DSP Group Inc. Annual Report 2015

FY2015 Annual Report · DSP Group Inc.

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April 2016

Dear Stockholders:

2015 was a banner year for DSP Group, highlighted by the return to full year revenue
growth. This accomplishment was driven by a 35% increase in revenues from new
product initiatives and our successful entry into the mobile market, which was a
milestone event for DSP Group and the HDClear product line.

We successfully transitioned the company back to growth by diligently executing on our
higher margin, new product initiatives. This included record revenue contributions from
new products, major design wins for mobile, record revenues in VoIP and strategic
design wins with ULE.

The new DSP Group is a combination of two businesses; the first is a highly profitable,
mature cordless telephone business, although declining, continues to generate significant
cash flows. More importantly, the second is a growth business that generated revenues of
$40 million in 2015, growing at 35% year-over-year. This portfolio consists of new
products with strong competitive positions and addresses growing market opportunities.

Moreover, the growth business supports a better margin profile and its growth rate is
expected to accelerate in 2016.* The proven success of our new product initiatives is
propelling us rapidly towards a major inflection point where the high growth, high
margin segments will become the dominant part of our business and the basis for
sustaining our long-term value.

Given the solid execution by our team and the successful market adoption of our new
initiatives in VoIP, Mobile, HGW and ULE, we are confident in our ability to sustain
long term revenue growth.*

2015 new product highlights:

1. Office/VoIP segment – Posted solid revenue growth of 56% year-over-year to

$22.2 million, lifted by strong demand for our VoIP SoCs. We expect recent Tier
1 design wins to materialize into mass commercialization and contribute to
continued growth in this segment.*

2. Mobile segment – Successfully accomplished our strategic goal of a major design
win with a tier 1 mobile OEM for HDClear. We are optimistic about the outlook
for our Mobile segment and expect HDClear to provide meaningful revenue
contributions in 2016.*

3. Home/IoT segment – Grew customer base and ecosystem vendors for our ULE
technology. During 2015, eight new OEMs and three leading service providers
have launched products based on our ULE technology, driven by key attributes

that DECT and ULE bring to the IoT market, including better home coverage and
longer range, an interference-free band and support for voice and video on a
single link.

We ended 2015 with revenues of slightly more than $144 million, achieving our objective
of full year revenue growth.

 Gross Margin: 160 bps improvement in non-GAAP gross margins to 41.7% vs.

40.1% in 2014; **

 Operating Profit: Non-GAAP operating profit of $7.5 million, 5% of revenues; **
 Net Income: Non-GAAP net income of $8.0 million, representing 6% of

revenues;** and

 Cash Flow from Operations: Generation of $12.2 million in cash flow from

operations

Turning to our balance sheet, we ended 2015 with approximately $122 million in cash
and cash equivalents. Reflecting our continued belief in the company’s long-term growth
prospects, we repurchased 1.3 million shares of our common stock for approximately
$13.2 million.

Our plans for 2016 are focused on executing our business strategy relating to new product
offerings and accelerating adoption and revenue growth.* The continued growth in VoIP
products, expectations for meaningful revenue contributions from HDClear and
anticipated broader adoption of DECT/ULE, position us well for continued revenue
growth.*

Finally, we would like to thank our customers, business partners, stockholders and our
team for their continued, outstanding support, cooperation and loyalty.

We believe that with your support, our focus, the loyalty of our customers and the
dedication of our staff, we are well positioned to meet market challenges in 2016, reap
the benefits of our investments and achieve profitable revenue growth.

Patrick Tanguy
Chairman of the Board

Ofer Elyakim
Chief Executive Officer

*Forward-Looking Information

This letter contains forward-looking statements (which are denoted by an asterisk) that
involve risks and uncertainties, as well as assumptions that if they materialize or prove
incorrect, could cause DSP Group’s results to differ materially from those expressed or
implied by such forward-looking statements. Please review the “Risk Factors” section of
DSP Group’s 2015 Form 10-K that accompanies this letter for a description of the risks,
uncertainties and assumptions associated with DSP Group’s business and financial
results. DSP Group assumes no obligation to update any forward-looking statements or
information.

**Non-GAAP Financial Information

This letter contains references to non-GAAP financial measures (which are denoted by a
double asterisk). See DSP Group’s current report on Form 8-K and attached Exhibit 99.1,
filed with the Securities and Exchange Commission on February 2, 2016, for a
reconciliation of the company’s GAAP and non-GAAP gross margin, operating income
and net income results for the twelve-month periods ended December 31, 2014 and 2015.

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
OF THE SECURITIES EXCHANGE ACT OF 1934

For the Fiscal Year Ended December 31, 2015

Commission File Number 001-35256
DSP GROUP, INC.
(Exact name of registrant as specified in its charter)

Delaware
(State or other jurisdiction of incorporation 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:
None

Securities 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 of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every
Interactive Data File required 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 such shorter 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 any amendment 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 ☐
Non-accelerated filer ☐
(Do not check if a smaller reporting company)

Accelerated filer ☒
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, 2015, the aggregate market value of voting stock held by non-affiliates of the Registrant, based on the closing price of
the Common Stock on June 30, 2015 as reported on the NASDAQ Global Select Market, was approximately $151,631,477. Shares of
Common Stock held by each officer and director and by each person who owns 5% or more of the outstanding Common Stock have been
excluded from this computation in that such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily
a conclusive determination for other purposes.

As of March 4, 2016, the Registrant had outstanding 21,731,537 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 after Registrant’s fiscal year end of December 31, 2015 are incorporated herein by reference into Item 5 of Part II and Items 10,
11, 12, 13 and 14 of Part III of this annual report.

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INDEX

DSP GROUP, INC.

PART I
Item 1.
BUSINESS. ............................................................................................................................................
Item 1A. RISK FACTORS. ...................................................................................................................................
Item 1B. UNRESOLVED STAFF COMMENTS. ................................................................................................
Item 2.
PROPERTIES. ........................................................................................................................................
LEGAL PROCEEDINGS. ......................................................................................................................
Item 3.
Item 4. MINE SAFETY DISCLOSURES. .........................................................................................................

PART II
Item 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES. ...................................................................
SELECTED FINANCIAL DATA ..........................................................................................................

Item 6.
Item 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND

RESULTS OF OPERATIONS. ..............................................................................................................
Item 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK .......................
FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA. ......................................................
Item 8.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
Item 9.
FINANCIAL DISCLOSURE. ................................................................................................................
Item 9A. CONTROLS AND PROCEDURES. ......................................................................................................
Item 9B. OTHER INFORMATION. .....................................................................................................................

PART III
Item 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE. ...............................
Item 11. EXECUTIVE COMPENSATION. .........................................................................................................
Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND

RELATED STOCKHOLDER MATTERS. ...........................................................................................

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR

INDEPENDENCE. .................................................................................................................................
Item 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES. .......................................................................

PART IV
Item 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES. .............................................................
SIGNATURES ..........................................................................................................................................................

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This report and certain information incorporated herein by reference contain forward-looking statements, which
are provided under the “safe harbor” protection of the Private Securities Litigation Reform Act of 1995. All statements
included or incorporated by reference in this report, other than statements that are purely historical in nature, are forward-
looking statements. Forward-looking statements are generally written in the future tense and/or are preceded by words such
as “will,” “may,” “should,” “could,” “expect,” “suggest,” “believe,” “anticipate,” “intend,” “plan,” or other similar
words. Forward-looking statements include statements regarding:

● Our belief that sales of our DECT products will continue to represent a substantial percentage of our revenues

for 2016;

● 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 other connectivity, the traditional cordless telephony market using fixed-line telephony is
declining and will continue to decline, which will reduce our revenues derived from, and unit sales of, cordless
telephony products;

● Our belief that SparkPA is well positioned to support the new Wave 2 and Wave 3 802.11ac access point

requirements;

● Our belief that the market will remain price sensitive for 2016 for our traditional cordless telephony products
and expect that price erosion and the decrease in the average selling prices of such products to continue;

● Our anticipation that revenues from our new products, primarily VoIP and HDClear products, will continue to

increase in 2016 and expect such revenues to represent a higher percentage of 2016 total sales;

● Our anticipation that annual revenues generated from our new products to increase significantly in 2016 as

compared to 2015;

● Our belief that our gross margin on an annual basis will continue to increase in the foreseeable future as our

product mix shifts in favor of new products which generally have higher gross margins;

● Our belief that research and development expenses will increase slightly in 2016 in comparison to 2015;

● Our belief that commercial shipments of products incorporating our new products will continue during 2016;

and

● Our belief that our available cash and cash equivalents at December 31, 2015 should be sufficient to finance

our operations for the foreseeable future.

This Annual Report on Form 10-K includes trademarks and registered trademarks of DSP Group. Products or
service names of other companies mentioned in this Annual Report on Form 10-K may be trademarks or registered
trademarks of their respective owners.

DSP Group, Inc. is referred to in this Annual Report as “DSP Group,” “we,” “us” “our” or “company.”

Item 1.

BUSINESS.

Introduction

PART I

DSP Group®, Inc. (NASDAQ: DSPG) is a leading global provider of wireless chipset solutions for converged
communications. Delivering semiconductor system solutions with software and hardware reference designs, DSP Group
enables OEMs, ODMs, consumer electronics (CE) manufacturers and service providers to cost-effectively develop new
revenue-generating products with fast time to market. At the forefront of semiconductor innovation and operational
excellence for over two decades, DSP Group provides a broad portfolio of wireless chipsets integrating DECT/CAT-iq, ULE,
Wi-Fi, PSTN, HDClear™, video and VoIP technologies. DSP Group enables converged voice, audio, video and data
connectivity across diverse mobile, consumer and enterprise products – from mobile and wearable devices, connected
multimedia screens and home automation & security to cordless phones, VoIP systems and home gateways. Leveraging
industry-leading experience and expertise, DSP Group partners with leading CE manufacturers and service providers to
reshape the future of converged communications at home, 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 signal processing, complex RF
(radio frequency), analog and digital functions enables us to address the complex challenges of integrating various
technologies, platforms and processes posed by emerging trends in the industry. Our integrated circuit (IC) products are
customizable, achieve high functionality and performance at reduced power consumption, especially for Internet of Things
(IoT) and home automation devices, mobile and wearable products, cordless telephony and IP telephony that require very
low power consumption, and can be manufactured in high volumes using cost-effective process technologies. Our systems
architecture provides an open design environment 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, communication stack and application layers in Real-time Operating System (RTOS) and Full Featured Operating
System (FFOS) frameworks, enable our customers fast time to market with cost- and performance-optimized solutions.

In response to the growing trend towards wireless residential and business connectivity, we developed and are
offering leading wireless voice and data transmission solutions for various applications, including mobile handsets. Since
1999, we have developed and acquired various technologies, including Direct Sequence Spread Spectrum (DSSS), Frequency
Hopping Spread Spectrum (FHSS), Orthogonal Frequency Digital Modulation (OFDM), Digital Narrow Band,
Complementary Metal Oxide Semiconductor (CMOS), Gallium Arsenide (GaAs) technology, and Silicon Germanium (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 CMOS technologies.

Moreover, we have expanded our DECT solutions beyond cordless telephony to address the burgeoning IoT market
via an ultra low energy flavor of DECT called DECT ULE or ULE, ULE offers numerous technological benefits due to its
licensed and interference-free, frequency bands, longer range, RF robustness, propagation through multiple walls, voice and
visual support, while using very low power consumption.

During the past few years, we expanded into chips and phones for office and business applications, and have quickly
become a market leader in this growing segment. Today, DSP Group offers comprehensive systems-on-a-chip (SoC) and
solution for VoIP, home, SoHo and office IP phones. VoIP is a technology that enables users to make HD voice calls via a
broadband Internet connection rather than an analog phone line. Through successful penetration into tier 1 accounts we have
achieved over 50% CAGR in 2014 and 2015.

Furthermore, with mobile devices playing an increasingly significant role in peoples’ lives, in February 2013, we
unveiled our revolutionary HDClear solution, a comprehensive noise suppression and voice quality enhancement product for
mobile devices. There is a clear emerging market trend of mobile units incorporating technology to eliminate background
noise, HDClear leverages this trend by incorporating proprietary noise cancellation algorithms, thereby dramatically
improving user experience and delivering unparalleled voice quality and better voice call intelligibility. This technology will

-1-

enable people to use their cell phones for conversations in virtually any environment, whether in a car, on a train or in any
noisy surroundings. HDClear will also facilitate the use of speech recognition and voice commands by eliminating
background noise. It also enables always-on voice activation at very low power consumption. Our HDClear product family
was developed through the acquisition of BoneTone Communications Ltd. (“BoneTone”) and the addition of their innovative
intelligent noise cancellation algorithms to our low power SoC. In 2015, we secured our first design win for HDClear with a
tier one customer and started mass production shipments during the fourth quarter of 2015. During January 2016, we
announced our second design-win, which has already contributed to our revenues for the first quarter of 2016.

Committed to advancing technology across the CE and telecommunications markets, DSP Group is actively
involved in prominent industry associations, including the DECT Forum, the European Telecommunications Standards
Institute and the Wi-Fi Alliance, DSP Group also participates in the 3GPP and MIPI alliance. DSP Group is also deeply
involved in all stages of defining DECT CAT-iq as well as ULE standards and ULE Alliance and is building full eco-systems
to support these solutions. We are an active member of the Home Gateway Initiative (HGI), and support the specification
activities of CableLabs, which is contributing to the evolution and implementation of CAT-iq in various markets and
applications. Such involvement enables us to define standards and keep abreast of the latest innovations and requirements.
We also maintain close relationships with many world-leading telecommunication 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 and address new market verticals, including markets for IoT, office phones, mobile and wearable
devices and headsets, thus expanding our market opportunities.

Target Markets and DSP Group Products

In response to market trends, we are concentrating our development efforts on new products and opportunities to
leverage our strong technology base and customer relationships to address evolving market opportunities and take advantage
of the current market trends in our domain. In addition to our main product line that is targeted for cordless phones, new
products include three main groups of products: (i) home segment products consisting of ULE ICs targeting the growing
markets of IoT, smart home devices and home gateways; (ii) office segment products consisting of VoIP SoC products for
Enterprise, SMB and SoHo; and (iii) mobile segment products consisting of products targeted for mobile and wearable device
markets that incorporate our 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 and 2.4 GHz technologies are targeted at three broad categories of products: (a) digital cordless

telephony, (b) gateways, both home gateways and fixed mobile convergence and (c) smart home & IoT applications.

As a market leader in DECT and next-generation CAT-iq cordless technology, we offer a wide range of cost-
effective, highly integrated SoC solutions. Delivering high-quality audio with notably low power consumption, our field-
proven chipset solutions are ideal for highly integrated digital cordless telephony, DECT-enabled gateways and home
automation and security. Our chipsets provide a total integrated digital solution and include all required 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; and

2.4GHz – used in Japan, China, India and the U.S.; the dominant protocols for this RF band is our proprietary EDCT

(Enhanced Digital Cordless Technology) and WDCT (Wireless Digital Cordless Technology) protocols.

This chipset portfolio combines wireless communications technology with a range of telephony features, audio and
voice-processing algorithms to provide the industry a low cost and small footprint solution. Enhanced with our hardware and
software packages, these chipsets are highly versatile and enable the development of an array of cordless telephony solutions,
DECT home gateways and smart-home applications and devices at a lower effort and faster time to market than alternative
silicon offerings.

This portfolio supports cordless phones, cordless headsets, remote controls, home gateways, fixed-mobile

convergence solutions and home security and automation devices.

-2-

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-level applications. 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 maintains multi-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 baseband chip 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 open platform with powerful ARM9™ core processing capabilities, the cost-effective
DCX family delivers unsurpassed telephony coverage and HD voice features. Combining state-of-the-art RF and
ARM9 baseband functions in a single package with a rich set of telephony features and advanced audio-
processing capabilities, the DCX provides the best cost-performance solution for mid-to-high-range
DECT/DECT6.0/CAT-iq and 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, the DCX chipset family
offers a total integrated solution that includes a digital baseband controller, analog interface, RF transceiver and
power amplifier.

The DHX family is a low-power chipset solution for home automation and security. Equipped with audio
capabilities and a powerful ARM926™ processor, it implements hibernation features to deliver advanced ULE.
Miniature size DHX91 module DHAN-S shortens a customer’s time to market and ensures superior performance
of DHX91 RF. 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).

We achieved significant milestones in 2014 and 2015 by incorporating DHX91, a ULE SoC; in end customer
products for home automation and security applications. Our customers’ end products integrating DHX91 went through
various field trials and officially launched in the market in 2014. In 2015, Panasonic Communications Ltd. (“Panasonic”)
and several other leading CE brands launched an ULE home monitoring system that utilizes DECT/ULE for sensors,
actuators, voice and video cameras. Moreover, during 2015, two leading service providers in Europe launched services based
on our DECT and ULE solutions.

In January 2016, we unveiled a new CMOS power amplifier, or PA, product category that leverages DSP Group’s
decade long CMOS RF design expertise. SparkPA is a 5GHz Wi-Fi PA with the highest RF transmit power and best linearity
in CMOS technology. SparkPA achieves more than 100mW of output power at -35db EVM and more than 50 mW at -40db
EVM with excellent stability over temperature. When incorporated into access points, SparkPA has been proven to
dramatically improve device performance. Moreover, this technology is scalable and designed to cover several higher volume
segments of Wi-Fi PAs. By leveraging its superior linearity performance, SparkPA is well positioned to also support the new
Wave 2 and Wave 3 802.11ac access point requirements, MU-MIMO at 4×4 and 8×8 topologies, as well as future 1024
QAM.

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 a comprehensive solution for developing affordable, scalable and green VoIP home and office
products. DVF facilitates rapid introduction of embedded features into residential devices such as cordless IP and instant
messaging (IM) phones. DVF enables development of low-power enterprise IP, analog terminal adapters (ATAs) and home
VoIP phones that offer superb acoustic echo cancellation, high-quality HD voice, multi-line capabilities, and an enhanced
user interface (UI). Built on an open platform with multi-ARM processors running on Linux OS, DVF includes IPfonePro™,
an extensive SDK for 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. Designed specifically to meet Tier 1 requirements, DVF99 fully complements existing solutions, including
DVFD818 VoIP processors for low- and mid-range applications, and the XpandR® media processor for video IP devices.

-3-

Since 2008, we have been selling products for the VoIP market while developing a new platform based on ARM9
and REAL DSP core, and the VegaFireBird 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 processing baseband functions in a single package with a rich set of telephony features targeting Corded IP
phones for home and office, Analog Terminal Adaptors and Cordless IP Phones. These products support multi line and multi
HD voice channels, superior audio processing capabilities including acoustic echo cancellation 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 new VoIP SoC provides combined processing speed of 1.1 GHz, and is designed to support IP
phone processing needs - from basic single-line IP phones to high-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 leading customers.

In 2014, we continued our design win momentum with DVF99xx SoC with confirmed wins from two additional
tier-one VoIP OEMs. Prior design wins include products that went into production in 2014, which contributed to our VoIP
revenue growth.

Revenues from our VoIP segment continued its strong growth trajectory in 2015. A major tier 1 customer
successfully launched and manufactured in volume a series of IP phone models powered by our DVF9919 SoC. A number
of additional customers announced and launched new products based on our DVF99xx, both corded IP phones and wireless
IP DECT phones and terminals. Moreover, we continued to develop high volume products with our tier one and tier two
customers. We also successfully introduced solutions for voice conferencing systems and expect to introduce more designs
in 2016.

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 noise elimination. This technology supports two solutions: HDClear and HDMobileSurround™ which are
offered as part of the HDClear product line.

HDClear-based solutions offer mobile voice quality and intelligibility, while completely removing background
noise. Delivering clearer voice calls made from noisy environments, HDClear also maximizes accuracy of Automatic Speech
Recognition (ASR) applications in noisy environments by leveraging robust and powerful noise cancellation algorithms.
HDClear more effectively isolates voice from ambient noise, thereby drastically lowering Word Error Rate (WER) and
dramatically improves the user experience for speech-enabled applications like virtual assistants, voice search, speakerphone
conference calls and speech-to-text on mobile and wearable devices, tablets and other consumer devices.

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 measured just 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 connectivity options, including four TDM/I2S ports and SLIMbus, and
equipped with a comprehensive software framework that enables rapid development and fast time-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 for mobile 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. A truly 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 ASR accuracy. OEMs can leverage DBMD2’s open and flexible architecture to differentiate their
products to run their own voice/audio enhancement software for pre- and post-processing.

-4-

The DBMD2 supports a rich set of voice processing features to significantly enhance voice call quality, intelligibility

and speech recognition accuracy, 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 added two microphone hands free AEC

support. We also fully integrated DBMD2 with always-on latest android 5.0 lollipop.

In 2015, we started commercial shipments of DBMD2 for a wearable device with a leading OEM. In 2015, we also
taped-out a new DBMD4, a chip targeted for ultra-low-power, always-on voice and audio applications. DBMD4 incorporates
a suite of voice enhancement algorithms, including noise suppression that significantly improves user experience and
accuracy of speech-driven applications, particularly in high noise environments. Offered with a 25-WLCSP and 0.35mm ball
pitch, DBMD4 embeds a TeakLite-III DSP core, incorporates advanced connectivity options, including I2S, UART, SPI, I2C
ports and SLIMbus, and is equipped with a comprehensive software framework that enables rapid development and fast time-
to-market, thereby overcoming the challenges of portable design, real estate and power consumption. During January 2016,
we announced our second design-win incorporating our DBMD4 chip, which has already contributed to our revenues for the
first quarter of 2016.

