any new qualified investmentprogram after a transitional period. Once the Company is required to comply with the provisions under the 2011 Amendment, its average tax rate mayincrease. As of December 31, 2013, DSP Israel believed that it met all the conditions required under the plans, which include inter-alia an obligation toinvest certain amounts in property and equipment and an obligation to finance a percentage of investments by share capital. Should DSP Israel fail to meet such conditions in the future, it could be subject to corporate tax in Israel at the standard tax rate (25% for 2013and 26.5% for 2014) plus a consumer price index linkage adjustment and interest and could be required to refund tax benefits already received. As of December 31, 2013, approximately $35,481 was derived from tax exempt profits earned by DSP Israel's "Approved Enterprises" and"Beneficiary Enterprise". The Company has determined that such tax-exempt income will not be distributed as dividends and intends to reinvest theamount of its tax exempt income earned by DSP Israel. Accordingly, no provision for deferred income taxes has been provided on income attributable toDSP Israel's "Approved Enterprises" and "Beneficiary Enterprise" as such income is essentially permanently reinvested. If DSP Israel's retained tax-exempt income is distributed, the income would be taxed at the applicable corporate tax rate (currently 10%) as if ithad not elected the alternative tax benefits under the Investment Law and an income tax liability of approximately $3,942 would have been incurred as ofDecember 31, 2013. DSP Israel's income from sources other than the "Approved Enterprises" and "Beneficiary Enterprise" during the benefit period will be subject totax at the effective standard corporate tax rate in Israel (25% for 2013 and 26.5% for 2014). g. Tax benefits under Israel's Law for Encouragement of Industry (Taxation), 1969:DSP Israel is an "industrial company" under the Law for the Encouragement of Industry (Taxation), 1969, and as such is entitled to certain taxbenefits, mainly the amortization of costs relating to know-how and patents, over eight years and accelerated depreciation. The following corporate tax benefits, among others, are available to Industrial Companies: • amortization of the cost of purchasing a patent, rights to use a patent and know-how, which are used for the development oradvancement of the company, over an eight-year period commencing on the year in which such rights were first exercised; • under limited conditions, an election to file consolidated tax returns with related Israeli Industrial Companies; and • expenses related to a public offering are deductible in equal amounts over three years. 102 Eligibility for benefits under the Industry Encouragement Law is not contingent upon approval of any governmental authority. There can be no assurances that the Company will continue to qualify as an Industrial Company or that the benefits described above will beavailable in the future. h. Israeli tax rates: The rate of the Israeli corporate tax is as follows: 2011 - 24%, 2012 and 2013 – 25%, 2014 – 26.5%. Tax at a rate of 25% applies on capitalgains arising after January 1, 2003. i. In connection with the CIPT Acquisition, the Company received a tax ruling from the Swiss tax authorities with respect to the taxable incomegenerated by its Swiss subsidiary, including the amortization period for tax purposes of goodwill and all other intangible assets acquired in the CIPTAcquisition by its Swiss subsidiary. Pursuant to the tax ruling, the Company's Swiss subsidiary is entitled to reduced tax rates of approximately 10% to15%, depending on the source of income, and tax amortization period of up to 10 years for the goodwill and other intangible assets acquired in the CIPTAcquisition by its Swiss subsidiary. j. The Company has accumulated losses for federal and state tax purposes as of December 31, 2013 of approximately $10,736 and $3,030,respectively, which may be carried forward and offset against future taxable income for a period of fifteen to twenty years from its creation. In addition, theCompany has accumulated capital losses of approximately $1,169, which may be carried forward and offset against future capital gains for a period offive years from its creation. DSP Israel has accumulated losses for tax purposes as of December 31, 2013, of approximately $38,981 (including researchand development expenses carry forward), which may be carried forward and offset against future taxable income for an indefinite period. The Swisssubsidiary has accumulated losses for tax purposes as of December 31, 2013, of approximately $240,960, which may be carried forward and offsetagainst future taxable income for a period of seven years from its creation. 103 NOTE 16:- BASIC AND DILUTED LOSS PER SHARE The following table sets forth the computation of basic and diluted net loss per share: Year ended December 31, 2013 2012 2011 Numerator: Net income (loss) $2,676 $(8,042) $(16,242) Denominator: Weighted average number of shares of common stock outstanding during the yearused to compute basic net income (loss) per share (in thousands) 22,249 21,950 23,247 Incremental shares attributable to exercise of outstanding options, SARs and RSUs(assuming proceeds would be used to purchase treasury stock) (in thousands) 657 - - Weighted average number of shares of common stock used to compute diluted netincome (loss) per share (in thousands) 22,906 21,950 23,247 Basic net income (loss) per share $0.12 $(0.37) $(0.70) Diluted net income (loss) per share $0.12 $(0.37) $(0.70) NOTE 17:- RESTRUCTURING COSTS AND OTHER a.During the third quarter of 2012, the Company initiated a restructuring plan in order to improve operating efficiencies and reduce its operatingexpenses for fiscal year 2012 and subsequent periods. As part of this restructuring plan, the Company executed termination agreements withcertain of its employees. During the third quarter of 2012, the Company recorded an expense in the amount of $1,315, consisting mainly ofemployee severance costs and the future expected under-utilization of existing development tool agreements with expiry dates in 2013 and 2014.All restructuring payments related to this restructuring plan were paid as of December 31, 2013. b.During the second quarter of 2012, as part of the Company's plan to improve operating efficiencies and reduce its operating expenses for fiscalyear 2012 and subsequent periods, it restructured its operations. As part of this restructuring plan, the Company executed terminationagreements with certain of its employees. During the second quarter of 2012, the Company recorded an expense in the amount of $693,consisting mainly of employee severance costs. The Company anticipates that the remaining accrued restructuring cost balance of $39 will bepaid out in cash throughout 2014. c.During the third quarter of 2011, as part of the Company's plan to improve operating efficiencies and reduce its operating expenses for fiscalyear 2012 and subsequent periods, it restructured its U.S. operations. As part of this restructuring plan, the Company executed terminationagreements with certain of its U.S. employees and renegotiated the lease for its U.S facilities. In 2011, the Company recorded an expense in theamount of $419, consisting of employee severance costs and lease agreement termination. During 2012, the remaining restructuring expensesrelated to the restructuring of U.S. operations were included in research and development expenses due to the immateriality of such expenses.As of December 31, 2012, all restructuring expenses mentioned above have been paid. d.During the first quarter of 2011, the Company recorded total income of $590 in connection with its restructuring plan implemented during thethird quarter of 2010. The income resulted mainly from the closure of the Company’s Swiss facilities and the termination of employment ofthe employees of its Swiss subsidiary, which resulted in a curtailment and settlement of the Swiss pension plan during the first quarter of2011. 104 NOTE 18:- SEGMENT INFORMATION Description of segments: Until the second quarter of 2012, the Company operated under one reporting segment. During the third quarter of 2012, following a change inthe manner management evaluates financial information, the Company determined that it operates under three reportable segments.The Company's segment information has been prepared in accordance with ASC 280, "Segment Reporting." Operating segments are defined ascomponents of an enterprise engaging in business activities about which separate financial information is available that is evaluated regularly by theCompany's chief operating decision-maker (“CODM”) in deciding how to allocate resources and assess performance. The Company's CODM is its ChiefExecutive Officer, who evaluates the Company's performance and allocates resources based on segment revenues and operating income.The Company's operating segments are as follows: Home, Office and Mobile. The classification of the Company’s business segments is basedon a number of factors that management uses to evaluate, view and run its business operations, which include, but are not limited to, customer base,homogeneity of products and technology.A description of the types of products provided by each business segment is as follows:Home - Wireless chipset solutions for converged communication at home. Such solutions include integrated circuits targeted for cordlessphones sold in retail or supplied by telecommunication service providers, residential gateway devices supplied by telecommunication service providerswhich integrate the DECT/CAT-iq functionality and also address home automation applications, as well as fixed-mobile convergence solutions.Office - Comprehensive solution for Voice-over-IP (VoIP) office products, including office solutions that offer businesses of all size low-costVoIP terminals with converged voice and data applications.Mobile - Products for the mobile market that provides voice enhancement and far-end noise elimination targeted for mobile phone and mobileheadsets.Segment data: The Company derives the results of its business segments directly from its internal management reporting system and by using certainallocation methods. The accounting policies the Company uses to derive business segment results are substantially the same as those the Company usesfor consolidation of its financial statements. the CODM measures the performance of each business segment based on several metrics, including earningsfrom operations. CODM uses these results, in part, to evaluate the performance of, and to assign resources to, each of the business segments. TheCompany does not allocate to its business segments certain operating expenses, which it manages separately at the corporate level. These unallocated costsinclude primarily restructuring charges, amortization of purchased intangible assets, equity-based compensation expenses, proxy contest related expensesincurred during the second quarter of 2013 and certain corporate governance costs. 105 The Company does not allocate any assets to segments and, therefore, no amount of assets is reported to management and disclosed in thefinancial information for segments. Selected operating results information for each business segment was as follows for the year ended December 31, 2013,2012 and 2011: Year ended December 31 Revenues Income (loss) from operations 2013 2012 2011 2013 2012 2011 Home $142,144 $155,211 $188,192 $25,367 $15,040 -* Office $8,849 $7,579 $5,669 $(4,656) $(5,156) -* Mobile $70 $- $- $(11,040) $(8,585) -* Total $151,063 $162,790 $193,861 $9,671 $1,299 $(2,830) *) It is impracticable to present 2011 income (loss) from operations by segments due to lack in internal management reporting and trackingsystem, which tracks and reports employees actual hours in the various projects. The reconciliation of segment operating results information to the Company’s consolidated financial information was as follows: Year ended December 31, 201320122011Income (loss) from operations $9,671 $1,299 $(2,830)Unallocated corporate, general and administrative expenses * (2,368) (2,600) (3,484)Restructuring expenses - (2,008) 170 Proxy contest related expenses (1,403) - - Equity-based compensation expenses (4,159) (4,983) (6,220)Intangible assets amortization expenses (1,672) (2,310) (7,972)Other income from remeasurement of initial investment in an affiliated company - - 1,343 Financial income, net 2,457 2,388 1,885 Total consolidated income (loss) before taxes $2,526 $(8,214) $(17,108) *Includes mainly legal, accounting, board of directors and investors relation expenses. 106 Major customers and geographic information The following is a summary of operations within geographic areas based on customer locations: Year ended December 31, 2013 2012 2011 Revenue distribution Hong-Kong $86,090 $84,737 $100,894 Japan 34,377 51,033 57,260 Korea 914 1,968 5,909 Europe 7,370 7,429 9,180 United States 4,342 2,028 1,836 China 6,999 6,270 8,577 Taiwan 7,093 6,496 7,225 Other 3,878 2,829 2,980 $151,063 $162,790 $193,861 For a summary of revenues from major customers, please see Note 1. Sales to these customers were primarily related to the Company'sHome reportable segment. The following is a summary of long-lived assets within geographic areas based on the assets' locations: December 31, 2013 2012 Long-lived assets Europe $158 $120 Israel 2,260 3,151 United States 1 9 Other 418 426 $2,837 $3,706 107 Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE. None. Item 9A. CONTROLS AND PROCEDURES. Evaluation of Disclosure Controls and Procedures As of the end of the period covered by this report, we carried out an evaluation, under the supervision and with the participation of our ChiefExecutive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures. Based on thisevaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of December31, 2013. There has been no change in our internal control over financial reporting that occurred during our most recent fiscal quarter that has materiallyaffected or is reasonably likely to materially affect our internal control over financial reporting. Management’s Annual Report on Internal Control over Financial Reporting Our management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is defined inRule 13a-15(f) and Rule 15d-15(f) promulgated under the Securities Exchange Act of 1934, as amended. Our internal control over financial reporting is aprocess designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for externalpurposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may notprevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may becomeinadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, weconducted an evaluation of the effectiveness of our internal control over financial reporting based on the framework in Internal Control—IntegratedFramework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our management concludedthat our internal control over financial reporting was effective as of December 31, 2013. The effectiveness of our internal control over financial reporting as of December 31, 2013 has been audited by Kost, Forer, Gabbay & Kasierer,a member of Ernst & Young Global, an independent registered public accounting firm, who audited and reported on the consolidated financial statementsof the company for the year ended December 31, 2013, as stated in their report which is presented in this Annual Report on Form 10-K under Item 8. Item 9B. OTHER INFORMATION. None. 108 PART III Certain information required by Part III of this Annual Report is omitted and will be incorporated by reference herein from our definitive proxystatement pursuant to Regulation 14A in connection with the 2014 Annual Meeting of Stockholders to be held on June 9, 2014. Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. Information relating to our directors and executive officers will be presented under the captions “Proposal No. 1 – Election of Directors” and“Executive Officers and Directors” in our definitive proxy statement. Such information is incorporated herein by reference. Item 11. EXECUTIVE COMPENSATION. Information relating to executive compensation will be presented under the caption “Executive Compensation” in our definitive proxy statement.Such information is incorporated herein by reference. Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDERMATTERS. Information relating to the security ownership of our common stock by our management and other beneficial owners will be presented under thecaption “Security Ownership of Certain Beneficial Owners and Management” in our definitive proxy statement. Such information is incorporated hereinby reference. Information relating to our equity compensation plans will be presented under the caption “Equity Compensation Plan Information” in ourdefinitive proxy statement. Such information is incorporated herein by reference. Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE. Information relating to certain relationships of our directors and executive officers and related transactions, as well as director independenceinformation, will be presented under the caption “Certain Relationships and Related Transactions” in our definitive proxy statement. Such information isincorporated herein by reference. Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. Information relating to principal accountant fees and services will be presented under the caption “Principal Accountant Fees and Services” in ourdefinitive proxy statement. Such information is incorporated herein by reference. 