DSP Group Inc.
Annual Report 2014

Plain-text annual report

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, 2014 Commission File Number 001-35256 DSP GROUP, INC.(Exact name of registrant as specified in its charter) Delaware(State or other jurisdiction ofincorporation and organization)94-2683643(I.R.S. Employer Identification No.) 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, 2014, the aggregate market value of voting stock held by non-affiliates of the Registrant, based on the closing price of the CommonStock on June 30, 2014 as reported on the NASDAQ Global Select Market, was approximately $110,662,000. Shares of Common Stock held by eachofficer and director and by each person who owns 5% or more of the outstanding Common Stock have been excluded from this computation in that suchpersons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes. As of March 6, 2015, the Registrant had outstanding 22,292,670 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, 2014 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.  INDEX DSP GROUP, INC. Page No.PART I Item 1.BUSINESS.3 Item 1A.RISK FACTORS.12 Item 1B.UNRESOLVED STAFF COMMENTS.26 Item 2.PROPERTIES.26 Item 3.LEGAL PROCEEDINGS.27 Item 4.MINE SAFETY DISCLOSURES.27 PART II Item 5.MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUERPURCHASES OF EQUITY SECURITIES.28 Item 6.SELECTED FINANCIAL DATA31 Item 7.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS.32 Item 7A.QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK48 Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.49 Item 9.CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIALDISCLOSURE.104 Item 9A.CONTROLS AND PROCEDURES.104 Item 9B.OTHER INFORMATION.104 PART III Item 10.DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.105 Item 11.EXECUTIVE COMPENSATION.105 Item 12.SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATEDSTOCKHOLDER MATTERS.105 Item 13.CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE.105 Item 14.PRINCIPAL ACCOUNTANT FEES AND SERVICES.105 PART IV Item 15.EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.106 SIGNATURES112 x This report and certain information incorporated herein by reference contain forward-looking statements, which are provided under the “safeharbor” protection of the Private Securities Litigation Reform Act of 1995. All statements included or incorporated by reference in this report, otherthan statements that are purely historical in nature, are forward-looking statements. Forward-looking statements are generally written in the futuretense and/or are preceded by words such as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or othersimilar words. Forward-looking statements include statements regarding: ●Our belief that we are well positioned to achieve our 2015 key design and financial milestones, as well as a return to revenue growth forthe full year 2015; ●Our belief that sales of our DECT products will continue to represent a substantial percentage of our revenues for 2015; ●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 2015 for our traditional cordless telephony products and expect that price erosionand the decrease in the average selling prices of such products to continue; ●Our anticipation that annual revenues generated from our new products to increase significantly in 2015 as compared to 2014, includinggenerating revenues from products in our Mobile segment in 2015; ●Our belief that commercial shipments of products incorporating our new products will continue during 2015; and ●Our belief that our available cash and cash equivalents at December 31, 2014 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 other companiesmentioned 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 portfolioof wireless chipsets integrating DECT (Digital Enhanced Cordless Telecommunications); CAT-iq (Cordless Advanced Technology - Internet Quality),ULE (Ultra Low Energy), Wi-Fi, video, VoIP (Voice over Internet Protocol), PSTN (Public Switched Telephone Network), HDClear™ (previouslyBoneTone™) noise suppression and voice quality enhancement technologies. DSP Group enables converged voice, audio and data connectivity across diverse mobile, consumer and enterprise products - includingconnected multimedia terminals, mobile and wearable devices, home automation & security, cordless phones, VoIP systems and home gateways.Leveraging industry-leading experience and expertise, DSP Group partners with CE manufacturers and service providers to shape the future of convergedcommunications at home, in the 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. Industry Environment and Our Business 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, as well as multimedia, mobile, wearable and home automation devices, that require verylow power consumption, and can be manufactured in high volumes using cost-effective process technologies. Our systems architecture provides an opendesign environment for ODMs 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, communicationstack and application layers in Real-time Operating System (RTOS) and Full Featured Operating System (FFOS) frameworks, enable our customers fasttime to market with cost- and performance-optimized solutions. 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, including mobile handsets. Since 1999, we have developed and acquiredvarious technologies, including Direct Sequence Spread Spectrum (DSSS), Frequency Hopping Spread Spectrum (FHSS), Orthogonal Frequency DigitalModulation (OFDM), Digital Narrow Band, Complementary Metal Oxide Semiconductor (CMOS), Gallium Arsenide (GaAs) technology, and SiliconGermanium (SiGe) RF chips for 900MHz, 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), Wi-Fi (802.11, 2.4GHz/5GHz), BiCMOS (Bipolar CMOS) and deep sub-micron CMOStechnologies. 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. -3- During the past few years, we expanded into chips and phones for office and business applications, and have quickly gained market share in thisgrowing segment. Today, DSP Group offers comprehensive systems-on-a-chip (SoC) and solution for VoIP, home, SoHo and office IP phones. VoIP is atechnology that enables users to make HD 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 noise suppression and voice quality enhancement product for mobile devices. There is a clear emerging market trendof mobile units incorporating technology to eliminate background noise, HDClear leverages this trend by incorporating proprietary noise cancellationalgorithms, thereby dramatically improving user experience and delivering unparalleled voice quality and better voice call intelligibility. Thistechnology will enable people to use their cell phones for conversations in virtually any environment, whether in a car, on a train or in any noisysurroundings. HDClear will also facilitate the use of speech recognition and voice commands by eliminating background noise. Our HDClear productfamily was developed through the acquisition of BoneTone Communications Ltd. (“BoneTone”) and the addition of their innovative intelligent noisecancellation 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 also participates inthe 3GPP and MIPI alliance. DSP Group is also deeply involved in all stages of defining DECT CAT-iq as well as DECT ULE standards and ULE Allianceand is building full eco-systems to support these solutions. We are an active member of the Home Gateway Initiative (HGI), and support the specificationactivities of CableLabs, which is contributing to the evolution and implementation of CAT-iq in various markets and applications. Such involvementenables us to define standards and keep abreast of the latest innovations and requirements. We also maintain close relationships with many world-leadingtelecommunication service providers, thereby providing 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 and wearable devices and headsets, thus expanding our marketopportunities. 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 technologybase and customer relationships to address evolving market opportunities and take advantage of the current market trends in our domain. In addition toour main product line that is targeted for cordless phones, new products include three main groups of products: (i) home segment products consisting ofULE ICs targeting the growing markets of IoT, smart home devices and home gateways; (ii) office segment products consisting of VoIP SoC products forEnterprise, SMB and SoHo; and (iii) mobile segment products consisting of products targeted for mobile and wearable device markets that incorporateour HDClear technology, as well as other third party advanced voice processing, always on and sensor hub functionality. Home Segment - Products Targeted for Cordless Telephony, Home Gateways and Home Automation (IoT) 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. -4- 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 Digital CordlessTechnology) 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, audio and voice-processing algorithms toprovide the industry a low cost and small footprint solution. Enhanced with our hardware and software packages, these chipsets are highly versatile andenable the development of an array of cordless telephony solutions, DECT home gateways and smart-home applications and devices at a lower effort andfaster time to market than alternative silicon offerings. This portfolio supports cordless phones, cordless headsets, remote controls, home gateways, fixed-mobile convergence solutions and homesecurity and 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 and DCE59 basebandchip enables software implementation of a variety of voice coders, and provides a flexible platform for developing a wide range of solutions.With its DSP-based architecture, the chipset enables cost-effective incorporation of the most advanced audio and telephony features. ●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. ●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 cordless SoCs,functioning as a standalone ULE over the top box (DVF99) and embedded module for home gateways (DCX81). -5- We achieved significant milestones in 2014 by incorporating DHX91, a DECT ULE SoC; in end customer products for home automation andsecurity applications. Our customers’ end products integrating DHX91 went through various field trials and officially launched in the market in 2014. Office Segment - Products Targeted for the Office Market 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 multi-ARM processors running on Linux OS, DVF includes IPfonePro™, an extensive SDKfor IP phones 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. Since 2008, we have been selling products for the VoIP market while developing a new platform based on ARM9 and REAL DSP core, and theVegaFireBird and VegaOne SoC 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 January 2013. Built with two ARM926EJ-S™ cores, this newVoIP 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 2.0 port,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. In 2014, we continued our design win momentum with DVF99xx SoC with confirmed wins from two additional tier-one VoIP OEMs. Priordesign wins include products that went into production in 2014, which contributed to our VoIP revenue growth. 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 voicecalls made 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, speakerphoneconference calls and speech-to-text on mobile and wearable devices, tablets and other consumer devices. -6- 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 2.5 x 2.5mm. Offered with a 36-pin FCCSP and 0.4mm ball pitch, DBMD2 embeds a programmable 32-bit DSP, incorporates advanced connectivityoptions, including four TDM/I2S ports and SLIMbus, and equipped with a comprehensive software framework that enables rapid development and fasttime-to-market, thereby overcoming the challenges of portable design, real estate and power consumption. DBMD2’s low power enables an always-on voice feature for mobile devices. Always-on is a low power decisive natural voice interface formobile and wearable devices. An average user accesses his/her device tens or hundreds of times per day by physically pressing a screen or a button. Atruly always-on technology enables the user to skip this step by using natural voice to access the device even while the device is in standby mode. 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 to run their own voice/audio enhancement softwarefor pre- and post-processing. 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 •Sensor hub and sensor fusion functionality In 2014, we further enhanced our HDClear noise reduction capability, and we have added two microphone hands free AEC support. We also fullyintegrated DBMD2 with always-on latest android 5.0 lollipop. 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 officesacross Asia, Europe and North America, we deliver outstanding local service and support worldwide. We sell our products primarily through distributorsand directly 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 2014, 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, ADB, AEG,Alcatel, AT&T, Arris, Atlink, Arcadyan, Askey, Audioline, Ayecom, Baycom, Belgacom, Binatone, British Telecom, Brother, CCT Tech, Cetis, ChinaTelecom, Cisco, Comcast, Crow, Cybertan, Grandstream, Deutsche Telekom, Doro, Eclogic, Escene, France Telecom, Freebox, Giant, Gaoxinqi, Gemtek,Global China Technologies, Grandstream, Hagenuk, Huawei, Innomedia, Intelbras, Invoxia, JXE, Kaonmedia, Kocom, Korea Telecom, KPN, LGElectronics, Matsushita, Mitac, Mitrastar, Motorola, Moimstone, NEC, NTT, OnReal, Ooma, Panasonic, Philips, Pioneer, Plantronics, Sagemcom,Samsung, Sanyo, Sercomm, SGW, Skymotion, 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, Turkish Telecom, Verizon, VTech,Vodafone, WNC, Xingtel, Yamaha, Yealink and ZTE. -7- International Sales and Operations Export sales accounted for 97% of our total revenues for both 2014 and 2013 and 99% of our total revenues for 2012. Although most of our salesto foreign entities are denominated in United States dollars, we are subject to risks of conducting business internationally. See Note 18 of the attachedNotes to Consolidated Financial Statements for the year ended December 31, 2014, for a summary of the geographic breakdown of our revenues andlocation of our long-lived assets. Moreover, a portion of our expenses in Israel is paid in the Israeli currency (New Israeli Shekel (NIS)). Our primary expenses paid in NIS areemployee salaries and lease payments on our Israeli facilities. As a result, an increase in the value of Israeli currency in comparison to the U.S. dollarcould 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 of currency fluctuations, but our hedging positions may be partial, may not exist at all in the futureor may not succeed in minimizing our foreign currency fluctuation risks. In addition, a portion of our expenses in Europe is paid in Euro. Our primary expenses paid in Euro are employee salaries and lease andoperational 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 thecost of our technology development, research and development expenses 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 sales andmarketing team, working out of our sales offices in Hong Kong, China; Nierenberg, Germany; Los Altos, California; Tokyo, Japan; Herzelia Pituach,Israel, Edinburgh, Scotland; and Shenzhen, China; pursues business with our customers in North and South America, Europe and Asia. In territories wherewe do not have sales offices, we operate solely through a network of distributors and representatives. Revenues derived from sales through our Japanesedistributor, Tomen Electronics, represented 20% of our total revenues for 2014, 19% for 2013 and 21% for 2012. We also derive a significant amount ofrevenues from a limited number of customers. Sales to VTech represented 35% of our total revenues for 2014, 36% for 2013 and 35% for 2012. Sales toPanasonic through Tomen Electronics represented 15%, 14% and 15% of our total revenues for 2014, 2013 and 2012, respectively. Sales to Unidenrepresented 2%, 4% and 11% of our total revenues for 2014, 2013 and 2012, respectively. 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. -8- Manufacturing and Design Methodology We contract product wafer fabrication services mostly 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.Unforeseen difficulties with our independent foundries could harm our business, financial condition and results of operations. 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, KYEC, SPIL and Giga Solutions. Furthermore, our digital cordless products require an external component in the finished product, which is supplied by a third party, to provideflash memory. 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 (Lantiq recently signed an agreement to be acquired by Intel) and DialogSemiconductors. Similar principal competitive factors affect the VoIP market. We also believe that we are competitive with respect to most of thesefactors. Our principal competitors in the VoIP market include Broadcom, Dialog Semiconductors, Lantiq, Texas Instruments and new Taiwanese ICvendors. 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 andZigbee. Among those, the major competitors for digital home conectivity are Atmel, Freescale, NXP, Texas Instruments, Sigma Design and Silicon Lab. 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, Cirrus Logic and developers of noise cancellation software running on mobile phones such as NXP and ForteMedia. -9- 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. Thiscompetition comes from mobile telephony, including emerging dual-mode mobile Wi-Fi phones, and other innovative applications, such as Skype andiChat. Given that we derive a significant amount of revenues from chipsets incorporated into fixed-line telephony products, if we are unable to developnew technologies in 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, 2014, we had a staff of 195 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 $33.5 million in2014, $35.0 million in 2013 and $42.5 million in 2012 on research and development activities. Due to various new developments in the home residential market, including the rapid deployment of new communication access methods andthe rise of alternative technologies in lieu of fixed-line telephony, we are expanding our current product lines and develop products and services targetedat wider markets, including office enterprise market and the intensively competitive mobile device market. We will need to continue to invest in researchand development, and our research and development expenses may increase in the future, including the addition of new research and developmentpersonnel, to keep pace with new and rapidly changing trends in our industry. Licenses, Patents and Trademarks As of December 31, 2014, we have been granted a total of 150 patents and 94 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 thebreadth of claims allowed is uncertain. Accordingly, we cannot assure that any patent application filed by us will result in a patent being issued, or thatour patents, and any patents that may be issued in the future, will afford adequate protection against competitors with similar technology; nor can weprovide assurance that patents issued to us will not be infringed or designed around by others. In addition, the laws of certain countries in which ourproducts are or may be developed, manufactured or sold, including China, Hong Kong, Japan, Korea and Taiwan, may not protect our products andintellectual property 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. -10- While no material claims involving patent or other intellectual property rights have been brought against us to date, we cannot provideassurance that third parties will not assert claims against us or our customers with respect to existing or future products, or that we will not need to assertclaims against third parties to protect our proprietary technology. 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 or toprotect our proprietary technology, it could result in significant expense to us and could divert the efforts of our technical and management personnel,whether or not the claim has any merit and notwithstanding that the litigation is determined in our favor. In the event of an adverse result in anylitigation, we could be required to expend significant resources to develop non-infringing technology or to obtain licenses to the technology that is thesubject of the litigation. We cannot provide assurance that we would be successful in developing non-infringing technology or that any licenses wouldbe 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 moreimportant in maintaining our competitive position than the protection of our intellectual property. In addition, we believe that due to rapid technologicalchanges in residential telephony, computer telephony and personal computer markets, patents and trade secret protection are important but must besupported by other factors, including expanding the knowledge, ability and experience of our personnel, new product introductions and frequent productenhancements. Although we continue to implement protective measures and intend to defend our intellectual property rights vigorously, we cannotassure that these measures will be successful. Backlog At December 31, 2014, our backlog was approximately $34.1 million, compared to approximately $25.1 million and $32.7 million atDecember 31, 2013 and 2012, 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, 2014, we had 312 employees, including 195 in research and development, 53 in marketing and sales and 64 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. -11- 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 to differmaterially from those expressed in forward-looking statements made by us. These forward-looking statements are based on current expectations and weassume no obligation to update this information. Before you decide to buy, hold, or sell our common stock, you should carefully consider the risksdescribed below, in addition to the other information contained elsewhere in this report. The following risk factors are not the only risk factors facingour company. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our business. Ourbusiness, financial condition, and results of operation could be seriously harmed if any of the events underlying any of these risks or uncertaintiesactually occurs. In that event, the market price for our common stock could decline, and you may lose all or part of your investment. We generate a significant amount of our total revenues from the sale of digital cordless telephony products and our business and operating results maybe materially adversely affected if we do not continue to succeed in this competitive market or if sales within the overall cordless digital marketcontinue to decrease. Sales of our digital cordless telephony products comprised 79% of our total revenues for 2014, 85% for 2013 and 88% for 2012.Any adversechange in the digital cordless market or in our ability to compete and maintain our competitive position in that market would harm our business, financialcondition and results of operations. The digital cordless telephony market is undergoing a challenging period. With the rapid deployment of new communication access methods,including mobile, wireless broadband, cable and other connectivity, the traditional cordless telephony market using fixed-line telephony is declining andwill continue to decline, which reduces our revenues derived from, and unit sales of, cordless telephony products. Moreover, macro-economic trends inthe 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 significantmajority of our revenues are currently generated from sales of chipsets used in cordless phones that are based on fixed-line telephony, and the continueddecline in fixed-line telephony would reduce our revenues derived from, and unit sales of, our digital cordless telephony products. In addition, the digital cordless telephony market is competitive and is facing pricing pressures, and we expect that competition and pricingpressures will continue. It is possible that we may one day be unable to respond to increased pricing competition for digital cordless telephony processorsor other products through the introduction of new products or reduction of manufacturing costs. This inability to compete would have a material adverseeffect on our business, financial condition and results of operations. Likewise, any significant delays by us in developing, manufacturing or shipping newor enhanced products in this market also would have a material adverse effect on our business, financial condition and results of operations. -12- 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 four largest customers – VTech, Panasonic (through Tomen), CCT Telecom and Shenzhen Guo Wei Electronics Ltd. accounted forapproximately 66%, 66% and 62% of our total revenues for each of 2014, 2013 and 2012, respectively. Sales to VTech represented 35% of our totalrevenues for 2014, 36% for 2013 and 35% for 2012. Sales to Panasonic through our distributor represented 15% of our total revenues for 2014, 14% for2013, and 15% for 2012. Typically, our sales are made on a purchase order basis, and most of our customers have not entered into a long-term agreementrequiring it to purchase our products. Moreover, we do not typically require our customers to purchase a minimum quantity of our products, and ourcustomers can generally reschedule the delivery date of their orders on short notice without significant penalties. A significant amount of our revenueswill continue to be derived from a limited number of large customers. Furthermore, the primary customers for our products are original equipmentmanufacturers (OEMs) and original design manufacturers (ODMs) in the cordless digital market. This industry is highly cyclical and has been subject tosignificant economic downturns at various times, particularly in recent periods. These downturns are characterized by production overcapacity andreduced revenues, which at times may affect the financial stability of our customers. Therefore, the loss of one of our major customers, or reduced demandfor products from, or the reduction in purchasing capability of, one of our major customers, could have a material adverse effect on our business, financialcondition and results of operations. Our future success is dependent on market acceptance of our HDClear product family targeted for the mobile device market and on market acceptanceof our VoIP products,which are intensively competitive markets 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 and VoIP product families. Although a number of potential customers have expressed interest in our HDClear products,we have not yet started mass production and we cannot assure you that we will be successful in doing so. Moreover, we are targeting a new market withour HDClear product family, a market with dominant and established players selling to OEM customers 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 revenuesfrom our HDClear product family and gain significant market share in the mobile device market, our operating results would be adversely affected.Furthermore, our future growth is also dependent on the market acceptance of our VoIP products, a market where we also compete with existing andpotential competitors, many of whom have significantly greater financial, technical, manufacturing, marketing, sales and distribution resources andmanagement expertise than we do. 