Customers

We are a flexible customer-centric company that proactively partners with our broad base of CE manufacturer
customers and service providers. As a reliable long-term industry supplier, We maintain a proven track record of operational
excellence and successful delivery. With over 10 offices across Asia, Europe and North America, we deliver outstanding
local service and support worldwide. We sell our products primarily through distributors and directly to OEMs and ODMs
who incorporate our products into consumer products for the worldwide residential wireless communications market and
enterprise products for the worldwide office communications market. In 2014, we continued expanding our customer base,
and in some cases, increased our share of business with existing customers. Our blue-chip customer base features leading
international CE manufacturers, including the world’s top consumer brands, which have deployed our chipset solutions at
prominent tier-one telecom operators across the globe, and include: Aprotech, ADB, AEG, Alcatel, Atcom, AT&T, Arris,
Atlink, Arcadyan, Askey, Audioline, Avaya, Ayecom, Baycom, Belgacom, Binatone, British Telecom, Brother, CCT Tech,
Cetis, China Telecom, CIG, Cisco, Comcast, Crow, Cybertan, Grandstream, Deutsche Telekom, Doro, DNI, Eclogic, Escene,
Everspring, France Telecom, Freebox, Gibson (formerly Philips), Gaoxinqi, Gemtek, Global China Technologies,
Grandstream, Hagenuk, Huawei, Innomedia, Intelbras, Invoxia, JXE, Kaonmedia, Kocom, Korea Telecom, KPN, LG
Electronics, Matsushita, Mitac, Mitrastar, Motorola, Moimstone, NEC, Netgear, NTT, OnReal, Ooma, Panasonic, Pioneer,
Plantronics, Sagemcom, Samsung, Sanyo, SAXA, Sercomm, SGW, Skymotion, Sharp, Siemens (Gigaset), SK Telecom,
Sony, Spracht, Sumitomo, Swissvoice, Swisscom, TCL, Tecom, Telecom Italia, Telefonica, Telstra, Technicolor, Telefield
(RCA), Topcom, TP-Link, T&W, Uniden, Unihan, Urmet, Uwin, Turkcell, Turkish Telecom, Verizon, VTech, Vodafone,
WNC, WONDALINK, Xingtel, Yamaha, Yealink and Yeastar.

International Sales and Operations

Export sales accounted for 97% of our total revenues for 2015, 2014 and 2013. Although most of our sales to foreign
entities are denominated in United States dollars, we are subject to risks of conducting business internationally. See Note 17
of the attached Notes to Consolidated Financial Statements for the year ended December 31, 2015, for a summary of the
geographic breakdown of our revenues and location of our long-lived assets.

-5-

Moreover, a portion of our expenses in Israel is paid in the Israeli currency (New Israeli Shekel (NIS)). Our primary
expenses paid in NIS are employee 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. dollar could increase the cost of our technology development, research and
development expenses and general and administrative expenses. From time to time, we use derivative instruments to
minimize the effects of currency fluctuations, but our hedging positions may be partial, may not exist at all in the future or
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 and operational payments on our European facilities. As a result, an increase in the value of the Euro in
comparison to the U.S. dollar also could increase the cost of our technology development, research and 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 and marketing team, working out of our sales offices in Hong Kong, China; Nierenberg, Germany;
Los Altos, California; Tokyo, Japan; Herzliya Pituach, Israel, Edinburgh, Scotland; and Shenzhen, China; pursues business
with our customers in North and South America, Europe and Asia. In territories where we do not have sales offices, we
operate solely through a network of distributors and representatives. Revenues derived from sales through our Japanese
distributor, Tomen Electronics, Ltd. (“Tomen Electronics”), represented 16% of our total revenues for 2015, 20% for 2014
and 19% for 2013. Revenues derived from sales through our distributor, Ascend Technology Inc. (“Ascend Technology”)
represented 15% of our total revenues for 2015, 10% for 2014 and 9% for 2013.

We also derive a significant amount of revenues from a limited number of customers. Sales to VTech Holding Ltd.
(“VTech”) represented 31% of our total revenues for 2015, 35% for 2014 and 36% for 2013. Sales to Shenzhen Guo Wei
Electronics Ltd. (“Guo Wei”) represented 12% of our total revenues for 2015, 8% for 2014 and 8% for 2013. Sales to
Panasonic through Tomen represented 13%, 15% and 14% of our total revenues for 2015, 2014 and 2013, respectively.

Furthermore, as our products are generally incorporated into consumer products sold by our OEM customers, our

revenues may be affected by seasonal buying patterns of consumer products sold by our OEM customers.

Manufacturing and Design Methodology

We are ISO9001:2008 certified. This certification is applicable for the design, development, testing and supply of
our system-on-chip solutions. We also have well established methodologies and working procedures that are also regularly
audited.

We contract product wafer fabrication services mostly from TSMC. A majority of our integrated circuit products at
this time are manufactured by TSMC. We intend to continue to use independent foundries to manufacture our products. Our
reliance on independent foundries involves a number of risks, including the foundries’ ability to achieve acceptable
manufacturing yields at competitive costs and their allocation of sufficient capacity to us to meet 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 product needs. Shortage or lack of capacity at the foundries we use to manufacture our products
may lead to increased operating costs and lower gross margins. In addition, 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 and specifications for each product and require each subcontractor to use these procedures and
specifications before shipping us the finished products. We test and/or assemble our products at Amkor, ASE, Giga Solutions,
KYEC and SPIL.

Furthermore, our digital cordless products require an external component in the finished product, which is supplied

by a third party, to provide flash memory.

-6-

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 these factors. Our principal competitors in the cordless market include Lantiq
(acquired by Intel) and Dialog Semiconductors. Similar principal competitive factors affect the VoIP market. We also believe
that we are competitive with respect to most of these factors. Our principal competitors in the VoIP market include Broadcom
(Broadcom signed an agreement to be acquired by Avago Technologies), Dialog Semiconductors, Lantiq, Texas Instruments
and new Taiwanese IC vendors.

Similar principal competitive factors affect the Home Automation (DECT ULE) market. We also believe that we
are competitive with respect to most of these factors. Our principal competitors are developers of different wireless home
automation technologies, including Analog, Z-wave and Zigbee. Among those, the major competitors for digital home
connectivity are Atmel (Atmel signed an agreement to be acquired by Microchip Technology), 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 is that we are a newcomer to this market and this market already has a number of dominant,
well-established companies with significant existing market shares. Nonetheless, we believe that we are competitive in this
market with HDClear’s outstanding performance. Competitors in this market include Audience (acquired by Knowles
Corporation), Cirrus Logic and developers of noise cancellation software running on mobile phones such as NXP and
ForteMedia.

In future periods, due to various new developments in the residential telephony, enterprise telephony, home
automation and mobile markets, we intend to enter into new markets with competitors that have more established presence,
and significantly greater financial, technical, manufacturing, marketing, sales and distribution resources than we do.

Furthermore, there is a growing threat from alternative technologies accelerating the decline of the fixed-line
telephony market. This competition comes from mobile telephony, including emerging dual-mode mobile Wi-Fi phones, and
other innovative applications, such as Skype and iChat. Given that we derive a significant amount of revenues from chipsets
incorporated into fixed-line telephony products, if we are unable to develop new 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 conduct most of our product development at our facilities. At December 31, 2015, we had a staff of
196 research and development personnel, of which 137 were located in Israel. We also employ independent contractors to
assist with certain product development and testing activities. We spent $35.5 million in 2015, $33.5 million in 2014 and
$35.0 million in 2013 on research and development activities.

Due to various new developments in the home residential market, including the rapid deployment of new
communication access methods and the rise of alternative technologies in lieu of fixed-line telephony, we are expanding our
current product lines and develop products and services targeted at wider markets, including office enterprise market and the
intensively competitive mobile device market. We will need to continue to invest in research and development, and our
research and development expenses may increase in the future, including the addition of new research and development
personnel, to keep pace with new and rapidly changing trends in our industry.

Licenses, Patents and Trademarks

As of December 31, 2015, we have been granted a total of 152 patents and 75 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 statutory protection when we develop valuable new or improved technology. The status of any patent
involves complex legal and factual questions, and the breadth of claims allowed is uncertain. Accordingly, we cannot assure
that any patent application filed by us will result in a patent being issued, or that our patents, and any patents that may be
issued in the future, will afford adequate protection against competitors with similar technology; nor can we provide assurance
that patents issued to us will not be infringed or designed around by others. In addition, the laws of certain countries in which
our products are or may be developed, manufactured or sold, including China, Hong Kong, Japan, Korea and Taiwan, may
not protect our products and intellectual property rights to the same extent as the laws of the United States.

-7-

We attempt to protect our trade secrets and other proprietary information through agreements with our customers,
suppliers, employees and consultants, and through other security measures. Although we intend to protect our rights
vigorously, we cannot assure that these measures will be successful.

While no material claims involving patent or other intellectual property rights have been brought against us to date,
we cannot provide assurance 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 assert claims against third parties to protect our proprietary technology. In addition,
patent infringement claims are increasingly being asserted by patent holding companies (so-called patent “trolls”), which do
not use technology and whose sole business is to enforce patents against companies, such as us, for monetary gain. Because
such patent 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 certain circumstances to indemnify and defend against such claims.
If litigation becomes necessary to determine the validity of any third party claims or to protect 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 any litigation, we could be required to expend significant resources to develop non-infringing technology or to obtain
licenses to the technology that is the subject of the litigation. We cannot provide assurance that we would be successful in
developing non-infringing technology or that any licenses would be available on commercially reasonable terms.

While our ability to compete may be affected by our ability to protect our intellectual property, we believe that
because of the rapid pace of technological change in our industry, our technical expertise and ability to innovate on a timely
basis and in a cost-effective manner will be more important in maintaining our competitive position than the protection of
our intellectual property. In addition, we believe that due to rapid technological changes in residential telephony, computer
telephony and personal computer markets, patents and trade secret protection are important but must be supported by other
factors, including expanding the knowledge, ability and experience of our personnel, new product introductions and frequent
product enhancements. Although we continue to implement protective measures and intend to defend our intellectual property
rights vigorously, we cannot assure that these measures will be successful.

Backlog

At December 31, 2015, our backlog was approximately $17.2 million, compared to approximately $34.1 million
and $25.1 million at December 31, 2014 and 2013, respectively. We include in our backlog all accepted product purchase
orders with respect to which a delivery schedule has been specified for product shipment within one year. Our business is
characterized by short-term order and shipment schedules. Product orders in our current 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, 2015, we had 314 employees, including 196 in research and development, 57 in marketing and
sales and 61 in corporate, administration and manufacturing coordination. Competition for personnel in the semiconductor
industry in general is intense. We believe that our future prospects will depend, in part, on our ability to continue to attract
and retain highly-skilled technical, marketing and management personnel, who are in demand. In particular, there is a limited
supply of RF chip designers and highly-qualified engineers with digital signal processing experience. We believe that 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 Web site as soon as reasonably practicable after they are
electronically filed with, or furnished to, the Securities and Exchange Commission. We will also provide 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.

-8-

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 differ materially from those expressed in forward-looking statements made by us. These forward-looking
statements are based on current expectations and we assume no obligation to update this information. Before you decide to
buy, hold, or sell our common stock, you should carefully consider the risks described below, in addition to the other
information contained elsewhere in this report. The following risk factors are not the only risk factors facing our company.
Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also affect our
business. Our business, financial condition, and results of operation could be seriously harmed if any of the events underlying
any of these risks or uncertainties actually occurs. In that event, the market price for our common stock could decline, and
you may lose all or 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 may be materially adversely affected if we do not continue to succeed in this highly
competitive market or if sales within the overall cordless digital market continue to decrease.

Sales of our digital cordless telephony products comprised 72% of our total revenues for 2015, 79% for 2014 and
85% for 2013. Any adverse change in the digital cordless market or in our ability to compete and maintain our competitive
position in that market would harm our business, financial condition 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 and will continue to decline, which reduces our revenues derived
from, and unit sales of, cordless telephony products. Moreover, macro-economic trends in the consumer electronics industry
may adversely impact our future revenues.

Furthermore, the decline in fixed line telephony together with the rapid deployment of new communication access
methods, including mobile, wireless broadband, cable and other connectivity will decrease sales of products using fixed-line
telephony. Our business also may be affected by the outcome of the competition between cellular phone operators and fixed-
line operators for the provision of residential communication. A significant majority of our revenues are currently generated
from sales of chipsets used in cordless phones that are based on fixed-line telephony, and the continued decline 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 pricing pressures will continue. It is possible that we may one day be unable to respond to increased pricing
competition for digital cordless telephony processors or other products through the introduction of new products or reduction
of manufacturing costs. This inability to compete would have a material adverse effect on our business, financial condition
and results of operations. Likewise, any significant delays by us in developing, manufacturing or shipping new or enhanced
products in this market also would have a material adverse effect on our business, financial condition and results of operations.

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 in any period. Our four largest customers – VTech Holding Ltd. (“VTech”), Panasonic
Communications Ltd. (“Panasonic”) through Tomen Electronics, Ltd. (“Tomen Electronics”), CCT Telecom Holdings Ltd.
(“CCT”) and Shenzhen Guo Wei Electronics Ltd. (“Guo Wei”) accounted for approximately 61%, 66% and 66% of our total
revenues for each of 2015, 2014 and 2013, respectively. Sales to VTech represented 31% of our total revenues for 2015, 35%
for 2014 and 36% for 2013. Sales to Panasonic through Tomen Electronics represented 13% of our total revenues for 2015,
15% for 2014, and 14% for 2013. Sales to Guo Wei represented 12% of our total revenues for 2015, 8% for 2014 and 8% for
2013. Typically, our sales are made on a purchase order basis, and most of our customers have not entered into a long-term
agreement requiring it to purchase our products. Moreover, we do not typically require our customers to purchase a minimum
quantity of our products, and our customers can generally reschedule the delivery date of their orders on short notice without
significant penalties. A significant amount of our revenues will continue to be derived from a limited number of large
customers. Furthermore, the primary customers for our products are original equipment manufacturers (OEMs) and original
design manufacturers (ODMs) in the cordless digital market. This industry is highly cyclical and has been subject to
significant economic downturns at various times, particularly in recent periods. These downturns are characterized by
production overcapacity and reduced revenues, which at times may affect the financial stability of our customers. Therefore,
the loss of one of our major customers, or reduced demand for products from, or the reduction in purchasing capability of,
one of our major customers, could have a material adverse effect on our business, financial condition and results of operations.

-9-

Our future success is dependent on market acceptance of our HDClear product family targeted for the mobile device
market and on market acceptance of 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 to gain market share for our HDClear and VoIP product families. Moreover, we are targeting a new
market with our 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 significant revenues from our HDClear product family and
gain significant and sustainable 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 and potential competitors, many of whom have significantly greater financial, technical,
manufacturing, marketing, sales and distribution resources and management 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 greater resources 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 number of OEMs targeted for this market. Our main competitors
include Audience (acquired by Knowles Corporation) and Cirrus Logic. We also face competition from other companies and
could face competition from new market entrants. We also compete against solutions internally developed by OEMs, as well
as combined third-party software and hardware systems. If we are unable to compete effectively, we may not succeed in
achieving additional design wins and may have to lower our pricing to gain design wins, both of which would adversely
impact our operating results.

Because our products are components of end products, if OEMs do not incorporate our products into their end products
or if the end products of our OEM customers do not achieve market acceptance, we may not be able to generate adequate
sales of our products.

Our products are not sold directly to the end-user; rather, they are components of end products. As a result, we rely
upon OEMs to incorporate our products into their end products at the design stage. Once an OEM designs a competitor’s
product into its end product, it becomes significantly more difficult 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
its own product and without this “design win” it becomes significantly difficult to sell our products. This is especially the
case for our HDClear product family. Moreover, even after an OEM agrees to design our products into its end products, the
design cycle is long and may be delayed due to factors beyond our control which may result in the end product incorporating
our products not to reach the market until long after the initial “design win” with the OEM. From initial product design-in to
volume production, many factors could impact the timing and/or amount of sales actually realized from the design-in. These
factors include, but are not limited to, changes in the competitive position of our technology, our customers’ financial
stability, and our ability to ship products according to our customers’ schedule. Moreover, the continued uncertainty about
the sustainability of the global economic recovery and outlook may further prolong an OEM customer’s decision-making
process and design cycle.

Furthermore, we rely on the end products of our OEM customers that incorporate our products to achieve market
acceptance. Many of our OEM customers face intense competition in their markets. If end products that incorporate our
products are not accepted in the marketplace, we may not achieve adequate sales volume of our products, which would have
a negative effect on our results of operations.

We rely on a few distributors for a significant portion of our total revenues and the failure of those distributors to perform
as expected would materially 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 Japanese distributor, Tomen Electronics, accounted for 16% of our total revenues for 2015, 20% for 2014
and 19% for 2013. Revenues derived from sales through another distributor, Ascend Technology Inc. (“Ascend
Technology”), accounted for 15% of our total revenues for 2015, 10% for 2014 and 9% for 2013. Our future performance
will depend, in part, on those distributors to continue to successfully market and sell our products. Furthermore, Tomen
Electronics sells our products to a limited number of customers. One customer, Panasonic, has continually accounted for a
majority of the sales through Tomen Electronics. Sales to Panasonic through Tomen Electronics generated approximately
13% of our total revenues for 2015, 15% for 2014 and 14% for 2013.

-10-

The loss of Tomen Electronics and/or Ascend Technology as our distributors and our inability to obtain satisfactory
replacements 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 the following:

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 manage inventory;

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 from restructuring 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 products requested by our customers;

mergers and acquisitions by us, our competitors and our existing and potential customers; and

general economic conditions, including current economic conditions in the United States and worldwide, and the
adverse effects on the semiconductor and consumer electronics industries.

Each of the above factors is difficult to forecast and could harm our business, financial condition and results of
operations. Also, we sell our products to OEM customers that operate in consumer markets. As a result, our revenues are
affected by seasonal buying patterns of consumer products sold 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 products and other factors, including increases in assembly and testing expenses, and raw material
and commodity costs.

We have experienced and will continue to experience a decrease in the average selling prices of our products.
Decreasing average selling prices could result in decreased revenues even if the volume of products sold increases.
Decreasing average selling prices may also require us to sell our products 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 basis the declining average selling
prices of our products through general operational efficiencies and manufacturing cost reductions by achieving a higher level
of product integration and improving our yield percentages, there is no guarantee that our ongoing efforts will be successful
or that they will keep pace with the anticipated, continued decline in average selling prices of our products.

Moreover, we believe there are significant pressures in the supply chain as a result principally of the uncertainty
relating to the sustainability of the global economic recovery, which has negatively affected the consumer electronics
industry. The pressures in the supply chain make it very difficult for us to increase or even maintain our product pricing,
which further adversely affects our gross margins.

-11-

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 increased production costs, mainly assembly and packaging costs, may result in a decrease in our gross margins.
Moreover, our suppliers may pass the increase in raw materials and commodity costs onto us which would further reduce the
gross margin of our products. In addition, as we are a fabless company, global market trends such as “over-capacity” problems
so that there is a shortage of capacity to fulfill our fabrication needs also may increase our raw material costs and thus decrease
our gross margin.

There are several emerging market trends that may challenge our ability to continue to grow our business.

New technological developments in the home connectivity market may adversely affect our operating results. For
example, the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and
other connectivity, as well as the lack of growth in products using fixed-line telephony would reduce our total revenues
derived from, and unit sales of, cordless fixed-line telephony products. Our ability to maintain our growth will depend on the
expansion of our product lines to capitalize on the emerging access methods and on our success in developing and selling a
portfolio of “system-on-a-chip” solutions targeted at wider markets, including the intensively competitive mobile devices
market. We cannot assure you that we will succeed in expanding our product lines or portfolio of “system-on-a-chip”
solutions, or that they would receive market acceptance.

Furthermore, there is a growing threat from alternative technologies accelerating the decline of the fixed-line
telephony market. This competition comes from mobile telephony, including emerging dual-mode mobile Wi Fi phones and
other innovative applications, such as Skype and iChat. Given that we derive a significant amount of revenues from chipsets
incorporated into fixed-line telephony products, if we are unable to develop new 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 and always-
on capability.

Our HDClear product family is designed to enhance the sound quality and eliminate background voices for mobile
device users and to enable always-on capabilities in mobile and other wearable devices. OEMs and ODMs may decide that
the costs of improving sound quality outweigh the benefits or that always-on voice technology is not a required feature, both
of 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 rapidly and is
technologically challenging. New mobile devices with different components or software may be introduced that provide the
same functionality as HDClear product family. Our future business growth will depend on the growth of this market and our
ability to adapt to technological changes, user preferences and OEM demands. Our business could be materially 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 international operations that could increase our operating expenses and disrupt our business.

Although the majority of end users of the consumer products that incorporate our products are located in the U.S.,
we are dependent on sales to OEM customers, located outside of the U.S., that manufacture these consumer products. Also,
we depend on a network of distributors to sell our products that also are primarily located outside of the U.S. Export sales,
primarily consisting of digital cordless telephony products shipped to manufacturers in Europe and Asia, including Japan and
Asia Pacific, represented 97% of our total revenues for 2015, 2014 and 2013. Furthermore, we have material operations in
Germany, Hong Kong and India and employ a number of individuals within those foreign operations. As a result, the
occurrence of any negative international political, economic or geographic events, as well as our failure to mitigate the
challenges in managing an organization operating in various countries, could result in significant revenue shortfalls and
disrupt our workforce within our foreign operations. These shortfalls and disruptions could cause our business, financial
condition and results of operations to be harmed. Some of the risks of doing business internationally include:

● unexpected changes in foreign government regulatory requirements;

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●

fluctuations in the exchange rate for the United States dollar;

●

import and export license requirements;

●

imposition of tariffs and other barriers and restrictions;

● burdens of complying with a variety of foreign laws, treaties and technical standards;

● uncertainty of laws and enforcement in certain countries relating to the protection of intellectual property;

● difficulty in collecting accounts receivable and longer payment cycles for international customers than existing

customers;

● difficulty in staffing and managing foreign operations and maintaining the morale and productivity of employees

within foreign operations;

● multiple and possibly overlapping tax structures and potentially adverse tax consequences;

● political and economic instability; and

●

changes in diplomatic and trade relationships.