109 PART IV Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. (a)The following documents have been filed as a part of this Annual Report on Form 10-K. 1.Index to Financial Statements. Description:Report of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global Consolidated Balance Sheets as of December 31, 2013 and 2012 Consolidated Statements of Operations for the years ended December 31, 2013, 2012 and 2011 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2013, 2012 and 2011 Consolidated Statements of Cash Flows for the years ended December 31, 2013, 2012 and 2011 Notes to Consolidated Financial Statements 2.Index to Financial Statement Schedules. The following financial statement schedule and related auditor’s report are filed as part of this Annual Report on Form 10-K: Description: Valuation and Qualifying AccountsSchedule II All other schedules are omitted because they are not applicable or the required information is included in the attached consolidated financialstatements or the related notes for the year ended December 31, 2013. 110 List of Exhibits: ExhibitNumber Description2.1 Share and Business Sale Agreement, dated September 3, 2007, by and among DSP Group, Inc., DSP Group Ltd. and NXP, B.V. (filed asExhibit 2.1 to the Registrant’s Current Report on 8-K filed September 7, 2007, and incorporated herein by reference). 3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1B to the Registrant’s Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11, 1994, and incorporated herein by reference). 3.2 Certificate of Amendment of the Amended and Restated Certificate of Incorporation, Effective as of July 19, 1999 (filed as Exhibit 3.2 to theRegistrant’s Annual Report on Form 10-K for the year ended December 31, 2006, and incorporated herein by reference). 3.3 Amended and Restated Bylaws, effective as of October 31, 2013 (filed as Exhibit 3.1 to the Registrant’s Current Report on Form 8-K filed onNovember 1, 2013, and incorporated herein by reference). 10.1 Amended and Restated 1991 Employee and Consultant Stock Plan (filed as Exhibit 10.1 to the Registrant’s Annual Report on Form 10-K forthe year ended December 31, 2003, and incorporated herein by reference). †† 10.2 Amended and Restated 1993 Director Stock Option Plan (filed as Exhibit 10.2 to the Registrant’s Annual Report on Form 10-K for the yearended December 31, 2011, and incorporated herein by reference). †† 10.3 Form of Option Agreement for Israeli Directors under the Amended and Restated 1993 Director Stock Option Plan (filed as Exhibit 10.4 to theRegistrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, and incorporated herein by reference). †† 10.4 Form of Option Agreement for Non-Israeli Directors under the Amended and Restated 1993 Director Stock Option Plan (filed as Exhibit 10.4 tothe Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, and incorporated herein by reference). †† 10.5 Amended and Restated 1993 Employee Stock Purchase Plan and form of subscription agreement thereunder (filed as Exhibit 10.5 to theRegistrant’s Annual Report on Form 10-K for the year ended December 31, 2011, and incorporated herein by reference). †† 10.6 Form of Indemnification Agreement for directors and executive officers (filed as Exhibit 10.1 to the Registrant’s Registration Statement onForm S-1, file no. 33-73482, as declared effective on February 11, 1994, and incorporated herein by reference). 10.7 Lease, dated November 28, 1996, by and between DSP Semiconductors Ltd. and Gav-Yam Lands Company Ltd., relating to the propertylocated on Shenkar Street, Herzelia Pituach, Israel (filed as Exhibit 10.1 to the Registrant’s Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 1997, and incorporated herein by reference). 10.8 Lease, dated September 13, 1998, between DSP Group, Ltd. and Bayside Land Corporation Ltd., relating to the property located on ShenkarStreet, Herzelia Pituach, Israel (filed as Exhibit 10.22 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 1998,and incorporated herein by reference). 10.9 Amended and Restated 1998 Non-Officer Employee Stock Option Plan (filed as Exhibit 10.19 to the Registrant’s Annual Report on Form 10-Kfor the year ended December 31, 2003, and incorporated herein by reference). †† 111 ExhibitNumber Description10.10 Appendix Agreement, dated May 5, 1999, by and between DSP Group, Ltd. and Bayside Land Corporation Ltd., relating to the propertylocated on Shenkar Street, Herzelia Pituach, Israel (filed as Exhibit 10.25 to the Registrant’s Annual Report on Form 10-K for the year endedDecember 31, 1999, and incorporated herein by reference). 10.11 Non-Exclusive Distribution Agreement between the Registrant and Tomen Electronics Corporation as amended on October 12, 2000 (filed asExhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000, and incorporated herein by reference). 10.12 Amended and Restated 2001 Stock Incentive Plan and form of option agreement thereunder (filed as Exhibit 10.31 to the Registrant’s AnnualReport on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference). †† 10.13 Amended and Restated 2003 Israeli Share Incentive Plan (filed as Exhibit 10.1 to the Registrant’s Current Report on Form 8-K filed on May 4,2011, and incorporated herein by reference) and form of option agreement thereunder (filed as Exhibit 10.32 to the Registrant’s Annual Report onForm 10-K for the year ended December 31, 2003, and incorporated herein by reference). †† 10.14 Agreement, dated March 5, 2003, between DSP Group, Ltd. and The Gav-Yam Real Estate Company Ltd., relating to the property located onShenkar Street, Herzelia Pituach, Israel (filed as Exhibit 10.33 to the Registrant’s Quarterly Report on Form 10-Q for the quarter endedMarch 31, 2003, and incorporated herein by reference). 10.15 Form of Option Agreement under DSP Group, Inc.’s 2001 Stock Incentive Plan for Eliyahu Ayalon (filed as Exhibit 10.41 to Registrant’s AnnualReport on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference). †† 10.16 Manufacturing Capacity Agreement, effective as of July 1, 2004, by and among DSP Group, Inc., DSP Group, Ltd, and TaiwanSemiconductor Manufacturing Company Ltd (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter endedSeptember 30, 2004, and incorporated herein by reference) (confidential treatment has been granted for portions of this exhibit). 10.17 Form of Non-Qualified Stock Option Agreement Providing for the Grant of Options as a Material Inducement of Employment (filed asExhibit 4.1 to Registrant’s Registration Statement on Form S-8 filed on July 21, 2005, and incorporated herein by reference). †† 10.18 Form of Stock Appreciation Right Agreement for Executive Officers pursuant to the Amended and Restated 2003 Israeli Share Incentive Plan(filed as Exhibit 99.2 to Registrant’s Current Report on 8-K filed on April 11, 2006, and incorporated herein by reference). †† 10.19 Manufacturing Services Collaboration Agreement, dated September 4, 2007, by and among DSP Group, Inc., DSP Group Ltd. and NXP, B.V.(filed as Exhibit 10.39 to Registrant’s Quarterly Report on 10-Q for the quarter ended September 30, 2007, and incorporated herein by reference)(confidential treatment has been granted for portions of this exhibit). 10.20 Amendment Agreement to Manufacturing Services Collaboration Agreement, dated January 27, 2009, by and among DSP Group, Inc., DSPGroup Ltd. and NXP, B.V. (filed as Exhibit 10.38 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2008, andincorporated herein by reference) (confidential treatment has been granted for portions of this exhibit). 10.21 Agreement to Amend the Manufacturing Services Collaboration Agreement, dated December 8, 2010, by and among DSP Group, Inc., DSPGroup, Ltd. and NXP B.V. (filed as Exhibit 10.1 to Registrant’s Current Report on 8-K filed on December 10, 2010, and incorporated herein byreference) (confidential treatment has been granted for portions of this exhibit). 112 ExhibitNumber Description10.22 Intellectual Property Transfer and License Agreement, dated September 4, 2007, by and among DSP Group, Inc., DSP Group Ltd. and NXP,B.V. (filed as Exhibit 10.40 to Registrant’s Quarterly Report on 10-Q for the quarter ended September 30, 2007, and incorporated herein byreference) (confidential treatment has been granted for portions of this exhibit). 10.23 Intellectual Property Library Services and R&D Agreement, dated September 4, 2007, by and among DSP Group, Inc., DSP Group Ltd. andNXP, B.V. (filed as Exhibit 10.41 to Registrant’s Quarterly Report on 10-Q for the quarter ended September 30, 2007, and incorporated hereinby reference) (confidential treatment has been granted for portions of this exhibit). 10.24 Umbrella Transitional Services Agreement, dated September 4, 2007, by and among DSP Group, Inc., DSP Group Ltd. and NXP, B.V. (filedas Exhibit 10.42 to Registrant’s Quarterly Report on 10-Q for the quarter ended September 30, 2007, and incorporated herein by reference)(confidential treatment has been granted for portions of this exhibit). 10.25 Employment Agreement by and between DSP Group, Ltd. and Ofer Elyakim, effective June 25, 2009 (filed as Exhibit 10.32 to Registrant’sAnnual Report on 10-K for the year ended December 31, 2010, and incorporated herein by reference). †† 10.26 Amendment to Employment Agreement by and between DSP Group, Ltd. and Ofer Elyakim, effective January 31, 2011 (filed as Exhibit 10.33to Registrant’s Annual Report on 10-K for the year ended December 31, 2010, and incorporated herein by reference). †† 10.27 Amendment to Employment Agreement by and between DSP Group, Ltd. and Ofer Elyakim, as amended, effective as of May 16, 2011(filed asExhibit 10.2 to Registrant’s Current Report on 8-K filed on May 20, 2011, and incorporated herein by reference). †† 10.28 Employment Agreement by and between DSP Group, Ltd. and Dror Levy, effective June 9, 2002 (filed as Exhibit 10.34 to Registrant’s AnnualReport on 10-K for the year ended December 31, 2010, and incorporated herein by reference). †† 10.29 Amendment to Employment Agreement by and between DSP Group, Ltd. and Dror Levy, effective January 31, 2011 (filed as Exhibit 10.35 toRegistrant’s Annual Report on 10-K for the year ended December 31, 2010, and incorporated herein by reference). †† 10.30 Amendment to Employment Agreement by and between DSP Group, Ltd. and Dror Levy, as amended, effective as of May 16, 2011 (filed asExhibit 10.3 to Registrant’s Current Report on 8-K filed on May 20, 2011, and incorporated herein by reference). †† 10.31 Employment Agreement by and between DSP Group, Ltd. and David Dahan, effective February 1, 2012 (filed as Exhibit 10.41 to theRegistrant’s Annual Report on Form 10-K for the year ended December 31, 2011, and incorporated herein by reference). †† 10.32 Amendment to Employment Agreement by and among DSP Group, Inc., DSP Group, Ltd. and Ofer Elyakim, as amended, effective as ofNovember 5, 2012(filed as Exhibit 10.1 to Registrant’s Current Report on 8-K filed on November 9, 2012, and incorporated herein byreference). †† 10.33 Amendment to Employment Agreement by and among DSP Group, Inc., DSP Group, Ltd. and Dror Levy, as amended, effective as ofNovember 5, 2012 (filed as Exhibit 10.2 to Registrant’s Current Report on 8-K filed on November 9, 2012, and incorporated herein byreference). †† 10.34 DSP Group, Inc. Amended and Restated 2012 Stock Incentive Plan. ††* 113 ExhibitNumber Description10.35 Amendment to Employment Agreement of Ofer Elyakim, effective March 5, 2013 (filed as Exhibit 10.1 to Registrant’s Current Report on 8-Kfiled on March 8, 2013, and incorporated herein by reference). †† 10.36 Amendment to Employment Agreement of Dror Levy, effective March 5, 2013 (filed as Exhibit 10.2 to Registrant’s Current Report on 8-K filedon March 8, 2013, and incorporated herein by reference). †† 10.37 Amendment to Employment Agreement of David Dahan, effective March 5, 2013 (filed as Exhibit 10.3 to Registrant’s Current Report on 8-Kfiled on March 8, 2013, and incorporated herein by reference). †† 10.38 Form of Restricted Stock Unit Agreement for Israeli Resident Grantees under the 2012 Stock Incentive Plan(filed as Exhibit 10.1 to Registrant’sCurrent Report on 8-K filed on August 21, 2013, and incorporated herein by reference). †† 10.39 Amendment to Employment Agreement of Ofer Elyakim, effective October 31, 2013 (filed as Exhibit 10.1 to Registrant’s Current Report on 8-Kfiled on November 1, 2013, and incorporated herein by reference). †† 10.40 Amendment to Employment Agreement of Dror Levy, effective October 31, 2013 (filed as Exhibit 10.2 to Registrant’s Current Report on 8-Kfiled on November 1, 2013, and incorporated herein by reference). †† 10.41 Form of Restricted Stock Unit Agreement for Members of the Board of Directors under the 2012 Stock Incentive Plan. ††* 10.42 Form of Restricted Stock Unit Agreement for Members of the Board of Directors Who Are Israeli Residents under the 2012 Stock Incentive Plan.††* 10.43 Amended and Restated Director Equity Sub-Plan under the 2012 Equity Incentive Plan. ††* 21.1 Subsidiaries of DSP Group, Inc.* 23.1 Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, Independent Registered Public Accounting Firm.* 24.1 Power of Attorney (See signature page of this Annual Report on Form 10-K).* 31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.* 31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.* 32.1 Section 1350 Certification of Chief Executive Officer.* 32.2 Section 1350 Certification of Chief Financial Officer.* 101.INS XBRL Instance Document101.SCH XBRL Taxonomy Extension Schema Document101.CAL XBRL Taxonomy Extension Calculation Linkbase Document101.DEF XBRL Taxonomy Extension Definition Linkbase Document101.LAB XBRL Taxonomy Extension Labels Linkbase Document101.PRE XBRL Taxonomy Extension Presentation Linkbase Document †† Management contract or compensatory plan or arrangement required to be filed as an exhibit pursuant to Item 15(c) of Form 10-K. * Filed herewith. 114 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to besigned on its behalf by the undersigned, thereunto duly authorized. DSP GROUP, INC. By:/s/ Ofer Elyakim Ofer Elyakim Chief Executive Officer (Principal Executive Officer) Date: March 17, 2014 Power of AttorneyKNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Ofer Elyakim and DrorLevy or either of them, his true and lawful attorneys-in-fact and agents, with full power of substitution and re-substitution, for him and in his name, placeand stead, in any and all capacities to sign any and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto andother documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and each ofthem, full power and authority to do and perform each and every act and thing requisite and necessary to be done in connection therewith, as fully to allintents and purposes as he might or could do in person, hereby ratifying and confirming all that said attorneys-in-fact and agents, or either of them, ortheir or his substitutes or substitute, may lawfully do or cause to be done by virtue hereof. Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of theRegistrant and in the capacities and on the dates indicated. Signature Title Date /s/ Patrick Tanguy Chairman of the Board March 17, 2014Patrick Tanguy /s/ Ofer Elyakim Chief Executive Officer (Principal March 17, 2014Ofer Elyakim Executive Officer) and Director /s/ Dror Levy Chief Financial Officer and Secretary (PrincipalFinancial March 17, 2014Dror Levy Officer and Principal Accounting Officer) /s/ Reuven Regev Director March 17, 2014Reuven Regev /s/ Thomas A. Lacey Director March 17, 2014Thomas A. Lacey /s/ Norman J. Rice III Director March 17, 2014Norman J. Rice III /s/ Gabi Seligsohn Director March 17, 2014Gabi Seligsohn /s/ Yair Seroussi Director March 17, 2014Yair Seroussi /s/ Norman Taffe Director March 17, 2014Norman Taffe /s/ Kenneth H. Traub Director March 17, 2014Kenneth H. Traub 115 Schedule II DSP GROUP, INC.VALUATION AND QUALIFYING ACCOUNTS(in thousands) Description Balance at Beginning ofPeriod Charged to (deductedfrom) Costs andExpenses Balance at End of PeriodYear ended December 31, 2011: Allowance for doubtful accounts Sales returns reserve - - -Year ended December 31, 2012: Allowance for doubtful accounts Sales returns reserve - - -Year ended December 31, 2013: Allowance for doubtful accounts Sales returns reserve - - - 116 Exhibit 10.34 DSP GROUP, INC. AMENDED AND RESTATED 2012 EQUITY INCENTIVE PLAN 1. Purposes of the Plan. The purposes of this Plan are to attract and retain the best available personnel, to provide additional incentives toEmployees, Directors and Consultants and to promote the success of the Company’s business. 2. Definitions. The following definitions shall apply as used herein and in the individual Award Agreements except as defined otherwise in anindividual Award Agreement. In the event a term is separately defined in an individual Award Agreement, such definition shall supersede the definitioncontained in this Section 2. (a) “Administrator” means the Board or any of the Committees appointed to administer the Plan. (b) “Affiliate” and “Associate” shall have the respective meanings ascribed to such terms in Rule 12b-2 promulgated under theExchange Act. (c) “Applicable Laws” means the legal requirements relating to the Plan and the Awards, including under applicable provisions offederal securities laws, state corporate and securities laws, the Code, the rules of any applicable stock exchange or national market system, and the rulesof any non-U.S. jurisdiction applicable to Awards granted to residents therein. (d) “Assumed” means that pursuant to a Corporate Transaction either (i) the Award is expressly affirmed by the Company or (ii) thecontractual obligations represented by the Award are expressly assumed (and not simply by operation of law) by the successor entity or its Parent inconnection with the Corporate Transaction with appropriate adjustments to the number and type of securities of the successor entity or its Parent subject tothe Award and the exercise or purchase price thereof which at least preserves the compensation element of the Award existing at the time of the CorporateTransaction as determined in accordance with the instruments evidencing the agreement to assume the Award. (e) “Award” means the grant of an Option, SAR, Dividend Equivalent Right, Restricted Stock, Restricted Stock Unit or other rightor benefit under the Plan. (f) “Award Agreement” means the written agreement evidencing the grant of an Award executed by the Company and the Grantee,including any amendments thereto. (g) “Board” means the Board of Directors of the Company. (h) “Cause” means willful misconduct by the Grantee or willful failure by the Grantee to perform his or her responsibilities to theCompany or a Related Entity (including, without limitation, breach by the Grantee of any provision of any employment, consulting, advisory,nondisclosure, non-competition or other similar agreement between the Grantee and the Company or a Related Entity), as determined by the Company,which determination shall be conclusive. The Grantee shall be considered to have been discharged for Cause if the Company determines, within 30 daysafter the Grantee’s resignation, that discharge for Cause was warranted. 