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 other companies and couldface competition from new market entrants. We also compete against solutions internally developed by OEMs, as well as combined third-party softwareand hardware systems. If we are unable to compete effectively, we may not succeed in achieving any design wins and may have to lower our pricing togain 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 end products of ourOEM 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 a result,we may incur significant expenditures on the development of a new product without any assurance that an OEM will select our product for design into itsown product and without this “design win” it becomes significantly difficult to sell our products. This is especially the case for our HDClear productfamily. Moreover, even after an OEM agrees to design our products into its end products, the design cycle is long and may be delayed due to factorsbeyond our control which may result in the end product incorporating our products not to reach the market until long after the initial “design win” withthe OEM. From initial product design-in to volume production, many factors could impact the timing and/or amount of sales actually realized from thedesign-in. These factors include, but are not limited to, changes in the competitive position of our technology, our customers’ financial stability, and ourability 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. -13- 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 notachieve adequate 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 20% of our total revenues for 2014, 19% for 2013 and 21% for 2012. 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 limited numberof customers. One customer, Panasonic, has continually accounted for a majority of the sales through Tomen Electronics. Sales to Panasonic throughTomen Electronics generated approximately 15% of our total revenues for 2014, 14% for 2013 and 15% for 2012. The loss of Tomen Electronics as ourdistributor 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. 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 -14- ●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 ourproducts to OEM customers that operate in consumer markets. As a result, our revenues are affected by seasonal buying patterns of consumer productssold by our OEM 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 our productsand 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 pricescould result in decreased revenues even if the volume of products sold increases. Decreasing average selling prices may also require us to sell ourproducts at much lower gross margin than in the past and reduce profitability. Although we have to date been able to partially offset on an annual basisthe declining average selling prices of our products through general operational efficiencies and manufacturing cost reductions by achieving a higherlevel of product integration and improving our yield percentages, there is no guarantee that our ongoing efforts will be successful or that they will keeppace 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 difficultfor us to increase or even maintain our product pricing, which further adversely affects our gross margins. 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,our failure to introduce new engineering processes and mix of products sold. Our gross margins also are affected by the product mix. For example, mature products have lower average gross margins than other products.Therefore, increased sales of certain 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, globalmarket trends such as “over-capacity” problems so that there is a shortage of capacity to fulfill our fabrication needs also may increase our raw materialcosts 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 rapiddeployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity, as well as the lack of growth inproducts using fixed-line telephony would reduce our total revenues derived from, and unit sales of, cordless fixed-line telephony products. Our ability tomaintain our growth will depend on the expansion of our product lines to capitalize on the emerging access methods and on our success in developingand selling a portfolio of “system-on-a-chip” solutions targeted at wider markets, including the intensively competitive mobile devices market. Wecannot assure you that we will succeed in expanding our product lines or portfolio of “system-on-a-chip” solutions, or that they would receive marketacceptance. -15- Furthermore, there is a growing threat from alternative technologies accelerating the decline of the fixed-line telephony market. Thiscompetition comes from mobile telephony, including emerging dual-mode mobile Wi Fi phones and other innovative applications, such as Skype andiChat. Given that we derive a significant amount of revenues from chipsets incorporated into fixed-line telephony products, if we are unable to developnew technologies in 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. Because we have significant international operations, we may be subject to political, economic and other conditions relating to our internationaloperations 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 both 2014 and 2013 and 99% for 2012. Furthermore, wehave material operations in Germany, Hong Kong and India and employ a number of individuals within those foreign operations. As a result, theoccurrence of any negative international political, economic or geographic events, as well as our failure to mitigate the challenges in managing anorganization operating in various countries, could result in significant revenue shortfalls and disrupt our workforce within our foreign operations. Theseshortfalls and disruptions could cause our business, financial condition and results of operations to be harmed. Some of the risks of doing businessinternationally 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; -16- ●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 HDClear products. Our inability to penetrate themarket or lack of customer acceptance of these products may harm our business and potential growth. 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 ofthose standards, will be a significant factor in maintaining or improving our competitive position and prospects for growth. If new industry standardsemerge, our products or our customers’ products could become unmarketable or obsolete, and we could lose market share. We may also have to incursubstantial unanticipated costs to comply with these new standards. If our product development and improvements take longer than planned, theavailability of our products would be delayed. Any such delay may render our products obsolete or unmarketable, which would have a negative impacton our ability to sell our 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; -17- ●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, we aresubject 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. Inaddition, 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 we areunable to obtain satisfactory replacements to fulfill customer orders on a timely basis and in a cost-effective manner. Moreover, we do not have long termcapacity guarantee agreements with our foundries and with other third party suppliers. In addition, as TSMC produces a significant portion of our integrated circuit products and ASE tests and assembles a significant portion of them,earthquakes, aftershocks or other natural disasters in Asia, or adverse changes in the political situation in Taiwan, could preclude us from obtaining anadequate supply of wafers to fill customer orders. Such events could harm our reputation, business, financial condition, and results of operations. 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 to accuratelyforecast and plan future business activities and make reliable projections. Moreover, we operate within the semiconductor industry which experiencessignificant fluctuations in sales and profitability. Downturns in the semiconductor industry are characterized by diminished product demand, excesscustomer inventories, accelerated erosion of prices and excess production capacity. These factors could cause substantial fluctuations in our revenues andin our results of operations. If global economic and market conditions remain uncertain or deteriorate, we could experience a material adverse impact onour business and results of operations. -18- Because the manufacture of our products is complex, the foundries on which we depend may not achieve the necessary yields or product reliability thatour 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. As we depend on independent subcontractors, located in Asia, to assemble and test our semiconductor products, we are subject to additional risks thatmay 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 allocateto us a sufficient portion of their capacity to meet our needs in a timely manner. Our future success also depends on the financial viability of ourindependent subcontractors. If the capital structures of our independent subcontractors weaken, we may experience product shortages, production delays,quality assurance problems, increased manufacturing costs, and/or supply chain disruption. All of this could ultimately lead to a loss of sales of ourproducts, 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 are increasinglyfocused on cash preservation and tighter inventory management. Based on these trends, our customers are reluctant to place orders with normal leadtimes, and we are seeing a shift to shorter lead-times and rush orders. However, we place orders with our suppliers based on forecasts of our customers’demand and, in some instances, may establish buffer inventories to accommodate anticipated demand. Our forecasts are based on multiple assumptions,each of which may introduce error into our estimates. If we overestimate our customers’ demand or our customers overestimate their demand, we mayallocate 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 excess or obsoleteinventory, which would reduce our profit margins and adversely affect our financial results. Conversely, if we underestimate our customers’ demand orour customers underestimate their demand and insufficient manufacturing capacity is available, we could forego revenue opportunities and potentiallylose market share and damage our customer relationships. -19- Furthermore, we maintain inventory, or hubbing, arrangements with certain of our customers. Pursuant to these arrangements, we deliver productsto a customer or a designated third party warehouse based upon the customer’s projected needs, but do not recognize product revenue unless and until thecustomer reports that it has removed our product from the warehouse to incorporate into its end products. Since we own inventory that is physicallylocated in a third party’s warehouse, our ability to effectively manage inventory levels may be impaired, causing our total inventory turns to decrease,which could increase expenses associated with excess and obsolete product and negatively impact our 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 or reductions in theirpurchasing 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,we may not succeed in attracting new customers as these potential customers may have pre-existing relationships with our current or potentialcompetitors. This trend also may promote the consolidation of OEMs located in North America, Europe and Japan with OEMs located in Southeast Asia,which may reduce the number of our potential customers and reduce the volume of chipsets the combined OEM customer may purchase from us.However, as is common in our industry, we typically do not enter into long term contracts with our customers in which they commit to purchase productsfrom us. The loss of any of our OEM customers may have a material adverse effect on our results of operations. To attract new customers, we may be facedwith intense price 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 ourchipsets rather than chipsets of our competitors. Our inability to retain an OEM customer once such customer chooses to outsource production wouldhave a material 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 redesign ourproducts 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. -20- 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 could increase ouroperating 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, 2014, 204 of our 312employees were located in Israel, including 138 out of 195 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 majorhostilities involving Israel, or the interruption or curtailment of trade between Israel and its present trading partners, could significantly harm ourbusiness, operating results 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 ofits Arab 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 employeesare currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called for active military duty at any time.Although we have operated effectively under these requirements since our inception, we cannot predict the effect of these obligations on the company inthe 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 militaryservice. -21- The tax benefits available to us under Israeli law require us to meet several conditions, and may be terminated or reduced in the future, which wouldincrease 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, wewould be subject to corporate tax in Israel at the standard corporate tax rate (26.5% for 2015) and could be required to refund tax benefits (including withinterest and adjustments for inflation based on the Israeli consumer price index) already received. Our average tax rate for our investment programs alsomay change in the future due to circumstances outside of our control, including changes to legislation. For example, in July 2013, the Investment Lawwas amended whereby the reduction of corporate tax rate for preferred enterprises was eliminated such that such enterprises, which are subject to the newlaw, would be subject to a 16% tax rate. Therefore, we cannot provide any assurances that our average tax rate for our investment programs will continuein the future at their current levels, if at all. The termination or reduction of certain programs and tax benefits or a requirement to refund tax benefits(including with interest and adjustments for inflation based on the Israeli consumer price index) already received may have a material adverse effect onour business, operating results and financial condition. We may engage in future acquisitions that could dilute our stockholders’ equity and harm our business, results of operations and financial condition. We have pursued, and will continue to pursue, growth opportunities through internal development and acquisition of complementarybusinesses, products and technologies. We are unable to predict whether or when any other prospective acquisition will be completed. The process ofintegrating an acquired business may be prolonged due to unforeseen difficulties and may require a disproportionate amount of our resources andmanagement’s attention. We cannot assure you that we will be able to successfully identify suitable acquisition candidates, complete acquisitions,integrate acquired businesses into our operations, or expand into new markets. Further, once integrated, acquisitions may not achieve comparable levelsof revenues, profitability or productivity as our existing business or otherwise perform as expected. The occurrence of any of these events could harm ourbusiness, financial condition or results of operations. Future acquisitions may require substantial capital resources, which may require us to seekadditional debt or equity 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. -22- 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 similartechnology or functionality as our products, or they may attempt to copy or reverse engineer aspects of our product line or to obtain and use informationthat we regard as proprietary. Moreover, the laws of certain countries in which our products are or may be developed, manufactured or sold, includingHong 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 the unauthorized use of our products is difficult and may result in significant expense to us and could divert the efforts of our technical andmanagement personnel. Even if we spend significant resources and efforts to protect our intellectual property, we cannot assure you that we will be able toprevent misappropriation of our technology. Use by others of our proprietary rights could materially harm our business and expensive litigation may benecessary in the future to enforce our intellectual property rights. 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 or bugs,our credibility and the market acceptance and sales of our products could be significantly harmed. Furthermore, the nature of our products may also delaythe detection of any such error or defect. If our products contain material errors, defects and bugs, then we may be required to expend significant capitaland resources to alleviate these problems. This could result in the diversion of technical and other resources from our other development efforts. Anyactual or perceived problems or delays may also adversely affect our ability to attract or retain customers. Furthermore, the existence of any defects, errorsor failures in our products could lead to product liability claims or lawsuits against us or against our customers. We generally provide our customers witha standard warranty for our products, generally lasting one year from the date of purchase. Although we attempt to limit our liability for product defects toproduct replacements, we may not be successful, and customers may sue us or claim liability for the defective products. A successful product liabilityclaim could result in substantial cost and divert management’s attention and resources, which would have a negative impact on our financial conditionand 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. -23- Our executive officers and key personnel are critical to our business, and because there is significant competition for personnel in our industry, we maynot 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.Because our products are specialized and complex, our success depends upon our ability to attract, train and retain qualified personnel, includingqualified technical, marketing and sales personnel. However, the competition for personnel is intense and we may have difficulty attracting and retainingsuch personnel. 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 and haveoperations in Germany, Hong Kong and India. Significant judgment is required in determining our worldwide provision for income taxes and other taxliabilities. In the ordinary course of a global business, there are many intercompany transactions and calculations where the ultimate tax determination isuncertain. We are regularly under audit by tax authorities and as an example, we are now under audit for one of our subsidiaries, the outcome of whichcould have material adverse impact on our financial condition. Our intercompany transfer pricing may be reviewed by the U.S. Internal Revenue Serviceand by foreign tax jurisdictions. Although we believe that our tax estimates are reasonable, due to the complexity of our corporate structure, the multipleintercompany transactions and the various tax regimes, we cannot assure you that a tax audit or tax dispute to which we may be subject will result in afavorable outcome for us. If taxing authorities do not accept our tax positions and impose higher tax rates on our foreign operations, our overall taxexpenses 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 2014 and 2013 and 99% for 2012. Although most of our revenue and expenses are transactedin U.S. dollars, we may be exposed to currency exchange fluctuations in the future as business practices evolve and we are forced to transact business inlocal currencies. Moreover, part of our expenses in Israel are paid in Israeli currency, which subjects us to the risks of foreign currency fluctuationsbetween the U.S. dollar and the New Israeli Shekel (NIS) and to economic pressures resulting from Israel’s general rate of inflation. Our primary expensespaid in NIS are employee salaries and lease payments on our Israeli facilities. Furthermore, a portion of our expenses for our European operations are paidin the Euro, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and the Euro. Our primary expenses paid in the Euro areemployee salaries, lease and operational payments on our European facilities. As a result, an increase in the value of the NIS and Euro in comparison tothe U.S. dollar could increase the cost of our technology development, research and development expenses and general and administrative expenses, allof which could harm our operating profit. From time to time, we use derivative instruments in order to minimize the effects of currency fluctuations, butour hedging positions may be partial, may not exist at all in the future or may not succeed in minimizing our foreign currency fluctuation risks. Ourfinancial results may be harmed if the trend relating 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 cannot be certainthat 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. -24- 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. Ourprincipal competitors in the VoIP market include Broadcom, Dialog Semiconductors, Infineon, Texas Instruments and new Taiwanese IC vendors. 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 andreduce our 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 operating results. Our future effective tax rates could be adversely affected by earnings being lower than anticipated in countries where we have lower statutoryrates and higher than anticipated in countries where we have higher statutory rates, by changes in the valuation of our deferred tax assets and liabilities, orby changes in tax laws, regulations, accounting principles or interpretations thereof. In addition, we are subject to the periodic examination of our incometax returns by the IRS and other tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determinethe adequacy of our provision for income taxes, as an example, we are now under audit for one of our subsidiaries. The outcome from this examinationmay 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 toadjust our production schedules is highly dependent on this network. Any delay in the implementation of, or disruption in the transition to, new orenhanced processes, systems or controls, could adversely affect our ability to manage customer orders and manufacturing schedules, as well as generateaccurate financial and management information in a timely manner. These systems are also susceptible to power and telecommunication disruptions andother system 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 mayresult 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 requireus to 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 reduceour costs. Although this migration to smaller geometry process technologies has helped us to offset the declining average selling prices of our products,this effort 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. -25- 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 and we do not currently intend to extend this lease. Our operations in Israel are located in leased facilities, with the primary leased facility ofapproximately 45,359 square feet located in Herzeliya Pituach, Israel. These facilities are leased through November 2018. Our subsidiary in Tokyo, Japanhas a lease that terminates in December 2017. Our subsidiary in Nuremberg, Germany has a lease that terminates in December 2016. Our subsidiary inScotland has 2 lease agreements for its facilities, one with automatic renewals on a month-to-month basis and another that terminates in December 2019.Our subsidiary in India has sublease agreements with NXP for its facilities that terminate in March 2017. Our subsidiary in Shenzhen, China has a leasethat terminates in September 2016. Our subsidiary in Hong Kong entered into a lease agreement that is effective until November 2016. We believe thatour existing facilities are adequate to meet our needs for the immediate future. -26- 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 dispositionof which 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 PURCHASES OFEQUITY SECURITIES. Our common stock, par value $0.001, trades on the NASDAQ Global Select Market (NASDAQ symbol “DSPG”). The following table presents forthe periods indicated the high and low sales prices for our common stock as reported by the NASDAQ Global Select Market: Year EndedDecember 31, 2013 High LowFirst Quarter 8.33 5.63Second Quarter 8.76 6.95Third Quarter 8.75 6.3Fourth Quarter 10.14 6.78 Year EndedDecember 31, 2014 High LowFirst Quarter 10.32 8.31Second Quarter 9.21 7.90Third Quarter 9.48 8.30Fourth Quarter 11.48 8.83 As of March 6, 2015, there were 22,292,670 shares of common stock outstanding. As of March 10, 2015, the company had approximately 30holders of record and we believe greater than 2,100 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 8, 2015. 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 There were no repurchases of our common stock pursuant to our board authorized share repurchase program during the fourth quarter of 2014. 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 theapproximately 308,000 shares that were available for repurchase under the Board’s prior authorizations. At December 31, 2014, 1,203,601 shares of our common stock remained available for repurchase under our board authorized share repurchaseprogram. The repurchase program is being affected from time to time, depending on market conditions and other factors, through open market purchasesand privately negotiated transactions. 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 8, 2015. 