One or more of these factors may have a material adverse effect on our future operations and consequently, on our

business, financial conditions and operating results.

In order to sustain the future growth of our business, we must penetrate new markets and our new products must achieve
widespread market acceptance.

In order to increase our sales volume and expand our business, we must penetrate new markets and introduce new
products, especially our HDClear product family. We are exploring opportunities to expand sales of our products in China,
Japan, Korea and South America. However, there are no assurances that we will gain significant market share in those
competitive markets. In addition, due to the cyclical nature of manufacturing capacity issues, the increasing cost of silicon
integrated circuits, the continued decline of average selling prices of chipsets and other industry-wide factors, many North
American, European and Japanese OEMs are moving their manufacturing sites to Asia. This trend may cause the mix of our
OEM customers to change in the future, thereby further necessitating our need to penetrate new markets. Furthermore, to
sustain the future growth of our business, we need to introduce new products as sales of our older products taper off.
Moreover, the penetration of new competitive markets and introduction of new products could 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. Our revenue
growth is dependent on the successful deployment of our new VoIP and HDClear products. Our inability to penetrate such
markets and increase our market share in those markets or lack of customer acceptance of those 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 industry standards, changes in customer needs, demand for higher levels of integration, growing competition
and new product introductions. This is especially the case for the mobile device market. Our future growth is dependent not
only on the continued success of our existing products but also successful introduction of new products. Our ability to adapt
to changing technology and anticipate future standards, and the rate of adoption and acceptance of those standards, will be a
significant factor in maintaining or improving our competitive position and prospects for growth. If new industry standards
emerge, our products or our customers’ products could become unmarketable or obsolete, and we could lose market share.
We may also have to incur substantial unanticipated costs to comply with these new standards. If our product development
and improvements take longer than planned, the availability of our products would be delayed. Any such delay may render
our products obsolete or unmarketable, which would have a negative impact on 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 our products. Our success is dependent, in part, on our ability to:

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●

successfully develop, introduce and market new and enhanced products at competitive prices and in a timely manner
in order to meet changing customer needs;

convince leading OEMs to select our new and enhanced products for design into their own new products;

respond effectively to new technological changes or new product announcements by others;

effectively use and offer leading technologies; and

maintain close working relationships with our key customers.

There are no assurances that we will be successful in these pursuits, that the demand for our products will continue
or that our products will achieve market acceptance. Our failure to develop and introduce new products that are compatible
with industry standards and that satisfy customer requirements, and the failure of our products to achieve broad market
acceptance, could have a negative impact on our ability to sell our products and our results of operations.

Because we depend on independent foundries and other third party suppliers to manufacture and test all of our integrated
circuit products, we are subject to additional risks that may materially disrupt our business.

All of our integrated circuit products are manufactured and tested by independent foundries and other third party
suppliers. While these foundries and other third party suppliers have been able to adequately meet the demands of our
increasing business, we are and will continue to be dependent upon these foundries and third party suppliers to achieve
acceptable manufacturing yields, quality levels and costs, and to allocate to us a sufficient 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 and other third party suppliers, we may encounter capacity shortage issues in the future. In the event of a
worldwide shortage in foundry, assembly and/or test capacity, 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 ensure specified quantities of products and services.
Over-capacity at the current foundries and other third party suppliers we use, or future foundries or other third party suppliers
we may use, to manufacture and test our integrated circuit products may lead to increased operating costs and lower gross
margins. In addition, such a shortage could lengthen our products’ manufacturing and testing cycle and cause a delay in the
shipment of our products to our customers. This could ultimately lead to a loss of sales of our products, harm our reputation
and competitive position, and our revenues could be materially reduced. Our business could also be harmed if our current
foundries or other third party suppliers terminate their relationship with us and we are unable to obtain satisfactory
replacements to fulfill customer orders on a timely basis and in a cost-effective manner. Moreover, we do not have long term
capacity 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 an adequate 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 worldwide economic conditions remain uncertain which continues to make it difficult for our customers, the end-
product customers, our vendors and us to accurately forecast and plan future business activities and make reliable projections.
Moreover, we operate within the semiconductor industry which experiences significant fluctuations in sales and profitability.
Downturns in the semiconductor industry are characterized by diminished product demand, excess customer inventories,
accelerated erosion of prices and excess production capacity. These factors could cause substantial fluctuations in our
revenues and in our results of operations. If global economic and market conditions remain uncertain or deteriorate, we could
experience a material adverse impact on our business and results of operations.

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Because the manufacture of our products is complex, the foundries on which we depend may not achieve the necessary
yields or product reliability that our business requires.

The manufacture of our products is a highly complex and precise process, requiring production in a highly controlled
environment. Changes in manufacturing processes or the inadvertent use of defective or contaminated materials by a foundry
could adversely affect the foundry’s ability to achieve acceptable manufacturing yields and product reliability. If the foundries
we currently use do not achieve the necessary yields or product reliability, our ability 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 gross margins 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 that may materially disrupt our business.

Independent subcontractors, located in Asia, assemble and test our semiconductor products. Because we rely on
independent subcontractors to perform these services, we cannot directly control our product delivery schedules or quality
levels. We are dependent on these subcontractors to allocate to 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 our independent 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 our products, harm our reputation and competitive position, and our revenues could be materially harmed.

Moreover, the economic, market, social, and political situations in countries where some of our independent
subcontractors are located are unpredictable, 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 or man-made disasters, adverse changes
in tax laws, tariff, import or export quotas, power and water shortages, or interruption in air transportation, in areas where
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 defer purchase orders on short notice without incurring a significant penalty. Given current market
conditions, we have less ability to accurately predict what or how 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’s customers – generally consumer
electronics retailers. Furthermore, based on discussions with our customers, we understand that our customers also have less
visibility into their product demands. A decrease in the consumer electronics retailers’ demand or a build-up of their
inventory, both of which are out of the control of our customers and us, may cause a cancellation, change or deferral of
purchase orders on short notice by our customers. Anticipating demand is difficult because our customers and their customers
face volatile pricing and unpredictable demand for their own products, and are increasingly focused on cash preservation and
tighter inventory management. Based on these trends, our customers are reluctant to place orders with normal lead times, and
we are seeing a shift to shorter lead-times and rush orders. However, we place orders with our suppliers based on forecasts
of 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 may allocate resources to manufacturing products that
we may not be able to sell when we expect to, if at all. As a result, we could hold excess or obsolete inventory, which would
reduce our profit margins and adversely affect our financial results. Conversely, if we underestimate our customers’ demand
or our customers underestimate their demand and insufficient manufacturing capacity is available, we could forego revenue
opportunities and potentially lose market share and damage our customer relationships.

-15-

Furthermore, we maintain inventory, or hubbing, arrangements with certain of our customers. Pursuant to these
arrangements, we deliver products to a customer or a designated third party warehouse based upon the customer’s projected
needs, but do not recognize product revenue unless and until the customer reports that it has removed our product from the
warehouse to incorporate into its end products. Since we own inventory that is physically located 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 their purchasing volumes.

We sell our products to a limited number of OEM customers directly or through a network of distributors. Moreover,
many North American, European and Japanese OEMs are moving their manufacturing sites to Southeast Asia, as a result of
the cyclical nature of manufacturing capacity issues and cost of silicon integrated circuits, the continued decline of average
selling prices of chipsets and other industry-wide factors. In addition, OEMs located 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
potential competitors. This trend also may promote the consolidation of OEMs located in North America, Europe and Japan
with OEMs located in Southeast Asia, which 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 products from 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 faced
with 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 substantial resources to build relationships with our OEM customers. However the outsourcing companies
whom our OEM customers may choose to outsource production may not have prior business relationship with us or may
instead have prior or ongoing relationships with our competitors. The emergence of this trend may require us to expend
substantial additional resources to build relationships with these outsourcing companies, which would increase our operating
expenses. Even if we do expend such resources, there are no assurances that these outsourcing companies will choose to
incorporate our chipsets rather than chipsets of our competitors. Our inability to retain an OEM customer once such customer
chooses to outsource production would have 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 our products or seek licenses from third parties, and seriously harm our operating results and
disrupt our business.

As is typical in the semiconductor industry, we and our customers have been and may from time to time be notified
of claims that we may be infringing patents or intellectual property rights owned by third parties. In addition, patent
infringement claims are increasingly being asserted by patent holding companies (so-called patent “trolls”), which do not use
technology and whose sole business is to enforce patents against companies, such as us, for monetary gain. Because such
patent 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 certain circumstances to indemnify and defend against such claims.
If litigation becomes necessary to determine the validity of any third party claims, 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 merit and
notwithstanding that the litigation is determined in our favor.

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 the terms 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 technology used by us could cause us to incur
substantial liabilities, suspend the manufacturing of products utilizing the technology or damage the relationship with our
customers. Alternatively, we could be required to expend significant resources to develop non-infringing technology. We
cannot assure you that we would be successful in developing non-infringing technology. The occurrence of any of these
events could harm our business, financial condition or results of operations.

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Because we have significant operations in Israel, we may be subject to political, economic and other conditions affecting
Israel that could increase our operating expenses and disrupt our business.

Our principal research and development facilities are located in the State of Israel and, as a result, at December 31,
2015, 201 of our 314 employees were located in Israel, including 137 out of 196 of our research and development
personnel. In addition, although we are incorporated in Delaware, a majority of our directors and executive officers are
residents of Israel. Although substantially all of our sales currently are being made to customers outside of Israel, we are
nonetheless directly influenced by the political, economic and military conditions affecting Israel. Any major hostilities
involving Israel, or the interruption or curtailment of trade between Israel and its present trading partners, could significantly
harm our business, 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, low foreign exchange reserves, fluctuations in world commodity prices, military conflicts and civil unrest.
In addition, Israel and companies doing business with 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, these restrictive 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 Arab countries. Although Israel has entered into various agreements with certain Arab countries and
the Palestinian Authority, and various declarations have been signed in connection with efforts to resolve some of the
economic and political problems in the Middle East, hostilities between Israel and some of its Arab neighbors have recently
escalated and intensified. We cannot predict whether or in what manner these conflicts will be resolved. Our results of
operations may be negatively affected by the obligation of key personnel to perform military service. In addition, certain of
our officers and employees are 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 in the future. Our operations could be
disrupted by the absence, for a significant period, of one or more of our officers or key employees due to military service.

The tax benefits available to us under Israeli law require us to meet several conditions, and may be terminated or reduced
in the future, which would increase our taxes.

Our facilities in Israel have been granted Approved Enterprise and Beneficiary Enterprise status under the Law for
the Encouragement of Capital Investments, 1959, commonly referred to as the “Investment Law,” as amended. The
Investment Law provides that capital investments in a production facility (or other eligible assets) designated as an Approved
Enterprise or Beneficiary Enterprise receive certain tax benefits in Israel. Our investment programs that generate taxable
income are currently subject to an average tax rate of up to approximately 10% based on a variety of factors, including
percentage of foreign ownership and approvals for the erosion of the tax basis of our investment programs. To be eligible for
tax benefits, we must meet certain conditions, relating principally to adherence to the investment program filed with the
Investment Center of the Israeli Ministry of Economy and periodic reporting obligations. Although we believe we have met
such conditions in the past, should we fail to meet such conditions in the future, we would 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 with interest and
adjustments for inflation based on the Israeli consumer price index) already received. Our average tax rate for our investment
programs also may change in the future due to circumstances outside of our control, including changes to legislation. For
example, in July 2013, the Investment Law was amended whereby the reduction of corporate tax rate for preferred enterprises
was eliminated such that such enterprises, which are subject to the new law, would be subject to a 16% tax rate. Therefore,
we cannot provide any assurances that our average tax rate for our investment programs will continue in 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 on our 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 complementary businesses, products and technologies. We are unable to predict whether or when any other prospective
acquisition will be completed. The process of integrating an acquired business may be prolonged due to unforeseen
difficulties and may require a disproportionate amount of our resources and management’s attention. We cannot assure you
that we will be able to successfully identify suitable acquisition candidates, complete acquisitions, integrate acquired

-17-

businesses into our operations, or expand into new markets. Further, once integrated, acquisitions may not achieve
comparable levels of revenues, profitability or productivity as our existing business or otherwise perform as expected. The
occurrence of any of these events could harm our business, financial condition or results of operations. Future acquisitions
may require substantial capital resources, which may require us to seek additional debt 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 acquired companies;

diversion of management’s attention from other business concerns;

contractual disputes;

risks of entering geographic and business markets in which we have no or only limited prior experience; and

potential loss of key employees of acquired organizations.

We may not be able to adequately protect or enforce our intellectual property rights, which could harm our competitive
position.

Our success and ability to compete is in part dependent upon our internally-developed technology and other
proprietary rights, which we protect through a combination of copyright, trademark and trade secret laws, as well as through
confidentiality agreements and licensing arrangements with our customers, suppliers, employees and consultants. In addition,
we have filed a number of patents in the United States and in other foreign countries with respect to new or improved
technology that we have developed. However, the status of any patent involves complex legal and factual questions, and the
breadth of claims allowed is uncertain. Accordingly, we cannot assure you that any patent application filed by us will result
in a patent being issued, or that the patents issued to us will not be infringed by others. Also, our competitors and potential
competitors may develop products with similar technology or functionality as our products, or they may attempt to copy or
reverse engineer aspects of our product line or to obtain and use information that we regard as proprietary. Moreover, the
laws of certain countries in which our products are or may be developed, manufactured or sold, including Hong Kong, Japan,
Korea and Taiwan, may not protect our products and intellectual property rights to the same extent as the laws of the United
States. Policing the unauthorized use of our products is difficult and may result in significant expense to us and could divert
the efforts of our technical and management personnel. Even if we spend significant resources and efforts to protect our
intellectual property, we cannot assure you that we will be able to prevent misappropriation of our technology. Use by others
of our proprietary rights could materially harm our business and expensive litigation may be necessary 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, our credibility 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 delay the detection of any such error or defect. If our products
contain material errors, defects and bugs, then we may be required to expend significant capital and resources to alleviate
these problems. This could result in the diversion of technical and other resources from our other development efforts. Any
actual or perceived problems or delays may also adversely affect our ability to attract or retain customers. Furthermore, the
existence of any defects, errors or failures in our products could lead to product liability claims or lawsuits against us or
against our customers. We generally provide our customers with a standard warranty for our products, generally lasting one
year from the date of purchase. Although we attempt to limit our liability for product defects to product replacements, we

-18-

may not be successful, and customers may sue us or claim liability for the defective products. A successful product liability
claim could result in substantial cost and divert management’s attention and resources, which would have a negative impact
on our financial condition and results of operations.

We are exposed to the credit risk of our customers and to credit exposures in weakened markets, which could result in
material losses.

Most of our sales are on an open credit basis. Because of current conditions in the global economy, our exposure to
credit risks relating to sales on an open credit basis has increased. We expect demand for enhanced open credit terms, for
example, longer payment terms, to continue and believe that such arrangements are a competitive factor in obtaining business.
Although we monitor and attempt to mitigate credit risks, including through insurance coverage from time to time, there can
be no assurance that our efforts will be effective. Moreover, even if we attempt to mitigate credit risks through insurance
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 loss of a customer due to its financial default
also could harm our future business and potential growth.

Our executive officers and key personnel are critical to our business, and because there is significant competition for
personnel in our industry, we may not be able to attract and retain such qualified personnel.

Our success depends to a significant degree upon the continued contributions of our executive management team,
and our technical, marketing, sales customer support and product development personnel. The loss of significant numbers of
such personnel could significantly harm our business, financial condition and results of operations. We do not have any life
insurance or other insurance covering the loss of any of our key employees. Because our products are specialized and
complex, our success depends upon our ability to attract, train and retain qualified personnel, including qualified technical,
marketing and sales personnel. However, the competition for personnel is intense and we may have difficulty attracting and
retaining such 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, we have operations in Germany, the United Kingdom, Hong Kong and India. Significant judgment is
required in determining our worldwide provision for income taxes and other tax liabilities. In the ordinary course of a global
business, there are many intercompany transactions and calculations where the ultimate tax determination is uncertain. 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 which could have material adverse impact on our financial condition. Our intercompany transfer pricing may be reviewed
by the U.S. Internal Revenue Service and by foreign tax jurisdictions. Although we believe that our tax estimates are
reasonable, due to the complexity of our corporate structure, the multiple intercompany 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 a favorable outcome
for us. If taxing authorities do not accept our tax positions and impose higher tax rates on our foreign operations, our overall
tax expenses could increase.

We are exposed to fluctuations in currency exchange rates.

A significant portion of our business is conducted outside the United States. Export sales to manufacturers in Europe
and Asia, including Japan and Asia Pacific, represented 97% of our total revenues for 2015, 2014 and 2013. Although most
of our revenue and expenses are transacted in 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 in local currencies. Moreover, part of our expenses in
Israel are paid in Israeli currency, which subjects us to the risks of foreign currency fluctuations between the U.S. dollar and
the New Israeli Shekel (NIS) and to economic pressures resulting from Israel’s general rate of inflation. Our primary expenses
paid in NIS are employee salaries and lease payments on our Israeli facilities. Furthermore, a portion of our expenses for our
European operations 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 expenses paid in the Euro are employee salaries, lease and operational payments on our
European facilities. As a result, an increase in the value of the NIS and Euro in comparison to the U.S. dollar could increase
the cost of our technology development, research and development expenses and general and administrative expenses, all of
which could harm our operating profit. From time to time, we use derivative instruments in order to minimize the effects of
currency fluctuations, but our hedging positions may be partial, may not exist at all in the future or may not succeed in
minimizing our foreign currency fluctuation risks. Our financial results may be harmed if the trend relating to the devaluation
of the U.S. dollars continues for an extended period.

-19-

Because the markets in which we compete are highly competitive, and many of our competitors have greater resources
than we do, we cannot be certain that our products will be accepted in the marketplace or capture market share.

The markets in which we operate are extremely competitive and characterized by rapid technological change,
evolving standards, short product life cycles and price erosion. We expect competition to intensify as current competitors
expand their product offerings and new competitors enter the market. Given the highly competitive environment in which we
operate, we cannot be sure that any competitive advantages enjoyed by our current products would be sufficient to establish
and sustain our new products in the market. Any increase in price or competition could result in the erosion of our market
share, to the extent we have obtained market share, and would have a negative impact on our financial condition and results
of operations.

In each of our business activities, we face current and potential competition from competitors that have significantly
greater financial, technical, manufacturing, marketing, sales and distribution resources and management expertise than we
do. These competitors may also have pre-existing relationships with our customers or potential customers. Further, in the
event of a manufacturing capacity shortage, these competitors may be able to manufacture products when we are unable to
do so. Our principal competitors in the cordless market include Lantiq and Dialog Semiconductors. Our principal 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 that have more established presence, and significantly greater financial, technical, manufacturing,
marketing, sales and distribution resources and management expertise than we do. The expenditure of greater resources to
expand our current product lines and develop a portfolio of “system-on-a-chip” solutions that integrate video, voice, data and
communication technologies in a wider multimedia market may increase our operating expenses and reduce 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 statutory rates and higher than anticipated in countries where we have higher statutory rates, by changes in
the valuation of our deferred tax assets and liabilities, or by changes in tax laws, regulations, accounting principles or
interpretations thereof. In addition, we are subject to the periodic examination of our income tax returns by the IRS and other
tax authorities. We regularly assess the likelihood of adverse outcomes resulting from these examinations to determine the
adequacy of our provision for income taxes, as an example, we are now under audit for one of our subsidiaries. The outcome
from this examination may 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, to achieve short delivery lead times and superior levels of customer service while maintaining low
levels of inventory, we constantly adjust our production schedules with manufacturers and subcontractors. We develop and
adjust these schedules based on end customer demand as communicated by our customers and distributors and based on our
inventory levels, manufacturing cycle times, component lead times, and projected production yields. We combine and
distribute all of this information electronically over a complex global communications network. Our ability to estimate
demand and to adjust our production schedules is highly dependent on this network. Any delay in the implementation of, or
disruption in the transition to, new or enhanced processes, systems or controls, could adversely affect our ability to manage
customer orders and manufacturing schedules, as well as generate accurate financial and management information in a timely
manner. These systems are also susceptible to power and telecommunication disruptions and other system failures. Failure
of our IT systems or difficulties in managing them could result in business disruption. Our business could be significantly
disrupted and we could be subject to third party claims associated with such disruptions.

We may experience difficulties in transitioning to smaller geometry process technologies or in achieving higher levels of
design integration, which may result in reduced manufacturing yields, delays in product deliveries and increased expenses.

A growing trend in our industry is the integration of greater semiconductor content into a single chip to achieve
higher levels of functionality. In order to remain competitive, we must achieve higher levels of design integration and deliver
new integrated products on a timely basis. This will require us to expend greater research and development resources, and
may require us to modify the manufacturing processes for some of our products, to achieve greater integration. We
periodically evaluate the benefits, on a product-by-product basis, of migrating to smaller geometry process technologies to

-20-

reduce our 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 smaller geometry processes successfully. We cannot
assure you that our foundries will be able to effectively manage the transition. In case our foundries or we experience
significant delays in this transition or fail to efficiently implement this transition, our business, financial condition and results
of operations could be materially and adversely affected.