1 (i) “Change in Control” means a change in ownership or control of the Company effected through either of the following transactions: (i) the direct or indirect acquisition by any person or related group of persons (other than an acquisition from or by theCompany or by a Company-sponsored employee benefit plan or by a person that directly or indirectly controls, is controlled by, or is under commoncontrol with, the Company) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securities possessing more than fiftypercent (50%) of the total combined voting power of the Company’s outstanding securities pursuant to a tender or exchange offer made directly to theCompany’s stockholders which a majority of the Continuing Directors who are not Affiliates or Associates of the offeror do not recommend suchstockholders accept, or (ii) a change in the composition of the Board over a period of twelve (12) months or less such that one-third (1/3) of theBoard members (rounded up to the next whole number) ceases, by reason of one or more contested elections for Board membership, to be comprised ofindividuals who are Continuing Directors. (j) “Code” means the Internal Revenue Code of 1986, as amended, and the rules and regulations promulgated thereunder. (k) “Committee” means any committee composed of members of the Board appointed by the Board to administer the Plan. (l) “Common Stock” means the common stock of the Company. (m) “Company” means DSP Group, Inc., a Delaware corporation, or any successor entity that adopts the Plan in connection with aCorporate Transaction. (n) “Consultant” means any person (other than an Employee or a Director, solely with respect to rendering services in such person’scapacity as a Director) who is engaged by the Company or any Related Entity to render consulting or advisory services to the Company or such RelatedEntity. (o) “Continuing Directors” means members of the Board who either (i) have been Board members continuously for a period of atleast twelve (12) months or (ii) have been Board members for less than twelve (12) months and were elected or nominated for election as Board membersby at least a majority of the Board members described in clause (i) who were still in office at the time such election or nomination was approved by theBoard. (p) “Continuous Service” means that the provision of services to the Company or a Related Entity in any capacity of Employee,Director or Consultant is not interrupted or terminated. In jurisdictions requiring notice in advance of an effective termination as an Employee, Director orConsultant, Continuous Service shall be deemed terminated upon the actual cessation of providing services to the Company or a Related Entitynotwithstanding any required notice period that must be fulfilled before a termination as an Employee, Director or Consultant can be effective underApplicable Laws. A Grantee’s Continuous Service shall be deemed to have terminated either upon an actual termination of Continuous Service or upon theentity for which the Grantee provides services ceasing to be a Related Entity. Continuous Service shall not be considered interrupted in the case of (i) anyapproved leave of absence, (ii) transfers among the Company, any Related Entity, or any successor, in any capacity of Employee, Director or Consultant,or (iii) any change in status as long as the individual remains in the service of the Company or a Related Entity in any capacity of Employee, Director orConsultant (except as otherwise provided in the Award Agreement). Notwithstanding the foregoing, except as otherwise determined by the Administrator, inthe event of any spin-off of a Related Entity, service as an Employee, Director or Consultant for such Related Entity following such spin-off shall bedeemed to be Continuous Service for purposes of the Plan and any Award under the Plan. An approved leave of absence shall include sick leave, militaryleave, or any other authorized personal leave. For purposes of each Incentive Stock Option granted under the Plan, if such leave exceeds three (3) months,and reemployment upon expiration of such leave is not guaranteed by statute or contract, then the Incentive Stock Option shall be treated as a Non-Qualified Stock Option on the day three (3) months and one (1) day following the expiration of such three (3) month period. 2 (q) “Corporate Transaction” means any of the following transactions, provided, however, that the Administrator shall determineunder parts (iv) and (v) whether multiple transactions are related, and its determination shall be final, binding and conclusive: (i) a merger or consolidation in which the Company is not the surviving entity, except for a transaction the principalpurpose of which is to change the state in which the Company is incorporated; (ii) the sale, transfer or other disposition of all or substantially all of the assets of the Company; (iii) the complete liquidation or dissolution of the Company; (iv) any reverse merger or series of related transactions culminating in a reverse merger (including, but not limited to, a tenderoffer followed by a reverse merger) in which the Company is the surviving entity but (A) the shares of Common Stock outstanding immediately prior tosuch merger are converted or exchanged by virtue of the merger into other property, whether in the form of securities, cash or otherwise, or (B) in whichsecurities possessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities are transferred to a personor persons different from those who held such securities immediately prior to such merger or the initial transaction culminating in such merger; or (v) acquisition in a single or series of related transactions by any person or related group of persons (other than theCompany or by a Company-sponsored employee benefit plan) of beneficial ownership (within the meaning of Rule 13d-3 of the Exchange Act) of securitiespossessing more than fifty percent (50%) of the total combined voting power of the Company’s outstanding securities. 3 (r) “Covered Employee” means an Employee who is a “covered employee” under Section 162(m)(3) of the Code. (s) “Director” means a member of the Board or the board of directors of any Related Entity. (t) “Disability” means as defined under the long-term disability policy of the Company or the Related Entity to which the Granteeprovides services regardless of whether the Grantee is covered by such policy. If the Company or the Related Entity to which the Grantee provides servicedoes not have a long-term disability plan in place, “Disability” means that a Grantee is unable to carry out the responsibilities and functions of the positionheld by the Grantee by reason of any medically determinable physical or mental impairment for a period of not less than ninety (90) consecutive days. AGrantee will not be considered to have incurred a Disability unless he or she furnishes proof of such impairment sufficient to satisfy the Administrator inits discretion. (u) “Dividend Equivalent Right” means a right entitling the Grantee to compensation measured by dividends paid with respect toCommon Stock. (v) “Employee” means any person, including an Officer or Director, who is in the employ of the Company or any Related Entity,subject to the control and direction of the Company or any Related Entity as to both the work to be performed and the manner and method of performance.The payment of a director’s fee by the Company or a Related Entity shall not be sufficient to constitute “employment” by the Company. (w) “Exchange Act” means the Securities Exchange Act of 1934, as amended, and the rules and regulations promulgated thereunder. (x) “Fair Market Value” means, as of any date, the value of Common Stock determined as follows: (i) If the Common Stock is listed on one or more established stock exchanges or national market systems, includingwithout limitation The NASDAQ Global Select Market, The NASDAQ Global Market or The NASDAQ Capital Market of The NASDAQ StockMarket LLC, its Fair Market Value shall be the closing sales price for such stock (or the closing bid, if no sales were reported) as quoted on the principalexchange or system on which the Common Stock is listed (as determined by the Administrator) on the date of determination (or, if no closing sales price orclosing bid was reported on that date, as applicable, on the last trading date such closing sales price or closing bid was reported), as reported in The WallStreet Journal or such other source as the Administrator deems reliable; (ii) If the Common Stock is regularly quoted on an automated quotation system (including the OTC Bulletin Board) or by arecognized securities dealer, its Fair Market Value shall be the closing sales price for such stock as quoted on such system or by such securities dealer onthe date of determination, but if selling prices are not reported, the Fair Market Value of a share of Common Stock shall be the mean between the high bidand low asked prices for the Common Stock on the date of determination (or, if no such prices were reported on that date, on the last date such prices werereported), as reported in The Wall Street Journal or such other source as the Administrator deems reliable; or 4 (iii) In the absence of an established market for the Common Stock of the type described in (i) and (ii), above, the FairMarket Value thereof shall be determined by the Administrator in good faith and in a manner consistent with Applicable Laws. (y) “Grantee” means an Employee, Director or Consultant who receives an Award under the Plan. (z) “Incentive Stock Option” means an Option intended to qualify as an incentive stock option within the meaning of Section 422 ofthe Code. (aa) “Non-Qualified Stock Option” means an Option not intended to qualify as an Incentive Stock Option. (bb) “Officer” means a person who is an officer of the Company or a Related Entity within the meaning of Section 16 of the ExchangeAct. (cc) “Option” means an option to purchase Shares pursuant to an Award Agreement granted under the Plan. (dd) “Parent” means a “parent corporation”, whether now or hereafter existing, as defined in Section 424(e) of the Code. (ee) “Performance-Based Compensation” means compensation qualifying as “performance-based compensation” underSection 162(m) of the Code. (ff) “Plan” means this 2012 Equity Incentive Plan. (gg) “Related Entity” means any Parent or Subsidiary of the Company. (hh) “Replaced” means that pursuant to a Corporate Transaction the Award is replaced with a comparable stock award or a cashincentive program of the Company, the successor entity (if applicable) or Parent of either of them which preserves the compensation element of such Awardexisting at the time of the Corporate Transaction and provides for subsequent payout in accordance with the same (or a more favorable) vesting scheduleapplicable to such Award. The determination of Award comparability shall be made by the Administrator and its determination shall be final, binding andconclusive. (ii) “Restricted Stock” means Shares issued under the Plan to the Grantee for such consideration, if any, and subject to suchrestrictions on transfer, rights of first refusal, repurchase provisions, forfeiture provisions, and other terms and conditions as established by theAdministrator. (jj) “Restricted Stock Units” means an Award which may be earned in whole or in part upon the passage of time or the attainment ofperformance criteria established by the Administrator and which may be settled for cash, Shares or other securities or a combination of cash, Shares orother securities as established by the Administrator. 5 (kk) “Rule 16b-3” means Rule 16b-3 promulgated under the Exchange Act or any successor thereto. (ll) “SAR” means a stock appreciation right entitling the Grantee to Shares or cash compensation, as established by theAdministrator, measured by appreciation in the value of Common Stock. (mm) “Share” means a share of the Common Stock. (nn) “Subsidiary” means a “subsidiary corporation”, whether now or hereafter existing, as defined in Section 424(f) of the Code. 3. Stock Subject to the Plan. (a) Subject to the provisions of Section 10, below, the maximum aggregate number of Shares which may be issued pursuant to allAwards is 1,450,000 Shares; provided, however, that the maximum aggregate number of Shares that may be issued pursuant to Incentive Stock Optionsis 375,000 Shares. The Shares to be issued pursuant to Awards may be authorized, but unissued, or reacquired Common Stock. (b) Any Shares covered by an Award (or portion of an Award) which is forfeited, canceled or expires (whether voluntarily orinvoluntarily) shall be deemed not to have been issued for purposes of determining the maximum aggregate number of Shares which may be issued underthe Plan. Shares that actually have been issued under the Plan pursuant to an Award shall not be returned to the Plan and shall not become available forfuture issuance under the Plan, except that if unvested Shares are forfeited, or repurchased by the Company at the lower of their original purchase price ortheir Fair Market Value at the time of repurchase, such Shares shall become available for future grant under the Plan. Notwithstanding anything to thecontrary contained herein: (i) Shares tendered or withheld in payment of an Option exercise price shall not be returned to the Plan and shall not becomeavailable for future issuance under the Plan; (ii) Shares withheld by the Company to satisfy any tax withholding obligation shall not be returned to thePlan and shall not become available for future issuance under the Plan; and (iii) all Shares covered by the portion of an SAR that is exercised (whether ornot Shares are actually issued to the Grantee upon exercise of the SAR) shall be considered issued pursuant to the Plan. 4. Administration of the Plan. (a) Plan Administrator. (i) Administration with Respect to Directors and Officers. With respect to grants of Awards to Directors or Employees whoare also Officers or Directors of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by the Board, whichCommittee shall be constituted in such a manner as to satisfy the Applicable Laws and to permit such grants and related transactions under the Plan to beexempt from Section 16(b) of the Exchange Act in accordance with Rule 16b-3. Once appointed, such Committee shall continue to serve in its designatedcapacity until otherwise directed by the Board. 6 (ii) Administration With Respect to Consultants and Other Employees. With respect to grants of Awards to Employees orConsultants who are neither Directors nor Officers of the Company, the Plan shall be administered by (A) the Board or (B) a Committee designated by theBoard, which Committee shall be constituted in such a manner as to satisfy the Applicable Laws. Once appointed, such Committee shall continue to servein its designated capacity until otherwise directed by the Board. The Board may authorize one or more Officers to grant such Awards and may limit suchauthority as the Board determines from time to time. (iii) Administration With Respect to Covered Employees. Notwithstanding the foregoing, grants of Awards to any CoveredEmployee intended to qualify as Performance-Based Compensation shall be made only by a Committee (or subcommittee of a Committee) which iscomprised solely of two or more Directors eligible to serve on a committee making Awards qualifying as Performance-Based Compensation. In the case ofsuch Awards granted to Covered Employees, references to the “Administrator” or to a “Committee” shall be deemed to be references to such Committee orsubcommittee. (iv) Administration Errors. In the event an Award is granted in a manner inconsistent with the provisions of thissubsection (a), such Award shall be presumptively valid as of its grant date to the extent permitted by the Applicable Laws. (b) Powers of the Administrator. Subject to Applicable Laws and the provisions of the Plan (including any other powers given to theAdministrator hereunder), and except as otherwise provided by the Board, the Administrator shall have the authority, in its discretion: (i) to select the Employees, Directors and Consultants to whom Awards may be granted from time to time hereunder; (ii) to determine whether and to what extent Awards are granted hereunder; (iii) to determine the number of Shares or the amount of other consideration to be covered by each Award granted hereunder; (iv) to approve forms of Award Agreements for use under the Plan; (v) to determine the terms and conditions of any Award granted hereunder; (vi) to amend the terms of any outstanding Award granted under the Plan, provided that any amendment that wouldadversely affect the Grantee’s rights under an outstanding Award shall not be made without the Grantee’s written consent, provided, however, that anamendment or modification that may cause an Incentive Stock Option to become a Non-Qualified Stock Option shall not be treated as adversely affectingthe rights of the Grantee. Notwithstanding the foregoing, canceling an Option or SAR in exchange for another Option, SAR, Restricted Stock, or otherAward or for cash with an exercise price, purchase price or base appreciation amount (as applicable) that is equal to or greater than the exercise price orbase appreciation amount (as applicable) of the original Option or SAR shall not be