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 Company underthose statutes, the Stock Performance Graph shall not be deemed filed with the United States Securities and Exchange Commission and shall not bedeemed 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, 2009 and ends on December 31,2014, the end of our last fiscal year. The graph assumes an investment of $100 on December 31, 2009, 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, 2014, 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, 2014 2013 2012 2011 2010 (U.S. dollars in thousands) Statements of Operations Data: Revenues $143,036 $151,063 $162,790 $193,861 $225,482 Cost of revenues 85,992 91,237 101,660 123,734 137,571 Gross profit 57,044 59,826 61,130 70,127 87,911 Operating expenses Research and development, net 33,468 35,000 42,539 53,244 55,588 General, administrative, sales and marketing 22,446 23,085 24,875 29,417 31,561 Amortization of intangible assets 1,573 1,672 2,310 7,972 9,975 Restructuring cost (income) - - 2,008 (170) 463 Total operating expenses 57,487 59,757 71,732 90,463 97,587 Operating income (loss) (443) 69 (10,602) (20,336) (9,676)Financial and other income Financial income, net 1,204 2,457 2,388 1,885 1,468 Other income from remeasurement of investment in abusiness Combination - - - 1,343 - Income (loss) before taxes 761 2,526 (8,214) (17,108) (8,208)Income tax benefit (2,841) (150) (172) (866) (783)Net income (loss) $3,602 $2,676 $(8,042) $(16,242) $(7,425)Weighted average number of Common Stock outstandingduring the period used to compute basic net earnings (loss)per share 21,968 22,249 21,950 23,247 23,229 Weighted average number of Common Stock outstandingduring the period used to compute diluted net earnings(loss) per share 22,954 22,906 21,950 23,247 23,229 Basic net income (loss) per share $0.16 $0.12 $(0.37) $(0.70) $(0.32)Diluted net income (loss) per share $0.16 $0.12 $(0.37) $(0.70) $(0.32)Balance Sheet Data: Cash, cash equivalents, marketable securities and bankdeposits, including restricted deposits $124,944 $127,712 $120,339 $117,909 $139,761 Working capital $39,592 $42,301 $49,102 $60,010 $72,073 Total assets $191,179 $192,265 $185,182 $197,625 $222,555 Total stockholders’ equity $146,623 $147,411 $142,227 $148,624 $167,103 -31- Year EndedDecember 31, Fiscal Years by 2014 2013 Quarter Quarterly Data: 4 3rd 2nd 1st 4th 3rd 2nd 1st (Unaudited, U.S. dollars in thousands, except per share amount) Revenues $37,159 $36,715 $36,276 $32,886 $35,340 $35,381 $40,692 $39,650 Gross profit $14,721 $14,528 $14,781 $13,014 $14,153 $13,805 $16,162 $15,706 Net income (loss) $2,729 $773 $1,088 $(988) $356 $398 $750 $1,172 Net income (loss) per share —Basic $0.13 $0.04 $0.05 $(0.04) $0.02 $0.02 $0.03 $0.05 Net income (loss) per share —Diluted $0.12 $0.03 $0.05 $(0.04) $0.02 $0.02 $0.03 $0.05 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. A majority of our revenues is derived from products targeted fordigital cordless telephony. Such revenues currently represent approximately 79% of our total revenues for 2014. Our revenues were $143.0 million for 2014, a decrease of 5% in comparison to 2013. The decrease for 2014 was primarily as a result of decreasedsales in our DECT and 2.4GHz cordless telephony products, offset to some extent by an increase in sales of our VoIP, home gateways and homeautomation products. Revenues derived from the sale of cordless telephony products represented 79% of our total revenues for 2014, as compared to 85%of our total revenues for 2013. Sales of our DECT 6.0 products for the U.S. market decreased from $54.5 million for 2013 to $47.5 million for 2014. Salesof our DECT products for the European market decreased from $58.3 million for 2013 to $53.4 million for 2014. Revenues derived from the sale of DECTproducts represented 82% and 84% of our total revenues for 2014 and 2013, respectively. Our gross margin increased to 39.9% of our total revenues for2014 from 39.6% for 2013, primarily due to (i) an improvement in production yield and direct contribution of certain of our products as a result of lowercost structure for production of such products, and (ii) a change in the mix of products sold and customers. Our operating loss was $0.4 million for 2014, as compared to an operating income of $0.1 million for 2013. The decrease in operating income in2014 compared to 2013 was mainly as a result of a decrease in total revenues during 2014 as compared to 2013, offset to some extent by a decrease inresearch and development, and general and administrative expenses and an improvement in gross margins. Our operating expenses decreased by 4% to$57.5 million for 2014, as compared to $59.8 million for 2013, mainly as a result of the above mentioned decrease in research and development, andgeneral and administrative expenses. -32-th Notwithstanding our return to revenue growth in the second half of 2014 and our success in reducing our operating expenses, we expect that ourfinancial condition will continue to be challenged by the steady decline of the cordless telephony market and the continuing decline in the averageselling prices of our cordless telephony products. The cordless telephony market is undergoing a challenging period. With the rapid deployment of newcommunication access methods, including mobile, wireless broadband, cable and other connectivity, the traditional cordless telephony market usingfixed-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 be significantly affected by the outcome of the competition between cellular phone operators and fixed-line operatorsfor the provision of residential communication. A significant majority of our revenues are currently generated from sales of chipsets used in cordlessphones that are based on fixed-line telephony. If we are unable to develop new technologies to address alternative connectivity methods, our businesscould 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 intend to leverage our strong technology base and customer relationships to maximize growth and revenueopportunities of these new products. We see evidence that our past research and development investments in new technologies are beginning to materialize. We have achieved anumber of design wins for our new products. Commercial shipments for some products have begun with more shipments to occur during 2015. Aggregaterevenues derived from our new products were 20.8%, 14.7% and 11.9% of our total revenues for 2014, 2013 and 2012, respectively. Based on a strongpipeline of design wins, our current mix of new products and anticipated commercialization schedules of customers incorporating our new products, weanticipate annual revenues generated from our new products to increase significantly in 2015 as compared to 2014, including generating revenues fromproducts in our Mobile segment in 2015. Moreover, we believe we are well positioned to achieve our 2015 key design and financial milestones, as well asa return to revenue growth for the full year 2015. 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 started mass shipments for ourHDClear product for mobile devices. Furthermore, although our new products targeted for home control & automation and enterprise VOIP solutions aregradually being introduced into the market, market adoption of such products is at early stages and may require us to increase our research anddevelopment spending to capitalize on opportunities in these markets. As an example, we expect our research and development spending to increase in2015 as compare to 2014. Although we have achieved a number of design wins with top-tier OEMs for new products, revenue generated from thecommercialization of new products is a measured process as there is generally a long lead time from a design win to commercialization. From initialproduct design win to volume production, many factors could impact the timing and/or amount of sales actually realized from the design win. In additionto general price sensitive and price erosion in the markets we operate, the introduction of new productions may accelerate price erosion of older products.As a result, we expect the market to remain price sensitive for our traditional cordless telephony products and expect that price erosion and the decrease inthe average selling prices of such products to continue. Furthermore, various other factors, including increases in the cost of raw materials andcommodities and our suppliers passing such increases onto us, increases in silicon wafer costs and increases in production, assembly and testing costs,and shortage of capacity to fulfill our fabrication, assembly and testing needs, all may decrease our gross profit and harm our ability to grow our revenuesin future periods. As of December 31, 2014, our principal source of liquidity consisted of cash and cash equivalents of $20.5 million and marketable securities andshort term deposits of $103.8 million, totaling $124.3 million. Critical Accounting policies Our consolidated financial statements are prepared in accordance with U.S. GAAP. In connection with the preparation of the financial statements,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 and other factors thatmanagement believes to be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviews ouraccounting 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 and estimates, andsuch differences could be material. -33- Our significant accounting policies are discussed in Note 2, Significant Accounting Policies, of the notes to our consolidated financialstatements for the year ended December 31, 2014. 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. Description Judgments & Uncertainties Effect if Actual Results Differfrom Assumptions Tax Contingencies:Like most companies, domestic and foreigntax authorities periodically audit our incometax returns. These audits include questionsregarding our tax filing positions, includingthe timing 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 managementmust use judgment to estimate the exposureassociated with 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 likelythan not that the position will be sustained onaudit, including resolution of related appeals orlitigation processes, if any. The second step isto measure the tax benefit as the largest amountwhich is more than 50% likely of beingrealized upon ultimate settlement. Although management believes that its estimatesand judgments about tax contingencies arereasonable, actual results could differ, and wemay be exposed to gains or losses that could bematerial. To the extent we prevail in matters forwhich reserve has been established, or arerequired to pay amounts in excess of the reserve,our effective tax rate for a given financialstatement period could be materially affected.An unfavorable tax settlement would require useof our cash and result in an increase in oureffective tax rate for the year of resolution. Afavorable tax settlement would be recognized asa reduction in our effective tax rate for the yearof resolution. Tax Valuation Allowance:We have a valuation allowance for some of ourdeferred tax assets based on the determinationthat it is more likely than not that some ofthese assets will not be realized. Our management inherently must makeestimates to determine the ultimate realizationof these assets. The estimate of our taxvaluation allowance contains uncertaintybecause management must use judgment toestimate the expected results for tax purposes. Although management believes that its estimatesand judgments about expected results for taxpurposes are reasonable, actual results coulddiffer, and we may be required to record anadditional valuation allowance for our deferredtax assets. -34- Description Judgments & Uncertainties Effect if Actual Results Differ from Assumptions Valuation of Long-Lived Assets, IntangibleAssets and Goodwill :Goodwill represents the excess of purchaseprice over the fair value of identifiable netassets acquired in business combination. Thegoodwill on our consolidated balance sheet isa result of our acquisition of BoneTone. Theidentifiable intangible asset included on ourconsolidated balance sheet is technologyacquired in the BoneTone acquisition. We perform our annual impairment analysis ofgoodwill and indefinite-lived intangible assets(such as technology) in the fourth quarter ofeach fiscal year, or more often if there areindicators of impairment. We reviewintangible assets with finite useful life forpotential impairment when events or changesin circumstances indicate the carrying value ofthose intangible assets may be impaired. Wemay obtain an appraisal from an independentvaluation firm to determine the amount ofimpairment, if any. In addition to the use of anindependent valuation firm, we performinternal valuation analyses and consider otherpublicly available market information. We determine fair value using widely acceptedvaluation techniques, including discountedcash flow and market multiple analyses. Thesetypes of analyses require us to makeassumptions and estimates regarding industryeconomic factors and the profitability of futurebusiness strategies. It is our policy to conductimpairment testing based on our currentbusiness strategy in light of present industryand economic conditions, as well as futureexpectations. If management's estimates or related assumptionschange in the future, we may be required torecord impairment charges for our intangibleassets. -35- Description Judgments & Uncertainties Effect if Actual Results Differ from Assumptions Contingencies and Other Accrued Expenses:We are from time to time involved in legalproceedings and other claims. We are requiredto assess the likelihood of any adversejudgments or outcomes to these matters, aswell as potential ranges of probable losses. A determination of the amount of reserverequired, if any, for any contingencies andaccruals is made after careful analysis of eachindividual issue. The required reserve maychange due to future developments, such as achange in the settlement strategy in dealingwith any contingencies, which may result inhigher net losses. 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 costof the inventory or fair market value throughthe establishment of write-off and inventoryloss reserve. We have not made any changes inthe accounting methodology used to establishour markdown or inventory loss reservesduring the past four fiscal years. Our write-off represents the excess of thecarrying value, typically cost, over the amountwe expect to realize from the ultimate sale orother disposal of inventory based upon ourassumptions regarding forecasted consumerdemand, the promotional environment,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-offthat could be material. Equity-Based Compensation Expense:Equity-based compensation expense ismeasured on the grant date based on the fairvalue of the award and is recognized as anexpense over the requisite service periods. Determining the fair value of equity-basedawards on the grant date requires the exerciseof judgment, including the amount of equity-based awards that are expected to be forfeited.We consider many factors when estimatingexpected forfeitures, including types of awards,employee class, and historical experience.Actual results, and future changes in estimates,may differ substantially from our currentestimates. We estimate the fair value of equity-basedawards using a binomial option pricing model.The fair value of an award is affected by ourstock price on the date of grant as well as otherassumptions, including expected stock pricevolatility and the expected term of the equity-based award. The risk-free interest rate is basedon the yield from U.S. treasury bonds with anequivalent term. Expected volatility iscalculated based upon actual historical stockprice movements. The expected term of theequity-based award granted is based uponhistorical experience and represents the periodof time that the award granted is expected to beoutstanding. Our expected dividend rate is zerosince we do not currently pay cash dividendsand do not anticipate doing so in theforeseeable future. Although management believes that theirestimates and judgments about equity-basedcompensation expense are reasonable, actualresults could differ. -36- Description Judgments & Uncertainties Effect if Actual Results Differ from Assumptions Marketable Securities:Management determines the appropriateclassification for our investments in debt andequity securities at the time of purchase andre-evaluates such determination at eachbalance sheet date. The marketable securities are periodicallyreviewed for impairment. If it is concluded thatany of these investments are impaired,management determines whether suchimpairment is “other-than-temporary.” Factorsthat are considered in making such adetermination include the duration andseverity of the impairment, the reason for thedecline in value and the potential recoveryperiod, and our intent to sell, or whether it ismore likely than not that we will be required tosell, the investment before recovery of its costbasis. If any impairment is considered “other-than-temporary,” the investment is writtendown to its fair value and a correspondingcharge is recorded in financial income, 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 conditionsand uncertainty, management’s judgments couldprove to be wrong, and companies withrelatively high credit ratings and solid financialconditions may not be able to fulfill theirobligations and thereby cause other-than-temporary losses. Results of Operations: Total Revenues. Our total revenues were $143.0 million for 2014, $151.1 million for 2013 and $162.8 million for 2012. The decrease of 5.3% inrevenues for 2014 as compared to 2013 and the decrease of 7.2% in revenues for 2013 as compared to 2012 were both primarily as a result of decreasedsales of our 2.4GHz and DECT cordless telephony products, offset to some extent by increased sales of VoIP, home gateways and home automationproducts. Sales of our digital cordless telephony products were $113.2 million, $128.8 million and $143.4 million for the years ended 2014, 2013 and2012, respectively, representing approximately 79%, 85% and 88% of our total revenues for 2014, 2013 and 2012, respectively. Sales of DECT products,which include cordless telephony, home gateways and home automation products, were $117.1 million, $126.3 million and $133.9 million for the yearsended 2014, 2013 and 2012, respectively, representing approximately 82%, 84% and 82% of our total revenues for 2014, 2013 and 2012, respectively.The decrease of 7% in absolute dollars of DECT sales in 2014 as compared to 2013 and the decrease of 6% in absolute dollars of DECT sales in 2013 ascompared to 2012 were mainly attributable to a decline in market demands and a decrease in average selling prices of our DECT cordless telephonyproducts. Sales of our DECT 6.0 products for the U.S. end market were $47.5 million, $54.5 million and $69.1 million for 2014, 2013 and 2012,respectively, representing 33%, 36% and 42% of our total revenues for 2014, 2013 and 2012, respectively. Sales of our DECT products for the Europeanmarket were $53.4 million, $56.7 million and $58.3 million for 2014, 2013 and 2012, respectively, representing 37%, 38% and 36% of our total revenuesfor 2014, 2013 and 2012, respectively. -37- 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, 2014 2013 2012 United States $4,702 $4,342 $2,028 Hong Kong 79,622 86,090 84,736 Japan 31,261 34,377 51,033 Europe 6,787 7,370 7,429 China 6,568 6,999 6,270 Taiwan 9,077 7,093 6,496 Other 5,019 4,792 4,797 Total revenues $143,036 $151,063 $162,790 Sales to our customers in Hong Kong decreased for 2014 as compared to the same period of 2013, representing a decrease of 8% in absolutedollars. The decrease in our sales to Hong Kong for the comparable periods resulted mainly from the decrease in sales to Vtech Holding Ltd. (“Vtech”) of6% when comparing 2014 to 2013 and a decrease in sales to CCT Telecom Holdings Ltd. (“CCT”) of 18% when comparing 2014 to 2013. The decreasein our sales to Japan for the comparable periods resulted mainly from (i) a decrease in sales to the Japanese domestic market, representing a 6% decrease inabsolute dollars for 2014 as compared to 2013, and (ii) a decrease in sales to Uniden America Corporation (“Uniden”), representing a 52% decrease inabsolute dollars for 2014, as compared to 2013. 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 an increase insales to Shenzhen Guo Wei Electronics Ltd. (“Guo Wei Electronics”) of 67% when comparing 2013 to 2012 and an increase in sales to CCT of 8% whencomparing 2013 to 2012. The increase in our sales to Hong Kong for the comparable periods was offset to some extent by a decrease in sales to Vtech of6% when comparing 2013 to 2012. Sales to our customers in Japan decreased for 2013 as compared to the same period of 2012, representing a decrease of33% 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 Uniden,representing a 67% decrease in absolute dollars for 2013, as compared to 2012. 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 35%, 36% and 35% of our total revenues for 2014, 2013and 2012, respectively. -38- Revenues derived from sales through our largest distributor, Japan-based Tomen Electronics Corporation (“Tomen Electronics”), accounted for20% of our total revenues for 2014, as compared to 19% for 2013 and 21% for 2012. Sales to Uniden represented 2%, 4% and 11% of our total revenuesfor 2014, 2013 and 2012, 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 15%, 14% and 15% of our total revenues for2014, 2013 and 2012, respectively. Significant Products. Revenues from our digital cordless telephony products, represented 79%, 85% and 88% of our total revenues for 2014,2013 and 2012, respectively.. We believe that sales of digital cordless telephony products will continue to represent a substantial precentage of ourrevenues for 2015. We believe that the rapid deployment of new communication 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, for the short and long term. Revenues from our VoIP products represented 10%, 6% and 5% of our total revenues for 2014, 2013 and 2012, respectively. Gross Profit. Gross profit as a percentage of revenues was 39.9% for 2014, 39.6% for 2013 and 37.6% for 2012. The increase in our gross profitfor 2014 as compared to 2013 was primarily due to (i) an improvement in production yield and direct contribution of certain of our products as a result oflower cost structure for production of such products, and (ii) a change in the mix of products sold and customers, offset to some extent by the decrease intotal revenues. The increase in our gross profit for 2013 as compared to 2012 was primarily due to (i) a decrease in the provision for slow or obsoleteinventories, (ii) an improvement in production yield of certain of our products, (iii) different mix of products and customers, and (iv) a reduction inmanufacturing and other related operational expenses such as shipping, engineering, depreciation and payroll expenses. As gross profit reflects the sale of chips and chipsets that have different margins, changes in the mix of products sold and customers haveimpacted and will continue to impact our gross profit in future periods. Our gross profit may decrease in the future due to a variety of factors, includingthe continued decline in the average selling prices of our products, changes in the mix of products sold and customers, our failure to achieve costreductions, roll-out of new products in any given period, our success in introducing new engineering processes to reduce manufacturing costs, increasesin the cost of raw materials such as gold, oil and silicon wafers, and increases in production, assembly and testing costs. Moreover, our suppliers may passthe increase in the cost of raw materials and commodities onto us which would further reduce the gross margins of our products. There are no guaranteesthat our ongoing efforts in cost reduction and yield improvements will keep pace with the anticipated continuing decline in average selling prices of ourproducts. 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. Operating Expenses. Our operating expenses were $57.5 million for 2014, $59.8 million for 2013 and $71.7 million for 2012. The decrease inoperating expenses for 2014 as compared to 2013 was primarily attributable to (i) a decrease in research and development expenses in the amount of $1.5million in 2014 as compared to 2013, and (ii) a decrease in general and administrative expenses in the amount of $1.3 million in 2014 as compared to2013. These decreases were offset to some extent by an increase in sales and marketing expenses in the amount of $0.6 million in 2014 as compared to2013. The decrease in operating expenses for 2013 as compared to 2012 was primarily attributable to (i) a decrease in research and developmentexpenses 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 in2013 as compared to 2012, (iii) a decrease in restructuring expenses in the amount of $2.0 million, which were related to our operational restructuringplans that were initiated during the second and third quarters of 2012, and (iv) a decrease in the amortization cost for intangible assets related mostly tothe acquisition of the CIPT Business in the amount of $0.6 million. These decreases were offset to some extent by an increase in general andadministrative expenses in the amount of $1.2 million in 2013 as compared to 2012 relating primarily to the proxy contest. -39- Our operating loss was $0.4 million for 2014, as compared to an operating income of $0.1 million for 2013 and an operating loss of $10.6million for 2012. The decrease in operating income in 2014 as compared to 2013 was mainly as a result of a decrease in total revenues during 2014 ascompared to 2013, offset to some extent by a decrease in research and development, and general and administrative expenses, and an improvement ingross margins. The decrease in operating losses for 2013 as compared to 2012 was mainly due to an increase in gross margins and a decrease in operatingexpenses as noted above, offset to some extent by a decrease in revenues in 2013 as compared to 2012. Research and Development Expenses. Our research and development expenses, net, were $33.5 million for 2014, $35.0 million for 2013 and$42.5 million for 2012. The decrease for 2014 in research and development expenses, net, as compared to 2013, was mainly due to (i) a decrease inprojects-related expenses (mainly tapeouts) in the amount of $1.4 million, (ii) a decrease in depreciation expenses in the amount of $0.5 million, and (iii)funding received from the Israeli Office of the Chief Scientist (“OCS”) in the amount of $3.0 million for 2014, following the receipt of an approval fromthe OCS during the first quarter of 2014 for 2014 research and development programs and some residual funding that was approved for 2013 programs.During 2013, such funding recognized in research and development expenses amounted to $2.1 million. The above mentioned OCS funding wasrecognized as a deduction of our research and development expenses, net. The decrease in research and development expenses, net, for 2014, as comparedto the comparable period of 2013, was offset to some extent by (i) an increase in equity-based compensation expenses for 2014 in the amount of $0.5million, and (ii) an increase in labor and employees related expenses in the amount of $1.1 million for 2014 as compared to 2013, mainly as a result of thedevaluation of the U.S. dollar against the NIS, which increased our Israeli employees labor expenses. As a result of receipt of OCS funding, royalties may be payable to the OCS in the future based on a percentage of revenues derived from sales ofproducts whose development was facilitated by the OCS funding. The obligation to pay these royalties is contingent on actual sales of these products. The decrease for 2013 in research and development expenses, net, as compared to 2012, was mainly due to (i) the execution of two restructuringplans during the second and third quarters of 2012, which reduced the number of our research and development employees and labor contractors, whichreduced the related payroll expenses for 2013 by $3.3 million (offset to some extent by the devaluation of the U.S. dollar against the NIS for 2013, ascompared to the same period of 2012, which increased our payroll expenses), (ii) a decrease in projects-related