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 the acquisition would be beneficial to our stockholders. Our board of directors also has the authority to
fix the rights and preferences of shares of our preferred stock and to issue such shares without a stockholder vote. Our bylaws
also place limitations on the authority to call a special meeting of stockholders. Our stockholders may take action only at a
meeting of stockholders and not by written consent. We have advance notice procedures for stockholders desiring to nominate
candidates for election as directors or to bring matters before an annual meeting of stockholders. In addition, these factors
may also adversely affect 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, changes in the general conditions of the highly dynamic industry in which we compete or the national
economies in which we do business, and other factors could cause the price of our common stock to fluctuate, perhaps
substantially. In addition, in recent years, the stock market has experienced extreme price fluctuations, which have often been
unrelated to the operating performance of affected companies. These factors and fluctuations could have a material adverse
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 that expires in January 2018. Our operations in Israel are located in leased facilities, with the primary
leased facility of approximately 45,359 square feet located in Herzliya Pituach, Israel. These facilities are leased through
November 2018. Our subsidiary in Tokyo, Japan has a lease that terminates in October 2016. Our subsidiary in Nuremberg,
Germany has a lease that terminates in December 2016. Our subsidiary in Scotland has 2 lease agreements for its facilities,
one with automatic renewals on a month-to-month basis and another that terminates in November 2019. Our subsidiary in
India has a lease that terminates in August 2020. Our subsidiary in Shenzhen, China has a lease that terminates in
September 2016. Our subsidiary in Hong Kong entered into a lease agreement that is effective until November 2016. We
believe that our existing facilities are adequate to meet our needs for the immediate future.

Item 3.

LEGAL PROCEEDINGS.

From time to time, we may become involved in litigation relating to claims arising from our ordinary course of
business activities. Also, as is typical in the semiconductor industry, we have been and may from time to time be notified of
claims that we may be infringing patents or intellectual property rights owned by third parties. We currently believe that there
are no claims or actions pending or threatened against us, the ultimate disposition of which would have a material adverse
effect on us.

Item 4.

MINE SAFETY DISCLOSURES.

Not applicable.

-21-

PART II

Item 5.

MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES.

Our common stock, par value $0.001, trades on the NASDAQ Global Select Market (NASDAQ symbol “DSPG”).
The following table presents for the periods indicated the high and low sales prices for our common stock as reported by the
NASDAQ Global Select Market:

Year Ended
December 31, 2014
First Quarter .....................................................................................................
Second Quarter .................................................................................................
Third Quarter ....................................................................................................
Fourth Quarter ..................................................................................................

Year Ended
December 31, 2015
First Quarter .....................................................................................................
Second Quarter .................................................................................................
Third Quarter ....................................................................................................
Fourth Quarter ..................................................................................................

High

Low

10.32
9.21
9.48
11.48

High

Low

12.08
12.17
10.45
10.65

8.31
7.90
8.30
8.83

9.77
10.14
8.02
8.65

As of March 4, 2016, there were 21,731,537 shares of common stock outstanding. As of March 4, 2016, the company
had approximately 27 holders of record and we believe greater than 740 beneficial holders. We have never paid cash
dividends on our common stock and presently intend to continue 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 our definitive proxy statement pursuant to Regulation 14A in connection with the annual meeting of
stockholders to be held on June 6, 2016. The definitive proxy 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.

Issuer Purchases of Equity Securities

In November 2013, our board of directors authorized the company’s entry into a share repurchase plan, in accordance
with Rule 10b5-1 of the Securities Exchange Act of 1934, for the repurchase of up to 2,700,000 shares of our common stock.
This authorization was in addition to the approximately 308,000 shares that were available for repurchase under the board’s
prior authorizations. Furthermore, in August 2015, our board of directors authorized an additional $10 million dollar buyback
program, of which 0.5 million shares are available for repurchase under a Rule 10b5-1 plan.

At December 31, 2015, 905,040 shares of our common stock remained available for repurchase under our board
authorized share repurchase program. The repurchase program is being affected from time to time, depending on market
conditions and other factors, through open market purchases and privately negotiated transactions.

-22-

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, as amended, or the Securities Exchange Act of 1934, as amended, that might incorporate this proxy
statement or future filings made by the Company under those statutes, the Stock Performance Graph shall not be deemed
filed with the United States Securities and Exchange Commission and shall not be deemed incorporated by reference into
any of those prior filings or into any future filings made by the Company under those statutes.

The graph below compares the cumulative total stockholder return on our common stock with the cumulative total
return on the Standard & Poor’s 500 Index and Standard & Poor’s Information Technology Index. The period shown
commences on December 31, 2010 and ends on December 31, 2015, the end of our last fiscal year. The graph assumes an
investment of $100 on December 31, 2010, 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 our common stock.

-23-

Item 6.

SELECTED FINANCIAL DATA.

The selected historical consolidated financial data presented below is derived from our consolidated financial
statements. The selected consolidated financial data set forth below is qualified in its entirety by, and should be read in
conjunction with, our consolidated financial statements for the year ended December 31, 2015, and the discussion of our
business, operations and financial results in the section captioned, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.”

Year Ended December 31,

2015

2014

2013
(U.S. dollars in thousands)

2012

2011

Statements of Operations Data:
Revenues .............................................................. $
Cost of revenues ...............................................
Gross profit ..........................................................
Operating expenses

Research and development, net ........................
General, administrative, sales and marketing ..
Amortization of intangible assets .....................
Write-off of expired option related to

investment in other company ........................
Restructuring cost (income) ..............................
Total operating expenses ..................................
Operating income (loss) .......................................
Financial and other income
Financial income, net ..........................................
Other income from remeasurement of investment

in a business Combination ................................
Income (loss) before taxes ...................................
Income tax benefit (expense) ..............................
Net income (loss) .............................................

Weighted average number of Common Stock

outstanding during the period used to compute
basic net earnings (loss) per share ....................

Weighted average number of Common Stock

outstanding during the period used to compute
diluted net earnings (loss) per share .................
Basic net income (loss) per share ......................... $
Diluted net income (loss) per share ...................... $
Balance Sheet Data (end of year):
Cash, cash equivalents, marketable securities and

bank deposits, including restricted deposits...... $
Working capital .................................................... $
Total assets ........................................................... $
Total stockholders’ equity .................................... $

144,271 $ 143,036 $
85,992
57,044

84,411
59,860

151,063 $
91,237
59,826

162,790 $
101,660
61,130

193,861
123,734
70,127

35,483
21,979
1,284

400
-
59,146
714

33,468
22,446
1,573

-
-
57,487
(443)

35,000
23,085
1,672

-
-
59,757
69

42,539
24,875
2,310

53,244
29,417
7,972

-
2,008
71,732
(10,602)

-
(170)
90,463
(20,336)

1,175

1,204

2,457

2,388

1,885

-
1,889
(327)
1,562 $

-
761
2,841
3,602 $

-
2,526
150
2,676 $

-
(8,214)
172
(8,042) $

1,343
(17,108)
866
(16,242)

21,924

21,968

22,249

21,950

23,247

23,340
0.07 $
0.07 $

22,954
0.16 $
0.16 $

22,906
0.12 $
0.12 $

21,950
(0.37) $
(0.37) $

23,247
(0.70)
(0.70)

121,656 $ 124,944 $
38,817 $
38,352 $
183,962 $ 191,179 $
143,318 $ 146,623 $

127,712 $
42,301 $
192,265 $
147,411 $

120,339 $
49,102 $
185,182 $
142,227 $

117,909
60,010
197,625
148,624

-24-

Year Ended December 31,

Fiscal Years by Quarter
Quarterly Data:

4th

3rd

2015

2nd

1st

4th

3rd

2014

2nd

1st

(Unaudited, U.S. dollars in thousands, except per share amount)

Revenues ............................ $ 33,770 $ 35,219 $ 37,247 $ 38,035 $ 37,159 $ 36,715 $ 36,276 $ 32,886
Gross profit ........................ $ 14,517 $ 14,573 $ 15,235 $ 15,535 $ 14,721 $ 14,528 $ 14,781 $ 13,014
Net income (loss) ............... $
(988)
730 $
Net income (loss) per share

1,088 $

2,729 $

(108) $

773 $

167 $

— Basic ......................... $

0.00 $

0.01 $

0.03 $

0.13 $

0.04 $

0.05 $

(0.04)

Net income (loss) per share

— Diluted ...................... $

0.00 $

0.01 $

0.03 $

0.12 $

0.03 $

0.05 $

(0.04)

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 our financial 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 combine semiconductors and software with reference designs. We provide a broad portfolio of wireless
chipsets integrating DECT, Wi-Fi, PSTN and VoIP technologies 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 for digital cordless
telephony. Such revenues currently represent approximately 72% of our total revenues for 2015.

Our revenues were $144.3 million for 2015, an increase of 1% in comparison to 2014. The increase for 2015 was
primarily as a result of increased sales of our VoIP, home gateway and home automation products, as well as the
commencement of sales of our HDClear products, partially offset by a decrease in sales of our cordless telephony products.
Revenues from our new products accounted for 28% of our total revenues for 2015, as compared to 21% of our total revenues
for 2014. Sales of our home gateway products represented 10% of our total revenues in 2015, as compared to 8% of our total
revenues in 2014. Sales of our VoIP products represented 15% of our total revenues for 2015, as compared to 10% of our
total revenues in 2014. Revenues derived from the sale of cordless telephony products represented 72% of our total revenues
for 2015, as compared to 79% of our total revenues for 2014. We expect that revenues from new products, primarily VoIP
and HDClear products, will continue to increase in 2016 and expect such revenues to represent a higher percentage of 2016
total sales.

Our gross margin increased to 41.5% of our total revenues for 2015 from 39.9% for 2014, primary due to (i) an
increase in total revenues, (ii) an improvement in production yield and direct contribution of certain of our products, and (iii)
a change in the mix of products sold and mix of customers. We anticipated that our gross margin on an annual basis will
continue to increase in the foreseeable future as our product mix shifts in favor of new products which generally have higher
gross margins.

Our operating income was $0.7 million for 2015, as compared to an operating loss of $0.4 million for 2014. The
change from operating loss to operating income was mainly as a result of increases in total revenues and gross margin during
2015, as compared to 2014, offset to some extent by an increase in operating expenses, mainly in research and development
expenses, during 2015, as compared to 2014. Our operating expenses increased by 3% to $59.1 million for 2015, as compared
to $57.5 million for 2014, mainly as a result of the above mentioned increase in research and development expenses. We
expect our research and development expenses to increase slightly in 2016 in comparison to 2015.

Notwithstanding our return to revenue growth in 2015 and our success in increasing our gross margin, we expect
that our financial condition will continue to be challenged by the steady decline of the cordless telephony market. The 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 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

-25-

cellular phone operators and fixed-line operators for the provision of residential communication. A significant majority of
our revenues are currently generated from sales of chipsets used in cordless phones that are based on fixed-line telephony. If
we are unable to develop new technologies to address alternative connectivity methods, our business could be materially
adversely affected.

Therefore, in order to increase our revenues and offset the declining revenues generated from our cordless products,
we need to introduce new products and penetrate new markets. We intend to leverage our strong technology base and
customer relationships to maximize growth and revenue opportunities for these new products.

We see evidence that our past research and development investments in new technologies are beginning to
materialize. We have achieved a number of design wins for our new products and begun mass shipments of a number of new
products. Moreover, 2015 marked the achievement of a significant milestone for the company with initial mass production
shipments of HDClear products to a tier one mobile customer. Aggregate revenues derived from our new products were 28%,
21% and 15% of our total revenues for 2015, 2014 and 2013, respectively. Based on a strong pipeline of design wins, our
current mix of new products and anticipated commercialization schedules of customers incorporating our new products, we
anticipate annual revenues generated from our new products to increase significantly in 2016 as compared to 2015. However,
we can provide no assurances about our success in introducing new products and penetrating new markets, as well as our
predictions regarding market trends. Furthermore, although our new products targeted for mobile devices, home control &
automation and enterprise VoIP solutions are gradually being introduced into the market, market adoption of such products
is at early stages and may require us to increase our research and development spending to capitalize on opportunities in those
markets. Moreover, although we have achieved a number of design wins with top-tier OEMs for new products, revenue
generated from the commercialization of new products is a measured process as there is generally a long lead time from a
design win to commercialization. From initial product design win to volume production, many factors could impact the timing
and/or amount of sales actually realized from the design win. In addition to general price sensitivity and price erosion in the
markets we operate, the introduction of new products 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 in the average selling prices of such products to continue. Furthermore, various other factors, including increases in
the cost of raw materials and commodities 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 revenues in future periods.

As of December 31, 2015, our principal source of liquidity consisted of cash and cash equivalents of $13.7 million

and marketable securities and short term deposits of $107.8 million, totaling $121.5 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 that management believes to
be relevant at the time the consolidated financial statements are prepared. On a regular basis, management reviews our
accounting policies, assumptions, estimates and judgments to ensure that our financial statements are presented fairly and in
accordance with U.S. GAAP. However, because future events and their effects cannot be determined with certainty, actual
results could differ from our assumption and estimates, and such differences could be material.

Our significant accounting policies are discussed in Note 2, Significant Accounting Policies, of the notes to our

consolidated financial statements for the year ended December 31, 2015.

-26-

Management believes that the following accounting policies require management’s most difficult, subjective and
complex judgments, resulting from the need to make estimates about the effect of matters that are inherently uncertain.
Management has reviewed these critical accounting policies and related disclosures with our independent auditors and audit
committee.

Description
Tax Contingencies:
Like most companies, domestic and
foreign tax authorities periodically
audit our income tax returns. These
audits include questions regarding our
tax filing positions, including the
timing and amount of deductions and
income among
the allocation of
various tax jurisdictions. In evaluating
the exposure associated with our
various tax filing positions, including
state, foreign and local taxes, we
record
probable
exposures. A number of years may
elapse before a particular matter, for
which we have established a reserve, is
audited and fully resolved.

reserves

for

We report a liability for unrecognized
tax benefits resulting from uncertain
tax positions taken or expected to be
taken in a tax return. We recognize
interest and penalties, if any, related to
unrecognized tax benefits in income
tax expense.

Tax Valuation Allowance:
We have a valuation allowance for
some of our deferred tax assets based
on the determination that it is more
likely than not that some of these
assets will not be realized.

Judgments & Uncertainties
The estimate of our tax contingency
reserve contains uncertainty because
management must use judgment to
estimate the exposure associated with
our various tax filing positions.

According
to Financial Accounting
Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) No.
740, “Income Taxes,” the first step is to
evaluate the tax position for recognition
the weight of
if
by determining
available evidence indicates it is more
likely than not that the position will be
sustained on audit, including resolution
of
litigation
processes, if any. The second step is to
measure the tax benefit as the largest
amount which is more than 50% likely
of being
realized upon ultimate
settlement.

appeals or

Effect if Actual Results Differ from
Assumptions

Although management believes that its
estimates and judgments about tax
contingencies are reasonable, actual
results could differ, and we may be
exposed to gains or losses that could be
material. To the extent we prevail in
matters for which reserve has been
established, or are required to pay
amounts in excess of the reserve, our
effective tax rate for a given financial
statement period could be materially
tax
affected. An
settlement would require use of our
cash and result in an increase in our
effective tax rate for the year of
resolution. A favorable tax settlement
would be recognized as a reduction in
our effective tax rate for the year of
resolution.

unfavorable

Our management inherently must make
estimates to determine the ultimate
realization of these assets.

The estimate of our tax valuation
allowance contains uncertainty because
management must use judgment to
estimate the expected results for tax
purposes.

and

judgments

Although management believes that its
about
estimates
expected results for tax purposes are
reasonable, actual results could differ,
and we may be required to record an
additional valuation allowance for our
deferred tax assets.

-27-

Judgments & Uncertainties

Effect if Actual Results Differ from
Assumptions

require us

We determine fair value using widely
accepted
techniques,
valuation
including discounted cash flow and
market multiple analyses. These types
of analyses
to make
assumptions and estimates regarding
the
industry economic factors and
profitability
business
of
strategies. It is our policy to conduct
impairment testing based on our current
business strategy in light of present
industry and economic conditions, as
well as future expectations.

future

If management’s estimates or related
assumptions change in the future, we
may be required to record impairment
charges for our investment in other
company.

As of December 31, 2015, we did not
exercise the purchase option by the
expiration date, and as a result we
recorded a write-off of $0.4 million
associated with this investment.

Description
Valuation of Investment in Other
Company :
The investment in other company on
our consolidated balance sheet is as a
result of our investment in a private
for
company
approximately 14% of the equity of the
company on a fully diluted basis and
an option we had to acquire the
remaining equity of
this private
company by a specified date.

in Asia

return

not

investment may

This investment in other company is
reviewed for impairment whenever
events or changes in circumstances
indicate that the carrying amount of
be
such
We may obtain an
recoverable.
appraisal
independent
valuation firm to determine the amount
of impairment, if any. In addition to
the use of an independent valuation
firm, we perform internal valuation
analyses and consider other publicly
available market information.

from

Valuation of Long-Lived Assets,
Intangible Assets and Goodwill :
Goodwill represents the excess of
purchase price over the fair value of
identifiable net assets acquired in
business combination. The goodwill
on our consolidated balance sheet is a
result of our acquisition of BoneTone.
intangible asset
The
included on our consolidated balance
sheet is technology acquired in the
BoneTone acquisition.

identifiable

require us

future

If management’s estimates or related
assumptions change in the future, we
may be required to record impairment
charges for our intangible assets.

We perform our annual impairment
analysis of goodwill and indefinite-
lived
(such as
technology) in the fourth quarter of
each fiscal year, or more often if there

intangible assets

-28-

Judgments & Uncertainties

Effect if Actual Results Differ from
Assumptions

events

changes

Description
are indicators of impairment. We
review intangible assets with finite
useful life for potential impairment
in
or
when
circumstances indicate the carrying
value of those intangible assets may
be impaired. We may obtain an
independent
appraisal
the
valuation firm
amount of impairment, if any. In
addition to the use of an independent
valuation firm, we perform internal
valuation analyses and consider
other publicly available market
information.

to determine

from an

Contingencies and Other Accrued
Expenses:
We are from time to time involved in
legal proceedings and other claims.
We are required
the
likelihood of any adverse judgments
or outcomes to these matters, as well
as potential ranges of probable
losses.

to assess

A determination of the amount of
reserve required,
if any, for any
contingencies and accruals is made after
careful analysis of each individual issue.
The required reserve may change due to
future developments, such as a change
in the settlement strategy in dealing with
any contingencies, which may result in
higher net losses.

If actual results are not consistent with
management’s
and
judgments, we may be exposed to gains
or losses that could be material.

assumptions

value

through

Inventory Write-Off:
We value our inventory at the lower
of the cost of the inventory or fair
the
market
establishment of write-off and
inventory loss reserve. We have not
made any changes in the accounting
methodology used to establish our
markdown or inventory loss reserves
during the past four fiscal years.

Our write-off represents the excess of
the carrying value, typically cost, over
the amount we expect to realize from
the ultimate sale or other disposal of
inventory based upon our assumptions
regarding forecasted consumer demand,
the promotional environment, inventory
aging and technological obsolescence.

If management’s estimates regarding
consumer demand are inaccurate or
changes in technology affect demand for
in an unforeseen
certain products
manner, we may be exposed to losses or
gains in excess of our established write-
off that could be material.

Equity-Based Compensation
Expense:
Equity-based compensation expense
is measured on the grant date based
on the fair value of the award and is
recognized as an expense over the
requisite service periods.

Determining the fair value of equity-
based awards on the grant date requires
the exercise of judgment, including the
amount of equity-based awards that are
expected to be forfeited. We consider
many factors when estimating expected
forfeitures, including types of awards,
employee
historical
experience. Actual results, and future
in estimates, may differ
changes
substantially from our current estimates.

class,

and

Although management believes

that
their estimates and judgments about
equity-based compensation expense are
reasonable, actual results could differ.

-29-

Description

Judgments & Uncertainties

Effect if Actual Results Differ from
Assumptions

We estimate the fair value of equity-
based awards using a binomial option
pricing model. The fair value of an
award is affected by our stock price on
the date of grant as well as other
assumptions, including expected stock
price volatility and the expected term of
the equity-based award. The risk-free
interest rate is based on the yield from
U.S. treasury bonds with an equivalent
term. Expected volatility is calculated
based upon actual historical stock price
movements. The expected term of the
equity-based award granted is based
upon
and
represents the period of time that the
to be
award granted
outstanding. Our expected dividend rate
is zero since we do not currently pay
cash dividends and do not anticipate
doing so in the foreseeable future.

is expected

experience

historical

determines

Marketable Securities:
Management
the
appropriate classification for our
in debt and equity
investments
securities at the time of purchase and
re-evaluates such determination at
each balance sheet date.

Although management believes

actual

that
their considerations and
judgments
about fair value and whether a loss
associated with a marketable security is
other-than-temporary,
results
could differ. Given current market
conditions
uncertainty,
and
management’s judgments could prove to
be wrong, and companies with relatively
high credit ratings and solid financial
conditions may not be able to fulfill their
obligations and thereby cause other-
than-temporary losses.

The marketable

securities

are
periodically reviewed for impairment. If
it is concluded that any of these
investments are impaired, management
determines whether such impairment is
that
“other-than-temporary.” Factors
are considered
in making such a
determination include the duration and
severity of the impairment, the reason
for the decline in value and the potential
recovery period, and our intent to sell,
or whether it is more likely than not that
the
we will be required
investment before recovery of its cost
basis. If any impairment is considered
“other-than-temporary,” the investment
is written down to its fair value and a
corresponding charge is recorded in
financial income, net.

to sell,

Results of Operations:

Total Revenues. Our total revenues were $144.3 million for 2015, $143.0 million for 2014 and $151.1 million for
2013. The increase for 2015 was primarily as a result of increased sales of our VoIP, home gateway and home automation
products, as well as commencement of sales of our HDClear products, partially offset by a decrease in sales of our cordless
telephony products. The decrease of 5.3% in revenues for 2014 as compared to 2013 was primarily as a result of decreased
sales of our 2.4GHz and DECT cordless telephony products, offset to some extent by increased sales of VoIP, home gateway
and home automation products.