subject to stockholder approval; 7 (vii) to construe and interpret the terms of the Plan and Awards, including without limitation, any notice of award or AwardAgreement, granted pursuant to the Plan; (viii) to grant Awards to Employees, Directors and Consultants employed outside the United States on such terms andconditions different from those specified in the Plan as may, in the judgment of the Administrator, be necessary or desirable to further the purpose of thePlan, and to set forth such terms and conditions in Award Agreements, and to adopt related sub-plans under the Plan; and (ix) to take such other action, not inconsistent with the terms of the Plan, as the Administrator deems appropriate. The express grant in the Plan of any specific power to the Administrator shall not be construed as limiting any power or authority of the Administrator;provided that the Administrator may not exercise any right or power reserved to the Board. Any decision made, or action taken, by the Administrator or inconnection with the administration of this Plan shall be final, conclusive and binding on all persons having an interest in the Plan. (c) Indemnification. In addition to such other rights of indemnification as they may have as members of the Board or as Officers orEmployees of the Company or a Related Entity, members of the Board and any Officers or Employees of the Company or a Related Entity to whomauthority to act for the Board, the Administrator or the Company is delegated shall be defended and indemnified by the Company to the extent permitted bylaw on an after-tax basis against all reasonable expenses, including attorneys’ fees, actually and necessarily incurred in connection with the defense of anyclaim, investigation, action, suit or proceeding, or in connection with any appeal therein, to which they or any of them may be a party by reason of anyaction taken or failure to act under or in connection with the Plan, or any Award granted hereunder, and against all amounts paid by them in settlementthereof (provided such settlement is approved by the Company) or paid by them in satisfaction of a judgment in any such claim, investigation, action,suit or proceeding, except in relation to matters as to which it shall be adjudged in such claim, investigation, action, suit or proceeding that such person isliable for gross negligence, bad faith or intentional misconduct; provided, however, that within thirty (30) days after the institution of such claim,investigation, action, suit or proceeding, such person shall offer to the Company, in writing, the opportunity at the Company’s expense to defend the same. 5. Eligibility. Awards other than Incentive Stock Options may be granted to Employees, Directors and Consultants. Incentive Stock Optionsmay be granted only to Employees of the Company or a Parent or a Subsidiary of the Company. An Employee, Director or Consultant who has beengranted an Award may, if otherwise eligible, be granted additional Awards. Awards may be granted to such Employees, Directors or Consultants who areresiding in non-U.S. jurisdictions as the Administrator may determine from time to time. 8 6. Terms and Conditions of Awards. (a) Types of Awards. The Administrator is authorized under the Plan to award any type of arrangement to an Employee, Director orConsultant that is not inconsistent with the provisions of the Plan and that by its terms involves or might involve the issuance of (i) Shares, (ii) cash or(iii) an Option, a SAR, or similar right with a fixed or variable price related to the Fair Market Value of the Shares and with an exercise or conversionprivilege related to the passage of time, the occurrence of one or more events, or the satisfaction of performance criteria or other conditions. Such awardsinclude, without limitation, Options, SARs, sales or bonuses of Restricted Stock, Restricted Stock Units or Dividend Equivalent Rights, and an Awardmay consist of one such security or benefit, or two (2) or more of them in any combination or alternative. (b) Designation of Award. Each Award shall be designated in the Award Agreement. In the case of an Option, the Option shall bedesignated as either an Incentive Stock Option or a Non-Qualified Stock Option. However, notwithstanding such designation, an Option will qualify asan Incentive Stock Option under the Code only to the extent the $100,000 limitation of Section 422(d) of the Code is not exceeded. The $100,000 limitationof Section 422(d) of the Code is calculated based on the aggregate Fair Market Value of the Shares subject to Options designated as Incentive StockOptions which become exercisable for the first time by a Grantee during any calendar year (under all plans of the Company or any Parent or Subsidiary ofthe Company). For purposes of this calculation, Incentive Stock Options shall be taken into account in the order in which they were granted, and the FairMarket Value of the Shares shall be determined as of the grant date of the relevant Option. In the event that the Code or the regulations promulgatedthereunder are amended after the date the Plan becomes effective to provide for a different limit on the Fair Market Value of Shares permitted to be subject toIncentive Stock Options, then such different limit will be automatically incorporated herein and will apply to any Options granted after the effective date ofsuch amendment. (c) Conditions of Award. Subject to the terms of the Plan, the Administrator shall determine the provisions, terms, and conditions ofeach Award including, but not limited to, the Award vesting schedule, repurchase provisions, rights of first refusal, forfeiture provisions, form ofpayment (cash, Shares, or other consideration) upon settlement of the Award, payment contingencies, and satisfaction of any performance criteria. Theperformance criteria established by the Administrator may be based on any one of, or combination of, the following: (i) sales and net sales, (ii)appreciation in and/or maintenance of the price of the Shares or any other publicly-traded securities of the Company, (iii) expense levels, (iv) sales orlicenses of the Company’s assets, including its intellectual property, whether in a particular jurisdiction or territory or globally, or through partneringtransactions, (v) implementation, completion or attainment of measurable objectives with respect to research, development, manufacturing,commercialization, products or projects, production volume levels, acquisitions and divestitures and recruiting and maintaining personnel, (vi) financingand other capital raising transactions (including sales of the Company’s equity or debt securities, factoring transactions), (vii) revenue growth or productrevenue growth, (viii) profits (including gross profits, operating profits, net operating profits, controllable profits and profit margins), (ix) financial ratios,including those measuring liquidity, activity, profitability or leverage, (x) cost of capital or assets under management, (xi) net operating income (before orafter taxes) or operating income (before or after taxes), (xii) earnings (including earnings before taxes, earnings before interest and taxes, earnings beforeinterest, taxes and depreciation, earnings before interest, taxes and amortization or earnings before interest, taxes, depreciation and amortization), (xiii)revenue, (xiv) strategic partnerships or transactions (including in-licensing and out-licensing of intellectual property and establishing relationships withcommercial entities with respect to the marketing, distribution and sale of the Company’s products (including with group purchasing organizations,distributors and other vendors)), (xv) co-development, co-marketing, profit sharing, joint venture or other similar arrangements, (xvi) pre- or after-taxincome (before or after allocation of corporate overhead and bonus), (xvii) market share, (xviii) regulatory achievements (including submitting or filingapplications or other documents with regulatory authorities or receiving approval of any such applications or other documents; passing pre-approvalinspections (whether of the Company or third parties)), (xix) operating margins, gross margins or cash margins, (xx) earnings per share, (xxi)comparisons with various stock market indices, (xxii) stockholder equity, (xxiii) debt reduction, (xxiv) net income (before or after taxes), (xxv) reductionsin costs, (xxvi) year-end cash, (xxvii) return on equity, (xxviii) operating cash flow or cash flow per share (before or after dividends) and cash flow or cashflow per share (before or after dividends), (xxix) working capital levels, including cash, inventory and accounts receivable, (xxx) total shareholder return,(xxxi) return on capital (including return on total capital or return on invested capital), (xxxii) research and development achievements, (xxxiii) return onassets or net assets, (xxxiv) cash flow return on investment, (xxxv) operating efficiencies, (xxxvi) economic value-added models or equivalent metrics,(xxxvii) success in recruitment of financial advisors, (xxxviii) customer growth, (xxxix) employee or customer satisfaction (including objective customerindicators), (xxxx) productivity, (xxxxi) supplier awards from significant customers, (xxxxii) credit rating, (xxxxiii) contract awards or backlog, (xxxxix)bookings or orders, (xxxxv) budget comparisons, and (xxxxvi) improvements in capital structure. The performance criteria may be applicable to theCompany, Related Entities and/or any individual business units of the Company or any Related Entity. Partial achievement of the specified criteria mayresult in a payment or vesting corresponding to the degree of achievement as specified in the Award Agreement. In addition, the performance criteria shall becalculated in accordance with generally accepted accounting principles, but excluding the effect (whether positive or negative) of any change in accountingstandards and any extraordinary, unusual or nonrecurring item, as determined by the Administrator, occurring after the establishment of the performancecriteria applicable to the Award intended to be Performance-Based Compensation. Each such adjustment, if any, shall be made solely for the purpose ofproviding a consistent basis from period to period for the calculation of performance criteria in order to prevent the dilution or enlargement of the Grantee’srights with respect to an Award intended to be Performance-Based Compensation. 9 (d) Acquisitions and Other Transactions. The Administrator may issue Awards under the Plan in settlement, assumption orsubstitution for, outstanding awards or obligations to grant future awards in connection with the Company or a Related Entity acquiring another entity, aninterest in another entity or an additional interest in a Related Entity whether by merger, stock purchase, asset purchase or other form of transaction. (e) Deferral of Award Payment. The Administrator may establish one or more programs under the Plan to permit selected Grantees theopportunity to elect to defer receipt of consideration upon exercise of an Award, satisfaction of performance criteria, or other event that absent the electionwould entitle the Grantee to payment or receipt of Shares or other consideration under an Award. The Administrator may establish the election procedures,the timing of such elections, the mechanisms for payments of, and accrual of interest or other earnings, if any, on amounts, Shares or other considerationso deferred, and such other terms, conditions, rules and procedures that the Administrator deems advisable for the administration of any such deferralprogram. (f) Separate Programs. The Administrator may establish one or more separate programs under the Plan for the purpose of issuingparticular forms of Awards to one or more classes of Grantees on such terms and conditions as determined by the Administrator from time to time. (g) Individual Limitations on Awards. (i) Individual Limit for Options and SARs. The maximum number of Shares with respect to which Options and SARsmay be granted to any Grantee in any calendar year shall be 175,000 Shares. In connection with a Grantee’s commencement of Continuous Service, aGrantee may be granted Options and SARs for up to an additional 175,000 Shares which shall not count against the limit set forth in the previoussentence. The foregoing limitations shall be adjusted proportionately in connection with any change in the Company’s capitalization pursuant to Section ,below. To the extent required by Section 162(m) of the Code or the regulations thereunder, in applying the foregoing limitations with respect to a Grantee, ifany Option or SAR is canceled, the canceled Option or SAR shall continue to count against the maximum number of Shares with respect to which Optionsand SARs may be granted to the Grantee. For this purpose, the repricing of an Option (or in the case of a SAR, the base amount on which the stockappreciation is calculated is reduced to reflect a reduction in the Fair Market Value of the Common Stock) shall be treated as the cancellation of the existingOption or SAR and the grant of a new Option or SAR. (ii) Individual Limit for Restricted Stock and Restricted Stock Units. For awards of Restricted Stock and Restricted StockUnits that are intended to be Performance-Based Compensation, the maximum number of Shares with respect to which such Awards may be granted toany Grantee in any calendar year shall be 175,000. The foregoing limitation shall be adjusted proportionately in connection with any change in theCompany’s capitalization pursuant to Section , below. (h) Deferral. If the vesting or receipt of Shares under an Award is deferred to a later date, any amount (whether denominated in Sharesor cash) paid in addition to the original number of Shares subject to such Award will not be treated as an increase in the number of Shares subject to theAward if the additional amount is based either on a reasonable rate of interest or on one or more predetermined actual investments such that the amountpayable by the Company at the later date will be based on the actual rate of return of a specific investment (including any decrease as well as any increasein the value of an investment). 10 (i) Early Exercise. The Award Agreement may, but need not, include a provision whereby the Grantee may elect at any time while anEmployee, Director or Consultant to exercise any part or all of the Award prior to full vesting of the Award. Any unvested Shares received pursuant to suchexercise may be subject to a repurchase right in favor of the Company or a Related Entity or to any other restriction the Administrator determines to beappropriate. (j) Term of Award. The term of each Award shall be no more than ten (10) years from the date of grant thereof. However, in the caseof an Incentive Stock Option granted to a Grantee who, at the time the Option is granted, owns stock representing more than ten percent (10%) of the votingpower of all classes of stock of the Company or any Parent or Subsidiary of the Company, the term of the Incentive Stock Option shall be five (5) yearsfrom the date of grant thereof or such shorter term as may be provided in the Award Agreement. Notwithstanding the foregoing, the specified term of anyAward shall not include any period for which the Grantee has elected to defer the receipt of the Shares or cash issuable pursuant to the Award. (k) Transferability of Awards. Incentive Stock Options may not be sold, pledged, assigned, hypothecated, transferred, or disposedof in any manner other than by will or by the laws of descent or distribution and may be exercised, during the lifetime of the Grantee, only by the Grantee.Other Awards shall be transferable (i) by will and by the laws of descent and distribution and (ii) during the lifetime of the Grantee, to the extent and in themanner authorized by the Administrator but only to the extent such transfers are made to family members, to family trusts, to family controlled entities, tocharitable organizations, and pursuant to domestic relations orders or agreements, in all cases without payment for such transfers to the Grantee.Notwithstanding the foregoing, the Grantee may designate one or more beneficiaries of the Grantee’s Award in the event of the Grantee’s death on abeneficiary designation form provided by the Administrator. (l) Time of Granting Awards. The date of grant of an Award shall for all purposes be the date on which the Administrator makes thedetermination to grant such Award, or such other later date as is determined by the Administrator. 7. Award Exercise or Purchase Price, Consideration and Taxes. (a) Exercise or Purchase Price. The exercise or purchase price, if any, for an Award shall be as follows: (i) In the case of an Incentive Stock Option: (A) granted to an Employee who, at the time of the grant of such Incentive Stock Option owns stock representingmore than ten percent (10%) of the voting power of all classes of stock of the Company or any Parent or Subsidiary of the Company, the per Share exerciseprice shall be not less than one hundred ten percent (110%) of the Fair Market Value per Share on the date of grant; or (B) granted to any Employee other than an Employee described in the preceding paragraph, the per Share exerciseprice shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. 11 (ii) In the case of a Non-Qualified Stock Option, the per Share exercise price shall be not less than one hundred percent(100%) of the Fair Market Value per Share on the date of grant. (iii) In the case of Awards intended to qualify as Performance-Based Compensation, the exercise or purchase price, if any,shall be not less than one hundred percent (100%) of the Fair Market Value per Share on the date of grant. (iv) In the case of SARs, the base appreciation amount shall not be less than one hundred percent (100%) of the Fair MarketValue per Share on the date of grant. (v) In the case of other Awards, such price as is determined by the Administrator. (vi) Notwithstanding the foregoing provisions of this Section , in the case of an Award issued pursuant to Section , above,the exercise or purchase price for the Award shall be determined in accordance with the provisions of the relevant instrument evidencing the agreement toissue such Award.