expenses (mainly IPs and CAD tools) in theamount of $1.3 million, (iii) a decrease in equity-based compensation expenses for 2013 in the amount of $0.6 million, (iv) a decrease in other expenses(mainly depreciation, facilities and IT expenses allocated to our research and development expenses, net) in the amount of $1.4 million, and (v) anincrease in funding received from the OCS in 2013 in comparison to 2012 in the amount of $1.7 million, following the receipt of an approval from theOCS during 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 tapeout expenses in the amount of $1.3 million. Our research and development expenses, net, as a percentage of our total revenues were 23% for 2014 and 2013 and 26% for 2012, respectively.The decreases in research and development expenses, net, as a percentage of total revenues for 2013 as compared to 2012 were mainly due to a decreasein research and development expenses, net, for the comparable periods, which was offset to some extent by a decrease in absolute dollars of our totalrevenues for the comparable periods. -40- 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 equipmentand software 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 $11.9 million for 2014, $11.3 million for 2013 and $14.2 million for2012. The increase in sales and marketing expenses between 2014 and 2013 was mainly attributed to an increase in labor and employee-related expenses,mainly due to an increase in, sales commissions and the devaluation of the U.S. dollar against the NIS, which increased our Israeli employees laborexpenses. The decrease in sales and marketing expenses between 2013 and 2012 was mainly attributed to (i) a decrease in the number of sales andmarketing employees and labor expenses by $2.0 million, (ii) a decrease in commissions paid to distributers as a result of a decrease in revenues by $0.2million, (iii) a decrease in overseas travel expenses and allocated depreciation, facilities and IT expenses by $0.5 million, and (iv) a decrease in equity-based compensation expenses by $0.3 million. Our sales and marketing expenses as a percentage of our total revenues were 8%, 7% and 9% for 2014, 2013 and 2012, respectively. The increasein sales and marketing expenses as a percentage of total revenues for 2014 as compared to 2013 was mainly due to a decrease in absolute dollars of thetotal revenues and an increase in sales and marketing expenses for 2014 as compared to 2013. The decrease in sales and marketing expenses as apercentage of total revenues for 2013 as compared to 2012 was mainly due to a decrease in absolute dollars of sales and marketing expenses, offset tosome 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 $10.5 million, $11.8 million and $10.6 million for 2014,2013 and 2012, respectively. The decrease in general and administrative expenses for 2014 as compared to 2013 was mainly attributed to proxy contestrelated expenses (mainly legal and stockholders related expenses) we incurred during the second quarter of 2013 in the amount of $1.4 million ascompared to no such expenses in 2014. The increase in general and administrative expenses for 2013 as compared to 2012 was mainly attributed to (i) an increase in legal andshareholder relations related expenses by $0.9 million, mainly due to proxy contest related expenses we incurred during the second quarter of 2013 (ii) anincrease in other expenses (mainly expenses related to patent filings and board related expenses) by $0.3 million and (iii) an increase in payroll relatedexpenses in the amount of $0.3 million. The increase in general and administrative expenses for 2013, as compared to the comparable period of 2012, wasoffset to some extent by (x) a decrease in depreciation, facilities and IT expenses allocated to our general and administrative expenses in the amount of$0.2 million and (y) a decrease in accounting expenses by $0.1 million. General and administrative expenses as a percentage of our total revenues were 7%, 8% and 7% for 2014, 2013 and 2012, respectively. Thedecrease in general and administrative expenses in 2014 as a percentage of total revenues as compared to 2013 was due to a decrease in absolute dollarsof general and administrative expenses, offset to some extent by a decrease in total revenues for 2014 as compared to 2013. The increase in general andadministrative expenses in 2013 as a percentage of total revenues as compared to 2012 was due to (i) an increase in absolute dollars of general andadministrative expenses, 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 andlegal fees, expenses related to investor relations as well as facilities expenses associated with general and administrative activities. -41- 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 with ASC 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 factors thatour management uses to evaluate, view and run the company’s business operations, which include, but are not limited to, customer base, homogeneity ofproducts 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, home 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. In this segment, only revenues from cordless telephony products exceeded 10% of our total consolidatedrevenues and amounted to 79%, 85% and 88% of our total revenues for 2014, 2013 and 2012, respectively. 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. No revenues derived from products in the Office segment exceeded 10% of ourtotal consolidated revenues for the years 2014, 2013 and 2012. Mobile - Products for the mobile market that provides voice enhancement, always-on and far-end noise elimination targeted for mobile phoneand mobile headsets and wearable devices that incorporate our noise suppression and voice quality enhancement HDClear technology.Insignificant revenues were derived from this segment for 2014, 2013 and 2012. Segment data: We derive the results of our business segments directly from our internal management reporting system and by using certain allocation methods.The accounting policies we use to derive business segment results are substantially the same as those we use for consolidation of our financial statements.Management measures the performance of each business segment based on several metrics, including earnings from operations. Management uses theseresults, in part, to evaluate the performance of, and to assign resources to, each of the business segments. We do not allocate to our business segmentscertain operating expenses, which we manage separately at the corporate level. These unallocated costs include primarily restructuring charges,amortization of purchased intangible assets, equity-based compensation expenses, proxy contest related expenses incurred during the second quarter of2013 and certain corporate governance costs. -42- 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, 2014, 2013and 2012: Year ended December 31 Revenues Income (loss) from operations 2014 2013 2012 2014 2013 2012 Home $128,690 $142,144 $155,211 $23,438 $25,367 $15,040 Office $14,276 $8,849 $7,579 $(2,805) $(4,656) $(5,156)Mobile $70 $70 $- $(11,983) $(11,040) $(8,585)Total $143,036 $151,063 $162,790 $8,650 $9,671 $1,299 Sales to our customers in the home segment decreased for 2014 as compared to 2013, representing a decrease of 9% in absolute dollars anddecreased for 2013 as compared to 2012, representing a decrease of 8% in absolute dollars. The decrease in our home segment sales for the comparableperiods was mainly attributable to the decline in market demands, and the decrease in the average selling prices, of cordless phones over the comparativeperiods, offset to some extent by an increase in sales of home gateways and home automation products. Sales to our customers in the office segment increased for 2014 as compared to 2013, representing an increase of 61% in absolute dollars. Salesto our customers in the office segment increased for 2013 as compared to 2012, representing an increase of 17% in absolute dollars. The increase in ouroffice segment sales for both comparable periods was mainly due to an increase in our market share of VoIP products and a general increase in marketdemand for VoIP products. The reconciliation of segment operating results information to our consolidated financial information is as follows: Year ended December 31, 2014 2013 2012 Income from operations $8,650 $9,671 $1,299 Unallocated corporate, general and administrative expenses * (2,161) (2,368) (2,600)Restructuring expenses - - (2,008)Proxy contest related expenses - (1,403) - Equity-based compensation expenses (5,359) (4,159) (4,983)Intangible assets amortization expenses (1,573) (1,672) (2,310)Financial income, net 1,204 2,457 2,388 Total consolidated income (loss) before taxes $761 $2,526 $(8,214) *Includes mainly legal, accounting, board of directors and investors relation expenses. Amortization of Intangible Assets. During 2014, 2013 and 2012, we recorded an expense of $1.6 million, $1.7 million and $2.3 million,respectively, relating to the amortization of intangible assets associated with the acquisition of the CIPT Business from NXP B.V. in 2007 and theacquisition of BoneTone in 2011. The sequential decrease is consistent with, and is based on, the original amortization schedule determined followingthe impairment of goodwill and other intangible assets that took place in 2008 in relation to the acquisition of the CIPT Business, offset to some extentby an increase in 2013 in the amortization of intangible assets associated with the acquisition of BoneTone, 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 developmenttool agreements with expiry dates in 2013 and 2014. -43- Financial income, net. Financial income, net, was $1.2 million for 2014, $2.5 million for 2013 and $2.4 million for 2012. The decrease infinancial income, net, for 2014 as compared to 2013 was mainly due to (i) fewer gains realized from sales of certain of our marketable securities in theamount of $0.9 million, and (ii) a lower yield on marketable securities. The increase in financial income, net, for 2013 as compared to 2012 was mainlydue to a profit in the amount of $1.0 million resulting from the sale of certain marketable securities during 2013, as compared to a $0.7 million profitrecorded during 2012. The increase in financial income, net, was offset to some extent by a decrease in interest income received in 2013 compared to2012 in the amount of $0.2 million. Our total cash, cash equivalents, marketable securities and short term deposits, including restricted deposits, were $124.9 million as of December31, 2014, as compared to $127.7 million as of December 31, 2013. Provision for Income Taxes. Our income tax benefit was $2.8 million for 2014, as compared to a tax benefit of $0.2 million for 2013 and a taxbenefit of $0.2 million for 2012. The income tax benefit for 2014 was mainly attributed to (i) income from elimination of valuation allowance of deferredtax assets and tax advances in the amount of $2.1 million due to our current estimation of future taxable income, (ii) income from reversal of income taxcontingency reserves that were determined to be no longer needed due to finalization of tax assessment of one of our subsidiaries in the amount of $0.9million, and (iii) income from amortization of deferred tax liability related to intangible assets acquired in connection with the BoneTone acquisition inthe amount of $0.3 million. The above mentioned tax benefits were offset to some extent by current tax expenses that were recorded in the amount of $0.4million. The income tax benefit for 2013 was mainly attributed to (i) an amortization of deferred tax liability, net related to the intangible assets acquiredin connection with BoneTone acquisition in the amount of $0.4 million, and (ii) a reversal of an income tax contingency reserve that was determined tobe no longer needed due to the expiration of the applicable statute of limitations in the amount of $0.3 million. The above mentioned tax benefits wereoffset to some extent by current tax expenses that were recorded in the amount of $0.5 million. The income tax benefit for 2012 was mainly attributed to areversal of an income tax contingency reserve in the amount of $0.5 million that was determined to be no longer required due to the expiration of theapplicable statute of limitations during the third quarter of 2012. 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 the above investment plans have expired 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 regimeapplies to new investment programs only. 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). -44- 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 increased the Israeli corporate tax rate from25% to 26.5%, set the corporate tax rate for “Preferred Enterprises” to 16% for 2014 and thereafter under the New Law and increased the tax rate ondividends 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 theinvestment program filed with the investment Center of the Israeli Ministry of Industry and Trade and to periodic reporting obligations. We believe thatour investment programs are currently in compliance with these requirements. However, if we fail to meet these requirements, we would be subject tocorporate tax in Israel at the regular statutory rate (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 taxableincome generated 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 acquisitionby our Swiss subsidiary. LIQUIDITY AND CAPITAL RESOURCES Operating Activities. We generated $10.4, $13.3 and $10.2 million of cash and cash equivalents from our operating activities during 2014, 2013and 2012, respectively. The decrease in net cash generated by operating activities for 2014, as compared to 2013, was mainly as a result of (i) an increasein inventories in the amount of $3.3 million during 2014, as compared to a decrease in inventories in the amount of $0.6 million during 2013, and (ii) anincrease in accrued compensation and benefits for 2014 in the amount of $1.3 million, as compared to an increase in accrued compensation and benefitsin the amount of $4.0 million for 2013. The decrease in cash generated from operating activities when comparing the respective periods was offset to some extent by (a) an increase inaccounts payable during 2014 in the amount of $1.1 million, as compared to an increase in accounts payable during 2013 in the amount of $0.1 million,and (b) a decrease in accounts receivable during 2014 in the amount of $0.7 million, as compared to an increase in accounts receivable during 2013 in theamount of $0.8 million. 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 payableduring 2013 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 incash generated from operating activities when comparing the respective periods was offset to some extent by (a) an increase in accounts receivable during2013 in the 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 ininventories in the 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) adecrease in other accounts receivable and prepaid expenses in the amount of $0.5 million during 2013, as compared to a decrease in other accountsreceivable and prepaid expenses in the amount of $2.2 million during 2012. -45- 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 2014, we purchased $73.1 million of investments in marketable securities and deposits, ascompared to $70.7 million during 2013 and $78.2 million during 2012. During the same periods, $23.3 million, $18.3 million and $25.9 million,respectively, of investments in marketable securities matured and were called by the issuer. During the same periods, $46.5 million, $43.0 million and$39.1 million, respectively, of investments in marketable securities were sold. Additionally, during 2014, 2013 and 2012, $2.6 million, $2.8 million and$15.7 million, respectively, of short term deposits matured. As of December 31, 2014, the amortized cost of our marketable securities and deposits was approximately $104.1 million and their stated marketvalue was approximately $103.8 million, representing an unrealized loss of approximately $0.3 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 had the option to acquire the remaining equity of this private company under agreed terms until December31, 2014. The terms and conditions of the above buyout agreement were modified in November 2014 (including an extension of the option to acquire theremaining equity until December 31, 2015). Our capital equipment purchases for 2014, consisting primarily of research and development software tools, computers and other peripheralequipment, engineering test and lab equipment, leasehold improvements, furniture and fixtures, totaled $1.3 million, as compared to $1.1 million for2013, and $1.1 million for 2012. Financing Activities. During 2014, we repurchased 1.4 million shares of our common stock at an average purchase price of $8.83 per share for anaggregate amount of $12.48 million. In addition, during 2014, we received $1.8 million upon the exercise of employee stock options. During 2013, we repurchased 0.4 million shares of our common stock at an average purchase price of $8.95 per share for an aggregate amount of$3.49 million. In addition, during 2013, we received $2.0 million upon the exercise of employee stock options. 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. The 10b5-1 plan we entered into in 2013, which expired in February 2015, was extended by our board to endof November 2015. At December 31, 2014, approximately 1.2 million shares of our common stock are available for repurchase under our board authorized sharerepurchase program. As of December 31, 2014, we had cash and cash equivalents totaling approximately $20.5 million and marketable securities and time deposits ofapproximately $103.8 million, of which $108.8 million was held by foreign entities. Our intent is to permanently reinvest earnings of our foreignoperations and our current operating plans do not demonstrate a need to repatriate foreign earnings to fund our U.S. operations. However, if these fundswere needed for our operations in the United States, we would be required to accrue and pay U.S. taxes as well as taxes in other countries to repatriatethese funds. The determination of the amount of additional taxes related to the repatriation of these earnings is not practicable, as it may vary based onvarious factors such as the location of the cash and the effect of regulation in the various jurisdictions from which the cash would be repatriated. -46- Our working capital at December 31, 2014 was approximately $39.6 million, as compared to $42.3 million as of December 31, 2013. 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, and (ii) the repurchase of 1.4 million shares of our common stock for an aggregate amount of $12.48 million. Those factors wereoffset to some extent by the cash and cash equivalents generated during 2014 from our operating activities and cash received upon the exercise ofemployees 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, 2014 (in thousands): Payment Due By Period Contractual Obligations Total Less Than1 Year 2-3 Years 4-5 Years More Than5 Years Operating Lease Commitments (1) $8,608 $2,977 $4,271 $1,360 - Net Pension Liability (2) 1,428 41 25 18 1.344 Development tools lease (3) 3,025 1,100 1,925 - Total Contractual Obligations $13,061 $4,118 $6,221 $1,378 $1,344 (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, 2014. (2)Includes estimates of gross contributions and future payments required to meet the requirements of several defined benefit plans. The amountspresented 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, 2014, we had a liability for unrecognized tax benefits and an accrual for the payment of related interests totaling $1.0 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 examinationof the tax returns of one of our subsidiaries. We currently cannot provide an estimate of the range of change in the amount of the unrecognized taxbenefits due to the ongoing status of the examination. -47- 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 in NISare 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 primary expensespaid in Euro are employee salaries, lease and operational payments on our European facilities. To partially protect the company against an increase invalue of forecasted foreign currency cash flows resulting from salary and lease payments denominated in NIS during 2014, we instituted a foreigncurrency 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 notes toour consolidated financial statement for the year ended December 31, 2014. 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. -48- Item 8.FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA CONSOLIDATED FINANCIAL STATEMENTS AS OF DECEMBER 31, 2014 IN U.S. DOLLARS INDEX Page Reports of Independent Registered Public Accounting Firm50 Consolidated Balance Sheets53 Consolidated Statements of Operations55 Consolidated Statements of Comprehensive Income (Loss)56 Statements of Changes in Stockholders' Equity57 Consolidated Statements of Cash Flows59 Notes to Consolidated Financial Statements61 - - - - - - - - - - -49- 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. as of December 31, 2014 and 2013, and the relatedconsolidated statements of operations, comprehensive income (loss), changes in stockholders' equity, and cash flows for each of the three years in theperiod ended December 31, 2014. 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. Anaudit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessingthe accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. Webelieve that 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 positionof DSP Group, Inc. at December 31, 2014 and 2013, and the consolidated results of its operations and its cash flows for each of the three years in theperiod ended December 31, 2014, 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, 2014, based on criteria established in Internal Control-Integrated Framework issued by theCommittee of Sponsoring Organizations of the Treadway Commission (2013 framework) and our report dated March 16, 2015 expressed an unqualifiedopinion thereon. /s/ Kost Forer Gabbay & KasiererTel-Aviv, IsraelKOST FORER GABBAY & KASIERERMarch 16, 2015A Member of Ernst & Young Global -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 DSP Group, Inc.'s internal control over financial reporting as of December 31, 2014, based on criteria established in InternalControl-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (2013 framework) (the "COSOcriteria"). DSP Group, Inc.’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 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 reasonableassurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company's assets that could have a materialeffect on the financial statements. -51- 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 thedegree of compliance with the policies or procedures may deteriorate. In our opinion, DSP Group, Inc. maintained, in all material respects, effective internal control over financial reporting as of December 31, 2014,based on 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 DSP Group, Inc. as of December 31, 2014 and 2013, 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, 2014 of DSP Group, Inc. and our report datedMarch 16, 2015 expressed an unqualified opinion thereon. /s/ Kost Forer Gabbay & KasiererTel-Aviv, IsraelKOST FORER GABBAY & KASIERERMarch 16, 2015A Member of Ernst & Young Global -52- DSP GROUP, INC.CONSOLIDATED BALANCE SHEETSU.S. dollars in thousands December 31, 2014 2013 ASSETS CURRENT ASSETS: Cash and cash equivalents $20,544 $23,578 Restricted deposits 623 77 Marketable securities and short-term deposits (Note 3) 11,508 13,895 Trade receivables, net 20,298 21,195 Other accounts receivable and prepaid expenses (Note 4) 1,902 2,641 Inventories (Note 5) 15,635 12,334 Deferred income taxes (Note 15) 775 92 Total current assets 71,285 73,812 PROPERTY AND EQUIPMENT, NET (Note 6) 2,843 2,837 LONG-TERM ASSETS: Long-term marketable securities (Note 3) 92,269 90,162 Long-term prepaid expenses and lease deposits 1,162 100 Deferred income taxes (Note 15) 149 - Severance pay fund 10,860 11,168 Investment in other company (Note 9) 2,200 2,200 Intangible assets, net (Note 7) 5,135 6,710 Goodwill 5,276 5,276 117,051 115,616 Total assets $191,179 $192,265 The accompanying notes are an integral part of the consolidated financial statements. -53- DSP GROUP, INC.CONSOLIDATED BALANCE SHEETSU.S. dollars in thousands, except share and per share data December 31, 2014 2013 LIABILITIES AND STOCKHOLDERS' EQUITY CURRENT LIABILITIES: Trade payables $15,282 $14,149 Accrued compensation and benefits 9,408 9,845 Income tax accruals and payables 1,151 1,985 Accrued expenses and other accounts payable (Note 10) 5,852 5,532 Total current liabilities 31,693 31,511 LONG-TERM LIABILITIES: Deferred income taxes (Note 15) 845 1,183 Accrued severance pay 10,929 11,179 Accrued pensions (Note 11) 1,089 981 Total long-term liabilities 12,863 13,343 COMMITMENTS AND CONTINGENCIES (Note 14) STOCKHOLDERS' EQUITY (Note 13): Capital stock: Common stock, $0.001 par value - Authorized: 50,000,000 shares at December 31, 2014 and 2013;Issued and outstanding: 21,843,950 and 22,349,780 shares at December 31, 2014 and 2013,respectively 22 22 Additional paid-in capital 355,906 350,494 Treasury stock at cost (122,387) (118,749)Accumulated other comprehensive loss (1,566) (821)Accumulated deficit (85,352) (83,535) Total stockholders' equity 146,623 147,411 Total liabilities and stockholders' equity $191,179 $192,265 The accompanying notes are an integral part of the consolidated financial statements. -54- DSP GROUP, INC.CONSOLIDATED STATEMENTS OF OPERATIONSU.S. dollars and shares in thousands, except per share data Year ended December 31, 2014 2013 2012 Revenues $143,036 $151,063 $162,790 Costs of revenues (1) 85,992 91,237 101,660 Gross profit 57,044 59,826 61,130 Operating expenses: Research and development, net (2) 33,468 35,000 42,539 Sales and marketing (3) 11,905 11,273 14,237 General and administrative (4) 10,541 11,812 10,638 Amortization of intangible assets 1,573 1,672 2,310 Restructuring expenses - - 2,008 Total operating expenses 57,487 59,757 71,732 Operating income (loss) (443) 69 (10,602)Financial income, net (Note 12) 1,204 2,457 2,388 Income (loss) before income tax benefit 761 2,526 (8,214)Income tax benefit 2,841 150 172 Net income (loss) $3,602 $2,676 $(8,042) Net income (loss) per share: Basic $0.16 $0.12 $(0.37)Diluted $0.16 $0.12 $(0.37) Weighted average number of shares used in per share computations of: Basic net income (loss) per share 21,968 22,249 21,950 Diluted net income (loss) per share 22,954 22,906 21,950 (1)Includes equity-based compensation expense in the amount of $300, $253 and $330 for the years ended December 31, 2014, 2013 and 2012,respectively. (2)Includes equity-based compensation expense in the amount of $2,381, $1,873 and $2,425 for the years ended December 31, 2014, 2013 and 2012,respectively. (3)Includes equity-based compensation expense in the amount of $621, $478 and $778 for the years ended December 31, 2014, 2013 and 2012,respectively. (4)Includes equity-based compensation expense in the amount of $2,057, $1,555 and $1,450 for the years ended December 31, 2014, 2013 and 2012,respectively. The accompanying notes are an integral part of the