-30-

Sales of our cordless telephony products were $104.1 million, $113.2 million and $128.8 million for the years ended
2015, 2014 and 2013, respectively, representing approximately 72%, 79% and 85% of our total revenues for 2015, 2014 and
2013, respectively. The above mentioned decrease in 2015 compared to 2014 was mainly attributable to decreased demand
from our customers, mainly for the U.S. and Japanese domestic end markets. The above mentioned decrease in 2014
compared to 2013 was mainly attributable to decreased demand from our customers, mainly for the U.S. and European end
markets.

Sales of our home gateway products were $13.8 million, $12.0 million and $9.4 million for the years ended 2015,
2014 and 2013, respectively, representing approximately 10%, 8% and 6% of our total revenues for 2015, 2014 and 2013,
respectively. The increase of 15% in absolute dollars of our home gateway product sales in 2015 as compared to 2014 and
the increase of 28% in absolute dollars of our home gateway product sales in 2014 as compared to 2013 were both mainly
attributable to the increased acceptance and adoption of HD voice as DECT solution is the preferred medium for transmitting
HD voice wirelessly at home. Sales of our VoIP products were $22.2 million, $14.3 million and $8.9 million for 2015, 2014
and 2013, respectively, representing 15%, 10% and 6% of our total revenues for 2015, 2014 and 2013, respectively. The
increase of 56% in absolute dollars of our VoIP sales in 2015 as compared to 2014 and the increase of 61% in absolute dollars
of our VoIP sales in 2014 as compared to 2013 were both mainly attributable to a growth in market demand for our VoIP
products that resulted from the growth of our market share within this domain.

The following table shows the breakdown of revenues for all product lines for the periods indicated by geographic

location based on the geographic location of our customers (in thousands):

Year Ended December 31,
2014

2015

2013

United States ....................................................................................... $
Hong Kong ..........................................................................................
Japan....................................................................................................
Europe .................................................................................................
China ...................................................................................................
Taiwan .................................................................................................
Other....................................................................................................
Total revenues ..................................................................................... $

3,944 $
72,608
26,114
8,464
10,359
16,902
5,880
144,271 $

4,702 $
79,622
31,261
6,787
6,568
9,077
5,019
143,036 $

4,342
86,090
34,377
7,370
6,999
7,093
4,792
151,063

Sales to our customers in Hong Kong decreased for 2015 as compared to 2014, representing a decrease of 9% in
absolute dollars. The decrease in our sales to Hong Kong for the comparable periods resulted mainly from the decrease in
sales to VTech Holding Ltd. (“VTech”) of 12% when comparing 2015 to 2014 and a decrease in sales to CCT Telecom
Holdings Ltd. (“CCT”) of 34% when comparing 2015 to 2014. This decrease was partially offset by an increase of 52% in
sales to Shenzhen Guo Wei Electronics Ltd. (“Guo Wei”). The decrease in our sales to Japan for the comparable periods
resulted mainly from a decrease in sales to the Japanese domestic market, representing a 39% decrease in absolute dollars for
2015 as compared to 2014 and a decrease in sales through our distributor, Tomen Electronics, Ltd. (“Tomen Electronics”),
to Panasonic Communications Ltd (“Panasonic”) of 12% when comparing 2015 to 2014.

Sales to our customers in Taiwan increased for 2015 as compared to 2014, representing an increase of 86% in
absolute dollars. The increase in our sales to Taiwan for the comparable periods resulted mainly from an increase in sales
through our distributor, Ascend Technology Inc. (“Ascend Technology”).

Sales to our customers in Hong Kong decreased for 2014 as compared to the same period of 2013, representing a
decrease of 8% in absolute dollars. The decrease in our sales to Hong Kong for the comparable periods resulted mainly from
a decrease in sales to VTech of 6% during the comparable periods. Sales to our customers in Japan decreased for 2014 as
compared to the same period of 2013, representing a decrease of 9% in absolute dollars. The decrease in our sales to Japan
for the comparable periods resulted mainly from a decrease in sales to Uniden American Corporation, representing a 52%
decrease in absolute dollars for 2014, as compared to 2013.

As our products are generally incorporated into consumer electronics products sold by our OEM customers, our
revenues are affected by seasonal buying patterns of consumer electronics products sold by our OEM customers that
incorporate our products.

-31-

Significant Customers. The Japanese and Hong Kong markets and the OEMs that operate in those markets are
among the largest suppliers of residential wireless products with significant market share in the U.S. market. The loss of any
of our significant customers or distributors could have a material 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 31%, 35% and 36% of our

total revenues for 2015, 2014 and 2013, respectively.

Sales to Guo Wei represented 12%, 8% and 8% of our total revenues for 2015, 2014 and 2013, respectively.
Revenues derived from sales through our distributor, Japan-based Tomen Electronics accounted for 16% of our total revenues
for 2015, as compared to 20% for 2014 and 19% for 2013.

Tomen Electronics sells our products to a limited number of customers. One customer, Panasonic, has continually
accounted for a majority of sales through Tomen Electronics. Sales to Panasonic through Tomen Electronics generated
approximately 13%, 15% and 14% of our total revenues for 2015, 2014 and 2013, respectively.

Revenues derived from sales through our distributor, Ascend Technology, accounted for 15% of our total revenues
for 2015, as compared to 10% for 2014 and 9% for 2013. Ascend Technology sells our products to a limited number of
customers; however none of those customers accounted for more than 10% of our total revenues for 2015, 2014 or 2013.

Significant Products. Revenues from our digital cordless telephony products represented 72%, 79% and 85% of
our total revenues for 2015, 2014 and 2013, respectively. We believe that sales of digital cordless telephony products will
continue to represent a substantial percentage of our revenues for 2016. 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 home gateway products represented 10%, 8% and 6% of our total revenues for 2015, 2014 and

2013, respectively.

Revenues from our VoIP products represented 15%, 10% and 6% of our total revenues for 2015, 2014 and 2013,

respectively.

Gross Profit. Gross profit as a percentage of revenues was 41.5% for 2015, 39.9% for 2014 and 39.6% for 2013.
The increase in our gross profit for 2015 as compared to 2014 was primary due to (i) an increase in total revenues, (ii) an
improvement in production yield and direct contribution of certain of our products, and (iii) a change in the mix of products
sold and mix of customers. The increase in our gross profit for 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 of lower cost structure for
production of such products, and (ii) a change in the mix of products sold and customers, offset to some extent by a decrease
in total revenues.

As gross profit reflects the sale of chips and chipsets that have different margins, changes in the mix of products
sold and customers have impacted 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, including the continued decline in the average selling prices of our products, changes
in the mix of products sold and customers, our failure to achieve cost reductions, roll-out of new products in any given period,
our success in introducing new engineering processes to reduce manufacturing costs, increases in the cost of raw materials
such as gold, oil and silicon wafers, and increases in production, assembly and testing costs. Moreover, our suppliers may
pass the increase in the cost of raw materials and commodities onto us which would further reduce the gross margins of our
products. There are no guarantees that our ongoing efforts in cost reduction and yield improvements will keep pace with the
anticipated continuing decline in average selling prices of our products.

Cost of goods sold consists primarily of costs of wafer manufacturing and fabrication, assembly and testing of
integrated circuit devices and related overhead costs, and compensation and associated expenses related to manufacturing
and testing support, inventory obsolesce and logistics personnel.

Operating Expenses. Our operating expenses were $59.1 million for 2015, $57.5 million for 2014 and $59.8 million
for 2013. The increase in operating expenses for 2015 as compared to 2014 was primarily attributable to (i) an increase in
research and development expenses in the amount of $2.0 million, and (ii) an increase in sales and marketing expenses in the
amount of $0.2 million. These increases were offset to some extent by a decrease in general and administrative expenses in
the amount of $0.6 million in 2015 as compared to 2014.

-32-

The decrease in operating expenses for 2014 as compared to 2013 was primarily attributable to (i) a decrease in
research and development expenses in the amount of $1.5 million, and (ii) a decrease in general and administrative expenses
in the amount of $1.3 million. 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 to 2013.

Our operating income was $0.7 million for 2015, as compared to an operating loss of $0.4 million for 2014 and an
operating income of $0.1 million for 2013. The change from operating loss in 2014 to operating income in 2015 was mainly
as a result of increases in total revenues and gross margin during 2015, as compared to 2014, offset to some extent by an
increase in operating expenses, mainly in research and development expenses, during 2015, as compared to 2014. The
decrease in operating income in 2014 as 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 in research and development, and general and administrative
expenses, and an improvement in gross margins.

Research and Development Expenses. Our research and development expenses, net, were $35.5 million for 2015,
$33.5 million for 2014 and $35.0 million for 2013. The increase for 2015 in research and development expenses, net, as
compared to 2014, was mainly due to (i) an increase in projects-related expenses (mainly IP and tapeouts) in the amount of
$3.0 million, and (ii) a decrease in funding received from the Israeli Office of the Chief Scientist (“OCS”) in the amount of
$0.3 million for 2015. The increase in research and development expenses, net, for 2015, as compared to the comparable
period of 2014, was partially offset by a decrease in labor and employees related expenses in the amount of $1.2 million for
2015 as compared to 2014, mainly as a result of an increase in the exchange rate between the USD and the NIS, which
decreased the payroll expenses of our Israeli employees and a decrease in overall compensation payments to employees.

The OCS funding was recognized as a deduction of our research and development expenses, net. 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 of products 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 2014 in research and development expenses, net, as compared to 2013, was mainly due to (i) a
decrease in projects-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 OCS in the amount of $3.0 million for 2014, following the
receipt of an approval from the 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 was recognized as a deduction of our research and
development expenses, net. The decrease in research and development expenses, net, for 2014, as compared to 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 $0.5 million, 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 the devaluation of the U.S. dollar against the NIS, which increased our Israeli
employees labor expenses.

Our research and development expenses, net, as a percentage of our total revenues were 25% for 2015 and 23% for
both 2014 and 2013. The increase in research and development expenses, net, as a percentage of total revenues for 2015 as
compared to 2014 was mainly due to an increase in research and development expenses, net, for the comparable periods.

Research and development expenses consist mainly of payroll expenses to employees involved in research and
development activities, expenses related to tapeout and mask work, subcontracting, labor contractors and engineering
expenses, depreciation and maintenance fees related to equipment and 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 $12.1 million for 2015, $11.9 million for
2014 and $11.3 million for 2013. The increase in sales and marketing expenses between 2015 and 2014 was mainly due to
an increase in consulting services. 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 labor expenses.

Our sales and marketing expenses as a percentage of our total revenues were 8%, 8% and 7% for 2015, 2014 and
2013, respectively. The increase in 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 the total revenues and an increase in sales and marketing expenses
for 2014 as compared to 2013.

-33-

Sales and marketing expenses consist mainly of sales commissions, payroll expenses to direct sales and marketing
employees, travel, trade show expenses, and facilities expenses associated with and allocated to sales and marketing activities.

General and Administrative Expenses. Our general and administrative expenses were $9.9 million, $10.5 million
and $11.8 million for 2015, 2014 and 2013, respectively. The decrease in general and administrative expenses for 2015 as
compared to 2014 was mainly due to a decrease in payroll and overhead expenses as a result of (i) an increase in the exchange
rate of the USD and the NIS, which decreased our Israeli operational overhead and employee labor expenses, and (ii) a
decrease in other payroll benefit expenses.

The decrease in general and administrative expenses for 2014 as compared to 2013 was mainly attributed to proxy
contest related expenses (mainly legal and stockholder related expenses) we incurred during the second quarter of 2013 in
the amount of $1.4 million as compared to no such expenses in 2014.

General and administrative expenses as a percentage of our total revenues were 7%, 7% and 8% for 2015, 2014 and
2013, respectively. The decrease in general and administrative expenses in 2014 as a percentage of total revenues as compared
to 2013 was due to a decrease in absolute dollars of general and administrative expenses, offset to some extent by a decrease
in total revenues for 2014 as compared to 2013.

Our general and administrative expenses consist mainly of payroll expenses for management and administrative
employees, accounting and legal fees, expenses related to investor relations as well as facilities expenses associated with
general and administrative activities.

Amortization of Intangible Assets. During 2015, 2014 and 2013, we recorded an expense of $1.3 million, $1.6
million and $1.7 million, respectively, relating to the amortization of intangible assets associated with the acquisition of the
CIPT Business from NXP B.V. in 2007 and the acquisition of BoneTone in 2011. The sequential decrease is consistent with,
and is based on, the original amortization schedule determined following the impairment of goodwill and other intangible
assets that took place in 2008 in relation to the acquisition of the CIPT Business, offset to some extent by an increase from
2013 in the amortization of intangible assets associated with the acquisition of BoneTone.

Write-off of expired option related to investment in other company, . In November 2013, we made an investment
of $2.2 million in a private company in Asia in return for approximately 14% of the equity of the company on a fully diluted
basis. We also had the option to acquire the remaining equity of this private company until December 31, 2014. The terms
and conditions of the investment were modified in November 2014, including an extension of the option to acquire the
remaining equity of the company to December 31, 2015. We did not exercise the purchase option by the expiration date, and
as a result we recorded a write-off of $400,000 associated with the investment.

Financial income, net. Financial income, net, was $1.2 million for 2015, $1.2 million for 2014 and $2.5 million for
2013. The decrease in financial 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 the amount of $0.9 million, and (ii) a lower yield on marketable securities.

Our total cash, cash equivalents, marketable securities and short term deposits, including restricted deposits, were

$121.7 million as of December 31, 2015, as compared to $124.9 million as of December 31, 2014.

Provision for Income Taxes. Taxes on income were $0.3 million for 2015, as compared to an income tax benefit of
$2.8 million for 2014 and an income tax benefit of $0.2 million for 2013. The taxes on income for 2015 were mainly attributed
to current tax expenses that were recorded in the amount of $0.7 million, offset to some extent by an income from amortization
of deferred tax liability related to intangible assets acquired in connection with the BoneTone acquisition in the amount of
$0.4 million.

The income tax benefit for 2014 was mainly attributed to (i) income from elimination of valuation allowance of
deferred tax 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 tax contingency reserves that were determined to be no longer needed due to finalization of
tax assessment of one of our subsidiaries in the amount of $0.9 million, and (iii) income from amortization of deferred tax
liability related to intangible assets acquired in connection with the BoneTone acquisition in the 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 $0.4
million. The income tax benefit for 2013 was mainly attributed to (i) an amortization of deferred tax liability, net related to
the intangible assets acquired in connection with BoneTone acquisition in the amount of $0.4 million, and (ii) a reversal of
an income tax contingency reserve that was determined to be no longer needed due to the expiration of the applicable statute
of limitations in the amount of $0.3 million. The above mentioned tax benefits were offset to some extent by current tax
expenses that were recorded in the amount of $0.5 million.

-34-

DSP Group Ltd., our Israeli subsidiary, is eligible for various tax incentives under the Israeli Investment Laws. For
more information about these incentives and plans, please refer to Note 15 to our consolidated financial statements for the
year ended December 31, 2015.

Description of Segments.

We operate under three reportable segments.

Our segment information has been prepared in accordance with ASC 280, “Segment Reporting.” Operating
segments are defined as components of an enterprise engaging in business activities about which separate financial
information is available that is evaluated regularly by the company’s chief operating decision-maker (“CODM”) in deciding
how to allocate resources and assess performance. Our CODM is our Chief Executive Officer, who evaluates the Company’s
performance and allocates resources based on segment revenues and operating income.

Our operating segments are as follows: Home, Office and Mobile. The classification of our business segments is
based on a number of factors that our management uses to evaluate, view and run the company’s business operations, which
include, but are not limited to, customer base, homogeneity of products and technology.

A description of the types of products provided by each business segment is as follows:

Home - Wireless chipset solutions for converged communication at home. Such solutions include integrated circuits
targeted for cordless phones sold in retail or supplied by telecommunication service providers, home gateway devices
supplied by telecommunication service providers which integrate the DECT/CAT-iq functionality, integrated circuits
addressing home automation applications, as well as fixed-mobile convergence solutions. In this segment, (i) revenues from
cordless telephony products exceeded 10% of our total consolidated revenues and amounted to 72%, 79% and 85% of our
total revenues for 2015, 2014 and 2013, respectively, and (ii) revenues from home gateway products exceeded 10% of our
total consolidated revenues for 2015 and amounted to 10%, 8% and 6% of our total revenues for 2015, 2014 and 2013,
respectively.

Office - Comprehensive solution for Voice-over-IP (VoIP) office products, including office solutions that offer
businesses of all sizes low-cost VoIP terminals with converged voice and data applications. VoIP products in the Office
segment represented 15%, 10% and 6% of our total revenue for 2015, 2014 and 2013, respectively. No revenues derived
from other products in the office segment exceeded 10% of our total consolidated revenues for the years 2015, 2014 and
2013.

Mobile - Products for the mobile market that provides voice enhancement, always-on and far-end noise elimination
targeted for mobile phone and mobile headsets and wearable devices that incorporate our noise suppression and voice quality
enhancement HDClear technology. No revenues derived from products in the mobile segment exceeded 10% of our total
consolidated revenues for the years 2015, 2014 and 2013.

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 these results, in part, to evaluate the
performance of, and to assign resources to, each of the business segments. We do not allocate to our business segments certain
operating expenses, which we manage separately at the corporate level. These unallocated costs include primarily
amortization of purchased intangible assets, equity-based compensation expenses, proxy contest related expenses incurred
during the second quarter of 2013 and certain corporate governance costs.

-35-

We do not allocate any assets to segments and, therefore, no amount of assets is reported to management and
disclosed in the financial information for segments. Selected operating results information for each business segment was as
follows for the years ended December 31, 2015, 2014 and 2013:

Year ended December 31

Home ............... $
Office ............... $
Mobile .............. $
Totalb .............. $

2015

121,714 $
22,216 $
341 $
144,271 $

Revenues
2014

128,690 $
14,276 $
70 $
143,036 $

2013

142,144 $
8,849 $
70 $
151,063 $

Income (loss) from operations
2014

2013

2015

24,815 $
(4,861) $
(10,308) $
9,646 $

23,438 $
(2,805) $
(11,983) $
8,650 $

25,367
(4,656)
(11,040)
9,671

Sales to our customers in the home segment decreased for 2015 as compared to 2014, representing a decrease of 5%
in absolute dollars, and decreased for 2014 as compared to 2013, representing a decrease of 9% in absolute dollars. The
decrease in our home segment sales for the comparable periods was mainly attributable to the decline in market demands,
and the decrease in the average selling prices, of cordless phones over the comparative periods, 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 2015 as compared to 2014, representing an increase of
56% in absolute dollars. Sales to our customers in the office segment increased for 2014 as compared to 2013, representing
an increase of 61% in absolute dollars. The increase in our office segment sales for both comparable periods was mainly due
to an increase in our market share of VoIP products.

Sales to our customers in the mobile segment increased for 2015 as compared to 2014, representing an increase of
387% in absolute dollars. The increase in our mobile segment sales for the comparable periods was mainly due to achievement
of a significant milestone for the company with initial mass production shipments of HDClear products to a tier one mobile
customer. The reconciliation of segment operating results information to our consolidated financial information is included
in Note 17 to our consolidated financial statements.

LIQUIDITY AND CAPITAL RESOURCES

Operating Activities. We generated $12.2, $10.4 and $13.3 million of cash and cash equivalents from our operating
activities during 2015, 2014 and 2013, respectively. The increase in net cash generated by operating activities for 2015, as
compared to 2014, was mainly as a result of a decrease in inventories in the amount of $4.2 million during 2015, as compared
to an increase in inventories in the amount of $3.3 million during 2014. The above mentioned increase was offset to some
extent by (i) a decrease of $2.2 million in accounts payable during 2015, as compared to an increase in the amount of $1.1
million during 2014, and (ii) an increase of $1.0 million in prepaid expenses and other current assets during 2015 as compared
to a decrease of $0.7 million during 2014.

The decrease in net cash generated by operating activities for 2014, as compared to 2013, was mainly as a result of
(i) an increase in 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) an increase in accrued compensation and benefits for 2014 in the amount of $1.3
million, as compared to an increase in accrued compensation and benefits in the amount of $4.0 million for 2013.

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 2015, we purchased
$41.0 million of investments in marketable securities and deposits, as compared to $73.1 million during 2014 and $70.7
million during 2013. During the same periods, $20.1 million, $23.3 million and $18.3 million, respectively, of investments
in marketable securities matured and were called by the issuer. During the same periods, $13.3 million, $46.5 million and
$43.0 million, respectively, of investments in marketable securities were sold. Additionally, during 2015, 2014 and 2013,
$2.6 million, $2.6 million and $2.8 million, respectively, of short term deposits matured.

As of December 31, 2015, the amortized cost of our marketable securities and deposits was approximately $108.3
million and their stated market value was approximately $107.8 million, representing an unrealized loss of approximately
$0.5 million.

-36-

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 of the company on a fully diluted basis. We also had the option to acquire the remaining
equity of this private company under agreed terms until December 31, 2014. The terms and conditions of the investment were
modified in November 2014, including an extension of the option to acquire the remaining equity until December 31, 2015.
We did not exercise the purchase option by the expiration date.