(b) Consideration. Subject to Applicable Laws, the consideration to be paid for the Shares to be issued upon exercise or purchase of anAward including the method of payment, shall be determined by the Administrator. In addition to any other types of consideration the Administrator maydetermine, the Administrator is authorized to accept as consideration for Shares issued under the Plan the following, provided that the portion of theconsideration equal to the par value of the Shares must be paid in cash or other legal consideration permitted by the Delaware General Corporation Law: (i) cash; (ii) check; (iii) surrender of Shares or delivery of a properly executed form of attestation of ownership of Shares as the Administratormay require which have a Fair Market Value on the date of surrender or attestation equal to the aggregate exercise price of the Shares as to which saidAward shall be exercised; (iv) with respect to Options, payment through a broker-dealer sale and remittance procedure pursuant to which the Grantee(A) shall provide written instructions to a Company designated brokerage firm to effect the immediate sale of some or all of the purchased Shares andremit to the Company sufficient funds to cover the aggregate exercise price payable for the purchased Shares and (B) shall provide written directives to theCompany to deliver the certificates for the purchased Shares directly to such brokerage firm in order to complete the sale transaction; (v) with respect to Options, payment through a “net exercise” such that, without the payment of any funds, the Grantee mayexercise the Option and receive the net number of Shares equal to (i) the number of Shares as to which the Option is being exercised, multiplied by (ii) afraction, the numerator of which is the Fair Market Value per Share (on such date as is determined by the Administrator) less the exercise price per Share,and the denominator of which is such Fair Market Value per Share (the number of net Shares to be received shall be rounded down to the nearest wholenumber of Shares); or 12 (vi) any combination of the foregoing methods of payment. The Administrator may at any time or from time to time, by adoption of or by amendment to the standard forms of Award Agreement described inSection 4(b)(iv), or by other means, grant Awards which do not permit all of the foregoing forms of consideration to be used in payment for the Shares orwhich otherwise restrict one or more forms of consideration. (c) Taxes. No Shares shall be delivered under the Plan to any Grantee or other person until such Grantee or other person has madearrangements acceptable to the Administrator for the satisfaction of any non-U.S., federal, state, or local income and employment tax withholdingobligations, including, without limitation, obligations incident to the receipt of Shares. Upon exercise or vesting of an Award the Company shall withholdor collect from the Grantee an amount sufficient to satisfy such tax obligations, including, but not limited to, by surrender of the whole number of Sharescovered by the Award sufficient to satisfy the minimum applicable tax withholding obligations incident to the exercise or vesting of an Award (reduced tothe lowest whole number of Shares if such number of Shares withheld would result in withholding a fractional Share with any remaining tax withholdingsettled in cash). 8. Exercise of Award. (a) Procedure for Exercise; Rights as a Stockholder. (i) Any Award granted hereunder shall be exercisable at such times and under such conditions as determined by theAdministrator under the terms of the Plan and specified in the Award Agreement. (ii) An Award shall be deemed to be exercised when written notice of such exercise has been given to the Company inaccordance with the terms of the Award by the person entitled to exercise the Award and full payment for the Shares with respect to which the Award isexercised has been made, including, to the extent selected, use of the broker-dealer sale and remittance procedure to pay the purchase price as provided inSection 7(b)(iv). (b) Exercise of Award Following Termination of Continuous Service. (i) An Award may not be exercised after the termination date of such Award set forth in the Award Agreement and may beexercised following the termination of a Grantee’s Continuous Service only to the extent provided in the Award Agreement. (ii) Where the Award Agreement permits a Grantee to exercise an Award following the termination of the Grantee’sContinuous Service for a specified period, the Award shall terminate to the extent not exercised on the last day of the specified period or the last day of theoriginal term of the Award, whichever occurs first. 13 (iii) Any Award designated as an Incentive Stock Option to the extent not exercised within the time permitted by law for theexercise of Incentive Stock Options following the termination of a Grantee’s Continuous Service shall convert automatically to a Non-Qualified StockOption and thereafter shall be exercisable as such to the extent exercisable by its terms for the period specified in the Award Agreement. 9. Conditions Upon Issuance of Shares. (a) If at any time the Administrator determines that the delivery of Shares pursuant to the exercise, vesting or any other provision ofan Award is or may be unlawful under Applicable Laws, the vesting or right to exercise an Award or to otherwise receive Shares pursuant to the terms of anAward shall be suspended until the Administrator determines that such delivery is lawful and shall be further subject to the approval of counsel for theCompany with respect to such compliance. The Company shall have no obligation to effect any registration or qualification of the Shares under federal orstate laws. (b) As a condition to the exercise of an Award, the Company may require the person exercising such Award to represent and warrantat the time of any such exercise that the Shares are being purchased only for investment and without any present intention to sell or distribute such Sharesif, in the opinion of counsel for the Company, such a representation is required by any Applicable Laws. 10. Adjustments Upon Changes in Capitalization. Subject to any required action by the stockholders of the Company and Section 11 hereof,the number of Shares covered by each outstanding Award, and the number of Shares which have been authorized for issuance under the Plan but as towhich no Awards have yet been granted or which have been returned to the Plan, the exercise or purchase price of each such outstanding Award, themaximum number of Shares with respect to which Awards may be granted to any Grantee in any calendar year, as well as any other terms that theAdministrator determines require adjustment shall be proportionately adjusted for (i) any increase or decrease in the number of issued Shares resultingfrom a stock split, reverse stock split, stock dividend, recapitalization, combination or reclassification of the Shares, or similar transaction affecting theShares, (ii) any other increase or decrease in the number of issued Shares effected without receipt of consideration by the Company, or (iii) any othertransaction with respect to Common Stock including a corporate merger, consolidation, acquisition of property or stock, separation (including a spin-offor other distribution of stock or property), reorganization, liquidation (whether partial or complete) or any similar transaction; provided, however thatconversion of any convertible securities of the Company shall not be deemed to have been “effected without receipt of consideration.” In the event of anydistribution of cash or other assets to stockholders other than a normal cash dividend, the Administrator shall also make such adjustments as provided inthis Section 10 or substitute, exchange or grant Awards to effect such adjustments (collectively “adjustments”). Any such adjustments to outstandingAwards will be effected in a manner that precludes the enlargement of rights and benefits under such Awards. In connection with the foregoingadjustments, the Administrator may, in its discretion, prohibit the exercise of Awards or other issuance of Shares, cash or other consideration pursuant toAwards during certain periods of time. Except as the Administrator determines, no issuance by the Company of shares of any class, or securitiesconvertible into shares of any class, shall affect, and no adjustment by reason hereof shall be made with respect to, the number or price of Shares subjectto an Award. 14 11. Corporate Transaction and Change in Control. (a) Termination of Award to Extent Not Assumed in Corporate Transaction. Effective upon the consummation of a CorporateTransaction, all outstanding Awards under the Plan shall terminate. However, all such Awards shall not terminate to the extent they are Assumed inconnection with the Corporate Transaction. (b) Acceleration of Award Upon Corporate Transaction. Except as provided otherwise in an individual Award Agreement, in the eventof a Corporate Transaction, for the portion of each Award that is neither Assumed nor Replaced, such portion of the Award shall automatically becomefully vested and exercisable and be released from any repurchase or forfeiture rights (other than repurchase rights exercisable at Fair Market Value) for allof the Shares (or other consideration) at the time represented by such portion of the Award, immediately prior to the specified effective date of suchCorporate Transaction, provided that the Grantee’s Continuous Service has not terminated prior to such date. (c) Acceleration of Award Upon Change in Control. Except as provided otherwise in an individual Award Agreement, in the event of aChange in Control (other than a Change in Control which also is a Corporate Transaction), each Award which is at the time outstanding under the Planautomatically shall become fully vested and exercisable and be released from any repurchase or forfeiture rights (other than repurchase rights exercisable atFair Market Value), immediately prior to the specified effective date of such Change in Control, for all of the Shares (or other consideration) at the timerepresented by such Award, provided that the Grantee’s Continuous Service has not terminated prior to such date. (d) Effect of Acceleration on Incentive Stock Options. Any Incentive Stock Option the vesting of which is accelerated under thisSection 11 in connection with a Corporate Transaction or Change in Control shall remain exercisable as an Incentive Stock Option under the Code only tothe extent the $100,000 limitation of Section 422(d) of the Code is not exceeded. 12. Effective Date and Term of Plan. The Plan shall become effective upon the earlier to occur of its adoption by the Board or its approval bythe stockholders of the Company and shall continue in effect for a term of ten (10) years after becoming effective unless sooner terminated. Subject toSection , below, and Applicable Laws, Awards may be granted under the Plan upon its becoming effective. 13. Amendment, Suspension or Termination of the Plan. (a) The Board may at any time amend, suspend or terminate the Plan; provided, however, that no such amendment shall be madewithout the approval of the Company’s stockholders to the extent such approval is required by Applicable Laws. (b) No Award may be granted during any suspension of the Plan or after termination of the Plan. 15 (c) No suspension or termination of the Plan (including termination of the Plan under Section 11, above) shall adversely affect anyrights under Awards already granted to a Grantee. 14. Reservation of Shares. (a) The Company, during the term of the Plan, will at all times reserve and keep available such number of Shares as shall besufficient to satisfy the requirements of the Plan. (b) The inability of the Company to obtain authority from any regulatory body having jurisdiction, which authority is deemed bythe Company’s counsel to be necessary to the lawful issuance and sale of any Shares hereunder, shall relieve the Company of any liability in respect of thefailure to issue or sell such Shares as to which such requisite authority shall not have been obtained. 15. No Effect on Terms of Employment/Consulting Relationship. The Plan shall not confer upon any Grantee any right with respect to theGrantee’s Continuous Service, nor shall it interfere in any way with his or her right or the right of the Company or any Related Entity to terminate theGrantee’s Continuous Service at any time, with or without cause, including, but not limited to, Cause, and with or without notice. The ability of theCompany or any Related Entity to terminate the employment of a Grantee who is employed at will is in no way affected by its determination that theGrantee’s Continuous Service has been terminated for Cause for the purposes of this Plan. 16. No Effect on Retirement and Other Benefit Plans. Except as specifically provided in a retirement or other benefit plan of the Company or aRelated Entity, Awards shall not be deemed compensation for purposes of computing benefits or contributions under any retirement plan of the Companyor a Related Entity, and shall not affect any benefits under any other benefit plan of any kind or any benefit plan subsequently instituted under which theavailability or amount of benefits is related to level of compensation. The Plan is not a “Pension Plan” or “Welfare Plan” under the Employee RetirementIncome Security Act of 1974, as amended. 17. Stockholder Approval. The grant of Incentive Stock Options under the Plan shall be subject to approval by the stockholders of theCompany within twelve (12) months before or after the date the Plan is adopted excluding Incentive Stock Options issued in substitution for outstandingIncentive Stock Options pursuant to Section 424(a) of the Code. Such stockholder approval shall be obtained in the degree and manner required underApplicable Laws. The Administrator may grant Incentive Stock Options under the Plan prior to approval by the stockholders, but until such approval isobtained, no such Incentive Stock Option shall be exercisable. In the event that stockholder approval is not obtained within the twelve (12) month periodprovided above, all Incentive Stock Options previously granted under the Plan shall be exercisable as Non-Qualified Stock Options. 16 18. Unfunded Obligation. Grantees shall have the status of general unsecured creditors of the Company. Any amounts payable to Granteespursuant to the Plan shall be unfunded and unsecured obligations for all purposes, including, without limitation, Title I of the Employee RetirementIncome Security Act of 1974, as amended. Neither the Company nor any Related Entity shall be required to segregate any monies from its general funds,or to create any trusts, or establish any special accounts with respect to such obligations. The Company shall retain at all times beneficial ownership ofany investments, including trust investments, which the Company may make to fulfill its payment obligations hereunder. Any investments or the creationor maintenance of any trust or any Grantee account shall not create or constitute a trust or fiduciary relationship between the Administrator, the Companyor any Related Entity and a Grantee, or otherwise create any vested or beneficial interest in any Grantee or the Grantee’s creditors in any assets of theCompany or a Related Entity. The Grantees shall have no claim against the Company or any Related Entity for any changes in the value of any assets thatmay be invested or reinvested by the Company with respect to the Plan. 19. Construction. Captions and titles contained herein are for convenience only and shall not affect the meaning or interpretation of anyprovision of the Plan. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular. Use ofthe term “or” is not intended to be exclusive, unless the context clearly requires otherwise. 20. Nonexclusivity of the Plan. Neither the adoption of the Plan by the Board, the submission of the Plan to the stockholders of the Companyfor approval, nor any provision of the Plan will be construed as creating any limitations on the power of the Board to adopt such additional compensationarrangements as it may deem desirable, including, without limitation, the granting of Awards otherwise than under the Plan, and such arrangements maybe either generally applicable or applicable only in specific cases. 