consolidated financial statements. -55- DSP GROUP, INC.CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)U.S. dollars in thousands Year Ended December 31, 2014 2013 2012 Net income (loss): $3,602 $2,676 $(8,042)Other comprehensive income (loss): Available-for-sale securities: Changes in unrealized gains/losses 157 (304) 2,621 Reclassification adjustments for gains included in net income (loss) (61) (1,009) (670)Net change 96 (1,313) 1,951 Cash flow hedges: Changes in unrealized gains/losses (1,180) 372 635 Reclassification adjustments for (gains) losses included in net income (loss) 562 (856) 325 Net change (618) (484) 960 Change in unrealized components of defined benefit plans: Losses arising during the period (209) (11) (161)Amortization of actuarial loss and prior service benefit 11 11 2 Net change (198) - (159)Foreign currency translation adjustments, net (25) (12) (8)Other comprehensive income (loss) (745) (1,809) 2,744 Comprehensive income (loss) $2,857 $867 $(5,298) -56- DSP GROUP, INC.STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYU.S. dollars and shares in thousands Number ofshares ofcommonstock Commonstockamount Additionalpaid-incapital Treasurystock atcost Accumulatedothercomprehensiveincome (loss) Accumulateddeficit Totalstockholders'equity Balance at December 31, 2011 22,502 23 341,352 (122,236) (1,756) (68,759) 148,624 Issuance of treasury stock upon purchaseof common stock under employeestock purchase plan 446 *) - - 4,485 - (2,507) 1,978 Issuance of treasury stock upon exerciseof stock options and stockappreciation rights by employees anddirectors 9 *) - - 86 - (86) - Purchase of treasury stock (1,283) (1) - (8,059) - - (8,060)Equity-based compensation expenses - - 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 *) Represents an amount lower than $1. The accompanying notes are an integral part of the consolidated financial statements. -57- DSP GROUP, INC.STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITYU.S. dollars and shares in thousands Number ofshares ofcommonstock Commonstockamount Additionalpaid-incapital Treasurystock atcost Accumulatedothercomprehensiveincome (loss) Accumulateddeficit Totalstockholders'equity Cont. Balance at December 31, 2012 21,674 $22 $346,335 $(125,724) $988 $(79,394) $142,227 Issuance of treasury stock upon purchaseof common stock under employeestock purchase plan 374 *) - - 3,668 - (2,004) 1,664 Issuance of treasury stock upon exerciseof stock options, stock appreciationrights and restricted stock units byemployees and directors 692 1 - 6,796 - (4,813) 1,984 Purchase of treasury stock (390) (1) - (3,489) - - (3,490)Equity-based compensation expenses - - 4,159 - - - 4,159 Net income - - - - - 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 Issuance of treasury stock upon purchaseof common stock under employeestock purchase plan 310 *) - - 3,031 - (1,309) 1,722 Issuance of treasury stock upon exerciseof stock options, stock appreciationrights and restricted stock units byemployees and directors 598 1 53 5,814 - (4,110) 1,758 Purchase of treasury stock (1,414) (1) - (12,483) - - (12,484)Equity-based compensation expenses - - 5,359 - - - 5,359 Net income - - - - - 3,602 3,602 Change in Accumulated othercomprehensive income - - - - (745) - (745) Balance at December 31, 2014 21,844 $22 $355,906 $(122,387) $(1,566) $(85,352) $146,623 *) Represents an amount lower than $1. The accompanying notes are an integral part of the consolidated financial statements. -58- DSP GROUP, INC.CONSOLIDATED STATEMENTS OF CASH FLOWSU.S. dollars in thousands Year ended December 31, 2014 2013 2012 Cash flows from operating activities: Net income (loss) $3,602 $2,676 $(8,042)Adjustments required to reconcile net income (loss) to net cash provided byoperating activities: Depreciation 1,290 1,994 3,168 Equity-based compensation expenses related to employees' stock options, SARsand RSUs 5,359 4,159 4,983 Capital gain from sale and disposal of property and equipment - - (57)Realized gain from sale of marketable securities (61) (1,009) (670)Amortization of intangible assets 1,573 1,672 2,310 Accrued interest and amortization of premium on marketable securities and short-term deposits 1,214 747 1,295 Change in operating assets and liabilities: Deferred income tax assets and liabilities, net (1,170) (377) (12)Trade receivables, net 704 (767) 5,281 Other accounts receivable and prepaid expenses 719 536 2,175 Inventories (3,333) 587 3,535 Long-term prepaid expenses and lease deposits (1,052) 153 264 Trade payables 1,142 121 (3,965)Accrued compensation and benefits 1,323 3,952 1,277 Income tax accruals and payables (730) 54 (705)Accrued expenses and other accounts payable (289) (989) (567)Accrued severance pay, net 58 (228) (65)Accrued pensions 30 (31) - Net cash provided by operating activities 10,379 13,250 10,205 Cash flows from investing activities: Purchase of marketable securities (70,517) (67,850) (75,483)Purchase of short-term deposits (2,561) (2,849) (2,670)Proceeds from maturity of marketable securities 23,250 18,325 25,911 Proceeds from sales of marketable securities 46,491 42,949 39,063 Proceeds from redemption of short-term deposits 2,561 2,849 15,643 Proceeds from sales of property and equipment - - 81 Purchases of property and equipment (1,315) (1,118) (1,094)Investment in other company - (2,200) - Increase in restricted deposits (556) - - Net cash provided by (used in) investing activities (2,647) (9,894) 1,451 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, 2014 2013 2012 Cash flows from financing activities: Issuance of common stock and treasury stock upon exercise of stock options andSARs 1,758 1,984 - Purchase of treasury stock (12,484) (3,490) (8,060) Net cash used in financing activities (10,726) (1,506) (8,060) Increase (decrease) in cash and cash equivalents (2,994) 1,850 3,596 Cash and cash equivalents at the beginning of the year 23,578 21,684 18,109 Cash (erosion) due to exchange rate differences (40) 44 (21) Cash and cash equivalents at the end of the year $20,544 $23,578 $21,684 Supplemental disclosures of cash flows activities: Cash paid during the year for: Taxes on income $131 $149 $149 The accompanying notes are an integral part of the consolidated financial statements. -60- U.S. dollars in thousands, except share and per share data NOTE 1:-GENERAL DSP Group, Inc., a Delaware corporation, and its subsidiaries (collectively, the "Company"), are a fabless semiconductor company offeringadvanced chipset solutions for a variety of applications. The Company is a worldwide leader in the short-range wireless communicationmarket, enabling home 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 thecontinued success of its distributors in marketing and selling its products. The loss of the Company's distributors and the Company'sinability to obtain satisfactory replacements in a timely manner may harm the Company's sales and results of operations. In addition, theCompany expects that a limited number of customers, varying in identity from period-to-period, will account for a substantial portion of itsrevenues in any period. The loss of, or reduced demand for products from, any of the Company's major customers could have a materialadverse effect on the Company's business, financial condition and results of operations. Sales to Hong Kong-based VTech Holdings Ltd. ("VTech") represented 35%, 36% and 35% of the Company's total revenues for 2014, 2013and 2012, respectively. Revenues derived from sales through one distributor, Tomen Electronics Corporation ("Tomen Electronics"),accounted for 20%, 19% and 21% of the Company's total revenues for 2014, 2013 and 2012, respectively. Tomen Electronics sells theCompany's products to a limited number of customers. One customer, Panasonic Communications Co., Ltd. ("Panasonic"), has continuallyaccounted for a majority of the sales of Tomen Electronics. Sales to Panasonic through Tomen Electronics generated approximately 15%,14% and 15% of the Company's total revenues for 2014, 2013 and 2012, respectively. Additionally, sales to Uniden America Corporation("Uniden") represented 2%, 4% and 11% of the Company's total revenues for 2014, 2013 and 2012, respectively. The Japanese and HongKong markets and the OEMs that operate in those markets are among the largest suppliers in the world with significant market share in theU.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 thesefoundries and test houses have been able to adequately meet the demands of the Company's business, the Company is and will continue tobe dependent upon these foundries and test houses to achieve acceptable manufacturing yields, quality levels and costs, and to allocate tothe Company a sufficient portion of foundry and test capacity to meet the Company's needs in a timely manner. Revenues could bematerially and adversely affected should any of these foundries and test houses fail to meet the Company's request for productmanufacturing due to a shortage of production capacity, process difficulties, low yield rates or financial instability. Additionally, certain ofthe raw materials, components, and subassemblies included in the products manufactured by the Company's original equipmentmanufacturer (OEM) customers, which incorporate the Company's products, are obtained from a limited group of suppliers. Disruptions,shortages, or termination of certain of these sources of supply could occur and could negatively affect the Company's financial conditionand results of operations. -61- U.S. dollars in thousands, except share and per share data NOTE 2:-SIGNIFICANT ACCOUNTING POLICIES The consolidated financial statements are prepared according to United States generally accepted accounting principles (“U.S.GAAP”). a.Use of estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates, judgments andassumptions. The Company's management believes that the estimates, judgments and assumptions used are reasonable based uponinformation available at the time that these estimates, judgments and assumptions are made. These estimates, judgments andassumptions can affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates ofthe financial statements, and the reported amounts of revenue and expenses during the reporting period. Actual results could differfrom those estimates. b.Financial statements in U.S. dollars: Most of the Company’s revenues are generated in U.S. dollars ("dollar"). In addition, a substantial portion of the Company’s costs areincurred in dollars. The Company's management believes that the dollar is the currency of the primary economic environment inwhich the Company operates. Thus, the functional and reporting currency of the Company is the dollar. Monetary accounts maintained in currencies other than the dollar are remeasured into dollars in accordance with ASC No. 830-30,"Translation of Financial Statements." All transaction gains and losses resulting from the remeasurement of monetary balance sheetitems are reflected in the consolidated statements of operations as financial income or expenses as appropriate. The financial statements of the Company's subsidiary – DSP Group Technologies GmbH whose functional currency is not the dollar,has been translated into dollars. All amounts on the balance sheets have been translated into the dollar using the exchange rates ineffect on the relevant balance sheet dates. All amounts in the consolidated statements of operations have been translated into thedollar using the average exchange rate for the relevant periods. The resulting translation adjustments are reported as a component ofaccumulated other comprehensive income (loss) in changes in stockholders' equity. Accumulated other comprehensive loss related to foreign currency translation adjustments, net amounted to $218 and $193 as ofDecember 31, 2014 and 2013, respectively. c.Principles of consolidation: The consolidated financial statements include the accounts of the Company. Intercompany transactions and balances have beeneliminated in consolidation. d.Cash and cash equivalents: Cash equivalents are short-term highly liquid investments, which are readily convertible to cash with original maturity of threemonths or less from the date of acquisition. -62- U.S. dollars in thousands, except share and per share data e.Restricted deposits: Restricted deposits include deposits which are used as security for derivative instruments and for one of the Company's leaseagreements. f.Short-term deposits: Bank deposits with original maturities of more than three months and less than one year are presented at cost, including accruedinterest. g.Marketable securities: The Company accounts for investments in debt securities in accordance with FASB ASC No. 320-10, "Investments in Debt andEquity Securities." Management determines the appropriate classification of the Company's investments in debt securities at the timeof purchase and reevaluates 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 the specific identification method. Unrealized losses determined to be other-than-temporary are recorded as a financialexpense. The amortized cost of marketable 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 areimpaired, management determines whether such impairment is other-than-temporary. Factors considered in making such adetermination include the duration and severity of the impairment, the reason for the decline in value and the potential recoveryperiod, and the Company's intent to sell, or whether it is more likely than not that the Company will be required to sell theinvestment before recovery of cost basis. For debt securities, only the decline attributable to deteriorating credit of an-other-than-temporary impairment is recorded in the consolidated statement of operations, unless the Company intends, or more likely than notit will be forced, to sell the security. During the years ended December 31, 2014, 2013 and 2012, the Company did not record an-other-than-temporary impairment loss (see Note 3). h.Fair value of financial instruments: Cash and cash equivalents, restricted deposits, short-term deposits, trade receivables, trade payables and accrued liabilitiesapproximate fair value due to short term maturities of these instruments. Marketable securities and derivative instruments are carriedat fair value. See Note 3 for more information. -63- U.S. dollars in thousands, except share and per share data Fair value is an exit price, representing the amount that would be received for selling an asset or paid to transfer a liability in anorderly transaction between market participants. As such, fair value is a market-based measurement that should be determined basedon assumptions that market participants would use in pricing an asset or a liability. A three-tier fair value hierarchy is established asa basis for considering such assumptions and for inputs 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 unobservableinputs when measuring 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-movingitems or technological obsolescence. The Company and its subsidiaries periodically evaluate the quantities on hand relative to historical, current and projected salesvolume. Based on 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 thefollowing: historical usage rates and forecasted sales according to outstanding backlogs. Purchasing requirements and alternativeusage are explored within these processes to mitigate inventory exposure. When recorded, the reserves are intended to reduce thecarrying value of inventory to its net realizable value. Inventory of $15,635 and $12,334 as of December 31, 2014 and 2013,respectively, is stated net of inventory reserves of $505 and $591 in each year, respectively. If actual demand for the Company'sproducts deteriorates, or market conditions are less favorable than those projected, additional inventory reserves may be required. j.Property and equipment, net: Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated using the straight-line methodover the estimated useful lives of the assets, at the following annual rates: % Computers and equipment 20 - 33 Office furniture and equipment 6 - 15 Leasehold improvements The shorter of term of the lease or theuseful life of the asset -64- U.S. dollars in thousands, except share and per share data Property and equipment of the Company are reviewed for impairment whenever events or changes in circumstances indicate that thecarrying amount of an asset may not be recoverable. The recoverability of assets to be held and used is measured by a comparison ofthe carrying amount of such assets to the future undiscounted cash flows expected to be generated by the assets. If such assets areconsidered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the assetsexceeds the fair value of the assets. During the years ended December 31, 2014, 2013 and 2012, 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, "The Internal Use Software." FASB ASC 350-40 requires the capitalization of certain costs incurred in connection withdeveloping or obtaining internal use software. During 2014, 2013 and 2012, the Company capitalized $128, $34 and $22,respectively, of internal use software cost. Such costs are amortized using the straight-line method over their estimated useful life ofthree 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 CIPTAcquisition. Goodwill represents the excess of the purchase price in a business combination over the fair value of net tangible andintangible assets acquired. Goodwill is not amortized, but rather is subject to an annual impairment test. ASC 350 prescribes a two-phase process for impairment testing of goodwill. The first phase screens for impairment, while the secondphase (if necessary) measures impairment. Goodwill impairment is deemed to exist if the net book value of a reporting unit exceedsits estimated fair value. In such a case, the second phase is then performed, and the Company measures impairment by comparing thecarrying amount of the reporting unit’s goodwill to the implied fair value of that goodwill. An impairment loss is recognized in anamount equal to the excess. ASC 350 allows an entity to first assess qualitative factors to determine whether it is necessary toperform the two-step quantitative goodwill impairment test. An entity is not required to calculate the fair value of a reporting unitunless the entity determines, based on a qualitative assessment, that it is more likely than not that its fair value is less than itscarrying amount. Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and proceed directly toperforming the first step of the goodwill impairment test. The Company performs an annual impairment test on December 31 of each fiscal year, or more frequently if impairment indicatorsare present. The Company's reporting units are consistent with the reportable segments identified in Note 18. 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 capitaland market multiples for the reporting unit. -65- U.S. dollars in thousands, except share and per share data For the fiscal year ended December 31, 2014, 2013 and 2012, the Company performed a quantitative assessment on its goodwill andno impairment losses were identified. Intangible assets that are not considered to have an indefinite useful life are amortized using the straight-line basis over theirestimated useful lives, which range from 3 to 7.3 years. The carrying amount of these assets is reviewed whenever events or changesin circumstances indicate that the carrying value of an asset may not be recoverable. Recoverability of these assets is measured bycomparison of the carrying amount of the asset to the future undiscounted cash flows the asset is expected to generate. If such asset is considered to be impaired, the impairment to be recognized is measured as the difference between the carryingamount of the assets and the fair value of the impaired asset. During 2014, 2013 and 2012, 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 themost recent monthly salary of its employees multiplied by the number of years of employment as of the balance sheet date for suchemployees. DSP Israel's liability is fully provided for by monthly accrual and deposits with severance pay funds and insurancepolicies. The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may be withdrawn only upon thefulfillment of the obligation pursuant to Israel's Severance Pay Law or labor agreements. Severance expenses for the years ended December 31, 2014, 2013 and 2012, were $1,568, $1,494 and $1,660, respectively. m.Revenue recognition: The Company generates its revenues from sales of products. The Company sells its products through a direct sales force and througha network of distributors. -66- U.S. dollars in thousands, except share and per share data Product sales are recognized when persuasive evidence of an agreement exists, delivery of the product has occurred, the fee is fixedor determinable, 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 writtendocumentation, either a written contract or purchase order. The actual documentation used is dependent on the business practicewith each customer. Therefore, the Company determines that persuasive evidence of an arrangement exists with respect to a customerwhen it has a written contract, or a written purchase order from the customer. Delivery has occurred - Each written documentation relating to a sale arrangement that is agreed upon with the customer specificallysets forth when risk and title are being transferred (based on the agreed International Commercial terms, or "INCOTERMS").Therefore, the Company determines that risk and title are transferred to the customer when the terms of the written documentationbased on the applicable INCOTERMS are satisfied and thus delivery of its products has occurred. Separately, the Company has consignment inventory which is held for specific customers at the customers' premises. It recognizesrevenue on the consigned inventory when the customer consumes the products from the warehouse, as that is when per theconsignment inventory agreements, risk and title 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, stockrotation, right of return and/or other discount programs and thus the fee is considered fixed and determinable upon execution of thewritten documentation with the customers. Additionally, payments that are due within the normal course of the Company's creditterms, which are currently no more than four months from the contract date, are deemed to be fixed and determinable based on theCompany's successful collection history for such arrangements. Collectability is reasonably assured - The Company determines whether collectability is reasonably assured on a customer-by-customer basis pursuant to its credit review policy. The Company typically sells to customers with whom it has a long-term businessrelationship and a history of successful collection. A significant number of the Company's customers are also large originalequipment manufacturers with substantial financial resources. For a new customer, or when an existing customer substantiallyexpands its commitments, the Company evaluates the customer's financial position, the number of years the customer has been inbusiness, the history of collection with the customer and the customer's ability to pay and typically assigns a credit limit based onthat review. The Company increases the credit limit only after it has established a successful collection history with the customer. Ifthe Company determines at any time that collectability is not reasonably assured under a particular arrangement based upon itscredit review process, the customer's payment history or information that comes to light about a customer's financial position, itrecognizes revenue under that arrangement as customer payments are actually received. -67- U.S. dollars in thousands, except share and per share data With respect to product sales through the Company's distributors, such product revenues are deferred until the distributors resell theCompany's products to the end-customers ("sell through") and recognized based upon receipt of reports from the distributors,provided all other revenue recognition criteria as discussed above are met. The Company views its distributor arrangements as that of consignment because, although the actual sales are conducted throughthe distributors and legally title for the products passes to the distributors upon delivery to the distributors, in substance inventory issimply being transferred to another location for sale to the end-user customers as the Company's primary business relationships andresponsibilities are directly with the end-user customers. Because the Company views its arrangements with its distributors as that ofconsignment relationships, delivery of goods is not deemed to have occurred solely upon delivery to the distributors. Therefore, theCompany recognizes revenues from distributors under the "sell-through" method. As a result, revenue is deferred at the time ofshipment to the distributors and is recognized only when the distributors sell the products to the end-user customers. n.Warranty: The Company warrants its products against errors, defects and bugs for generally one year. The Company estimates the costs thatmay be incurred under its warranty and records a liability in the amount of such costs. The Company periodically assesses theadequacy of its recorded warranty liabilities and adjusts the amounts as necessary. Warranty costs and liability were immaterial forthe years ended December 31, 2014, 2013 and 2012. o.Research and development costs, net: Research and development costs, net of grants received, are charged to the consolidated statement of operations as incurred. p.Government grants: Government grants received by the Company’s Israeli subsidiary relating to categories of operating expenditures are credited to theconsolidated statements of income during the period in which the expenditure to which they relate is charged. Royalty and non-royalty-bearing grants from the Israeli Office of the Chief Scientist ("OCS") for funding certain approved research and developmentprojects are recognized at the time when the Company’s Israeli subsidiary is entitled to such grants, on the basis of the related costsincurred, and are included as a deduction from research and development expenses, net. The Company recorded royalty bearing grants in the amount of $3,002 and $2,116 for the year ended December 31, 2014 and 2013,respectively. In 2012, 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 ofwhich received grants from the OCS in previous years. The obligation to pay these royalties is contingent on actual sales of suchproducts. Grants received from the OCS may become repayable if certain criteria under the grants are not met. The Israeli Researchand Development Law provides that know-how developed under an approved research and development program may not betransferred to third parties without the approval of the OCS. Such approval is not required for the sale or export of any productsresulting from such research or development. The OCS, under special circumstances, may approve the 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 in consideration forsuch 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 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 recipient receives 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 with certain types of cooperation in research and development activities; or (d) if suchtransfer of know-how arises in connection with a liquidation by reason of insolvency or receivership of the grant recipient. -68- U.S. dollars in thousands, except share and per share data q.Equity-based compensation: At December 31, 2014, the Company had two equity incentive plans from which the Company may grant future equity awards andthree expired equity incentive plans from which no future equity awards may be granted but had outstanding equity awards grantedprior to expiration. The Company also had one employee stock purchase plan. See full description in Note 13. 