Our capital equipment purchases for 2015, consisting primarily of research and development software tools,
computers and other peripheral equipment, engineering test and lab equipment, leasehold improvements, furniture and
fixtures, totaled $2.3 million, as compared to $1.3 million for 2014, and $1.1 million for 2013.

Financing Activities. During 2015, we repurchased 1.3 million shares of our common stock at an average purchase
price of $10.24 per share for an aggregate amount of $13.2 million. In addition, during 2015, we received $1.2 million upon
the exercise of employee stock options.

During 2014, we repurchased 1.4 million shares of our common stock at an average purchase price of $8.83 per
share for an aggregate amount of $12.48 million. In addition, during 2014, we received $1.8 million upon the exercise of
employee stock options.

In November 2013, our board of directors authorized the company’s entry into a share repurchase plan, in accordance
with Rule 10b5-1 of the Securities Exchange Act of 1934, for the repurchase of up to 2,700,000 shares of our common stock.
This authorization was in addition to the approximately 308,000 shares that were available for repurchase under the board’s
prior authorizations. Furthermore, in August 2015, our board authorized an additional $10 million dollar buyback program,
of which 0.5 million shares are available for repurchase under a Rule 10b5-1 plan. At December 31, 2015, approximately 0.9
million shares of our common stock are available for repurchase under our board authorized share repurchase program.

As of December 31, 2015, we had cash and cash equivalents totaling approximately $13.7 million and marketable
securities and time deposits of approximately $107.8 million. Out of total cash, cash equivalents and marketable securities of
$121.5 million, $107.8 million was held by foreign entities. Our intent is to permanently reinvest earnings of our foreign
operations and our current operating plans do not demonstrate a need to repatriate foreign earnings to fund our U.S.
operations. However, if these funds were 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 repatriate these funds. The determination of the amount of additional
taxes related to the repatriation of these earnings is 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 from which the cash would be repatriated.

Our working capital at December 31, 2015 was approximately $38.4 million, as compared to $38.8 million as of
December 31, 2014. The decrease in working capital was mainly due to a decrease in inventories in the amount of $4.2
million, offset to some extent by a decrease in current liabilities.

We believe that our current cash, cash equivalents, cash deposits and market securities will be sufficient to meet our

cash requirements for both the short and long term.

In addition, as part of our business strategy, we may evaluate potential acquisitions of businesses, products and
technologies. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary
products or businesses. Such potential transactions may require substantial capital resources, which may require us to seek
additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition
candidates, complete acquisitions, integrate acquired businesses into our current operations, or expand into new markets.
Furthermore, we cannot assure you that additional financing will be available to us in any required time frame and on
commercially reasonable terms, 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 our business, results of operations and financial condition.” for more
detailed information.

-37-

Contractual Obligations

The following table aggregates our material expected obligations and commitments as of December 31, 2015 (in

thousands):

Payment Due By Period

Total

Less Than
1 Year

2-3 Years 4-5 Years

More Than
5 Years

Contractual Obligations
Operating Lease Commitments (1) ................... $
Net Pension Liability (2) ..................................

6,278 $
1,360

2,684 $
55

3,449 $
29

Development tools lease and other (3) .............
Total Contractual Obligations .......................... $

2,637
10,275 $

1,515
4,254 $

1,122
4,600 $

145
17

-
162 $

-
1,259

(1) Represents mainly operating lease payments for facilities and vehicles under non-cancelable lease agreements. See

Note 14 to notes to our consolidated financial statements for the year ended December 31, 2015.

(2) Includes estimates of gross contributions and future payments required to meet the requirements of several defined
benefit plans. The amounts presented in the table are not discounted and do not take into consideration staff turnover
assumptions.

(3) Represents lease payments for development tools and other non-cancelable lease agreements.

At December 31, 2015, we had a liability for unrecognized tax benefits and an accrual for the payment of related
interests totaling $1.7 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 taxing authority will occur. We believe a change in the amount of
unrecognized tax benefit is reasonably possible in the next 12 months due to the examination of 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 tax benefits
due to the ongoing status of the examination.

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 Exchange Commission, that have or are reasonably likely to have a current or future effect on our financial
condition, changes in financial condition, revenues or expenses, 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 currency exposures 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 foreign jurisdictions, to the extent such
deposits are even insured in such foreign jurisdictions. While we monitor on a systematic basis the cash balances and adjust
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 is subject 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 financial and 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 and political subdivisions of the U.S. government. We intend, and have the ability, to hold investments
in marketable securities with a decline in fair value until an anticipated recovery of any temporary declines in their market
value. We typically do not attempt to reduce or eliminate our market exposures on our investment securities because the
majority of our investments are short-term. However, we can provide no assurances that we will recover present declines in
the market value of our investments.

-38-

Interest rate fluctuations relating to our cash and cash equivalents and within our investment portfolio have not had,
and we do not currently anticipate such fluctuations will have, a material effect 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 in Israel 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 NIS are employee salaries and lease payments on our Israeli
facilities. Furthermore, a portion of our expenses for our European operations 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 expenses paid in Euro are employee
salaries, lease and operational payments on our European facilities. To partially protect the company against an increase in
value of forecasted foreign currency cash flows resulting from salary and lease payments denominated in NIS during 2015,
we instituted a foreign currency cash flow hedging program. The option and forward contracts used are designated as cash
flow hedges, as defined by FASB ASC No. 815,” Derivatives and Hedging,” and are all effective as hedges of these expenses.
For more information about our hedging activity, see Note 2 to our notes to our consolidated financial statement for the year
ended December 31, 2015. 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
operating profit. Although we currently are using a hedging program to minimize the effects of currency fluctuations relating
to the NIS, our hedging position is partial, may not exist at all in the future and may not succeed in minimizing our foreign
currency fluctuation risks.

-39-

Item 8.

FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CONSOLIDATED FINANCIAL STATEMENTS

AS OF DECEMBER 31, 2015

IN U.S. DOLLARS

INDEX

Page

Reports of Independent Registered Public Accounting Firm .................................................................................

Consolidated Balance Sheets .....................................................................................................................................

Consolidated Statements of Operations ...................................................................................................................

Consolidated Statements of Comprehensive Income (Loss) ...................................................................................

Statements of Changes in Stockholders’ Equity ......................................................................................................

Consolidated Statements of Cash Flows ...................................................................................................................

Notes to Consolidated Financial Statements ............................................................................................................

- - - - - - - - - -

-40-

Kost Forer Gabbay &
Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel

Tel: +972-3-6232525
Fax: +972-3-5622555
ey.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, 2015 and
2014, 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, 2015. Our audits also included the financial
statement schedule listed in the Index at Item 15(a). These financial statements and schedule are the responsibility of the
Company’s management. Our responsibility is to express an opinion on these financial statements and schedule based on our
audits.

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board
(United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the
financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the
amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
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 position of DSP Group, Inc. at December 31, 2015 and 2014, and the consolidated results of its
operations and its cash flows for each of the three years in the period ended December 31, 2015, in conformity with U.S.
generally accepted accounting principles. Also, in our opinion, the related financial statement schedule, when considered in
relation to the basic financial statements taken as a whole, presents fairly in all material respects the information set forth
therein.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), DSP Group, Inc.’s internal control over financial reporting as of December 31, 2015, based on criteria established in
Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission
(2013 framework) and our report dated March 5, 2016 expressed an unqualified opinion thereon.

Tel-Aviv, Israel
March 15, 2016

/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global

-41-

Kost Forer Gabbay &
Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel

Tel: +972-3-6232525
Fax: +972-3-5622555
ey.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, 2015, based on
criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the
Treadway Commission (2013 framework) (the “COSO criteria”). DSP Group, Inc.’s management is responsible for
maintaining effective internal control over financial reporting, and for its assessment of the effectiveness of internal control
over financial reporting included in the accompanying Management’s Annual Report on Internal Control over Financial
Reporting. 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 standards require that we plan and perform the audit to obtain reasonable assurance about whether
effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an
understanding of internal control over financial reporting, assessing the risk that a material weakness exists, testing and
evaluating the design and operating effectiveness of internal control based on the assessed risk, and performing such other
procedures 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 financial reporting and the preparation of financial statements for external purposes in accordance
with generally accepted accounting principles. A company’s internal 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 recorded as
necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that
receipts and expenditures of the company are being made only in accordance with authorizations of management and directors
of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition,
use, or disposition of the company’s assets that could have a material effect on the financial statements.

-42-

Kost Forer Gabbay &
Kasierer
3 Aminadav St.
Tel-Aviv 6706703, Israel

Tel: +972-3-6232525
Fax: +972-3-5622555
ey.com

Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements.
Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become
inadequate because of changes in conditions, or that the degree 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, 2015, based on the COSO criteria.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United
States), the consolidated balance sheets of DSP Group, Inc. as of December 31, 2015 and 2014, 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, 2015 of DSP Group, Inc. and our report dated March 5, 2016 expressed an unqualified
opinion thereon.

Tel-Aviv, Israel
March 15, 2016

/s/ Kost Forer Gabbay & Kasierer
KOST FORER GABBAY & KASIERER
A Member of Ernst & Young Global

-43-

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands

ASSETS

CURRENT ASSETS:

DSP GROUP, INC.

December 31,

2015

2014

Cash and cash equivalents ........................................................................................... $
Restricted deposits ......................................................................................................
Marketable securities and short-term deposits (Note 3) ..............................................
Trade receivables, net ..................................................................................................
Other accounts receivable and prepaid expenses (Note 4)...........................................
Inventories (Note 5) .....................................................................................................

13,704 $
168
18,070
19,211
3,319
11,453

20,544
623
11,508
20,298
1,902
15,635

Total current assets .......................................................................................................

65,925

70,510

PROPERTY AND EQUIPMENT, NET (Note 6) ...........................................................

3,764

2,843

LONG-TERM ASSETS:

Long-term marketable securities (Note 3) ...................................................................
Long-term prepaid expenses and lease deposits ..........................................................
Deferred income taxes (Note 15) .................................................................................
Severance pay fund ......................................................................................................
Investment in other company (Note 9) ........................................................................
Intangible assets, net (Note 7) .....................................................................................
Goodwill .....................................................................................................................

89,714
743
1,311
11,578
1,800
3,851
5,276

92,269
1,162
924
10,860
2,200
5,135
5,276

114,273

117,826

Total assets ..................................................................................................................... $

183,962 $

191,179

The accompanying notes are an integral part of the consolidated financial statements.

-44-

CONSOLIDATED BALANCE SHEETS

U.S. dollars in thousands, except share and per share data

DSP GROUP, INC.

December 31,

2015

2014

LIABILITIES AND STOCKHOLDERS’ EQUITY

CURRENT LIABILITIES:

Trade payables ............................................................................................................. $
Accrued compensation and benefits ............................................................................
Income tax accruals and payables ................................................................................
Accrued expenses and other accounts payable (Note 10) ............................................

13,103 $
7,788
1,864
4,818

15,282
9,408
1,151
5,852

Total current liabilities .................................................................................................

27,573

31,693

LONG-TERM LIABILITIES:

Deferred income taxes (Note 15) .................................................................................
Accrued severance pay ................................................................................................
Accrued pensions (Note 11) ........................................................................................

476
11,703
892

845
10,929
1,089

Total long-term liabilities .............................................................................................

13,071

12,863

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, 2015 and 2014; Issued and
outstanding: 21,572,616 and 21,843,950 shares at December 31, 2015 and
2014, respectively .............................................................................................
Additional paid-in capital ............................................................................................
Treasury stock at cost ..................................................................................................
Accumulated other comprehensive loss ......................................................................
Accumulated deficit .....................................................................................................

22
361,023
(125,697)
(1,267)
(90,763)

22
355,906
(122,387 )
(1,566 )
(85,352 )

Total stockholders’ equity ............................................................................................

143,318

146,623

Total liabilities and stockholders’ equity .................................................................... $

183,962 $

191,179

The accompanying notes are an integral part of the consolidated financial statements.

-45-

CONSOLIDATED STATEMENTS OF OPERATIONS

U.S. dollars and shares in thousands, except per share data

DSP GROUP, INC.

Year ended December 31,
2014

2013

2015

Revenues ........................................................................................... $
Costs of revenues (1) .........................................................................

144,271 $
84,411

143,036 $
85,992

151,063
91,237

Gross profit .......................................................................................

59,860

57,044

59,826

Operating expenses:

Research and development, net (2) ................................................
Sales and marketing (3) .................................................................
General and administrative (4) ......................................................
Amortization of intangible assets ..................................................
Write-off of expired option related to investment in other

35,483
12,103
9,876
1,284

33,468
11,905
10,541
1,573

35,000
11,273
11,812
1,672

company ...................................................................................

400

Total operating expenses ................................................................

59,146

57,487

59,757

Operating income (loss) ....................................................................
Financial income, net (Note 12) .......................................................

Income before income tax benefit .....................................................
Income tax benefit (expense) ............................................................

714
1,175

1,889
(327)

(443)
1,204

761
2,841

Net income ....................................................................................... $

1,562 $

3,602 $

Net earnings per share:

Basic .............................................................................................. $
Diluted ........................................................................................... $

0.07 $
0.07 $

0.16 $
0.16 $

69
2,457

2,526
150

2,676

0.12
0.12

Weighted average number of shares used in per share

computations of:
Basic net earnings per share ..........................................................
Diluted net earnings per share .......................................................

21,924
23,340

21,968
22,954

22,249
22,906

(1)

(2)

(3)

(4)

Includes equity-based compensation expense in the amount of $300, $300 and $253 for the years ended December 31,
2015, 2014 and 2013, respectively.

Includes equity-based compensation expense in the amount of $2,201, $2,381 and $1,873 for the years ended
December 31, 2015, 2014 and 2013, respectively.

Includes equity-based compensation expense in the amount of $641, $621 and $478 for the years ended December 31,
2015, 2014 and 2013, respectively.

Includes equity-based compensation expense in the amount of $1,950, $2,057 and $1,555 for the years ended
December 31, 2015, 2014 and 2013, respectively.

The accompanying notes are an integral part of the consolidated financial statements.

-46-

DSP GROUP, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

U.S. dollars in thousands

Net income: ........................................................................................ $
Other comprehensive income (loss):
Available-for-sale securities:

Changes in unrealized gains/losses ..........................................
Reclassification adjustments for losses (gains) included in

net income (loss) .................................................................
Net change ...............................................................................

Cash flow hedges:

Changes in unrealized gains/losses ..........................................
Reclassification adjustments for (gains) losses included in

net income (loss) .................................................................
Net change ...............................................................................

Change in unrealized components of defined benefit plans:

Gains (losses) arising during the period ..................................
Amortization of actuarial loss and prior service benefit ..........
Net change ...............................................................................
Foreign currency translation adjustments, net .............................
Other comprehensive income (loss) ...................................................
Comprehensive income ..................................................................... $

Year Ended December 31,
2014

2015

2013

1,562 $

3,602 $

2,676

(230)

24
(206)

157

(304 )

(61 )
96

(1,009 )
(1,313 )

(38)

(1,180 )

621
583

63
20
83
(161)
299
1,861 $

562
(618 )

(209 )
11
(198 )
(25 )
(745 )
2,857 $

372

(856 )
(484 )

(11 )
11
-
(12 )
(1,809 )
867

-47-

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

U.S. dollars and shares in thousands

DSP GROUP, INC.

Number
of shares
of
common
stock

Common
stock
amount
22

Additional
paid-in
capital

Treasury
stock at
cost

Accumulated
other
comprehensive
income (loss)

Accumulated
deficit

Total
stockholders’
equity

$ 346,335 $ (125,724) $

988 $

(79,394) $

142,227

Balance at December 31, 2012 .. 21,674 $

Issuance of treasury stock upon
purchase of common stock
under employee stock
purchase plan ........................

Issuance of treasury stock upon
exercise of stock options,
stock appreciation rights and
restricted stock units by
employees and directors ........
Purchase of treasury stock .........
Equity-based compensation

expenses ..............................
Net income ............................
Change in Accumulated
other comprehensive
income ...............................

374

*) -

3,668

(2,004)

1,664

692
(390)

-
-

1
(1)

-
-

6,796
(3,489)

4,159
-

-
-

(4,813)
-

-
2,676

1,984
(3,490)

4,159
2,676

(1,809)

Balance at December 31, 2013 .. 22,350 $

$ 350,494 $ (118,749) $

(821) $

(83,535) $

147,411

*) Represents an amount lower than $1.

The accompanying notes are an integral part of the consolidated financial statements.

-48-

DSP GROUP, INC.

STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

U.S. dollars and shares in thousands

Number
of shares
of
common
stock

Common
stock
amount

Additional
paid-in
capital

Treasury
stock at
cost

Accumulated
other
comprehensive
income (loss)

Accumulated
deficit

Total
stockholders’
equity

Cont.
Balance at December 31, 2013 .. 22,350 $

$ 350,494 $ (118,749) $

(821) $

(83,535) $

147,411

Issuance of treasury stock upon
purchase of common stock
under employee stock
purchase plan ........................

expenses ..............................
Net income ............................
Change in Accumulated
other comprehensive
income ...............................

310

*) -

3,031

(1,309)

1,722

598
(1,414)

-
-

1
(1)

-
-

53
-

5,814
(12,483)

5,359
-

-
-

(4,110)
-

-
3,602

1,758
(12,484)

5,359
3,602

(745)

Balance at December 31, 2014 .. 21,844 $

$ 355,906 $ (122,387) $

(1,566) $

(85,352) $

146,623

Issuance of treasury stock upon
purchase of common stock
under employee stock
purchase plan ........................

expenses ..............................
Net income ............................
Change in Accumulated
other comprehensive
income ...............................

233

*) -

2,269

(500)

1,769

791
(1,295)

1
(1)

-
-

25
-

7,689
(13,268)

5,092
-

-
-

(6,473)
-

-
1,562

1,242
(13,269)

5,092
1,562

299

Balance at December 31, 2015 .. 21,573 $

$ 361,023 $ (125,697) $

(1,267) $

(90,763) $

143,318

*) Represents an amount lower than $1.

The accompanying notes are an integral part of the consolidated financial statements.

-49-

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

Cash flows from operating activities:

Net income ....................................................................................... $
Adjustments required to reconcile net income to net cash provided

by operating activities:
Depreciation .................................................................................
Equity-based compensation expenses related to employees’ stock

options, SARs and RSUs ...........................................................
Capital loss from sale and disposal of property and equipment .....
Realized losses (gains) from sale of marketable securities ...........
Amortization of intangible assets .................................................
Write-off of expired option related to investment in other

company ....................................................................................

Accrued interest and amortization of premium on marketable

securities and short-term deposits ..............................................

Change in operating assets and liabilities:

Deferred income tax assets and liabilities, net ...............................
Trade receivables, net ....................................................................
Other accounts receivable and prepaid expenses ...........................
Inventories .....................................................................................
Long-term prepaid expenses and lease deposits ............................
Trade payables ...............................................................................
Accrued compensation and benefits ..............................................
Income tax accruals and payables ..................................................
Accrued expenses and other accounts payable ..............................
Accrued severance pay, net ...........................................................
Accrued pensions ...........................................................................

DSP GROUP, INC.

Year ended December 31,
2014

2013

2015

1,562 $

3,602 $

2,676

1,356

1,290

1,994

5,092
4
24
1,284

400

847

(756)
945
(987)
4,131
(31)
(2,180)
184
800
(499)
55
(7)

5,359
-
(61)
1,573

1,214

(1,170)
704
719
(3,333)
(1,052)
1,142
1,323
(730)
(289)
58
30

4,159
-
(1,009)
1,672

747

(377)
(767)
536
587
153
121
3,952
54
(989)
(228)
(31)

Net cash provided by operating activities .........................................

12,224

10,379

13,250

Cash flows from investing activities:

Purchase of marketable securities ..................................................
Purchase of short-term deposits .....................................................
Proceeds from maturity of marketable securities ...........................
Proceeds from sales of marketable securities ................................
Proceeds from redemption of short-term deposits .........................
Purchases of property and equipment ............................................
Investment in other company .........................................................
Decrease (Increase) in restricted deposits ......................................

(35,475)
(5,563)
20,127
13,238
2,589
(2,297)
-
455

(70,517)
(2,561)
23,250
46,491
2,561
(1,315)
-
(556)

(67,850)
(2,849)
18,325
42,949
2,849
(1,118)
(2,200)
-

Net cash used in investing activities ..................................................

(6,926)

(2,647)

(9,894)

The accompanying notes are an integral part of the consolidated financial statements.

-50-

CONSOLIDATED STATEMENTS OF CASH FLOWS

U.S. dollars in thousands

Cash flows from financing activities:

DSP GROUP, INC.

Year ended December 31,
2014

2013

2015

Issuance of common stock and treasury stock upon exercise of

stock options and SARs .............................................................
Purchase of treasury stock .............................................................

1,242
(13,206)

1,758
(12,484)

1,984
(3,490)

Net cash used in financing activities .................................................

(11,964)

(10,726)

(1,506)

Increase (decrease) in cash and cash equivalents ..............................
Cash and cash equivalents at the beginning of the year ....................
Cash (erosion) due to exchange rate differences ...............................

(6,666)
20,544
(174)

(2,994)
23,578
(40)

1,850
21,684
44

Cash and cash equivalents at the end of the year .............................. $

13,704 $

20,544 $

23,578

Supplemental disclosures of cash flows activities:

Cash paid during the year for:

Taxes on income ............................................................................... $

134 $

131 $

149

The accompanying notes are an integral part of the consolidated financial statements.