17 Exhibit 10.41 DSP GROUP, INC. 2012 EQUITY INCENTIVE PLAN AMENDED AND RESTATED DIRECTOR EQUITYSUB-PLAN NOTICE OF RESTRICTED STOCK UNIT AWARD Director’s Name and Address: You (the “Director”) have been granted an award of Restricted Stock Units (the “Award”), subject to the terms and conditions of this Notice ofRestricted Stock Unit Award (the “Notice”), the DSP Group, Inc. 2012 Equity Incentive Plan, as amended from time to time (the “Plan”), the Amendedand Restated Director Equity Sub-Plan of the Plan (the “Sub-Plan”) and the Restricted Stock Unit Agreement (the “Agreement”) attached hereto, as follows.Unless otherwise provided herein, the terms in this Notice shall have the same meaning as those defined in the Plan and the Sub-Plan. In the event of anyinconsistency or contradiction between any of the terms of this Notice and the provisions of the Plan and the Sub-Plan, the terms and provisions of thisNotice shall prevail. Award Number Date of Award Vesting Commencement Date Total Number of Restricted StockUnits Awarded (the “Units”) Vesting Schedule: Subject to the Director’s Continuous Status as a Director and other limitations set forth in this Notice, the Agreement, the Plan and the Sub-Plan,the Units will vest in accordance with the following schedule: 100% of the Units will vest upon the one-year anniversary of the Vesting Commencement Date. In addition, the Units shall be subject to the terms of Section 10 of the Sub-Plan. For purposes of this Notice and the Agreement, the term “vest” shall mean, with respect to any Units, that such Units are no longer subject toforfeiture to the Company. If the Director would become vested in a fraction of a Unit, such Unit shall not vest until the Director becomes vested in theentire Unit. [Vesting shall cease upon the date of termination of the Director’s Continuous Status as a Director for any reason, including death or Disability.In the event of termination of the Director’s Continuous Status as a Director for any reason, including death or Disability, any unvested Units held by theDirector immediately upon such termination of the Director’s Continuous Status as a Director shall be forfeited and deemed reconveyed to the Companyand the Company shall thereafter be the legal and beneficial owner of such reconveyed Units and shall have all rights and interest in or related theretowithout further action by the Director.] IN WITNESS WHEREOF, the Company and the Director have executed this Notice and agree that the Award is to be governed by the terms andconditions of this Notice, the Plan, the Sub-Plan and the Agreement. DSP Group, Inc. a Delaware corporation By: Title: Date: THE DIRECTOR ACKNOWLEDGES AND AGREES THAT THE UNITS SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THEDIRECTOR’S CONTINUOUS STATUS AS A DIRECTOR OR AS OTHERWISE SPECIFICALLY PROVIDED HEREIN (NOT THROUGH BEINGGRANTED THIS AWARD OR ACQUIRING SHARES HEREUNDER). THE DIRECTOR FURTHER ACKNOWLEDGES AND AGREES THATNOTHING IN THIS NOTICE, THE AGREEMENT, NOR IN THE PLAN AND THE SUB-PLAN, SHALL CONFER UPON THE DIRECTORANY RIGHT WITH RESPECT TO CONTINUATION OF THE DIRECTOR’S CONTINUOUS SERVICE, NOR SHALL IT INTERFERE IN ANYWAY WITH THE DIRECTOR’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE DIRECTOR’S CONTINUOUS SERVICE ATANY TIME, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. The Director acknowledges receipt of a copy of the Plan, the Sub-Plan and the Agreement, and represents that he or she is familiar with the termsand provisions thereof, and hereby accepts the Award subject to all of the terms and provisions hereof and thereof. The Director has reviewed this Notice,the Plan, the Sub-Plan and the Agreement in their entirety, has had an opportunity to obtain the advice of counsel prior to executing this Notice, and fullyunderstands all provisions of this Notice, the Plan, the Sub-Plan and the Agreement. The Director hereby agrees that all questions of interpretation andadministration relating to this Notice, the Plan, the Sub-Plan and the Agreement shall be resolved by the Administrator in accordance with Section 8 of theAgreement. The Director further agrees to the venue selection and waiver of a jury trial in accordance with Section 9 of the Agreement. The Director furtheragrees to notify the Company upon any change in the residence address indicated in this Notice. Date: Director’s Signature Director’s Printed Name Address City, State & Zip Award Number: __________________ DSP GROUP, INC. 2012 EQUITY INCENTIVE PLAN AMENDED AND RESTATED DIRECTOR EQUITY SUB-PLAN RESTRICTED STOCK UNIT AGREEMENT 1. Issuance of Units. DSP Group, Inc., a Delaware corporation (the “Company”), hereby issues to the Director (the “Director”) named in theNotice of Restricted Stock Unit Award (the “Notice”) an award (the “Award”) of the Total Number of Restricted Stock Units Awarded set forth in theNotice (the “Units”), subject to the Notice, this Restricted Stock Unit Agreement (the “Agreement”), the terms and provisions of the DSP Group, Inc. 2012Equity Incentive Plan, as amended from time to time (the “Plan”) and the Amended and Restated Director Equity Sub-Plan of the Plan (the “Sub-Plan”),which are incorporated herein by reference. Unless otherwise provided herein, the terms in this Agreement shall have the same meaning as those defined inthe Plan, the Sub-Plan and the Notice. 2. Transfer Restrictions. The Units may not be transferred in any manner other than by will or by the laws of descent and distribution andmay be converted during the lifetime of the Director only by the Director. 3. Conversion of Units and Issuance of Shares. (a) General. Subject to Sections 3(b) and 3(c), one share of Common Stock shall be issuable for each Unit subject to the Award (the“Shares”) upon vesting. Immediately thereafter, or as soon as administratively feasible, the Company will deliver the appropriate number of Shares to theDirector after satisfaction of any required tax or other withholding obligations. Any fractional Unit remaining after the Award is fully vested shall bediscarded and shall not be converted into a fractional Share. Notwithstanding the foregoing, the relevant number of Shares shall be delivered to the Directorno later than March 15th of the year following the calendar year in which the Award vests. (b) Delay of Conversion. The conversion of the Units into the Shares under Section 3(a) above, shall be delayed in the event theCompany reasonably anticipates that the issuance of the Shares would constitute a violation of federal securities laws or other Applicable Laws. If theconversion of the Units into the Shares is delayed by the provisions of this Section 3(b), the conversion of the Units into the Shares shall occur at theearliest date at which the Company reasonably anticipates issuing the Shares will not cause a violation of federal securities laws or other Applicable Laws.For purposes of this Section 3(b), the issuance of Shares that would cause inclusion in gross income or the application of any penalty provision or otherprovision of the Code is not considered a violation of Applicable Laws. (c) Delay of Issuance of Shares. The Company shall delay the delivery of any Shares under this Section 3 to the extent necessary tocomply with Section 409A(a)(2)(B)(i) of the Code (relating to payments made to certain “specified employees” of certain publicly-traded companies); insuch event, any Shares to which the Director would otherwise be entitled during the six (6) month period following the date of the Director’s termination ofContinuous Service will be delivered on the first business day following the expiration of such six (6) month period. 4. Right to Shares. The Director shall not have any right in, to or with respect to any of the Shares (including any voting rights or rights withrespect to dividends paid on the Common Stock) issuable under the Award until the Award is settled by the issuance of such Shares to the Director. 5. Taxes. (a) Tax Liability. The Director is ultimately liable and responsible for all taxes owed by the Director in connection with the Units,regardless of any action the Company or any Related Entity takes with respect to any tax withholding obligations that arise in connection with the Units.Neither the Company nor any Related Entity makes any representation or undertaking regarding the treatment of any tax withholding in connection withany aspect of the Units, including the grant, vesting, assignment, release or cancellation of the Units, the delivery of Shares, the subsequent sale of anyShares acquired upon vesting and the receipt of any dividends or dividend equivalents. The Company does not commit and is under no obligation tostructure the Units to reduce or eliminate the Director’s tax liability. (b) Payment of Withholding Taxes. No Shares will be delivered to the Director until the Director has made arrangements acceptable tothe Administrator for the satisfaction of applicable income tax and employment tax withholding obligations, including, without limitation, such other taxobligations of the Director incident to the receipt of Shares. The Company or the Director’s employer, as applicable, may offset or withhold (from anyamount owed by the Company or the Director’s employer to the Director) or collect from the Director an amount sufficient to satisfy such tax withholdingobligations. Furthermore, in the event of any determination that the Company or the Director’s employer, as applicable, has failed to withhold a sumsufficient to pay all withholding taxes due in connection with the Award, the Director agrees to indemnify the Company or the Director’s employer, asapplicable, and hold them harmless against and from any and all liability for any such tax or interest or penalty thereon, including without limitation,liabilities relating to the necessity to withhold, or to have withheld, any such tax from any payment made to the Director, and pay them the amount of suchdeficiency in cash within five (5) days after receiving a written demand from the Company or the Director’s employer, as applicable, to do so, whether ornot the Director is an employee of the Company and/or the Director’s employer at that time. (c) Tax Consultation. The Director is advised to consult with a tax advisor with respect to the tax consequences of receiving orconverting Units hereunder. The Company and/or the Director’s employer do not assume any responsibility to advise the Director on such matters, whichshall remain solely the responsibility of the Director. 6. Entire Agreement; Governing Law. The Notice, the Plan, the Sub-Plan and this Agreement constitute the entire agreement of the parties withrespect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and the Director with respect tothe subject matter hereof, and may not be modified adversely to the Director’s interest except by means of a writing signed by the Company and theDirector. Nothing in the Notice, the Plan, the Sub-Plan and this Agreement (except as expressly provided therein) is intended to confer any rights orremedies on any persons other than the parties. The Notice, the Plan, the Sub-Plan and this Agreement are to be construed in accordance with and governedby the internal laws of the State of Delaware without giving effect to any choice of law rule that would cause the application of the laws of any jurisdictionother than the internal laws of the State of Delaware to the rights and duties of the parties, provided that the tax treatment and the tax rules and regulationsapplying hereto shall be the Ordinance and Rules. Should any provision of the Notice, the Plan, the Sub-Plan or this Agreement be determined to be illegalor unenforceable, such provision shall be enforced to the fullest extent allowed by law and the other provisions shall nevertheless remain effective and shallremain enforceable. 7. Construction. The captions used in the Notice and this Agreement are inserted for convenience and shall not be deemed a part of the Awardfor construction or interpretation. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include thesingular. Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise. 8. Administration and Interpretation. Any question or dispute regarding the administration or interpretation of the Notice, the Plan, the Sub-Plan or this Agreement shall be submitted by the Director or by the Company to the Administrator. The resolution of such question or dispute by theAdministrator shall be final and binding on all persons. 9. Venue and Jurisdiction. The Company and the Director agree that any suit, action, or proceeding arising out of or relating to the Notice, thePlan, the Sub-Plan or this Agreement shall be brought in the United States District Court for the District of Delaware (or should such court lackjurisdiction to hear such action, suit or proceeding, in a Delaware state court) and that the parties shall submit to the jurisdiction of such court. The partiesirrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action or proceedingbrought in such court. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A JURY TRIAL OF ANY SUCHSUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 9 shall for any reason be held invalid or unenforceable, it is thespecific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid and enforceable 10. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery,upon deposit for delivery by an internationally recognized express mail courier service or upon deposit in the United States mail by certified mail (if theparties are within the United States), with postage and fees prepaid, addressed to the other party at its address as shown in these instruments, or to suchother address as such party may designate in writing from time to time to the other party. 11. Amendment and Delay to Meet the Requirements of Section 409A. The Director acknowledges that the Company, in the exercise of its solediscretion and without the consent of the Director, may amend or modify this Agreement in any manner and delay the issuance of any Shares issuablepursuant to this Agreement to the minimum extent necessary to meet the requirements of Section 409A of the Code as amplified by any Treasuryregulations or guidance from the Internal Revenue Service as the Company deems appropriate or advisable. In addition, the Company makes norepresentation that the Award will comply with Section 409A of the Code and makes no undertaking to prevent Section 409A of the Code from applying tothe Award or to mitigate its effects on any deferrals or payments made in respect of the Units. The Director is encouraged to consult a tax adviser regardingthe potential impact of Section 409A of the Code. END OF AGREEMENT Exhibit 10.42 DSP GROUP, INC. 2012 EQUITY INCENTIVE PLAN AMENDED AND RESTATED DIRECTOR EQUITY SUB-PLAN NOTICE OF RESTRICTED STOCK UNIT AWARD FOR ISRAELI RESIDENT DIRECTORS Director’s Name and Address: You (the “Director”) have been granted an award of Restricted Stock Units (the “Award”), subject to the terms and conditions of this Notice ofRestricted Stock Unit Award for Israeli Resident Directors (the “Notice”), the DSP Group, Inc. 2012 Equity Incentive Plan, as amended from time to time(the “Plan”), the Amended and Restated Director Equity Sub-Plan of the Plan (the “Sub-Plan”), the Israeli Sub-Plan of the Plan (the “Israeli Sub-Plan”) andthe Restricted Stock Unit Agreement (the “Agreement”) attached hereto, as follows. Unless otherwise provided herein, the terms in this Notice shall havethe same meaning as those defined in the Plan, the Sub-Plan and the Israeli Sub-Plan. In the event of any inconsistency or contradiction between any of theterms of this Notice and the provisions of the Plan, the Sub-Plan and the Israeli Sub-Plan, the terms and provisions of this Notice shall prevail. Award Number Date of Award Vesting Commencement Date Total Number of Restricted StockUnits Awarded (the “Units”) Type of Award: 102 Capital Gains Track Option (with Trustee) 102 Ordinary Income Track Option (with Trustee) 102 Non-Trustee Option 3(i) Option Other Vesting Schedule: Subject to the Director’s Continuous Status as a Director and other limitations set forth in this Notice, the Agreement, the Plan, the Sub-Plan andthe Israeli Sub-Plan, the Units will vest in accordance with the following schedule: 100% of the Units will vest upon the one-year anniversary of the Vesting Commencement Date. In addition, the Units shall be subject to the terms of Section 10 of the Sub-Plan. For purposes of this Notice and the Agreement, the term “vest” shall mean, with respect to any Units, that such Units are no longer subject toforfeiture to the Company. If the Director would become vested in a fraction of a Unit, such Unit shall not vest until the Director becomes vested in theentire Unit. Vesting shall cease upon the date of termination of the Director’s Continuous Status as a Director for any reason, including death or Disability. Inthe event of termination of the Director’s Continuous Status as a Director for any reason, including death or Disability, any unvested Units held by theDirector immediately upon such termination of the Director’s Continuous Status as a Director shall be forfeited and deemed reconveyed to the Companyand the Company shall thereafter be the legal and beneficial owner of such reconveyed Units and shall have all rights and interest in or related theretowithout further action by the Director. IN WITNESS WHEREOF, the Company and the Director have executed this Notice and agree that the Award is to be governed by the terms andconditions of this Notice, the Plan, the Sub-Plan and the Agreement. DSP Group, Inc.a Delaware corporation By: _________________________________________________________ Title: ________________________________________________________ Date: ________________________________________________________ THE DIRECTOR ACKNOWLEDGES AND AGREES THAT THE UNITS SHALL VEST, IF AT ALL, ONLY DURING THE PERIOD OF THEDIRECTOR’S CONTINUOUS STATUS AS A DIRECTOR OR AS OTHERWISE SPECIFICALLY PROVIDED HEREIN (NOT THROUGH BEINGGRANTED THIS AWARD OR ACQUIRING SHARES HEREUNDER). THE DIRECTOR FURTHER ACKNOWLEDGES AND AGREES THATNOTHING IN THIS NOTICE, THE AGREEMENT, NOR IN THE PLAN, THE SUB-PLAN AND THE ISRAELI SUB-PLAN, SHALL CONFERUPON THE DIRECTOR ANY RIGHT WITH RESPECT TO CONTINUATION OF THE DIRECTOR’S CONTINUOUS SERVICE, NOR SHALLIT INTERFERE IN ANY WAY WITH THE DIRECTOR’S RIGHT OR THE COMPANY’S RIGHT TO TERMINATE THE DIRECTOR’SCONTINUOUS SERVICE AT ANY TIME, WITH OR WITHOUT CAUSE, AND WITH OR WITHOUT NOTICE. 