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 anoption-pricing model. The value of the portion of the award that is ultimately expected to vest is recognized as an expense over therequisite service periods in the Company's consolidated statements of operations. The Company recognizes compensation expenses for the value of its awards granted based on the accelerated attribution method,rather than a straight-line method over the requisite service period of each of the awards, net of estimated forfeitures. FASB ASCNo. 718 requires forfeitures to be estimated at the time of grant and revised, if necessary, in subsequent periods if actual forfeituresdiffer from those estimates. Estimated forfeitures are based 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 thoseequity-based awards 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 andvalues options and stock appreciation rights (SARs) based on the market value of the underlying shares on the date of grant. Theoption-pricing model requires a number of assumptions, of which the most significant are the expected stock price volatility and theexpected term of the equity-based award. Expected volatility is calculated based upon actual historical stock price movements. Theexpected term of the equity-based award granted is based upon historical experience and represents the period of time that the awardgranted is expected to be outstanding. The risk-free interest rate is based on the yield from U.S. treasury bonds with an equivalentterm. The Company has historically not paid dividends and has no foreseeable plans to pay dividends. -69- U.S. dollars in thousands, except share and per share data r.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 duringthe year. Diluted net income (loss) per share further include the dilutive effect of stock options, stock appreciation rights (SARs) andrestricted 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 calculationof diluted net income (loss) per share due to their anti-dilutive effect was 1,811,687, 2,730,867 and 7,584,336 for the years endedDecember 31, 2014, 2013 and 2012, respectively. s.Income taxes: The Company accounts for income taxes in accordance with FASB ASC No. 740, "Income Taxes." This topic prescribes the use ofthe liability method, whereby deferred tax asset and liability account balances are determined based on differences between financialreporting and tax bases of assets and liabilities and are measured using the enacted tax rates that will be in effect when thedifferences are expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax assets to theirestimated realizable value. Deferred tax liabilities and assets are classified as current or non-current based on the classification of the related asset or liability forfinancial reporting, or according to the expected reversal dates of the specific temporary differences if not related to an asset orliability for financial reporting. The Company accounts for uncertain tax positions in accordance with ASC 740, which contains a two-step approach to recognizingand measuring uncertain tax positions. The first step is to evaluate the tax position taken or expected to be taken in a tax return bydetermining whether the weight of available evidence indicates that it is more likely than not that, on an evaluation of the technicalmerits, the tax position will be sustained on audit, including resolution of any related appeals or litigation processes. The secondstep is to measure the tax benefit as the largest amount that is more than 50% likely to be realized upon ultimate settlement. TheCompany reevaluates its income tax positions periodically to consider factors such as changes in facts or circumstances, changes inor interpretations of tax law, effectively settled issues under audit, and new audit activity. Such a change in recognition ormeasurement would result in recognition of a tax benefit or an additional charge to the tax provision. The Company includes interest related to tax issues as part of income tax expense in its consolidated financial statements. TheCompany records any applicable penalties related to tax issues within the income tax provision. t.Concentrations of credit risk: Financial instruments that potentially subject the Company to concentrations of credit risk consist principally of cash and cashequivalents, restricted deposits, short-term deposits, trade receivables and marketable securities. -70- U.S. dollars in thousands, except share and per share data The majority of cash and cash equivalents and short-term deposits of the Company are invested in dollar deposits with major U.S.,European and Israeli banks. Deposits in U.S. banks may be in excess of insured limits and are not insured in other jurisdictions.Generally, cash and cash equivalents and these deposits may be withdrawn upon demand and therefore bear low risk. The Company's marketable securities consist of investment-grade corporate bonds and U.S. government-sponsored enterprise("GSE") securities. As of December 31, 2014, the amortized cost of the Company's marketable securities was $101,474, and theirstated market value was $101,178, representing an unrealized loss of $296. A significant portion of the products of the Company is sold to original equipment manufacturers of consumer electronics products.The customers of the Company are located primarily in Japan, Hong Kong, Taiwan, China, Korea, Europe and the United States. TheCompany performs ongoing credit evaluations of their customers. A specific allowance for doubtful accounts is determined, basedon 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, 2014 and 2013, no allowance fordoubtful accounts was provided. The Company has no off-balance-sheet concentration of credit risk, except for certain derivative instruments as mentioned below. u.Derivative instruments: The Company accounts for derivatives and hedging based on FASB ASC No. 815,"Derivatives and Hedging". ASC No. 815 requirescompanies to recognize all of their derivative instruments as either assets or liabilities on 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 expectedfuture cash flows that is attributable to a particular risk), the effective portion of the gain or loss on the derivative instrument isreported as a component of other comprehensive income and reclassified into earnings in the same period or periods during whichthe hedged transaction affects earnings. Any gain or loss on a derivative instrument in excess of the cumulative change in the presentvalue of future cash flows of the hedged item is recognized in current earnings during the period of change. To protect against the increase in value of forecasted foreign currency cash flows resulting from salary and rent payments in NewIsraeli Shekel ("NIS") during the year, the Company instituted a foreign currency cash flow hedging program. The Company hedgesportions of the anticipated payroll and rent of its Israeli facilities denominated in NIS for a period of one to 12 months with put andcall options and forward contracts. These forward contracts and put and call options are designated as cash flow hedges and are alleffective as hedges of these expenses. -71- U.S. dollars in thousands, except share and per share data The fair value of the outstanding derivative instruments at December 31, 2014 and 2013 is summarized below: Fair value of derivative instruments Derivative assets As of December 31, (liabilities) Balance sheet location 2014 2013 Foreign exchange forward contracts andput and call options Accrued expenses and other accountspayable $(618) $- Total $(618) $- The effect of derivative instruments in cash flow hedging transactions on income and other comprehensive income ("OCI") for theyears ended December 31, 2014, 2013 and 2012 is summarized below: Gains (losses) on derivatives recognized in OCI Year ended December 31, 2014 2013 2012 Foreign exchange forward contracts and put and call options $(1,180) $372 $635 Gains (losses) on derivatives reclassified from OCI to income Year ended December 31, Location 2014 2013 2012 Foreign exchange forward contracts and putand call options Operatingexpenses $(562) $856 $(325) As of December 31, 2014 and 2013, the Company had outstanding option contracts in the amount of $16,575 and $0, respectively. v.Comprehensive income: The Company accounts for comprehensive income in accordance with FASB ASC No. 220, "Comprehensive Income.".Comprehensive income generally represents all changes in stockholders' equity during the period except those resulting frominvestments by, or distributions to, stockholders. The Company determined that its items of other comprehensive income relate togains and losses on hedging derivative instruments, unrealized gains and losses on available-for-sale securities, unrealized gains andlosses from pension and unrealized gain and losses from foreign currency translation adjustments. -72- U.S. dollars in thousands, except share and per share data The following table summarizes the changes in accumulated balances of other comprehensive income (loss) for 2014: Unrealized gains(losses) onavailable-for-salemarketablesecurities Unrealized gains(losses) on CashFlow Hedges Unrealized gains(losses) oncomponents ofdefined benefitplans Unrealized gains(losses) on foreigncurrencytranslation Total Beginning balance $(391) $- $(237) $(193) $(821)Othercomprehensiveincome (loss)beforereclassifications 157 (1,180) (209) (25) (1,257)Amountsreclassified fromaccumulated othercomprehensiveincome (loss) (61) 562 11 - 512 Net current periodothercomprehensiveincome (loss) 96 (618) (198) (25) (745) Ending balance $(295) $(618) $(435) $(218) $(1,566) The following table provides details about reclassifications out of accumulated other comprehensive income (loss) for 2014: Details about AccumulatedOther Comprehensive Income(Loss) Components AmountReclassified fromAccumulated OtherComprehensiveIncome (Loss) Affected Line Item in theStatement of Income (Loss) (In millions) Gains on available-for-sale marketable securities $(61)Financial income, net - Provision for income taxes (61)Total, net of income taxes Gains on cash flow hedges 441 Research and development 43 Sales and marketing 78 General and administrative 562 Total, before income taxes - Provision for income taxes 562 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 512 Total, net of income taxes -73- U.S. dollars in thousands, except share and per share data w.Treasury stock at cost The Company repurchases its common stock from time to time on the open market or in other transactions and holds such shares astreasury stock. The Company presents the cost to repurchase treasury stock as a reduction of stockholders' equity. From time to time, the Company reissues treasury stock under its employee stock purchase plan and equity incentive plans, uponpurchases or exercises of equity awards under the plans. When treasury stock is reissued, the Company accounts for the re-issuance inaccordance with ASC No. 505-30, "Treasury Stock" and charges the excess of the purchase cost over the re-issuance price (loss) toretained earnings. The purchase cost is calculated based on the specific identification method. In case the purchase cost is lower thanthe re-issuance price, the Company credits the difference to additional paid-in capital. x.Investment in other company: Investment in other company is stated at cost. The Company followed ASC 323, "Investments - Equity and Joint Ventures", todetermine whether it should apply the equity method of accounting to investment in other than common stock with regard to acertain investment in preferred shares, and determined 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 thatthe carrying amount of an investment may not be recoverable, in accordance with ASC 325-20. As of December 31, 2014, noimpairment loss was indicated (see also Note 9). y.The impact of recently issued accounting standards (not effective for the Company as of December 31, 2014) is as follows: In May 2014, the FASB issued an accounting standard update on revenue from contracts with customers, which requires an entity torecognize the amount of revenue to which it expects to be entitled for the transfer of promised goods or services to customers. Thenew guidance will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standardwill be effective for the Company on July 1, 2017. Early application is not permitted. The standard permits the use of either theretrospective or cumulative effect transition method. The Company is currently evaluating the effect that the new guidance will haveon its consolidated financial statements and related disclosures. The Company has not yet selected a transition method nor has itdetermined the effect of the standard on its ongoing financial reporting. -74- U.S. dollars in thousands, except share and per share data NOTE 3:MARKETABLE SECURITIES AND TIME DEPOSITS The following is a summary of marketable securities and time deposits at December 31, 2014 and 2013 (see also Note 8): Amortized cost Unrealized gains (losses), net Fair value 2014 2013 2014 2013 2014 2013 Short term deposit $2,599 $2,911 $- $- $2,599 $2,911 U.S. GSE securities 21,085 3,093 (34) (11) 21,051 3,082 Corporate obligations 80,389 98,444 (262) (380) 80,127 98,064 $104,072 $104,448 $(296) $(391) $103,777 $104,057 The amortized cost of marketable debt securities at December 31, 2014, by contractual maturities or anticipated dates of sale, are shownbelow: Amortized Unrealized gains (losses) Fair cost Gains Losses value Due in one year or less $8,910 $4 $(5) $8,909 Due after one year to five years 92,564 110 (405) 92,269 $101,474 $114 $(410) $101,178 The amortized cost of marketable debt securities at December 31, 2013, by contractual maturities or anticipated dates of sale, are shownbelow: 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 six years 90,576 162 (576) 90,162 $101,537 $185 $(576) $101,146 The actual maturity dates may differ from the contractual maturities because debtors may have the right to call or prepay obligationswithout penalties. The total fair value of marketable securities with outstanding unrealized losses as of December 31, 2014 amounted to $68,945, while theunrealized losses for these marketable securities amounted to $410. Of the $410 unrealized losses outstanding as of December 31, 2014, aportion of which in the amount of $113 was related to marketable securities that were in a loss position for more than 12 months and theremaining portion of $297 was 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, 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, aportion of which in the amount of $145 was related to marketable securities that were in a loss position for more than 12 months and theremaining portion of $431 was related to marketable securities that were in a loss position for less than 12 months. -75- U.S. dollars in thousands, except share and per share data Management believes that as of December 31, 2014, the unrealized losses in the Company's investments in all types of marketablesecurities were temporary and no impairment loss was realized in the Company's consolidated statements of operations. The unrealized losses related to the Company’s marketable securities were primarily due to changes in interest rates. Because the Companydoes not intend to sell the investments and it is not more likely than not that the Company will be required to sell the investments beforerecovery 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, 2014. Proceeds from maturity of available-for-sale marketable securities during 2014, 2013 and 2012 were $23,250, $18,325 and $25,911,respectively. Proceeds from sales of available-for-sale marketable securities during 2014, 2013 and 2012 were $46,491, $42,949 and$39,063, respectively. Realized gains from the sale of available-for sale marketable securities for 2014, 2013 and 2012 were $73, $1,013and $708, respectively. Realized losses from the sale of available-for sale marketable securities for 2014, 2013 and 2012 were $12, $4 and$38, respectively. The Company determines realized gains or losses on the sale of available-for-sale marketable securities based on aspecific identification method. NOTE 4:-OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES December 31, 2014 2013 Prepaid expenses $1,010 $1,706 Tax and governmental receivables 649 652 Deposits 208 201 Others 35 82 $1,902 $2,641 NOTE 5:-INVENTORIES Inventories are composed of the following: December 31, 2014 2013 Work-in-progress $6,795 $5,412 Finished products 8,840 6,922 $15,635 $12,334 -76- U.S. dollars in thousands, except share and per share data For the years ended December 31, 2014 and 2013, the Company recorded $6 and $261, respectively, of income due to the utilization ofinventory that was previously written off. Inventory write-downs amounted to $29 for the year ended December 31, 2012. NOTE 6:-PROPERTY AND EQUIPMENT, NET Composition of assets, grouped by major classifications, is as follows: December 31, 2014 2013 Cost: Computers and equipment $17,793 $40,624 Office furniture and equipment 1,446 1,590 Leasehold improvements 4,559 4,651 23,798 46,865 Less - accumulated depreciation 20,955 44,028 Depreciated cost $2,843 $2,837 During 2014, the Company disposed fully depreciated equipment, which ceased to be used, in the amount of $24,247. No capital loss wasrecorded due to this disposal of equipment in the consolidated statement of operations. Depreciation expenses, which also include amortization expenses of assets recorded under capital leases, amounted to $1,290, $1,994 and$3,168 for the years ended December 31, 2014, 2013 and 2012, respectively. NOTE 7:-INTANGIBLE ASSETS, NET The following table shows the Company's intangible assets for the periods presented: Useful life December 31, (years) 2014 2013 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 13,407 13,274 Technology (completion of the development of in-process R&D) 2,567 1,284 Non-competition agreement 519 360 64,756 63,181 Impairment: (Note 7b) Current technology 28,817 28,817 Customer relations 10,070 10,070 38,887 38,887 Amortized cost $5,135 $6,710 -77- U.S. dollars in thousands, except share and per share data a.Amortization expenses amounted to $1,573, $1,672 and $2,310 for the years ended December 31, 2014, 2013 and 2012,respectively. b.Estimated amortization expenses for the years ending: Year ending December 31, 2015 $1,284 2016 1,284 2017 1,284 2018 1,283 $5,135 NOTE 8:- FAIR VALUE MEASUREMENTS In accordance with ASC 820, the Company measures its cash equivalents, marketable securities and foreign currency derivative contracts atfair value. Cash equivalents, marketable securities and foreign currency derivative contracts are classified within Level 1 or Level 2 valuehierarchies. This is because cash equivalents, and marketable securities are valued using quoted market prices or alternative pricing sourcesand models utilizing market observable inputs. Foreign currency derivative contracts are classified within Level 2 value hierarchy as thevaluation inputs 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 recurringbasis as of December 31, 2014 (see also Note 3): Balance as of Fair value measurements Description December 31,2014 Level 1 Level 2 Level 3 Assets Cash equivalents Money market mutual funds $2,746 $2,746 - - Short-term marketable securities and time deposits U.S. GSE securities $1,499 - $1,499 - Corporate debt securities $7,410 - $7,410 - Long-term marketable securities U.S. GSE securities $19,552 - $19,552 - Corporate debt securities $72,717 - $72,717 - Derivative liabilities $(618) - $(618) - -78- U.S. dollars in thousands, except share and per share data The following table provides information by value level for financial assets and liabilities that are measured at fair value on a recurringbasis as of December 31, 2013: Balance as of Fair value measurements Description December 31,2013 Level 1 Level 2 Level 3 Assets Cash equivalents Money market mutual funds $3,762 $3,762 Short-term marketable securities and time deposits U.S. GSE securities $251 $251 - Corporate debt securities $10,733 $10,733 - Long-term marketable securities U.S. GSE securities $2,831 $2,831 - Corporate debt securities $87,331 $87,331 - In addition to the assets and liabilities described above, the Company's financial instruments also include cash and cash equivalents,restricted deposits, short-term deposits, trade receivables, other accounts receivable, trade payables, accrued expenses and other payables.The fair value of these financial instruments was not materially different from their carrying value at December 31, 2014 and 2013 due tothe short-term maturity of these instruments. 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 thecompany, on a fully diluted basis. The Company also signed a buyout agreement pursuant to which the Company had the option topurchase from all holders of the Asian private company, under agreed terms, all of the remaining outstanding securities by no later thanDecember 31, 2014. The terms and conditions of the above buyout agreement were modified on November 2014 (including an extension ofthe option to purchase the remaining outstanding securities until December 31, 2015). The investment is accounted under the cost-methodin accordance with ASC 325-20. -79- U.S. dollars in thousands, except share and per share data NOTE 10:-ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE December 31, 2014 2013 Accrued expenses $3,279 $3,324 Derivative instruments 618 - Legal, accounting and investors relation accrual 543 779 Royalties and commission 538 640 Others 874 789 $5,852 $5,532 NOTE 11:-ACCRUED PENSION LIABILITIES As of December 31, 2014 and 2013, 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 therequirements of local law, the Company deposits funds for certain plans with insurance companies, third-party trustees, or into government-managed accounts, and/or accrues for 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 futureservice period) of the employees were outsourced in November 2010 to an external insurance company ("Nuremberger Versicherung"). Fromand after the outsourcing date, the Company is required to pay premiums to the external insurance company and in return the pensionbenefits earned by the German employees are covered by the Company’s arrangement with the external insurance company. The Companylegally is released from its obligations to the German employees once the premiums are paid, and it is no longer subject to any of the risksand rewards associated with the benefit obligations covered and the plan assets transferred to the external insurance company. Since theoutsourcing arrangement meets the requirements of a nonparticipating annuity contract, the Company treats the costs of the outsourcingarrangement as the costs of the benefits being earned in accordance with ASC Paragraph 715-30-25-7 of ASC 715 "Compensation—Retirement Benefits." -80- U.S. dollars in thousands, except share and per share data The following tables provide a reconciliation of the changes in the pension plans' benefit obligation and fair value of assets for the yearsended December 31, 2014 and 2013, and the statement of funded status as of December 31, 2014 and 2013: December 31, 2014 2013 Accumulated benefit obligation $1,194 $1,227 Change in benefit obligation Benefit obligation at beginning of year $1,239 $1,334 Service cost 5 5 Interest cost 29 35 Benefits paid from the plan (152) (181)Actuarial loss 218 1 Exchange rates and others (134) 45 Benefit obligation at end of year $1,205 $1,239 Change in plan assets Fair value of plan assets at beginning of year 258 364 Actual return on plan assets 6 6 Employer contributions to plan - - Benefits paid from the plan (127) (123)Exchange rates (21) 11 Fair value of plan assets at end of year $116 $258 The assumptions used in the measurement of the Company's pension expense and benefit obligations as of December 31, 2014, 2013 and2012 are as follows: Year ended December 31, 2014 2013 2012 Weighted-average assumptions Discount rate 2.1% 3.5% 3.6%Expected return on plan assets 2.86% 2.88% 2.88%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 actuarialassumptions used. The Company reviews historical trends, future expectations, current market conditions, and external data to determinethe assumptions. The discount rate is determined considering the yield of government bonds. The rate of compensation increase isdetermined by the Company, based on its long-term plans for such increases. The following table provides the components of net periodic benefit cost for the years ended December 31, 2014, 2013 and 2012: December 31, 2014 2013 2012 Components of net periodic benefit cost Service cost $5 $5 $61 Interest cost 29 35 47 Expected return on plan assets (6) (6) (12)Amortization of net loss 11 11 2 Net periodic benefit cost $39 $45 $98 -81- U.S. dollars in thousands, except share and per share data December 31, 2014 2013 Net amounts recognized in the consolidated balance sheets as of December 31, 2014 and2013 consist of: Current liabilities $- $- Noncurrent liabilities 1,089 981 Net amounts recognized in the consolidated balance sheets $1,089 $981 Net amounts recognized in accumulated other comprehensive income as of December 31,2014 and 2013 consist of: Net actuarial loss $(435) $(237) Net amounts recognized in accumulated other comprehensive loss $(435) $(237) The estimated amount that will be amortized from accumulated other comprehensive income (loss) into net periodic benefit cost in 2015 isas follows: 2015 Net actuarial loss and other $22 Benefit payments are expected to be paid as follows: Year ending December 31, 2015 $104 2016 $60 2017 $22 2018 $9 2019 $9 2020-2024 $99 The plan asset allocations at December 31 of the relevant years are as follows: December 31, 2014 2013 Bonds - - Real estate - - Cash - - Shares - - Other 100% 100% 100% 100% -82- U.S. dollars in thousands, except share and per share data The fair value of the Company's pension plan assets at December 31, 2014 by asset category, classified by the three levels of inputsdescribed in Note 2, are as follows: Fair value measurements at December 31, 2014 using: Total fairvalue atDecember31, 2014 Quotedprices inactivemarkets(Level 1) Significantotherobservableinputs(Level 2) Significantunobservableinputs (Level 3) Cash $- $- $- $- Equity securities - - - - Real estate - - - - Corporate bonds - - - - Others 116 - 116 - Total assets measured at fair value $116 $- $116 $- 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 gainsor losses exceeding 10% of the greater of the PBO or the market value of the plan assets. If amortization is required, the minimumamortization amount is that excess divided by the average remaining service period of the active employees expected to receive benefitsunder the plan. Actuarial losses were recognized in other comprehensive income (loss) in the amount of $209, $11 and $160 for the years ended December31, 2014, 2013 and 2012, respectively. NOTE 12:-FINANCIAL INCOME, NET The components of financial income, net were as follows: Year ended December 31, 2014 2013 2012 Foreign exchange gains $27 $- $120 Interest income from marketable securities and deposits, net ofamortization of premium on marketable securities 1,391 1,656 1,859 Realized gains on marketable securities 73 1,013 708 Other - 13 1 Financial income 1,491 2,682 2,688 Realized losses on marketable securities 12 4 38 Foreign exchange losses 113 86 88 Interest expenses 24 29 35 Other 138 106 139 Financial expense 287 225 300 Financial income, net $1,204 $2,457 $2,388 -83- U.S. dollars in thousands, except share and per share data 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 theissuance of up to 5,000,000 shares of preferred stock in one or more series with such designations, rights, preferences, and limitationsas the Board of Directors may determine, including the consideration received, the number of shares comprising each series,dividend rates, redemption provisions, liquidation preferences, sinking fund provisions, conversion rights and voting rights. Noshares of preferred stock are currently outstanding. 