-51-

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 offering advanced chipset solutions for a variety of applications. The Company is a
worldwide leader in the short-range wireless communication market, 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) who incorporate the Company’s products into consumer and enterprise products. The
Company’s future performance will depend, in part, on the continued success of its distributors in marketing
and selling its products. The loss of the Company’s distributors and the Company’s inability to obtain
satisfactory replacements in a timely manner may harm the Company’s sales and results of operations. In
addition, the Company expects that a limited number of customers, varying in identity from period-to-period,
will account for a substantial portion of its revenues in any period. The loss of, or reduced demand for products
from, any of the Company’s major customers could have a material adverse effect on the Company’s business,
financial condition and results of operations.

Sales to Hong Kong-based VTech Holdings Ltd. (“VTech”) represented 31%, 35% and 36% of the Company’s
total revenues for 2015, 2014 and 2013, respectively. Sales to Hong Kong-based Guo Wei Electronics Ltd.
(“Guo Wei”) represented 12%, 8% and 8% of the Company’s total revenues for 2015, 2014 and 2013,
respectively. Revenues derived from sales through one distributor, Tomen Electronics Corporation (“Tomen
Electronics”), accounted for 16%, 20% and 19% of the Company’s total revenues for 2015, 2014 and 2013,
respectively. Tomen Electronics sells the Company’s products to a limited number of customers. One customer,
Panasonic Communications Co., Ltd. (“Panasonic”), has continually accounted for a majority of the sales of
Tomen Electronics. Sales to Panasonic through Tomen Electronics generated approximately 13%, 15% and
14% of the Company’s total revenues for 2015, 2014 and 2013, respectively. Revenues derived from sales
through another distributor, Ascend Technology Inc. (“Ascend Technology”) accounted for 15%, 10% and 9%
of the Company’s total revenues for 2015, 2014 and 2013, respectively. Ascend Technology sells the
Company’s products to a limited number of customers; however none of those customers accounted for more
than 10% of the Company’s total revenues for 2015, 2014 and 2013. The Japanese and Hong Kong markets
and the OEMs that operate in those markets are among the largest suppliers in the world with significant market
share in the U.S. market for residential wireless products.

The majority of the revenues derived from the above mentioned customers are included in the Home segment.

All of the Company’s integrated circuit products are manufactured and tested by independent foundries and
test houses. While these foundries and test houses have been able to adequately meet the demands of the
Company’s business, the Company is and will continue to be dependent upon these foundries and test houses
to achieve acceptable manufacturing yields, quality levels and costs, and to allocate to the Company a sufficient
portion of foundry and test capacity to meet the Company’s needs in a timely manner. Revenues could be
materially and adversely affected should any of these foundries and test houses fail to meet the Company’s
request for product manufacturing due to a shortage of production capacity, process difficulties, low yield rates
or financial instability. Additionally, certain of the raw materials, components, and subassemblies included in
the products manufactured by the Company’s original equipment manufacturer (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 condition and results of operations.

-52-

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”).

Use of estimates:

The preparation of financial statements in conformity with U.S. GAAP requires management to make
estimates, judgments and assumptions. The Company’s management believes that the estimates,
judgments and assumptions used are reasonable based upon information available at the time that these
estimates, judgments and assumptions are made. These estimates, judgments and assumptions can affect
the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the
dates of the financial statements, and the reported amounts of revenue and expenses during the reporting
period. Actual results could differ from those estimates.

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 are incurred in dollars. The Company’s management believes that the
dollar is the currency of the primary economic environment in which 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 sheet items 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 in Euro, has been translated into dollars. All amounts on the balance sheets have
been translated into the dollar using the exchange rates in effect on the relevant balance sheet dates. All
amounts in the consolidated statements of operations have been translated into the dollar using the
average exchange rate for the relevant periods. The resulting translation adjustments are reported as a
component of accumulated other comprehensive income (loss) in changes in stockholders’ equity.

Accumulated other comprehensive loss related to foreign currency translation adjustments, net
amounted to $379 and $218 as of December 31, 2015 and 2014, respectively.

Principles of consolidation:

The consolidated financial statements include the accounts of the Company. Intercompany transactions
and balances have been eliminated in consolidation.

Cash equivalents:

Cash equivalents are short-term highly liquid investments, which are readily convertible to cash with
original maturity of three months or less from the date of acquisition.

Restricted deposits:

Restricted deposits include deposits which are used as security for derivative instruments and for one
of the Company’s lease agreements.

Short-term deposits:

Bank deposits with original maturities of more than three months and less than one year are presented
at cost, including accrued interest.

-53-

U.S. dollars in thousands, except share and per share data.

g. Marketable securities:

The Company accounts for investments in debt securities in accordance with Financial Accounting
Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 320-10, “Investments in
Debt and Equity Securities.” Management determines the appropriate classification of the Company’s
investments in debt securities at the time of 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 financial expense. 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 are impaired, management determines whether such impairment is other-than-
temporary. Factors considered in making such a determination include the duration and severity of the
impairment, the reason for the decline in value and the potential recovery period, and the Company’s
intent to sell, or whether it is more likely than not that the Company will be required to sell the
investment 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 not it will be forced, to sell the security.
During the years ended December 31, 2015, 2014 and 2013, the Company did not record an-other-than-
temporary impairment loss (see Note 3).

Fair value of financial instruments:

Cash and cash equivalents, restricted deposits, short-term deposits, trade receivables, trade payables and
accrued liabilities approximate fair value due to short term maturities of these instruments. Marketable
securities and derivative instruments are carried at fair value. See Note 3 for more information.

Fair value is an exit price, representing the amount that would be received for selling an asset or paid to
transfer a liability in an orderly transaction between market participants. As such, fair value is a market-
based measurement that should be determined based on assumptions that market participants would use
in pricing an asset or a liability. A three-tier fair value hierarchy is established as a basis for considering
such assumptions and 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 unobservable inputs when measuring fair value.

Inventories:

Inventories are stated at the lower of cost or market value. Inventory reserves are provided to cover risks
arising from slow-moving items or technological obsolescence.

The Company and its subsidiaries periodically evaluate the quantities on hand relative to historical,
current and projected sales volume. Based on this evaluation, an impairment charge is recorded when
required to write-down inventory to its market value.

-54-

U.S. dollars in thousands, except share and per share data.

Cost is determined as follows:

Work in progress and finished products- on the basis of raw materials and manufacturing costs on an
average basis.

The Company regularly evaluates the ability to realize the value of inventory based on a combination
of factors, including the following: historical usage rates and forecasted sales according to outstanding
backlogs. Purchasing requirements and alternative usage are explored within these processes to mitigate
inventory exposure. When recorded, the reserves are intended to reduce the carrying value of inventory
to its net realizable value. Inventory of $11,453, $15,635 and $12,334 as of December 31, 2015, 2014
and 2013, respectively, is stated net of inventory reserves of $670, $505 and $591 in each year,
respectively. If actual demand for the Company’s products deteriorates, or market conditions are less
favorable than those projected, additional inventory reserves may be required.

Property and equipment, net:

Property and equipment are stated at cost, net of accumulated depreciation. Depreciation is calculated
using the straight-line method over the estimated useful lives of the assets, at the following annual rates:

Computers and equipment ........................................
Office furniture and equipment .................................

Leasehold improvements ..........................................

%
20 - 33
6 - 15

The shorter of term of the lease
or the useful life of the asset

Property and equipment of the Company are reviewed for impairment whenever events or changes in
circumstances indicate that the carrying amount of an asset may not be recoverable. The recoverability
of assets to be held and used is measured by a comparison of the carrying amount of such assets to the
future undiscounted cash flows expected to be generated by the assets. If such assets are considered to
be impaired, the impairment to be recognized is measured by the amount by which the carrying amount
of the assets exceeds the fair value of the assets.

During the years ended December 31, 2015, 2014 and 2013, 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 with developing or obtaining internal use software.
During 2015, 2014 and 2013, the Company capitalized $1,086, $128 and $34, respectively, of internal
use software cost. Such costs are amortized using the straight-line method over their estimated useful
life of three years.

Goodwill and other intangible assets:

The goodwill and certain other purchased intangible assets have been recorded as a result of the
BoneTone Acquisition and the CIPT Acquisition. Goodwill represents the excess of the purchase price
in a business combination over the fair value of net tangible and intangible assets acquired. 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 second phase (if necessary) measures impairment. Goodwill impairment is
deemed to exist if the net book value of a reporting unit exceeds its estimated fair value. In such a case,
the second phase is then performed, and the Company measures impairment by comparing the carrying
amount of the reporting unit’s goodwill to the implied fair value of that goodwill. An impairment loss
is recognized in an amount equal to the excess. ASC 350 allows an entity to first assess qualitative

-55-

U.S. dollars in thousands, except share and per share data.

factors to determine whether it is necessary to perform the two-step quantitative goodwill impairment
test. An entity is not required to calculate the fair value of a reporting unit unless the entity determines,
based on a qualitative assessment, that it is more likely than not that its fair value is less than its carrying
amount.

Alternatively, ASC 350 permits an entity to bypass the qualitative assessment for any reporting unit and
proceed directly to performing 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 indicators are present.

The Company’s reporting units are consistent with the reportable segments identified in Note 17.

Fair value is determined using discounted cash flows, market multiples and market capitalization.
Significant estimates used in the methodologies include estimates of future cash-flows, future short-
term and long-term growth rates, weighted average cost of capital and market multiples for the reporting
unit.

For the fiscal year ended December 31, 2015, 2014 and 2013, the Company performed a quantitative
assessment on its goodwill and no impairment losses were identified.

Intangible assets that are not considered to have an indefinite useful life are amortized using the straight-
line basis over their estimated useful lives, which range from 3 to 7.3 years. The carrying amount of
these assets is reviewed whenever events or changes in circumstances indicate that the carrying value
of an asset may not be recoverable. Recoverability of these assets is measured by comparison 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 carrying amount of the assets and the fair value of the impaired asset.

During 2015, 2014 and 2013, no impairment losses were identified.

Severance pay:

DSP Group Ltd., the Company’s Israeli subsidiary (“DSP Israel”), has a liability for severance pay
pursuant to Israeli law, based on the most recent monthly salary of its employees multiplied by the
number of years of employment as of the balance sheet date for such employees. DSP Israel’s liability
is fully provided for by monthly accrual and deposits with severance pay funds and insurance policies.

The deposited funds include profits accumulated up to the balance sheet date. The deposited funds may
be withdrawn only upon the fulfillment of the obligation pursuant to Israel’s Severance Pay Law or
labor agreements.

Severance expenses for the years ended December 31, 2015, 2014 and 2013, were $1,498, $1,568 and
$1,494, respectively.

Revenue recognition:

The Company generates its revenues from sales of products. The Company sells its products through a
direct sales force and through a network of distributors.

Product sales are recognized when persuasive evidence of an agreement exists, delivery of the product
has occurred, the fee is fixed or determinable, collectability is reasonably assured, and no significant
obligations remain.

-56-

U.S. dollars in thousands, except share and per share data.

Persuasive evidence of an arrangement exists - The Company’s sales arrangements with customers are
pursuant to written documentation, either a written contract or purchase order. The actual documentation
used is dependent on the business practice with each customer. Therefore, the Company determines that
persuasive evidence of an arrangement exists with respect to a customer when 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 specifically sets 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 documentation based 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 recognizes revenue on the consigned inventory when the customer consumes
the products from the warehouse, as that is when per the consignment inventory agreements, risk and
title passes to the customer and the products are deemed delivered to the customer.

Price is fixed or determinable - Pursuant to the customer agreements, the Company does not provide
any price protection, stock rotation, right of return and/or other discount programs and thus the fee is
considered fixed and determinable upon execution of the written documentation with the customers.
Additionally, payments that are due within the normal course of the Company’s credit terms, which are
currently no more than four months from the contract date, are deemed to be fixed and determinable
based on the Company’s successful collection history for such arrangements.

Collectability of the related receivable 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 business relationship and a
history of successful collection. A significant number of the Company’s customers are also large
original equipment manufacturers with substantial financial resources. For a new customer, or when an
existing customer substantially expands its commitments, the Company evaluates the customer’s
financial position, the number of years the customer has been in business, the history of collection with
the customer and the customer’s ability to pay and typically assigns a credit limit based on that review.
The Company increases the credit limit only after it has established a successful collection history with
the customer. If the Company determines at any time that collectability is not reasonably assured under
a particular arrangement based upon its credit review process, the customer’s payment history or
information that comes to light about a customer’s financial position, it recognizes revenue under that
arrangement as customer payments are actually received.

With respect to product sales through the Company’s distributors, such product revenues are deferred
until the distributors resell the Company’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 through the distributors and legally title for the products passes to the distributors
upon delivery to the distributors, in substance inventory is simply being transferred to another location
for sale to the end-user customers as the Company’s primary business relationships and responsibilities
are directly with the end-user customers. Because the Company views its arrangements with its
distributors as that of consignment relationships, delivery of goods is not deemed to have occurred
solely upon delivery to the distributors. Therefore, the Company recognizes revenues from distributors
under the “sell-through” method. As a result, revenue is deferred at the time of shipment to the
distributors and is recognized only when the distributors sell the products to the end-user customers.

-57-

U.S. dollars in thousands, except share and per share data.

n. Warranty:

The Company warrants its products against errors, defects and bugs for generally one year. The
Company estimates the costs that may be incurred under its warranty and records a liability in the
amount of such costs. The Company periodically assesses the adequacy of its recorded warranty
liabilities and adjusts the amounts as necessary. Warranty costs and liability were immaterial for the
years ended December 31, 2015, 2014 and 2013.

Research and development costs, net:

Research and development costs, net of grants received, are charged to the consolidated statement of
operations as incurred.

Government grants:

Government grants received by the Company’s Israeli subsidiary relating to categories of operating
expenditures are credited to the consolidated 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 development projects
are recognized at the time when the Company’s Israeli subsidiary is entitled to such grants, on the basis
of the related costs incurred, and are included as a deduction from research and development expenses,
net.

The Company recorded royalty bearing grants in the amount of $2,738, $3,002 and $2,116 for the year
ended December 31, 2015 and 2014 and 2013, respectively.

The Company’s Israeli subsidiary is obligated to pay royalties amounting to 5% of the sales of certain
products the development of which received grants from the OCS in previous years. The obligation to
pay these royalties is contingent on actual sales of such products. Grants received from the OCS may
become repayable if certain criteria under the grants are not met. The Israeli Research and Development
Law provides that know-how developed under an approved research and development program may not
be transferred to third parties without the approval of the OCS. Such approval is not required for the
sale or export of any products resulting 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 for such
OCS-funded know-how or in consideration for the sale of the grant recipient itself, as the case may be,
which portion will not exceed six times the amount of the grants received plus interest (or three times
the amount of the grant received plus interest, in the event 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 such transfer of know-how arises in connection with a liquidation
by reason of insolvency or receivership of the grant recipient.

Equity-based compensation:

At December 31, 2015, the Company had two equity incentive plans from which the Company may
grant future equity awards and three expired equity incentive plans from which no future equity awards
may be granted but had outstanding equity awards granted prior 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 ASC No. 718”). FASB ASC No. 718 requires companies to estimate the fair
value of equity-based awards on the date of grant using an option-pricing model. The value of the
portion of the award that is ultimately expected to vest is recognized as an expense over the requisite
service periods in the Company’s consolidated statements of operations.

-58-

U.S. dollars in thousands, except share and per share data.

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 ASC No. 718 requires forfeitures to be estimated
at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures differ from those
estimates. Estimated forfeitures are based on actual historical pre-vesting forfeitures.

The Company selected the lattice option pricing model as the most appropriate fair value method for its
equity-based awards and values options and stock appreciation rights (SARs) based on the market value
of the underlying shares on the date of grant. The option-pricing model requires a number of
assumptions, of which the most significant are the expected stock price volatility and the expected term
of the equity-based award. Expected volatility is calculated based upon actual historical stock price
movements. The expected term of the equity-based award granted is based upon historical experience
and represents the period of time that the award granted is expected to be outstanding. The risk-free
interest rate is based on the yield from U.S. treasury bonds with an equivalent term. The Company has
historically not paid dividends and has no foreseeable plans to pay dividends.

The Company granted stock appreciation rights (SARs) until 2012. Starting in 2013, a majority of the
Company’s equity awards were in the form of restricted stock unit (“RSU”) grants.

Basic and diluted income (loss) per share:

Basic net income (loss) per share is computed based on the weighted average number of shares of
common stock outstanding during the year. Diluted net income (loss) per share further includes the
dilutive effect of stock options, SARs and RSUs outstanding during the year, all in accordance with
FASB ASC No. 260, “Earnings Per Share.”

The total weighted average number of shares related to the outstanding stock options, SARs and RSUs
excluded from the calculation of diluted net income per share due to their anti-dilutive effect was
403,632, 1,811,687and 2,730,867 for the years ended December 31, 2015, 2014 and 2013, respectively.

Income taxes:

The Company accounts for income taxes in accordance with FASB ASC No. 740, “Income Taxes.”
This topic prescribes the use of the liability method, whereby deferred tax asset and liability account
balances are determined based on differences between financial reporting and tax bases of assets and
liabilities and are measured using the enacted tax rates that will be in effect when the differences are
expected to reverse. The Company provides a valuation allowance, if necessary, to reduce deferred tax
assets to their estimated realizable value.

Deferred tax liabilities and assets are classified as non-current based on the adopting of Accounting
Standards Update (“ASU”) 2015-17, “Balance Sheet Classification of Deferred Taxes.” Prior to the
adoption of ASU 2015-17, U.S. GAAP required an entity to separate deferred income tax liabilities and
assets into current and noncurrent amounts in a classified statement of financial position. ASU 2015-17
was issued to simplify the presentation of deferred income taxes. Deferred tax liabilities and assets are
now classified as noncurrent in a classified statement of financial position for all period presented.

The Company accounts for uncertain tax positions in accordance with ASC 740, which contains a two-
step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax
position taken or expected to be taken in a tax return by determining whether the weight of available
evidence indicates that it is more likely than not that, on an evaluation of the technical merits, the tax
position will be sustained on audit, including resolution of any related appeals or litigation processes.
The second step is to measure the tax benefit as the largest amount that is more than 50% likely to be
realized upon ultimate settlement. The Company reevaluates its income tax positions periodically to
consider factors such as changes in facts or circumstances, changes in or interpretations of tax law,
effectively settled issues under audit, and new audit activity. Such a change in recognition or
measurement would result in recognition of a tax benefit or an additional charge to the tax provision.

-59-

U.S. dollars in thousands, except share and per share data.

The Company includes interest related to tax issues as part of income tax expense in its consolidated
financial statements. The Company records any applicable penalties related to tax issues within the
income tax provision.

Concentrations of credit risk:

Financial instruments that potentially subject the Company to concentrations of credit risk consist
principally of cash and cash equivalents, restricted deposits, short-term deposits, trade receivables and
marketable securities.

The majority of cash and cash equivalents and short-term deposits of the Company 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, 2015, the amortized cost of
the Company’s marketable securities was $102,717, and their stated market value was $102,216,
representing an unrealized loss of $501.

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. The Company performs ongoing credit
evaluations of their customers. A specific allowance for doubtful accounts is determined, based on
management’s estimates and historical experience. Under certain circumstances, the Company may
require a letter of credit. The Company covers most of its trade receivables through credit insurance. As
of December 31, 2015 and 2014, no allowance for doubtful accounts was provided.

The Company has no off-balance-sheet concentration of credit risk, except for certain derivative
instruments as mentioned below.

Derivative instruments:

The Company accounts for derivatives and hedging based on FASB ASC No. 815,”Derivatives and
Hedging”. ASC No. 815 requires companies 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 expected future cash flows that is attributable to a particular risk), the effective
portion of the gain or loss on the derivative instrument is reported as a component of other
comprehensive income and reclassified into earnings in the same period or periods during which the
hedged transaction affects earnings. Any gain or loss on a derivative instrument in excess of the
cumulative change in the present value of future cash flows of the hedged item is recognized in current
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 New Israeli Shekel (“NIS”) during the year, the Company instituted a foreign
currency cash flow hedging program. The Company hedges portions of the anticipated payroll and rent
of its Israeli facilities denominated in NIS for a period of one to 12 months with put and call options
and forward contracts. These forward contracts and put and call options are designated as cash flow
hedges and are all effective as hedges of these expenses.

-60-

U.S. dollars in thousands, except share and per share data.

The fair value of the outstanding derivative instruments at December 31, 2015 and 2014 is summarized
below:

Derivative assets
(liabilities)

Balance sheet location

Fair value of
derivative instruments
As of December 31,
2014
2015

Foreign exchange forward

contracts and put and call
options .................................

Accrued expenses and other

accounts payable ......................... $

(36) $

(618)

Total

(36) $

(618)

The effect of derivative instruments in cash flow hedging transactions on income and other
comprehensive income (“OCI”) for the years ended December 31, 2015, 2014 and 2013 is summarized
below:

Gains (losses) on derivatives
recognized in OCI
Year ended December 31,
2014

2013

2015

Foreign exchange forward contracts and put

and call options ............................................ $

(38) $

(1,180 ) $

372

Location

Foreign exchange forward

contracts and put and call
options ..................................

Operating
expenses

Gains (losses) on derivatives reclassified
from OCI to income
Year ended December 31,
2014

2013

2015

(621) $

(562) $

856

As of December 31, 2015, the Company had outstanding option contracts and forward contracts in the
amount of $12,850 and $1,800, respectively.

As of December 31, 2014, the Company had outstanding option contracts in the amount of $16,575.

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 from investments by, or distributions to, stockholders.
The Company determined that its items of other comprehensive income relate to gains and losses on
hedging derivative instruments, unrealized gains and losses on available-for-sale securities, unrealized
gains and losses from pension and unrealized gain and losses from foreign currency translation
adjustments.