2 The Director acknowledges receipt of a copy of the Plan, the Sub-Plan, the Israeli Sub-Plan and the Agreement, and represents that he or she isfamiliar with the terms and provisions thereof, and hereby accepts the Award subject to all of the terms and provisions hereof and thereof. The Directorhas reviewed this Notice, the Plan, the Sub-Plan, the Israeli Sub-Plan and the Agreement in their entirety, has had an opportunity to obtain the advice ofcounsel prior to executing this Notice, and fully understands all provisions of this Notice, the Plan, the Sub-Plan, the Israeli Sub-Plan and the Agreement.The Director hereby agrees that all questions of interpretation and administration relating to this Notice, the Plan, the Sub-Plan, the Israeli Sub-Plan andthe Agreement shall be resolved by the Administrator in accordance with Section 8 of the Agreement. The Director further agrees to the venue selection andwaiver of a jury trial in accordance with Section 9 of the Agreement. The Director further agrees to notify the Company upon any change in the residenceaddress indicated in this Notice. To the extent an Approved 102 Option, as defined below, is designated above, the Director declares and acknowledges: (i) that he or she fullyunderstand that Section 102 of the Ordinance and the rules and regulations enacted thereunder apply to the Units specified in this Notice and to him orher; and (ii) that he or she understands the provisions of Section 102 of the Ordinance, the tax track chosen and the implications thereof. In addition, theterms of the Units shall also be subject to the terms of the Trust Agreement made between the Company and the Trustee for the benefit of the Director (the“Trust Agreement”), as well as the requirements of the Israeli Income Tax Commissioner. The grant of the Units is conditioned upon the Director signingall documents requested by the Company, the Employer or the Trustee, in accordance with and under the Trust Agreement. A copy of the TrustAgreement is available for the Director’s review, during normal working hours, at Company’s offices. Notwithstanding anything to the contrary, including the indication under “Type of Award” above, the Company shall be under no duty toensure, and no representation or commitment is made, that the Units qualify or will qualify under any particular tax treatment (such as Section 102 or anyother treatment), nor shall the Company be required to take any action for the qualification of any Units under such tax treatment. The Company shallhave no liability of any kind or nature in the event that, for any reason whatsoever, the Units do not qualify for any particular tax treatment. Date: ________________________________________ _____________________________________________________________ Director’s Signature _____________________________________________________________ Director’s Printed Name _____________________________________________________________ Address _____________________________________________________________ City, State & Zip 3 Award Number: __________________ DSP GROUP, INC. 2012 EQUITY INCENTIVE PLAN AMENDED AND RESTATED DIRECTOR EQUITY SUB-PLAN RESTRICTED STOCK UNIT AGREEMENT FOR ISRAELI RESIDENT DIRECTORS 1. Issuance of Units. DSP Group, Inc., a Delaware corporation (the “Company”), hereby issues to the Director (the “Director”) named in theNotice of Restricted Stock Unit Award for Israeli Resident Directors (the “Notice”) an award (the “Award”) of the Total Number of Restricted Stock UnitsAwarded set forth in the Notice (the “Units”), subject to the Notice, this Restricted Stock Unit Agreement for Israeli Resident Directors (the “Agreement”),the terms and provisions of the DSP Group, Inc. 2012 Equity Incentive Plan, as amended from time to time (the “Plan”), the Amended and RestatedDirector Equity Sub-Plan of the Plan (the “Sub-Plan”) and the Israeli Sub-Plan of the Plan (the “Israeli Sub-Plan”), which are incorporated herein byreference. Unless otherwise provided herein, the terms in this Agreement shall have the same meaning as those defined in the Plan, the Sub-Plan, the IsraeliSub-Plan and the Notice. 2. Transfer Restrictions. The Units may not be transferred in any manner other than by will or by the laws of descent and distribution andmay be converted during the lifetime of the Director only by the Director. With respect to any Units granted under the provisions of Section 102 of theOrdinance, Shares resulting from their conversion and any additional rights, including bonus shares that may be distributed to the Director in connectionwith the Units (the “Additional Rights”), which will be allocated to the Trustee on behalf of the Director according to the provisions of Section 102 of theOrdinance and the Rules (the “Approved 102 Option”), a Director shall not sell, assign, transfer, give as a collateral or any right that would be given toany third party or release from trust any Share received upon the conversion of an Approved 102 Option and/or any Additional Right, until at least thelapse of the Holding Period required under Section 102 of the Ordinance. Notwithstanding the above, if any such sale or release occurs during the HoldingPeriod, the sanctions under Section 102 of the Ordinance and under any rules or regulations or orders or procedures promulgated thereunder shall apply toand shall be borne by such Director. At the end of the Holding Period, the Units, Shares or any Additional Rights may be transferred to the Director uponhis demand, but only under the condition that the tax due in accordance with Section 102 and the Rules is paid to the satisfaction of the Trustee and theCompany. With respect to an Unit granted pursuant to Section 102(c) of the Ordinance, including Additional Rights in respect thereof, if the Directorceases to be employed by the Employer, the Director shall extend to the Company and/or the Employer a security or guarantee for the payment of tax(including social security taxes and health insurance taxes) due at the time of sale of Shares, all in accordance with the provisions of Section 102 and theRules. 3. Conversion of Units and Issuance of Shares. (a) General. Subject to Sections 3(b) and 3(c), one share of Common Stock shall be issuable for each Unit subject to the Award (the“Shares”) upon vesting. Immediately thereafter, or as soon as administratively feasible, the Company will deliver the appropriate number of Shares to theDirector after satisfaction of any required tax or other withholding obligations, or, in the case of Approved 102 Option, to the Trustee. Any fractional Unitremaining after the Award is fully vested shall be discarded and shall not be converted into a fractional Share. Notwithstanding the foregoing, the relevantnumber of Shares shall be delivered to the Director or, in the case of Approved 102 Option, to the Trustee no later than March 15th of the year followingthe calendar year in which the Award vests. (b) Delay of Conversion. The conversion of the Units into the Shares under Section 3(a) above, shall be delayed in the event the Companyreasonably anticipates that the issuance of the Shares would constitute a violation of federal securities laws or other Applicable Laws. If the conversion ofthe Units into the Shares is delayed by the provisions of this Section 3(b), the conversion of the Units into the Shares shall occur at the earliest date atwhich the Company reasonably anticipates issuing the Shares will not cause a violation of federal securities laws or other Applicable Laws. For purposesof this Section 3(b), the issuance of Shares that would cause inclusion in gross income or the application of any penalty provision or other provision of theCode is not considered a violation of Applicable Laws. (c) Delay of Issuance of Shares. The Company shall delay the delivery of any Shares under this Section 3 to the extent necessary tocomply with Section 409A(a)(2)(B)(i) of the Code (relating to payments made to certain “specified employees” of certain publicly-traded companies); insuch event, any Shares to which the Director would otherwise be entitled during the six (6) month period following the date of the Director’s termination ofContinuous Service will be delivered on the first business day following the expiration of such six (6) month period. 4. Right to Shares. The Director shall not have any right in, to or with respect to any of the Shares (including any voting rights or rights withrespect to dividends paid on the Common Stock) issuable under the Award until the Award is settled by the issuance of such Shares to the Director or, inthe case of Approved 102 Option, to the Trustee. 5. Taxes. (a) Tax Liability. The Director is ultimately liable and responsible for all taxes owed by the Director in connection with the Units,regardless of any action the Company or any Related Entity takes with respect to any tax withholding obligations that arise in connection with the Units.Neither the Company nor any Related Entity makes any representation or undertaking regarding the treatment of any tax withholding in connection withany aspect of the Units, including the grant, vesting, assignment, release or cancellation of the Units, the delivery of Shares, the subsequent sale of anyShares acquired upon vesting and the receipt of any dividends or dividend equivalents. The Company does not commit and is under no obligation tostructure the Units to reduce or eliminate the Director’s tax liability. 2 (b) Payment of Withholding Taxes. No Shares will be delivered to the Director until the Director has made arrangements acceptable to theAdministrator and/or the Trustee, as applicable, for the satisfaction of applicable income tax and employment tax withholding obligations, including,without limitation, such other tax obligations of the Director incident to the receipt of Shares. The Company, the Director’s employer or the Trustee, asapplicable, may offset or withhold (from any amount owed by the Company or the Director’s employer to the Director) or collect from the Director anamount sufficient to satisfy such tax withholding obligations. Furthermore, in the event of any determination that the Company, the Director’s employer orthe Trustee, as applicable, has failed to withhold a sum sufficient to pay all withholding taxes due in connection with the Award, the Director agrees toindemnify the Company, the Director’s employer or the Trustee, as applicable, and hold them harmless against and from any and all liability for anysuch tax or interest or penalty thereon, including without limitation, liabilities relating to the necessity to withhold, or to have withheld, any such tax fromany payment made to the Director, and pay them the amount of such deficiency in cash within five (5) days after receiving a written demand from theCompany, the Director’s employer or the Trustee, as applicable, to do so, whether or not the Director is an employee of the Company and/or the Director’semployer at that time. (c) Tax Consultation. The Director is advised to consult with a tax advisor with respect to the tax consequences of receiving or convertingUnits hereunder. The Company and/or the Director’s employer do not assume any responsibility to advise the Director on such matters, which shallremain solely the responsibility of the Director. 6. Entire Agreement; Governing Law. The Notice, the Plan, the Sub-Plan, the Israeli Sub-Plan and this Agreement constitute the entire agreementof the parties with respect to the subject matter hereof and supersede in their entirety all prior undertakings and agreements of the Company and theDirector with respect to the subject matter hereof, and may not be modified adversely to the Director’s interest except by means of a writing signed by theCompany and the Director. Nothing in the Notice, the Plan, the Sub-Plan, the Israeli Sub-Plan and this Agreement (except as expressly provided therein) isintended to confer any rights or remedies on any persons other than the parties. The Notice, the Plan, the Sub-Plan, the Israeli Sub-Plan and thisAgreement are to be construed in accordance with and governed by the internal laws of the State of Delaware without giving effect to any choice of law rulethat would cause the application of the laws of any jurisdiction other than the internal laws of the State of Delaware to the rights and duties of the parties,provided that the tax treatment and the tax rules and regulations applying hereto shall be the Ordinance and Rules. Should any provision of the Notice, thePlan, the Sub-Plan, the Israeli Sub-Plan or this Agreement be determined to be illegal or unenforceable, such provision shall be enforced to the fullest extentallowed by law and the other provisions shall nevertheless remain effective and shall remain enforceable. 7. Construction. The captions used in the Notice and this Agreement are inserted for convenience and shall not be deemed a part of the Award forconstruction or interpretation. Except when otherwise indicated by the context, the singular shall include the plural and the plural shall include the singular.Use of the term “or” is not intended to be exclusive, unless the context clearly requires otherwise. 8. Administration and Interpretation. Any question or dispute regarding the administration or interpretation of the Notice, the Plan, the Sub-Plan,the Israeli Sub-Plan or this Agreement shall be submitted by the Director or by the Company to the Administrator. The resolution of such question ordispute by the Administrator shall be final and binding on all persons. 3 9. Venue and Jurisdiction. The Company and the Director agree that any suit, action, or proceeding arising out of or relating to the Notice, thePlan, the Sub-Plan, the Israeli Sub-Plan or this Agreement shall be brought in the United States District Court for the District of Delaware (or should suchcourt lack jurisdiction to hear such action, suit or proceeding, in a Delaware state court) and that the parties shall submit to the jurisdiction of such court.The parties irrevocably waive, to the fullest extent permitted by law, any objection the party may have to the laying of venue for any such suit, action orproceeding brought in such court. THE PARTIES ALSO EXPRESSLY WAIVE ANY RIGHT THEY HAVE OR MAY HAVE TO A JURY TRIAL OFANY SUCH SUIT, ACTION OR PROCEEDING. If any one or more provisions of this Section 9 shall for any reason be held invalid or unenforceable,it is the specific intent of the parties that such provisions shall be modified to the minimum extent necessary to make it or its application valid andenforceable 10. Notices. Any notice required or permitted hereunder shall be given in writing and shall be deemed effectively given upon personal delivery,upon deposit for delivery by an internationally recognized express mail courier service or upon deposit in the United States mail by certified mail (if theparties are within the United States), with postage and fees prepaid, addressed to the other party at its address as shown in these instruments, or to suchother address as such party may designate in writing from time to time to the other party. 11. Amendment and Delay to Meet the Requirements of Section 409A. The Director acknowledges that the Company, in the exercise of its solediscretion and without the consent of the Director, may amend or modify this Agreement in any manner and delay the issuance of any Shares issuablepursuant to this Agreement to the minimum extent necessary to meet the requirements of Section 409A of the Code as amplified by any Treasuryregulations or guidance from the Internal Revenue Service as the Company deems appropriate or advisable. In addition, the Company makes norepresentation that the Award will comply with Section 409A of the Code and makes no undertaking to prevent Section 409A of the Code from applying tothe Award or to mitigate its effects on any deferrals or payments made in respect of the Units. The Director is encouraged to consult a tax adviser regardingthe potential impact of Section 409A of the Code. END OF AGREEMENT 4 Exhibit 10.43 DSP GROUP, INC. 2012 EQUITY INCENTIVE PLAN AMENDED AND RESTATED DIRECTOR EQUITY SUB-PLAN This sub-plan will be known as the Director Equity Sub-Plan (formerly the Director Option Sub-Plan) (the “Director Equity Sub-Plan”) of theDSP Group, Inc. 2012 Equity Incentive Plan (the “Plan”). The Director Equity Sub-Plan has been adopted for the purpose of attracting and retaining thebest available personnel for service as Outside Directors of the Company, to provide additional incentive to the Outside Directors of the Company to serveas Directors, and to encourage their continued service on the Board. For purposes of the Director Equity Sub-Plan, the provisions of the Plan shall apply subject to the terms provided for below and, in the event ofany inconsistencies between the provisions of the Plan and the Director Equity Sub-Plan, the provisions of the Director Equity Sub-Plan shall control withrespect to any Award of Options to Outside Directors. All other Awards granted under the Plan shall be governed by the Plan without any reference to orapplication of the Director Equity Sub-Plan. Any Director Awards granted under the Director Equity Sub-Plan shall be governed by the Plan subject to theterms provided for below: 1. Definitions. The following words and expressions shall have the following meanings solely for the purposes of the Director Equity Sub-Planand the Awards granted hereunder, unless the context otherwise requires: (a) “Continuous Status as a Director” shall mean the absence of any interruption or termination of service as a member of the Board. (b) “Director” means a member of the Board. (c) “Director Equity Sub-Plan” means the Director Equity Sub-Plan (formerly the Director Option Sub-Plan) of the DSP Group, Inc.2012 Equity Incentive Plan constituted and governed by the Plan subject to the terms set out herein. (d) “Effective Date” means January 1, 2014. (e) “Plan” means DSP Group, Inc.’s 2012 Equity Incentive Plan. (f) “Director Award” means an Award of an Option or a Restricted Stock Unit that is granted under and satisfies the conditions of theDirector Equity Sub-Plan. (g) “Director Option” means an Award of an Option that is granted under and satisfies the conditions of the Director Equity Sub-Plan. (h) “Director RSU” means an Award of a Restricted Stock Unit that is granted under and satisfies the conditions of the DirectorEquity Sub-Plan. (i) “Outside Director” means a member of the Board who is not an Employee. 1 2. Interpretation. (a) Capitalized words not defined herein shall have the same meaning as in the Plan. (b) Where the context so permits the singular shall include the plural and vice versa and the masculine shall include the feminine. 3. Stock Subject to the Director Equity Sub-Plan. The maximum aggregate number of Shares which may be issued under the Director EquitySub-Plan shall be the number of Shares that may be issued under the Plan (the “Pool”). The Shares may be authorized, but unissued, or reacquiredCommon Stock. 