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 allmatters to be voted upon by the Company's stockholders. Subject to the rights of holders of preferred stock, if any, in the event ofliquidation, dissolution or winding up, holders of common stock are entitled to share ratably in all of the Company's assets. TheCompany's Board of Directors may declare a dividend out of funds legally available therefore and, subject to the rights of holders ofpreferred stock, if any, the holders of common stock are entitled to receive ratably 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 no redemption or sinking fund provisions applicable to common stock. c.Dividend policy: At December 31, 2014, the Company had an accumulated deficit of $85,352. The Company has never paid cash dividends on thecommon stock 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 ExchangeAct of 1934, for the repurchase of up to 2,700,000 shares of its common stock. This amount is in addition to the approximately308,000 shares that were available for repurchase under the board’s prior authorizations. In 2014, 2013 and 2012, the Company repurchased approximately 1,414,000, 390,000 and 1,283,000 shares, respectively, ofcommon stock at an average purchase price of $8.83, $8.95 and $6.28 per share, respectively, for an aggregate purchase price of$12,484, $3,490 and $8,060, respectively. As of December 31, 2014, 1,203,601 shares of the Company’s common stock remainedauthorized for repurchase under the Company's board-authorized share repurchase program. In 2014, 2013 and 2012, the Company issued 908,000, 1,066,000 and 455,000 shares, respectively, of common stock, out of treasurystock, to employees who exercised their equity awards under the Company's equity incentive plans or purchased shares from theCompany's 1993 Employee Stock Purchase Plan ("ESPP"). -84- U.S. dollars in thousands, except share and per share data 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 itssubsidiaries and others, including consultants, may be granted rights to purchase the Company's common stock. The plans authorizethe administrator, except for the grant of RSUs, to grant equity incentive awards at an exercise price of not less than 100% of the fairmarket value of the common stock on the date the award is granted. It is the Company's policy to grant stock options and SARs at anexercise 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 futuregrant. During 2012 and 2011, the Company granted to employees and executive officers of the Company primarily share appreciationrights ("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, theappreciation amount is paid through the issuance of shares of the Company's common stock. The ceiling limits the maximum incomefor each SAR unit and the maximum number of shares to be issued. SARs are considered an equity instrument as it is a net sharesettled award capped with a ceiling. Starting in 2013, the Company granted to employees and executive officers of the Company 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 timethe award is vested. RSUs granted to employees and executive officers generally vest over a four year period from the grant date with25% of the RSUs granted vesting on the first 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 "DirectorsPlan"). Under the Directors Plan, which expired in January 2014, the Company was authorized to issue nonqualified stock options tothe Company's outside non-employee directors to purchase up to 1,980,875 shares of common stock at an exercise price equal to thefair market value of the common stock on the date of grant. The Directors Plan, as amended, provided that each person who becamean outside, non-employee director of the Board of Directors was automatically granted an option to purchase 30,000 shares ofcommon stock (the "First Option"). Thereafter, each outside director was automatically granted an option to purchase 15,000 sharesof common stock (a "Subsequent Option") on January 1 of each year if, on such date, he had served on the Board of Directors for atleast six months. In addition, an option to purchase an additional 15,000 shares of common stock (a "Committee Option") wasgranted on January 1 of each year to each outside director for each committee of the Board on which had served as a chairperson forat least six months. -85- U.S. dollars in thousands, except share and per share data Options granted under the Directors Plan generally had a term of 10 years. One-third of the shares were exercisable after the first yearand thereafter one-third at the end of each twelve-month period. The Directors Plan expired in January 2014 and therefore no further awards may be granted thereunder. As of December 31, 2014,2,464,933 shares of common stock had been granted under the plan and stock options to acquire 540,000 shares remainedoutstanding in the plan prior to its expiration. 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 may be granted non-qualified stock options for the purchase of common stock. The 1998 Plan currently provides for thepurchase of up to 5,062,881 shares of common stock. As of December 31, 2014, 118,535 shares of common stock remained availablefor grant under the 1998 Plan. The exercise price of options under the 1998 Plan shall not be less than the fair market value of common stock for nonqualified stockoptions, 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 determinedby the Company's Board of Directors or a committee appointed by the Company's Board of Directors. Options under the 1998 Planexpire up to seven years after the 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 furthergrants of awards may be made thereunder. As of December 31, 2014, 2,194,847 shares of common stock were granted under the plan,stock options to acquire 10,000 shares 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 fairmarket value of the 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 asdetermined by the Company's Board of Directors or a committee appointed by the Company's Board of Directors. Equity awardsunder the 2001 plan expired up to seven years 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 2003 Plan terminated in 2012 upon approval of the Company's 2012 Equity Incentive Plan (the "2012 Plan"). As ofDecember 31, 2014, 10,700,543 shares of common stock had been granted under the plan and stock option and SARs to acquire1,412,613 shares of common stock remained outstanding under the plan. As the 2003 Plan expired in May 2012, no further awardsmay be granted thereunder. -86- U.S. dollars in thousands, except share and per share data Equity awards under the 2003 Plan were generally exercisable over a 48-month period beginning 12 months after issuance, or asdetermined by the Company's Board of Directors or a committee appointed by the Company's Board of Directors. Equity awardsunder the 2003 Plan expired up to seven years after the date of grant. 2012 Equity Incentive Plan In 2012, the Company adopted the 2012 Plan, which also complies with the Israeli tax reforms. Under the 2012 Plan, employees,directors and consultants may be granted incentive or non-qualified stock options, SARs, RSUs and other awards under the plan. Theexercise price of the equity awards under the 2012 Plan shall not be less than the fair market value of common stock at the time ofgrant, unless otherwise determined by the Company's Board of Directors or a committee appointed by the Company's Board ofDirectors. The 2012 Plan currently provides for the purchase of up to 1,450,000 shares of common stock. As of December 31, 2014,475,435 shares of common stock remained available for grant under the 2012 Plan. Stock options, SARs and RSUs awarded under the 2012 Plan to employees and executive officers are generally exercisable over a48-month period beginning 12 months after issuance, or as determined by the Company's Board of Directors or a committeeappointed by the Company's Board of Directors 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 to provide for the grant of equity awards to the Company’s non-employeedirectors. The director subplan is designed to work automatically; however, to the extent administration is necessary, it would beprovided by the Company’s board of directors. Starting in 2014, non-employee directors are granted automatically under the directorsubplan, on January 1 of each year, 8,000 stock options and 4,000 restricted stock units, all of which would fully vest at the end ofone year from the grant date. If a director is appointed for a term commencing during a calendar year, the director would be grantedstock options and restricted stock units on the date of appointment and the number of stock options and restricted stock unitsgranted would be based upon the number of days remaining in the in the calendar year following the date such person wasnominated as a director. Solely with respect to calendar year 2014, in addition to the grants of 8,000 stock options and 4,000restricted stock units on January 1, 2014 to all then elected board members, each committee chair also received an automatic grant ofstock options of 15,000 shares. 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 aggregateof 3,800,000 shares of common stock for issuance under the ESPP. The ESPP provides that substantially all employees of theCompany may purchase Company common stock at 85% of its fair market value on specified dates via payroll deductions. Therewere approximately 310,000, 374,000 and 446,000 shares of common stock issued at a weighted average purchase price of $5.55,$4.44 and $4.42 per share under the ESPP in 2014, 2013 and 2012, respectively. As of December 31, 2014, 403,000 shares ofcommon stock were reserved under the ESPP. -87- U.S. dollars in thousands, except share and per share data Stock Reserved for Future Issuance The following table summarizes the number of shares available for future issuance at December 31, 2014 (after giving effect to theabove increases in the equity incentive plans): ESPP 403,000 Equity awards 594,000 Undesignated preferred stock 5,000,000 5,997,000 -88- U.S. dollars in thousands, except share and per share data The following is a summary of activities relating to the Company's stock options, SARs and RSUs granted among the Company'svarious plans: Year ended December 31, 2014 2013 2012 Amount ofoptions/SARs/RSUs Weightedaverageexerciseprice Aggregateintrinsicvalue (4) Amount ofoptions/SARs/RSUs Weightedaverageexerciseprice Aggregateintrinsicvalue (4) Amount ofoptions/SARs/RSUs Weightedaverageexerciseprice Aggregateintrinsicvalue (4) inthousands inthousands inthousands Options outstanding atbeginning of year 6,537 $8.68 $- 9,622 $10.72 $- 10,564 $12.22 $- Changes during theyear: Options granted 232 $9.15 $- 524 $6.42 $- 310 $5.67 $- SARs granted (1) - $- $- - $- $- 1,100 $6.16 $- RSUs granted 337 $- $- 552 $- $- - $- $- Exercised (1,715) $7.92 $3,537 (2,105) $6.49 $3,795 (127) $5.97 $62 Forfeited andcancelled (747) $20.11 $- (2,056) $17.56 $- (2,225) $15.14 $- Options/SARs/RSUsoutstanding at endof year (2) 4,644 $6.52 $21,409 6,537 $8.68 $16,673 9,622 $10.72 $98 Options/SARs/RSUsexercisable at end ofyear (3) 3,106 $7.73 $10,941 4,623 $10.30 $7,230 7,223 $12.07 $28 (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 3,670,000 shares of theCompany's common stock as of December 31, 2014. (3)Due to the ceiling imposed on the SAR grants, the exercisable amount above can be exercised for a maximum of 2,279,000 shares of theCompany's common stock as of December 31, 2014. (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, 2014, 2013 and 2012 which was $10.87, $9.71 and $5.76 per share, respectively. The intrinsic value for optionsand SARs exercised during those years represents the difference between the fair market value of the Company's common stock on the date ofexercise and the exercise price of each option or SAR, as applicable. -89- U.S. dollars in thousands, except share and per share data The stock options and SARs outstanding as of December 31, 2014, have been separated into ranges of exercise price as follows: Range ofexerciseprice Outstanding Remainingcontractuallife (years)(1) Weightedaverageexerciseprice Exercisable Remainingcontractuallife (years) Weightedaverageexerciseprice $ thousands $ thousands $ 0 (RSUs) 660 - - - - - 5.21-7.26 2,484 3.39 6.46 1,941 2.93 6.55 7.49-10.23 1,345 3.71 8.44 1,010 2.54 8.33 11.60-15.79 65 1.89 12.52 65 1.89 12.52 21.07-25.06 90 1.00 23.03 90 1.00 23.03 4,644 3.42 6.52 3,106 2.73 7.73 (1)Calculation of weighted average remaining contractual term does not include the RSUs that were granted, which have anindefinite contractual term. As of December 31, 2014, the outstanding number of SARs was 2,468,499 and based on the share price of the Company's commonstock as of December 31, 2014 ($10.87 per share), 2,451,499 of those SARs were in the money as of December 31, 2014. The weighted average estimated fair value of employee RSUs granted during 2014 was 7.94 per share (using the weighted averagepre vest cancellation rate of 3.79% on an annual basis). The weighted-average estimated fair value of employee stock options and SARs granted during the years ended December 31, 2014,2013 and 2012 was $3.47, $4.90 and $2.39 per stock option and SAR, respectively, using the binomial model with the followingweighted-average assumptions (annualized percentages): Year ended December 31, 2014 2013 2012 Volatility 43.14% 46.24% 48.23%Risk-free interest rate 1.85% 1.39% 2.20%Dividend yield 0% 0% 0%Pre-vest cancellation rate *) 4.17% 3.48% 3.50%Post-vest cancellation rate **) 4.09% 2.52% 2.58%Suboptimal exercise factor ***) 1.61 1.81 1.60 Expected life (years) 3.27 4.66 4.19 *)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. -90- U.S. dollars in thousands, except share and per share data The computation of volatility uses a combination of historical volatility and implied volatility derived from the Company'sexchange traded options 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 employeeequity-based awards. The dividend yield assumption is based on the Company's historical and expectation of future dividend payouts and may be subjectto substantial change in the future. The expected term of employee equity-based awards represents the weighted-average period the awards are expected to remainoutstanding and is a derived output of the binomial model. The expected life of employee equity-based awards is impacted by all ofthe underlying assumptions used in the Company's model. The binomial model assumes that employees' exercise behavior is afunction of the award's remaining contractual life and the extent to which the award is in-the-money (i.e., the average stock priceduring the period is above the strike price of the award). The binomial model estimates the probability of exercise as a function ofthese two variables based on the history of exercises and cancellations on past award grants made by the Company. As equity-based compensation expense recognized in the consolidated statement of operations is based on awards ultimatelyexpected to vest, it should be reduced for estimated forfeitures. The forfeitures are estimated at the time of grant and revised, ifnecessary, in subsequent periods if actual forfeitures 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 usingthe same assumptions set forth above for the years ended 2014, 2013 and 2012 except the expected life and the volatility. Theexpected life was assumed to be between six to 24 months based on the contractual life of the plan, and the expected volatility wasassumed to be in a range of 29.06%-37.17% in 2014, 36.37%-44.19% in 2013 and 35.79%-42.02% in 2012. The Company's aggregate equity compensation expenses for the years ended December 31, 2014, 2013 and 2012 totaled $5,359,$4,159 and $4,983, respectively. The Company recognized no tax benefit in its consolidated statements of operations for the yearsended December 31, 2014, 2013 and 2012 for the Company's equity-based compensation arrangements. -91- U.S. dollars in thousands, except share and per share data A summary of the status of the Company's non-vested stock options, SARs and RSUs as of December 31, 2014, and changes duringthe year ended December 31, 2014, is presented below: Non-vested Units Weighted averagegrant date fairvalue (In thousands) Non-vested at January 1, 2014 1,914 4.14 Granted 569 6.12 Vested (918) 3.89 Forfeited (27) 4.26 Non-vested at December 31, 2014 1,538 5.01 As of December 31, 2014, equity-based compensation arrangements to purchase a maximum of approximately 3,376,000 shares ofcommon stock were vested and expected to vest (the calculation takes into consideration the forfeiture rate). As of December 31, 2014, there was a total unrecognized compensation expense of $3,168 related to non-vested equity-basedcompensation arrangements granted under the Company's various equity incentive plans. That expense is expected to be recognizedduring the period from 2015 through 2018. NOTE 14:-COMMITMENTS AND CONTINGENCIES Commitments a.The Company and its subsidiaries lease certain equipment and facilities under non-cancelable operating leases. The Company hassignificant leased facilities in Herzlia Pituach, Israel. The lease agreement for the Israeli facilities is effective until November 2018.The Company has various agreements for its facilities in the U.S. that terminate in 2015 through 2016. The Company's subsidiariesin Scotland, Japan, Germany, China and Hong-Kong have lease agreements for their facilities that terminate in 2019, 2017, 2016,2016 and 2016, respectively. The Company's subsidiary in India has sublease agreements with NXP for their facilities that terminatein 2017. The Company has operating lease agreements for its motor vehicles which terminate in 2015 through 2017. At December 31, 2014, the Company is required to make the following minimum lease payments under non-cancelable operating leases formotor vehicles and facilities: Year ended December 31, 2015 $2,977 2016 2,584 2017 1,687 2018 and thereafter 1,360 $8,608 Facilities rental expenses amounted to $2,298, $2,389 and $2,891 for the years ended December 31, 2014, 2013 and 2012, respectively. b.The Company participated in programs (most of which are royalty bearing grants) sponsored by the Israeli government for thesupport of research and development activities. Through December 31, 2014, the Company had obtained grants from the IsraeliOffice of the Chief Scientist (the “OCS”) for certain of the Company’s research and development projects. The Company is obligatedto pay royalties to the OCS, amounting to 5% of the sales of the products and other related revenues (based on the dollar) generatedfrom such projects, up to 100% of the grants received. The royalty payment obligations also bear interest at the LIBOR rate. Theobligation to pay these royalties is contingent on actual sales of the applicable products and in the absence of such sales, nopayment is required. -92- U.S. dollars in thousands, except share and per share data As of December 31, 2014, the aggregate contingent liability to the OCS amounted to $5,290. The Israeli Research and DevelopmentLaw provides that know-how developed under an approved research and development program may not be transferred to third partieswithout the approval of the OCS. Such approval is not required for the sale or export of any products resulting from such research ordevelopment. The OCS, under special circumstances, may approve the transfer of OCS-funded know-how outside Israel, in thefollowing cases: (a) the grant recipient pays to the OCS a portion of 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 theamount of the grants received plus interest (or three times the amount of the grant received plus interest, in the event that therecipient of the know-how has committed to retain the R&D activities of the grant recipient in Israel after the transfer); (b) the grantrecipient receives 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 with certain types of cooperation in research and development activities; or (d) if such transfer of know-howarises in connection with a liquidation by reason of insolvency or receivership of the grant recipient. Litigation a.The Company is involved in certain claims arising in the normal course of business. However, the Company believes that theultimate resolution of these matters will not have a material adverse effect on its financial position, results of operations, or cashflows. b.From time to time, the Company may become involved in litigation relating to claims arising in the ordinary course of businessactivities. Also, as is typical in the semiconductor industry, the Company has been and, from time to time may be, notified of claimsthat it may be infringing on patents or 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, 2014 2013 2012 Domestic taxes Federal taxes: Current $- $(271) $(465) State taxes: Current 2 (9) 1 Foreign taxes: Current (1) (1,672) 507 304 Deferred (2) (1,170) (377) (12) (2,842) 130 292 Income tax benefit $(2,840) $(150) $(172) (1)Includes (i) income in the amount of $858 due to reversal of income tax contingency reserves that were determined to be nolonger needed due to finalization of a tax assessment of one of the Company’s subsidiaries and (ii) income in the amount of$1,234 due to removal of valuation allowance of tax advances. (2)Includes income tax benefit in the amount of $827 due to elimination of valuation allowance of deferred tax assets. -93- U.S. dollars in thousands, except share and per share data There were no tax benefits associated with the exercise of non-qualified stock options in 2014, 2013 and 2012. b.Income (loss) before taxes is comprised as follows: Year ended December 31, 2014 2013 2012 Domestic $(3,497) $(3,525) $(844)Foreign 4,258 6,051 (7,370) $761 $2,526 $(8,214) c.A reconciliation between the Company's effective tax rate assuming all income is taxed at statutory tax rate applicable to the incomeof the Company and the U.S. statutory rate is as follows: Year ended December 31, 2014 2013 2012 Income (loss) before taxes on income $761 $2,526 $(8,214) Theoretical tax at U.S. statutory tax rate (35%) $266 $884 $(2,875)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) (5,974) (3,015) 1,253 Nondeductible equity-based compensation expenses 1,876 1,456 1,744 Current adjustment and interest on uncertain tax position liabilityin U.S. - (283) (465)Valuation allowance in U.S. 989 804 154 Other 1 2 15 $(2,840) $(150) $(172) -94- U.S. dollars in thousands, except share and per share data d.Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts of assets and liabilities forfinancial reporting purposes and the amounts used for income tax purposes. December 31, 2014 2013 Deferred tax assets (short-term): Reserves and accruals $149 $92 Carryforward tax losses $626 $- Total deferred tax assets (short-term) 775 92 Valuation allowance - - Total 775 92 Deferred tax assets (long-term): Reserves and accruals 1,669 1,074 Equity-based compensation 2,761 2,526 Intangible assets 1,198 1,453 Carryforward tax losses 27,621 31,817 Other 15 16 Total deferred tax assets (long-term) 33,264 36,886 Valuation allowance (33,115) (36,886) Total 149 - Total deferred tax assets $924 $92 Deferred tax liabilities, net (Long term): Acquired intangible assets 1,360 1,670 Acquired carryforward tax losses (515) (487) Total deferred tax liabilities, net $845 $1,183 -95- U.S. dollars in thousands, except share and per share data Management believes that part of the deferred 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 $33,115 and $36,886 was provided as of December 31, 2014 and 2013,respectively. As of December 31, 2014, the Company had cash and cash equivalents, marketable securities and time deposits of approximately$124.3 million, of which $108.8 million was held by foreign subsidiaries of the Company. The Company intends to permanently reinvest earnings of itsforeign operations and its current operating plans do not demonstrate a need to repatriate foreign earnings to fund the Company’s U.S. operations.However, if these funds were needed for the Company’s operations in the United States, the Company would be required to accrue and pay U.S. taxes aswell as taxes in other countries to repatriate these funds. The determination of the amount of additional taxes related to the repatriation of these earningsis not practicable, as it may vary based on various factors such as the location of the cash and the effect of regulation in the various jurisdictions fromwhich the cash would be repatriated. e.Uncertain tax positions: A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax benefits is as follows: 2014 2013 Gross unrecognized tax benefits at January 1 $1,892 $1,815 Decrease in tax positions for previous years (104) - Increases in tax positions for previous years 115 59 Increases in tax positions for current year 71 109 Change in interest and linkage related to tax positions (85) 193 Lapse in statute of limitations or finalization of tax assessment (858) (284) Gross unrecognized tax benefits at December 31 $1,031 $1,892 The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate was $1,031 and $1,892 atDecember 31, 2014 and 2013, respectively. The Company accrues interest and penalties relating to unrecognized tax benefits in itsprovision for income taxes. At December 31, 2014 and 2013, the Company had accrued interest and penalties related tounrecognized tax benefits of $135 and $408, respectively. The Company reversed income tax contingency reserves that were determined to be no longer required due to the expiration ofapplicable statute of limitations. Pursuant to this reversal, the Company recorded a tax benefit of $284 and $622 during 2013 and2012, respectively. During 2014, the Company recorded a tax benefit of $858 due to the finalization of tax assessment. The Company and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and various state and foreignjurisdictions. The last examination conducted by U.S. tax authorities was with respect to the Company's U.S. federal income taxreturns for 2004. The statute of limitations relating to the consolidated Federal income tax return is closed for all tax years up to andincluding 2010. -96- U.S. dollars in thousands, except share and per share data The last examination conducted by the Israeli tax authorities was with respect to the Company’s Israeli income tax returns for theyears between 2006 and 2012. With respect to DSP Israel, the tax returns up to and including 2012 are considered to be final and not subject to any audits due tothe expiration of the statute of limitations. 