4. Eligibility. (a) Director Awards may be granted only to Outside Directors of the Company. All Director Awards shall be automatically granted inaccordance with the terms set forth in Section 5 hereof. An Outside Director who has been granted a Director Award may, if he or she is otherwise eligible,be granted additional Director Awards in accordance with such provisions. (b) The Plan shall not confer upon a Grantee any right with respect to continuation of service as a Director or nomination to serve as aDirector, nor shall it interfere in any way with any rights which the Director or the Company may have to terminate his or her directorship at any time. 5. Grants of Director Awards Under the Director Equity Sub-Plan (a) Procedure for Grants. All grants of Director Awards hereunder shall be automatic and nondiscretionary and shall be made inaccordance with the following provisions: (i) No person shall have any discretion to select which Outside Directors of the Company shall be granted Director Awardsor to determine the number of Shares to be covered by Director Awards granted to Outside Directors of the Company. (ii) Each Outside Director who becomes a member of the Board after the Effective Date of this Director Equity Sub-Planshall be automatically granted (i) a pro rata portion of a Director Option to purchase 8,000 Shares and (ii) a pro rata portion of 4,000 DirectorRSUs on the date on which such person first becomes an Outside Director of the Company, whether through election by the stockholders of theCompany or appointment by the Board to fill a vacancy. Proration shall be based upon the number of days remaining in the calendar yearfollowing the date such person was nominated as an Outside Director of the Company. (iii) Each Outside Director of the Company shall be automatically granted (i) a Director Option to purchase 8,000 Shares and(ii) 4,000 Director RSUs on January 1 of each year. (iv) Notwithstanding the provisions of subsections (ii) and (iii) hereof, in the event that a grant would cause the number ofShares subject to outstanding Awards, plus the number of Shares previously issued pursuant to Awards to exceed the Pool, then each suchautomatic grant shall be for that number of Shares determined by dividing the total number of Shares remaining available for grant by thenumber of grants to be made on the automatic grant date. Any further grants shall then be deferred until such time, if any, as additional Sharesbecome available for grant under the Plan through action of the stockholders to increase the number of Shares which may be issued under thePlan or through cancellation or expiration of Awards previously granted hereunder. 2 (v) The terms of any Director Award granted hereunder shall be as follows: (A) Except as provided in Section 8 and the Award Agreement, a Director Award shall be exercisable only while theOutside Director remains a Director of the Company. (B) The exercise price of a Director Option shall be 100% of the Fair Market Value per Share on the date of grant. (C) Director Awards shall vest in full and become exercisable as to 100% of the Shares subject to any DirectorAward on the first anniversary of the date of grant of the Director Award. (D) The Board may accelerate the unvested portion of any Director Award granted under the Plan held by anyDirector whose Continuous Status as a Director terminates for any reason prior to the Director Award being fully vested. 6. Form of Consideration. The consideration, if any, to be paid for the Shares to be issued upon exercise of a Director Option shall consistentirely of cash, check, other Shares having a fair market value on the date of surrender equal to the aggregate exercise price of the Shares as to which saidDirector Option shall be exercised (which, if acquired from the Company, shall have been held for at least six months), delivery of a properly executedexercise notice, together with such other documentation as the Company and the broker, if applicable, shall require to effect an exercise of the DirectorOption and delivery to the Company of the funds required to pay the exercise price, or any combination of such methods of payment and/or any otherconsideration or method of payment as shall be permitted under applicable corporate law. 7. Term of Director Options. The term of each Director Option shall be 10 years from the date of grant thereof. 8. Exercise of Options (a) Termination of Continuous Status as a Director. If a Grantee ceases to serve as a Director, he or she may, but only within threemonths after the date he or she ceases to be a Director, exercise his or her Director Option to the extent that he or she was entitled to exercise it at the date ofsuch termination. Notwithstanding the foregoing, in no event may the Director Option be exercised after its term has expired. The Board may extend theexercise period of a Director Option held by a Director whose term is expiring to any date prior to the Option’s expiration date. To the extent that suchOutside Director was not entitled to exercise a Director Option at the date of such termination, or does not exercise such Director Option (which he or shewas entitled to exercise) within the time specified herein, the Option shall terminate. 3 (b) Disability of Grantee. Notwithstanding the provisions of Section 8(a) above, in the event a Grantee is unable to continue his or herservice as a Director as a result of his or her total and permanent disability (as defined in Section 22(e)(3) of the Internal Revenue Code), he or she may,but only within six months from the date of such termination, exercise his or her Director Option to the extent he or she was entitled to exercise it at the dateof such termination. The Board may extend the exercise period of a Director Option held by a Director whose Continuous Status as a Director terminates asa result of his or her total and permanent disability. Notwithstanding the foregoing, in no event may the Director Option be exercised after its term hasexpired. To the extent that he or she was not entitled to exercise the Director Option at the date of termination, or if he or she does not exercise such DirectorOption (which he or she was entitled to exercise) within the time specified herein, the Director Option shall terminate. (c) Death of Grantee. In the event of the death of a Grantee: (i) during the term of the Director Option who is, at the time of his or her death, a Director and who shall have been inContinuous Status as a Director since the date of grant of the Director Option, the Director Option may be exercised, at any time within 12months following the date of death, by the Grantee’s estate or by a person who acquired the right to exercise the Director Option by bequest orinheritance, but only to the extent of the right to exercise that would have accrued had the Grantee continued living and remained in ContinuousStatus as a Director for six months after the date of death. The Board may extend the exercise period of an Option held by a Director whoseContinuous Status as a Director terminates as a result of his or her death. Notwithstanding the foregoing, in no event may the Director Option beexercised after its term has expired. (ii) within three months after the termination of Continuous Status as a Director, the Director Option may be exercised, atany time within 12 months following the date of death, by the Grantee’s estate or by a person who acquired the right to exercise the DirectorOption by bequest or inheritance, but only to the extent of the right to exercise that had accrued at the date of termination. The Board may extendthe exercise period of a Director Option held by a Director who dies within three months after the termination of Continuous Status as a Director.Notwithstanding the foregoing, in no event may the Director Option be exercised after its term has expired. 9. Nontransferability of Awards. The Director Awards may not be sold, pledged, assigned, hypothecated, transferred, or disposed of in anymanner other than by will or by the laws of descent or distribution. The designation of a beneficiary by a Grantee does not constitute a transfer. A DirectorOption may be exercised during the lifetime of a Grantee only by the Grantee. 10. Corporate Transaction and Change in Control. In the event of a Corporate Transaction, each Director Award which is at the timeoutstanding under the Plan automatically shall become fully vested and exercisable and be released from any restrictions on transfer and repurchase orforfeiture rights, immediately prior to the specified effective date of such Corporate Transaction, for all of the Shares at the time represented by suchDirector Award. Effective upon the consummation of the Corporate Transaction, all outstanding Director Awards under the Plan shall terminate unlessAssumed by the successor company or its parent. In the event of a Change in Control (other than a Change in Control which also is a CorporateTransaction), each Director Award which is at the time outstanding under the Plan automatically shall become fully vested and exercisable and be releasedfrom any restrictions on transfer and repurchase or forfeiture rights, immediately prior to the specified effective date of such Change in Control, for all ofthe Shares at the time represented by such Director Awards. Each such Director Award shall remain exercisable until the expiration or sooner termination ofthe applicable Director Award term. 11. The Director Equity Sub-Plan is designed to comply with the provisions of the Israeli Income Tax Ordinance New Version, 1961, asamended (the “Tax Ordinance”). The Administrator at its sole discretion may grant Director Options to an Outside Director who is an Israeli residentpursuant to Sections 3(i) and 102 of the Tax Ordinance. END OF DIRECTOR EQUITY SUB-PLAN 4 Exhibit 21.1 LIST OF SUBSIDIARIES Name of Subsidiary Jurisdiction of Incorporation1. DSP Group Ltd. Israel 2. Nihon DSP K.K. Japan 3. RF Integrated Systems, Inc. Delaware, U.S. 4. DSPG Edinburgh Ltd. Scotland 5. DSPG Technologies GmbH Germany 6. DSP Group HK Limited Hong Kong 7. DSP Technology Indian Private Limited India 8. DSP Switzerland AG Switzerland 9. BoneTone Communications LTD Israel 10. DSP Group (Shenzhen) Limited People’s Republic of China Exhibit 23.1 CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM We consent to the incorporation by reference in the Registration Statements (Form S-8 Nos. 333-190570, 333-183219, 333-175172, 333-161206,333-151527, 333-140233, 333-135220, 333-131324, 333-126773, 333-112417, 333-108937, 333-147561) pertaining to the 1991 Employee and ConsultantStock Plan, 1993 Director Stock Option Plan, 1998 Employee Stock Purchase Plan, 2001 Stock Incentive Plan, 2003 Israeli Share Option Plan and 2012Equity Incentive Plan of DSP Group, Inc., the 239,000 shares of common stock of DSP Group, Inc. issuable pursuant to options granted on December 1,2004, and the 235,000 shares of common stock of DSP Group, Inc. issuable pursuant to options granted on October 31, 2007, of our reports dated March 17,2014, with respect to the consolidated financial statements and schedule of DSP Group Inc., and the effectiveness of internal control over financial reporting ofDSP Group Inc. included in this Annual Report on Form 10-K for the year ended December 31, 2013. /s/ Kost Forer Gabbay & Kasierer KOST FORER GABBAY & KASIERER A Member of Ernst & Young Global Tel-Aviv, Israel March 17, 2014 Exhibit 31.1 DSP GROUP, INC. CERTIFICATION I, Ofer Elyakim, certify that: 1.I have reviewed this annual report on Form 10-K of DSP Group, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make thestatements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by thisreport; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects thefinancial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined inExchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f))for the registrant and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures to bedesigned under our supervision, to ensure that material information relating to the registrant, including itsconsolidated subsidiaries, is made known to us by others within those entities, particularly during the periodin which this report is being prepared; b)designed such internal control over financial reporting, or caused such internal control over financial reportingto be designed under our supervision, to provide reasonable assurance regarding the reliability of financialreporting and the preparation of financial statements for external purposes in accordance with generallyaccepted accounting principles; c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report ourconclusions about the effectiveness of the disclosure controls and procedures, as of the end of the periodcovered by this report based on such evaluation; and d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annualreport) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal controlover financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to theregistrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions): a)all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which arereasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’sinternal control over financial reporting. Date: March 17, 2014 /s/ Ofer Elyakim Ofer Elyakim Chief Executive Officer Exhibit 31.2 DSP GROUP, INC. CERTIFICATION I, Dror Levy, certify that: 1I have reviewed this annual report on Form 10-K of DSP Group, Inc.; 2.Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary tomake the statements made, in light of the circumstances under which such statements were made, not misleading with respect to theperiod covered by this report; 3.Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all materialrespects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4.The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (asdefined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules13a-15(f) and 15d-15(f) for the registrant and have: a)designed such disclosure controls and procedures, or caused such disclosure controls and procedures tobe designed under our supervision, to ensure that material information relating to the registrant, includingits consolidated subsidiaries, is made known to us by others within those entities, particularly during theperiod in which this report is being prepared; b)designed such internal control over financial reporting, or caused such internal control over financialreporting to be designed under our supervision, to provide reasonable assurance regarding the reliability offinancial reporting and the preparation of financial statements for external purposes in accordance withgenerally accepted accounting principles; c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in thisreport our conclusions about the effectiveness of the disclosure controls and procedures, as of the end ofthe period covered by this report based on such evaluation; and d)disclosed in this report any change in the registrant’s internal control over financial reporting that occurredduring the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of anannual report) that has materially affected, or is reasonably likely to materially affect, the registrant’sinternal control over financial reporting; and 5.The registrant’s other certifying officer(s) and I have disclosed, based on our most recent evaluation of internal control over financialreporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalentfunctions): a)all significant deficiencies and material weaknesses in the design or operation of internal control overfinancial reporting which are reasonably likely to adversely affect the registrant’s ability to record,process, summarize and report financial information; and b)any fraud, whether or not material, that involves management or other employees who have a significantrole in the registrant’s internal control over financial reporting. Date: March 17, 2014 /s/ Dror Levy Dror Levy Chief Financial Officer Exhibit 32.1 DSP GROUP, INC. CERTIFICATION In connection with the annual report of DSP Group, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2013 as filed with the Securities andExchange Commission (the “Report”), I, Ofer Elyakim, Chief Executive Officer of the Company, hereby certify as of the date hereof, solely for purposes ofTitle 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge: (1)the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and (2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations ofthe Company at the dates and for the periods indicated. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting the signature thatappears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company and will be retainedby the Company and furnished to the Securities and Exchange Commission or its staff upon request. This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission. Date: March 17, 2014 /s/ Ofer Elyakim Ofer Elyakim Chief Executive Officer Exhibit 32.2 DSP GROUP, INC. CERTIFICATION In connection with the annual report of DSP Group, Inc. (the “Company”) on Form 10-K for the year ended December 31, 2013 as filed with theSecurities and Exchange Commission (the “Report”), I, Dror Levy, Chief Financial Officer of the Company, hereby certify as of the date hereof, solely forpurposes of Title 18, Chapter 63, Section 1350 of the United States Code, that to the best of my knowledge: (1)the Report fully complies with the requirements of Section 13(a) or 15(d), as applicable, of the Securities Exchange Act of 1934, and (2)the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of theCompany at the dates and for the periods indicated. A signed original of this written statement required by Section 906, or other document authenticating, acknowledging, or otherwise adopting thesignature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Company andwill be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request. This Certification has not been, and shall not be deemed, “filed” with the Securities and Exchange Commission. Date: March 17, 2014 /s/ Dror Levy Dror Levy Chief Financial Officer

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