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 theGerman tax authorities of the Company’s German tax returns for 2007 – 2009. The Company currently cannot provide an estimate ofthe range of change in the amount of the unrecognized tax benefits due to the ongoing status of the examination. f.Tax benefits under the Law for the Encouragement of Capital Investments, 1959 ("Investment Law"): Six separate investmentprograms of DSP Israel's production facilities have been granted "Approved Enterprise" status and two investment programs of DSPIsrael's production facilities were filed under "Beneficiary Enterprise" status under the Investment Law. The Investment Law providescertain Israeli tax benefits for eligible capital investments 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 theprovisions of the Investment Law. Generally, DSP Israel's investment programs that obtained approval for Approved Enterprise statusprior to enactment of the Amendment will 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 thatcompanies are no longer required to get the Investment Center's prior approval to qualify for tax benefits. An enterprise that receivestax benefits without the initial approval from the Investment Center is called a "Beneficiary Enterprise," rather than the previousterminology of “Approved Enterprise”. The period of tax benefits for a new Beneficiary Enterprise commences in the "Year ofCommencement," which is the later of: (1) the year in which taxable income is first generated by the company, or (2) the year ofelection. In addition, under the Amendment, tax benefits are available to production facilities, which generally are required to derive morethan 25% of their business income from export. Furthermore, in order to receive the tax benefits under the Amendment, a companymust make an investment in the Benefited Enterprise exceeding a certain percentage or a minimum amount specified in theInvestment Law. DSP Israel has chosen the "alternative benefits" track for all of its investment programs. Accordingly, DSP Israel's income from an"Approved Enterprise" and "Beneficiary Enterprise" is tax-exempt for a period of two or four years and is subject to a reducedcorporate tax rate of 10%-25% (based on the percentage of foreign ownership) for an additional period of eight or six years,respectively. -97- U.S. dollars in thousands, except share and per share data DSP Israel's first, second, third, fourth, fifth and sixth investment programs, which were completed and commenced operations in1994, 1996, 1998, 1999, 2002 and 2004, respectively, were tax exempt for a period of between two and four years, from the first yearthey had taxable income and were entitled to a reduced corporate tax rate of 10%-25% (based on the percentage of foreignownership) for an additional period of between six to eight years. As of 2014, all those investment programs were no longer entitledto a reduced corporate tax rate. DSP Israel's seventh and eighth investment programs have been in operation since 2006 and 2009, respectively, and entitles DSPIsrael to a corporate tax exemption for a period of two years and a reduced corporate tax rate of 10%-25% (based on the percentage offoreign ownership) for an additional 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 thevarious applicable tax rates and tax exemptions and the computation is made for income derived from each investment program onthe basis and formulas specified in the Investment 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. During2008, DSP Israel received an approval for the erosion of tax basis with respect to its second, third and fourth investment programs.Those approvals resulted in increasing the taxable income attributable to the later investment programs, which are currently inoperation and will be taxed at a lower tax rate than the previous investment programs, which in turn will decrease the overalleffective tax rate. The Company's investment programs that generate taxable income are currently subject to an average tax rate of up to approximately10% based on a variety of factors, including percentage of foreign ownership and approvals for the erosion of the tax basis of ourinvestment programs. The Company's average tax rate for its investment programs may change in the future due to circumstancesoutside of its control and therefore, the Company cannot provide any assurances that its average tax rate for its investment programswill 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 other things, included an amendment to the Investment Law, effective as of January 1, 2011 (the “2011 Amendment”). Inaccordance with the 2011 Amendment, the benefit tracks under the Investment Law were modified and a uniform tax rate wouldapply to companies eligible for the “Preferred Enterprise” 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 asthen in effect). On July 30, 2013, the Israeli Parliament passed a law, which, among other things, was designated to amend the uniform tax rates thatwere set in the 2011 Amendment, and to increase the tax levy for years 2013 and 2014 (the “New Law”). The New Law increased theIsraeli corporate tax rate from 25% to 26.5%, canceled the reduction of corporate tax rate for “Preferred Enterprises,” which was seton 16% for 2014 and thereafter under the New Law and increased the tax rate on dividends from sources under the Israeli InvestmentLaw to 20% commencing on January 1, 2014. -98- U.S. dollars in thousands, except share and per share data The Company does not currently intend to implement the 2011 Amendment, rather it intends to continue to comply with theInvestment Law as it was in effect prior to enactment of the 2011 Amendment until the earlier of such time that compliance with theInvestment Law prior to enactment of the 2011 Amendment is no longer in the Company’s best interests or until the expiration of itscurrent investment programs. The Company is required to comply with the 2011 Amendment subsequent to the expiration of theCompany’s current investment programs and for any new qualified investment program after a transitional period. Once theCompany is required to comply with the provisions under the 2011 Amendment, its average tax rate may increase. As of December 31, 2014, DSP Israel believed that it met all the conditions required under the plans, which include inter-alia anobligation to invest certain amounts in property and equipment and an obligation to finance a percentage of investments by sharecapital. 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 2013 and 26.5% for 2014) plus a consumer price index linkage adjustment and interest and could be required to refund taxbenefits already received. As of December 31, 2014, approximately $33,293 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 andintends to reinvest the amount of its tax exempt income earned by DSP Israel. Accordingly, no provision for deferred income taxeshas been provided on income attributable to DSP Israel's "Approved Enterprises" and "Beneficiary Enterprise" as such income isessentially permanently reinvested. If DSP Israel's retained tax-exempt income is distributed, the income would be taxed at the applicable corporate tax rate (currently10%) as if it had not elected the alternative tax benefits under the Investment Law and an income tax liability of approximately$3,699 would have been incurred as of December 31, 2014. DSP Israel's income from sources other than the "Approved Enterprises" and "Beneficiary Enterprise" during the benefit period willbe subject to tax at the effective standard corporate tax rate in Israel (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 tocertain tax benefits, mainly the amortization of costs relating to know-how and patents, over eight years and accelerateddepreciation. 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. -99- U.S. dollars in thousands, except share and per share data 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 abovewill be available in the future. h.Israeli tax rates: The rate of the Israeli corporate tax is as follows: 2012 and 2013 – 25%, 2014 – 26.5%. Tax at a rate of 25% applies on capital gainsarising 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 thetaxable income generated by its Swiss subsidiary, including the amortization period for tax purposes of goodwill and all otherintangible assets acquired in the CIPT Acquisition by its Swiss subsidiary. Pursuant to the tax ruling, the Company's Swisssubsidiary is entitled to reduced tax rates of approximately 10% to 15%, depending on the source of income, and tax amortizationperiod of up to 10 years for the goodwill and other intangible assets acquired in the CIPT Acquisition by its Swiss subsidiary. j.The Company has accumulated losses for federal and state tax purposes as of December 31, 2014 of approximately $12,012 and$2,515, respectively, which may be carried forward and offset against future taxable income for a period of fifteen to twenty yearsfrom its creation. DSP Israel has accumulated losses for tax purposes as of December 31, 2014, of approximately $24,236 (includingresearch and development expenses carry forward), which may be carried forward and offset against future taxable income for anindefinite period. The Swiss subsidiary has accumulated losses for tax purposes as of December 31, 2014, of approximately$215,450, which may be carried forward and offset against future taxable income for a period of seven years from its creation. 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, 2014 2013 2012 Numerator: Net income (loss) $3,602 $2,676 $(8,042) Denominator: Weighted average number of shares of common stock outstandingduring the year used to compute basic net income (loss) per share(in thousands) 21,968 22,249 21,950 Incremental shares attributable to exercise of outstanding options,SARs and RSUs (assuming proceeds would be used to purchasetreasury stock) (in thousands) 986 657 - Weighted average number of shares of common stock used tocompute diluted net income (loss) per share (in thousands) 22,954 22,906 21,950 Basic net income (loss) per share $0.16 $0.12 $(0.37) Diluted net income (loss) per share $0.16 $0.12 $(0.37) -100- U.S. dollars in thousands, except share and per share data 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 and2014. All restructuring payments related to this restructuring plan were paid as of December 31, 2014. 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 2015. 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 regularlyby the Company's chief operating decision-maker (“CODM”) in deciding how to allocate resources and assess performance. The Company'sCODM is its Chief Executive Officer, who evaluates the Company's performance and allocates resources based on segment revenues andoperating 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, customerbase, homogeneity of products and technology. -101- U.S. dollars in thousands, except share and per share data 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, home gateway devices supplied by telecommunication serviceproviders which integrate the DECT/CAT-iq functionality and also address home automation applications, as well as fixed-mobileconvergence solutions. In this segment, revenues from cordless telephony products exceeded 10% of the Company’s total consolidatedrevenues and amounted to 79%, 85% and 88% of the Company’s total revenues for 2014, 2013 and 2012, respectively. 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. No revenues derived from products in the Office segment exceeded 10% of theCompany’s total consolidated revenues for the years 2014,2013 and 2012. Mobile - Products for the mobile market that provides voice enhancement and far-end noise elimination targeted for mobile phone and mobileheadsets. Insignificant revenues were derived from this segment for 2014, 2013 and 2012. 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 theCompany uses for consolidation of its financial statements. the CODM measures the performance of each business segment based on severalmetrics, including earnings from operations. CODM uses these results, in part, to evaluate the performance of, and to assign resources to, eachof the business segments. The Company does not allocate to its business segments certain operating expenses, which it manages separately atthe corporate level. These unallocated costs include primarily restructuring charges, amortization of purchased intangible assets, equity-basedcompensation expenses, proxy contest related expenses incurred during the second quarter of 2013 and certain corporate governance costs. 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 endedDecember 31, 2014, 2013 and 2012: Year ended December 31 Revenues Income (loss) from operations 2014 2013 2012 2014 2013 2012 Home $128,690 $142,144 $155,211 $23,438 $25,367 $15,040 Office $14,276 $8,849 $7,579 $(2,805) $(4,656) $(5,156)Mobile $70 $70 $- $(11,983) $(11,040) $(8,585)Total $143,036 $151,063 $162,790 $8,650 $9,671 $1,299 -102- U.S. dollars in thousands, except share and per share data The reconciliation of segment operating results information to the Company’s consolidated financial information was as follows: Year ended December 31, 2014 2013 2012 Income from operations $8,650 $9,671 $1,299 Unallocated corporate, general and administrative expenses * (2,161) (2,368) (2,600)Restructuring expenses - - (2,008)Proxy contest related expenses - (1,403) - Equity-based compensation expenses (5,359) (4,159) (4,983)Intangible assets amortization expenses (1,573) (1,672) (2,310)Financial income, net 1,204 2,457 2,388 Total consolidated income (loss) before taxes $761 $2,526 $(8,214) *Includes mainly legal, accounting, board of directors and investors relation expenses. Major customers and geographic information The following is a summary of operations within geographic areas based on customer locations: Year ended December 31, 2014 2013 2012 Revenue distribution Hong-Kong $79,622 $86,090 $84,737 Japan 31,261 34,377 51,033 Europe 6,787 7,370 7,429 United States 4,702 4,342 2,028 China 6,568 6,999 6,270 Taiwan 9,077 7,093 6,496 Other 5,019 4,792 4,797 $143,036 $151,063 $162,790 For a summary of revenues from major customers, please see Note 1. Sales to these customers were primarily related to the Company's Homereportable segment. The following is a summary of long-lived assets within geographic areas based on the assets' locations: December 31, 2014 2013 Long-lived assets Europe $188 $158 Israel 2,264 2,260 United States - 1 Other 391 418 $2,843 $2,837 -103- 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, 2014. 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 maynot prevent 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 updated 2013 framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based on this assessment, our managementconcluded that our internal control over financial reporting was effective as of December 31, 2014. The effectiveness of our internal control over financial reporting as of December 31, 2014 has been audited by Kost, Forer, Gabbay & Kasierer, amember 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, 2014, as stated in their report which is presented in this Annual Report on Form 10-K under Item 8. Item 9B.OTHER INFORMATION. None. -104- 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 2015 Annual Meeting of Stockholders to be held on June 8, 2015. 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 proxystatement. 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” inour definitive proxy statement. Such information is incorporated herein by reference. -105- 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, 2014 and 2013 Consolidated Statements of Operations for the years ended December 31, 2014, 2013 and 2012 Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2014, 2013 and 2012 Consolidated Statements of Cash Flows for the years ended December 31, 2014, 2013 and 2012 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 consolidatedfinancial statements or the related notes for the year ended December 31, 2014. -106- List of Exhibits: ExhibitNumber Description 3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1B to the Registrant’s Registration Statement on Form S-1, fileno. 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 tothe Registrant’s Annual Report on Form 10-K for the year ended December 31, 2006, and incorporated herein by reference). 3.3 Amendment to Restated Certificate of Amendment of DSP Group, Inc., effective as of June 9, 2014 (filed as Exhibit 3.1 to the Registrant’sCurrent Report on Form 8-K filed on June 13, 2014, and incorporated herein by reference). 3.4 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 filedon November 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-Kfor the 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 tothe Registrant’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 asExhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, and incorporated herein byreference). †† 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 quarterended September 30, 1997, and incorporated herein by reference). -107- ExhibitNumber Description 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 onForm 10-K for the year ended December 31, 2003, and incorporated herein by reference). †† 10.10 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 (filedas Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2000, and incorporated herein byreference). 10.12 Amended and Restated 2001 Stock Incentive Plan and form of option agreement thereunder (filed as Exhibit 10.31 to the Registrant’sAnnual Report 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 May4, 2011, and incorporated herein by reference) and form of option agreement thereunder (filed as Exhibit 10.32 to the Registrant’s AnnualReport on Form 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 locatedon Shenkar 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’sAnnual Report 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). †† -108- ExhibitNumber Description 10.18 Form of Stock Appreciation Right Agreement for Executive Officers pursuant to the Amended and Restated 2003 Israeli Share IncentivePlan (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 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). 10.20 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 incorporatedherein by reference) (confidential treatment has been granted for portions of this exhibit). 10.21 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). †† 10.22 Amendment to Employment Agreement by and between DSP Group, Ltd. and Ofer Elyakim, effective January 31, 2011 (filed asExhibit 10.33 to Registrant’s Annual Report on 10-K for the year ended December 31, 2010, and incorporated herein by reference). †† 10.23 Amendment to Employment Agreement by and between DSP Group, Ltd. and Ofer Elyakim, as amended, effective as of May 16, 2011(filedas Exhibit 10.2 to Registrant’s Current Report on 8-K filed on May 20, 2011, and incorporated herein by reference). †† 10.24 Employment Agreement by and between DSP Group, Ltd. and Dror Levy, effective June 9, 2002 (filed as Exhibit 10.34 to Registrant’sAnnual Report on 10-K for the year ended December 31, 2010, and incorporated herein by reference). †† 10.25 Amendment to Employment Agreement by and between DSP Group, Ltd. and Dror Levy, effective January 31, 2011 (filed as Exhibit 10.35to Registrant’s Annual 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 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). †† 10.27 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). †† 10.28 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). †† 10.29 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). †† -109- ExhibitNumber Description 10.30 DSP Group, Inc. Amended and Restated 2012 Stock Incentive Plan. †† 10.31 Amendment to Employment Agreement of Ofer Elyakim, effective March 5, 2013 (filed as Exhibit 10.1 to Registrant’s Current Report on 8-K filed on March 8, 2013, and incorporated herein by reference). †† 10.32 Amendment to Employment Agreement of Dror Levy, effective March 5, 2013 (filed as Exhibit 10.2 to Registrant’s Current Report on 8-Kfiled on March 8, 2013, and incorporated herein by reference). †† 10.33 Amendment to Employment Agreement of David Dahan, effective March 5, 2013 (filed as Exhibit 10.3 to Registrant’s Current Report on 8-K filed on March 8, 2013, and incorporated herein by reference). †† 10.34 Form of Restricted Stock Unit Agreement for Israeli Resident Grantees under the 2012 Stock Incentive Plan(filed as Exhibit 10.1 toRegistrant’s Current Report on 8-K filed on August 21, 2013, and incorporated herein by reference). †† 10.35 Amendment to Employment Agreement of Ofer Elyakim, effective October 31, 2013 (filed as Exhibit 10.1 to Registrant’s Current Report on8-K filed on November 1, 2013, and incorporated herein by reference). †† 10.36 Amendment to Employment Agreement of Dror Levy, effective October 31, 2013 (filed as Exhibit 10.2 to Registrant’s Current Report on 8-K filed on November 1, 2013, and incorporated herein by reference). †† 10.37 Form of Restricted Stock Unit Agreement for Members of the Board of Directors under the 2012 Stock Incentive Plan. †† 10.38 Form of Restricted Stock Unit Agreement for Members of the Board of Directors Who Are Israeli Residents under the 2012 Stock IncentivePlan. †† 10.39 Amended and Restated Director Equity Sub-Plan under the 2012 Equity Incentive Plan. †† 10.40 2014 Performance-Based Bonus Plan applicable for the Chief Executive Officer, Chief Financial Officer and Chief Operating Officer of DSPGroup, Inc. the Company (terms set forth in the Registrant’s Current Report on Form 8-K filed on April 4, 2014, and incorporated herein byreference). 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.* -110- ExhibitNumber Description 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. -111- 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 16, 2015 Power of Attorney KNOW 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 16, 2015Patrick Tanguy /s/ Ofer Elyakim Chief Executive Officer (Principal March 16, 2015Ofer Elyakim Executive Officer) and Director /s/ Dror Levy Chief Financial Officer and Secretary March 16, 2015Dror Levy (Principal Financial Officer and Principal Accounting Officer) /s/ Thomas A. Lacey Director March 16, 2015Thomas A. Lacey /s/ Reuven Regev Director March 16, 2015Reuven Regev /s/ Norman J. Rice III Director March 16, 2015Norman J. Rice II /s/ Gabi Seligsohn Director March 16, 2015Gabi Seligsohn /s/ Yair Seroussi Director March 16, 2015Yair Seroussi /s/ Norman Taffe Director March 16, 2015Norman Taffe /s/ Kenneth H. Traub Director March 16, 2015Kenneth H. Traub -112- Schedule II DSP GROUP, INC.VALUATION AND QUALIFYING ACCOUNTS(in thousands) Description Balance atBeginning ofPeriod Charged to(deductedfrom) Costsand Expenses Balance at Endof Period Year ended December 31, 2012: Allowance for doubtful accounts Sales returns reserve - - - Year ended December 31, 2013: Allowance for doubtful accounts Sales returns reserve - - - Year ended December 31, 2014: Allowance for doubtful accounts Sales returns reserve - - - -113- Exhibit 21.1 LIST OF SUBSIDIARIES Name of Subsidiary Jurisdiction ofIncorporation 1.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 Employeeand Consultant Stock Plan, 1993 Director Stock Option Plan, 1998 Employee Stock Purchase Plan, 2001 Stock Incentive Plan, 2003 Israeli Share OptionPlan and 2012 Equity Incentive Plan of DSP Group, Inc., the 239,000 shares of common stock of DSP Group, Inc. issuable pursuant to options granted onDecember 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 reportsdated March 16, 2015, with respect to the consolidated financial statements and schedule of DSP Group Inc., and the effectiveness of internal control overfinancial reporting of DSP Group Inc. included in this Annual Report on Form 10-K for the year ended December 31, 2014. /s/ Kost Forer Gabbay & Kasierer KOST FORER GABBAY &KASIERER A Member of Ernst & Young Global Tel-Aviv, Israel March 16, 2015 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 respectsthe 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 (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 be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared; b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the 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 occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal 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 financial reporting,to the registrant’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’s internalcontrol over financial reporting. Date: March 16, 2015 /s/ Ofer Elyakim Ofer Elyakim Chief Executive Officer Exhibit 31.2 DSP GROUP, INC. CERTIFICATION I, Dror Levy, 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 respectsthe 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 (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 be designed under oursupervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to usby others within those entities, particularly during the period in which this report is being prepared; b)designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed underour supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financialstatements for external purposes in accordance with generally accepted accounting principles; c)evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about theeffectiveness of the disclosure controls and procedures, as of the end of the 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 occurred during the registrant’s mostrecent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonablylikely to materially affect, the registrant’s internal 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 financial reporting,to the registrant’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’s internalcontrol over financial reporting. Date: March 16, 2015 /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, 2014 as filed with the Securitiesand Exchange Commission (the “Report”), I, Ofer Elyakim, Chief Executive 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 operationsof the 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 thesignature that appears in typed form within the electronic version of this written statement required by Section 906, has been provided to the Companyand will 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 16, 2015 /s/ Ofer Elyakim Ofer Elyakim Chief Executive Officer Exhibit 32.2DSP 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, 2014 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 Companyand will 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 16, 2015 /s/ Dror Levy Dror Levy Chief Financial Officer 

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