-61-

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 2015:

Unrealized
gains
(losses) on
available-
for-sale
marketable
securities

Unrealized
gains
(losses) on
Cash Flow
Hedges

Unrealized
gains
(losses) on
components
of defined
benefit
plans

(295) $

(618) $

(435) $

Unrealized
gains
(losses) on
foreign
currency
translation
(218) $

Total

(1,566 )

(230)

(38)

(161)

(366 )

621

665

(206)

583

(161)

299

January 1, 2015 ............... $
Other comprehensive
income (loss) before
reclassifications ............

Amounts reclassified

from accumulated other
comprehensive income
(loss) .............................

Net current period other
comprehensive income
(loss) .............................

December 31, 2015 ......... $

(501) $

(35) $

(352) $

(379) $

(1,267 )

The following table provides details about reclassifications out of accumulated other comprehensive
income (loss) for 2015:

Details about Accumulated
Other Comprehensive Income
(Loss) Components

Losses on available-for-sale marketable securities ... $

Losses on cash flow hedges ......................................

Losses on components of defined benefit plans........

Amount
Reclassified
from
Accumulated
Other
Comprehensive
Income (Loss)
(In millions)

Affected Line Item in the
Statement of Income (Loss)

24 Financial income, net

- Provision for income taxes
24 Total, net of income taxes

487 Research and development
48 Sales and marketing
86 General and administrative
621 Total, before income taxes
- Provision for income taxes
621 Total, net of income taxes

12 Research and development

8 Sales and marketing

20 Total, before income taxes
- Provision for income taxes
20 Total, net of income taxes

Total reclassifications for the period ........................

665 Total, net of income taxes

-62-

U.S. dollars in thousands, except share and per share data.

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 as treasury 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, upon purchases or exercises of equity awards under the plans. When treasury
stock is reissued, the Company accounts for the re-issuance in accordance with ASC No. 505-30,
“Treasury Stock” and charges the excess of the purchase cost over the re-issuance price (loss) to retained
earnings. The purchase cost is calculated based on the specific identification method. In case the
purchase cost is lower than the re-issuance price, the Company credits the difference to additional paid-
in capital.

Investment in other company:

Investment in other company is stated at cost. The Company followed ASC 323, “Investments - Equity
and Joint Ventures,” to determine whether it should apply the equity method of accounting to a certain
investment in preferred shares, and determined that the preferred shares were not in substance common
stock.

The Company’s investment in other company is reviewed for impairment whenever events or changes
in circumstances indicate that the carrying amount of such investment may not be recoverable, in
accordance with ASC 325-20. As of December 31, 2014, no impairment loss was indicated. As of
December 31, 2015, an impairment in the amount of $400 was recognized in the Company’s
consolidated financial statements as a result of the expiration of a purchase option related to such
investment. (See also Note 9).

Recently Issued Accounting Guidance:

In May 2014, FASB issued ASU 2014-09, "Revenue from Contracts with Customers." ASU 2014-09
modifies revenue recognition guidance for U.S. GAAP. Previous revenue recognition guidance in U.S.
GAAP comprised broad revenue recognition concepts together with numerous revenue requirements
for particular industries or transactions, which sometimes resulted in different accounting for
economically similar transactions. In contrast, International Accounting Standards Board ("IASB")
provided limited guidance on revenue recognition. Accordingly, the FASB and IASB initiated a joint
project to clarify the principles for recognizing revenue and to develop a common revenue standard for
GAAP and International Financial Reporting Standards ("IFRS"). The core principle of the guidance is
that an entity should recognize revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for
those goods or services. To achieve that core principle, an entity should apply the following steps:

Step 1: Identify the contract(s) with a customer.

Step 2: Identify the performance obligations in the contract.

Step 3: Determine the transaction price.

Step 4: Allocate the transaction price to the performance obligations in the contract.

Step 5: Recognize revenue when (or as) the entity satisfies a performance obligation.

In August 2015, the FASB issued ASU 2015-14 to defer the effective date of ASU 2014-09 by one year.
As a result, the amendments in ASU 2014-09 are effective for annual reporting periods beginning after
December 15, 2017, including interim periods within that reporting period. Early adoption is permitted
only as of annual reporting periods beginning after December 15, 2016, including interim periods within
that reporting period. An entity shall adopt the amendments in ASU 2014-09 by either (i) retrospectively

-63-

U.S. dollars in thousands, except share and per share data.

adjusting each prior reporting period presented or (ii) retrospectively adjusting for the cumulative effect
of initially applying ASU 2014-09 at the date of initial adoption. The Company has not determined (i)
the extent to which it expects ASU 2014-09 will impact its reported revenues or (ii) the manner in which
it will adopt ASU 2014-09. In September 2015, the FASB issued ASU 2015-16, "Business
Combinations." ASU 2015-16 modifies how changes to provisional amounts determined during the
measurement period of a business combination are recognized. Under existing accounting literature,
changes to provisional amounts determined during the measurement period of a business combination,
resulting from facts and circumstances that existed on the acquisition date, are recognized by
retrospectively adjusting the provisional amounts on the acquisition date. However, under ASU 2015-
16, an acquirer recognizes adjustments to provisional amounts that are identified during the
measurement period in the reporting period in which the adjustments are determined. ASU 2015-16 is
effective for annual reporting periods beginning after December 15, 2015, including interim periods
within that reporting period.

NOTE 3: MARKETABLE SECURITIES AND TIME DEPOSITS

The following is a summary of marketable securities and time deposits at December 31, 2015 and 2014 (see
also Note 8):

Amortized cost

2015

2014

Unrealized gains
(losses), net

Fair value

2015

2014

2015

2014

Short term deposit $
U.S. GSE
securities ............
Corporate
obligations .........

5,568 $

2,599 $

- $

5,568 $

2,599

23,645

21,085

(114)

(34)

23,531

21,051

79,072

80,389

(387)

(262)

78,685

80,127

108,285 $

104,073 $

(501) $

(296) $

107,784 $

103,777

The amortized costs of marketable debt securities at December 31, 2015, by contractual maturities or
anticipated dates of sale, are shown below:

Amortized

Unrealized gains (losses)

cost

Gains

Losses

Fair
value

Due in one year or less ............................... $
Due after one year to five years ................

12,500 $
90,217

102,717 $

8 $
25

33 $

(7) $
(527)

12,501
89,715

(534) $

102,216

The amortized cost of marketable debt securities at December 31, 2014, by contractual maturities or anticipated
dates of sale, are shown below:

Amortized

Unrealized gains (losses)

cost

Gains

Losses

Fair
value

Due in one year or less ............................... $
Due after one year to six years ..................

8,910 $
92,564

4 $
110

(5) $
(405)

8,909
92,269

101,474 $

114 $

(410) $

101,178

The actual maturity dates may differ from the contractual maturities because debtors may have the right to call
or prepay obligations without penalties.

-64-

U.S. dollars in thousands, except share and per share data.

The total fair value of marketable securities with outstanding unrealized losses as of December 31, 2015
amounted to $84,095, while the unrealized losses for these marketable securities amounted to $534. Of the
$534 unrealized losses outstanding as of December 31, 2015, a portion of which in the amount of $70 was
related to marketable securities that were in a loss position for more than 12 months and the remaining portion
of $464 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, 2014
amounted to $68,945, while the unrealized losses for these marketable securities amounted to $410. Of the
$410 unrealized losses outstanding as of December 31, 2014, a portion of which in the amount of $113 was
related to marketable securities that were in a loss position for more than 12 months and the remaining portion
of $297 was related to marketable securities that were in a loss position for less than 12 months.

Management believes that as of December 31, 2015, the unrealized losses in the Company’s investments in all
types of marketable securities 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 Company does not intend to sell the investments and it is not more likely than not that the
Company will be required to sell the investments before recovery of their amortized cost bases, which may be
maturity, the Company does not consider those investments to be other-than-temporarily impaired at
December 31, 2015.

Proceeds from maturity of available-for-sale marketable securities during 2015, 2014 and 2013 were $20,127,
$23,250 and $18,325, respectively. Proceeds from sales of available-for-sale marketable securities during 2015,
2014 and 2013 were $13,238, $46,491 and $42,949, respectively. Realized gains from the sale of available-for
sale marketable securities for 2015, 2014 and 2013 were $3, $73 and $1,013, respectively. Realized losses from
the sale of available-for sale marketable securities for 2015, 2014 and 2013 were $27, $12 and $4, respectively.
The Company determines realized gains or losses on the sale of available-for-sale marketable securities based
on a specific identification method.

NOTE 4:- OTHER ACCOUNTS RECEIVABLE AND PREPAID EXPENSES

Prepaid expenses ..................................................................................... $
Tax and governmental receivables ...........................................................

Deposits ...................................................................................................
Others .......................................................................................................

December 31,

2015

2014

2,054 $
956

260
49

1,010
649

208
35

3,319 $

1,902

NOTE 5:- INVENTORIES

Inventories are composed of the following:

Work-in-progress ...................................................................................... $
Finished products ......................................................................................

6,384 $
5,069

6,795
8,840

11,453 $

15,635

December 31,

2015

2014

-65-

U.S. dollars in thousands, except share and per share data.

Inventory write-downs amounted to $361 for the year ended December 31, 2015. For the years ended
December 31, 2014 and 2013, the Company recorded $6 and $261, respectively, of income due to the utilization
of inventory that was previously written off.

NOTE 6:- PROPERTY AND EQUIPMENT, NET

Composition of assets, grouped by major classifications, is as follows:

Cost:

Computers and equipment ............................................................................ $
Office furniture and equipment .....................................................................
Leasehold improvements ..............................................................................

Less - accumulated depreciation .......................................................................

December 31,

2015

2014

19,735 $
1,469
4,728

25,932
22,168

Depreciated cost ............................................................................................... $

3,764 $

17,793
1,446
4,559

23,798
20,955

2,843

During 2014, the Company disposed fully depreciated equipment, which ceased to be used, in the amount of
$24,247. No capital loss was recorded 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 $1,356, $1,290 and $1,994 for the years ended December 31, 2015, 2014 and 2013, respectively.

NOTE 7:- INTANGIBLE ASSETS, NET

The following table shows the Company’s intangible assets for the periods presented:

Useful life
(years)

December 31,

2015

2014

Cost:

Current technology ................................................
Customer relations .................................................
Technology (completion of the development of

in-process R&D) .................................................
Non-competition agreement ...................................

4.2 - 5.3
7.3

6
3

77,080 $
23,477

7,702
519

77,080
23,477

7,702
519

108,778

Accumulated amortization:

Current technology ................................................
Customer relations .................................................
Technology (completion of the development of

in-process R&D) .................................................
Non-competition agreement ...................................

Impairment: (Note 7b)

Current technology ................................................
Customer relations .................................................

48,263
13,407

3,851
519

66,040

28,817
10,070

38,887

Amortized cost ............................................................

3,851 $

48,263
13,407

2,567
519

64,756

28,817
10,070

38,887

5,135

a. Amortization expenses amounted to $1,284, $1,573 and $1,672 for the years ended December 31, 2015,

2014 and 2013, respectively.

-66-

U.S. dollars in thousands, except share and per share data.

b. Estimated amortization expenses for the years ending:

Year ending December 31,

2016 ................................................................................................................................. $
2017 .................................................................................................................................
2018 .................................................................................................................................

1,284
1,284
1,283

3,851

NOTE 8:- FAIR VALUE MEASUREMENTS

In accordance with ASC 820, the Company measures its cash equivalents, marketable securities and foreign
currency derivative contracts at fair value. Cash equivalents, marketable securities and foreign currency
derivative contracts are classified within Level 1 or Level 2 value hierarchies. This is because cash equivalents,
and marketable securities are valued using quoted market prices or alternative pricing sources and models
utilizing market observable inputs. Foreign currency derivative contracts are classified within Level 2 value
hierarchy as the valuation 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 recurring basis as of December 31, 2015 (see also Note 3):

Description

Assets

Balance as of
December 31,
2015

Fair value measurements

Level 1

Level 2

Level 3

Cash equivalents
Money market mutual funds .................... $

Short-term marketable securities and

time deposits

U.S. GSE securities ..................................
Corporate debt securities .......................... $

Long-term marketable securities
U.S. GSE securities .................................. $
Corporate debt securities .......................... $

1,089 $

1,089

12,501

23,531
66,184

-
- $

- $
- $

- $

12,501

23,531
66,184

(36)

-
-

Derivative liabilities ................................. $

(36)

-67-

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 recurring basis as of December 31, 2014:

Description

Assets

Balance as of
December 31,
2014

Fair value measurements

Level 1

Level 2

Level 3

Cash equivalents
Money market mutual funds .................... $

2,746 $

2,746

Short-term marketable securities and

time deposits

U.S. GSE securities .................................. $
Corporate debt securities .......................... $

1,499
7,410

Long-term marketable securities
U.S. GSE securities .................................. $
Corporate debt securities .......................... $
Derivative liabilities ................................. $

19,552
72,717
(618)

- $
- $

- $
- $
- $

1,499
7,410

19,552
72,717
(618)

-
-

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, 2015 and 2014 due to the 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. The
investment was in return for approximately 14% of the equity of the company, on a fully diluted basis. The
Company also signed an agreement pursuant to which it had the option to purchase all of the remaining
outstanding securities of the private company by no later than December 31, 2014. The terms and conditions
of the investment were modified on November 2014, including an extension of the option to purchase the
remaining outstanding securities until December 31, 2015. The investment is accounted under the cost-method
in accordance with ASC 325-20.

The Company did not exercise the purchase option by December 31, 2015 and as a result, recorded a write-off
in the amount of $400.

NOTE 10:- ACCRUED EXPENSES AND OTHER ACCOUNTS PAYABLE

December 31,

2015

2014

Accrued expenses ..................................................................................... $
Derivative instruments .............................................................................
Legal, accounting and investors relation accrual .....................................
Royalties and commission ........................................................................
Governmental payables ............................................................................
Others .......................................................................................................

2,729 $
36
615
488
212
738

4,818 $

3,279
618
543
538
104
770

5,852

-68-

U.S. dollars in thousands, except share and per share data.

NOTE 11:- ACCRUED PENSION LIABILITIES

As of December 31, 2015 and 2014, the defined benefits plans that the Company assumed in connection with
the CIPT Acquisition that are accounted for in the Company’s consolidated financial statements are the pension
plans in Germany and India. Consistent with the requirements 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 future service period) of the employees were outsourced in November 2010 to an external
insurance company (“Nuremberger Versicherung”). From and after the outsourcing date, the Company is
required to pay premiums to the external insurance company and in return the pension benefits earned by the
German employees are covered by the Company’s arrangement with the external insurance company. The
Company legally is released from its obligations to the German employees once the premiums are paid, and it
is no longer subject to any of the risks and rewards associated with the benefit obligations covered and the plan
assets transferred to the external insurance company. Since the outsourcing arrangement meets the
requirements of a nonparticipating annuity contract, the Company treats the costs of the outsourcing
arrangement as the costs of the benefits being earned in accordance with ASC Paragraph 715-30-25-7 of ASC
715 “Compensation—Retirement Benefits.”

The following tables provide a reconciliation of the changes in the pension plans’ benefit obligation and fair
value of assets for the years ended December 31, 2015 and 2014, and the statement of funded status as of
December 31, 2015 and 2014:

December 31,

2015

2014

Accumulated benefit obligation ........................................................... $

937 $

1,194

Change in benefit obligation

Benefit obligation at beginning of year ................................................ $
Service cost ..........................................................................................
Interest cost ..........................................................................................
Benefits paid from the plan ..................................................................
Actuarial loss ........................................................................................
Exchange rates and others ....................................................................

1,205 $
5
17
(96)
(62)
(123)

Benefit obligation at end of year .......................................................... $

946 $

Change in plan assets

Fair value of plan assets at beginning of year ......................................
Actual return on plan assets .................................................................
Benefits paid from the plan ..................................................................
Exchange rates .....................................................................................

Fair value of plan assets at end of year ................................................ $

116
5
(56)
(11)

54 $

1,239
5
29
(152)
218
(134)

1,205

258
6
(127)
(21)

116

-69-

U.S. dollars in thousands, except share and per share data.

The assumptions used in the measurement of the Company’s pension expense and benefit obligations as of
December 31, 2015, 2014 and 2013 are as follows:

Year ended December 31,
2014

2013

2015

Weighted-average assumptions
Discount rate .........................................................
Expected return on plan assets ..............................
Rate of compensation increase ..............................

2.5%
4.28%
2.5%

2.1%
2.86%
2.5%

3.5%
2.88%
2.5%

The amounts reported for net periodic pension costs and the respective benefit obligation amounts are
dependent upon the actuarial assumptions used. The Company reviews historical trends, future expectations,
current market conditions, and external data to determine the assumptions. The discount rate is determined
considering the yield of government bonds. The rate of compensation increase is determined 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,
2015, 2014 and 2013:

Components of net periodic benefit cost

Service cost ........................................................... $
Interest cost ...........................................................
Expected return on plan assets ..............................
Amortization of net loss .......................................

Net periodic benefit cost ....................................... $

2015

December 31,
2014

2013

5 $
17
(5)
20

37 $

5 $
29
(6)
11

39 $

December 31,

2015

2014

Net amounts recognized in the consolidated balance sheets as of

December 31, 2015 and 2014 consist of:

Current liabilities .................................................................................. $
Noncurrent liabilities ............................................................................

Net amounts recognized in the consolidated balance sheets ................ $

Net amounts recognized in accumulated other comprehensive income

as of December 31, 2015 and 2014 consist of:

Net actuarial loss ................................................................................. $

Net amounts recognized in accumulated other comprehensive loss..... $

- $
892

892 $

(351) $

5
35
(6)
11

-
1,089

1,089

(435)

The estimated amount that will be amortized from accumulated other comprehensive income (loss) into net
periodic benefit cost in 2016 is as follows:

2016

Net actuarial loss and other ............................................................................................... $

-70-

U.S. dollars in thousands, except share and per share data.

Benefit payments are expected to be paid as follows:

Year ending December 31,

2016 .................................................................................................................................... $
2017 .................................................................................................................................... $
2018 .................................................................................................................................... $
2019 .................................................................................................................................... $
2020 .................................................................................................................................... $
2021-2025 .......................................................................................................................... $

The plan asset allocations at December 31 of the relevant years are as follows:

Bonds ....................................................................................................
Real estate .............................................................................................
Cash .......................................................................................................
Shares ....................................................................................................
Other ....................................................................................................

December 31,

2015

2014

-
-
-
-
100%

100%

55
21
8
8
9
104

-
-
-
-
100%

100%

The fair value of the Company’s pension plan assets at December 31, 2015 by asset category, classified by the
three levels of inputs described in Note 2, are as follows:

Fair value measurements at December 31, 2015 using:

Total fair
value at
December
31, 2015

Quoted
prices in
active
markets
(Level 1)

Significant
other
observable
inputs
(Level 2)

Significant
unobservable
inputs
(Level 3)

Cash .............................................................. $
Equity securities ...........................................
Real estate ....................................................
Corporate bonds ...........................................
Others ...........................................................

Total assets measured at fair value ............... $

- $
-
-
-
54

54 $

- $
-
-
-
-

- $

- $
-
-
-
54

54 $

-
-
-
-
-

Valuation techniques - For Level 2 inputs, the Company utilizes quoted market prices in markets that are not
active, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency.

Regarding the policy for amortizing actuarial gains or losses for pension and post-employment plans, the
Company has chosen the “corridor” option. This option consists of recognizing in the consolidated statements
of operations, the part of unrecognized actuarial gains or losses exceeding 10% of the greater of the PBO or
the market value of the plan assets. If amortization is required, the minimum amortization amount is that excess
divided by the average remaining service period of the active employees expected to receive benefits under the
plan.

Actuarial profits were recognized in other comprehensive income (loss) in the amount of $63 for the year ended
December 31, 2015. Actuarial losses were recognized in other comprehensive income (loss) in the amount of
$209 and $11 for the years ended December 31, 2014 and 2013, respectively.

-71-

U.S. dollars in thousands, except share and per share data.

NOTE 12:- FINANCIAL INCOME, NET

The components of financial income, net were as follows:

Year ended December 31,
2014

2015

2013

19 $

27 $

Foreign exchange gains ........................................... $
Interest income from marketable securities and
deposits, net of amortization of premium on
marketable securities ...........................................
Realized gains on marketable securities ..................
Other .......................................................................

1,391
3
-

1,391
73
-

Financial income .....................................................

1,413

1,491

Realized losses on marketable securities .................
Foreign exchange losses ..........................................
Interest expenses .....................................................
Other .......................................................................

Financial expense ....................................................

27
58
12
141

238

12
113
24
138

287

1,656
1,013
13

2,682

4
86
29
106

225

Financial income, net .............................................. $

1,175 $

1,204 $

2,457

NOTE 13:- STOCKHOLDERS’ EQUITY

Preferred stock:

The Company’s Board of Directors has the authority, without any further vote or action by the stockholders,
to provide for the issuance of up to 5,000,000 shares of preferred stock in one or more series with such
designations, rights, preferences, and limitations as 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. No shares of preferred
stock are currently outstanding.

Common stock:

Currently, 50,000,000 shares of common stock are authorized. Holders of common stock are entitled to one
vote per share on all matters to be voted upon by the Company’s stockholders. Subject to the rights of holders
of preferred stock, if any, in the event of liquidation, dissolution or winding up, holders of common stock are
entitled to share ratably in all of the Company’s assets. The Company’s Board of Directors may declare a
dividend out of funds legally available therefore and, subject to the rights of holders of preferred 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.

Dividend policy:

At December 31, 2015, the Company had an accumulated deficit of $90,763. The Company has never paid
cash dividends on the common stock and presently intends to follow a policy of retaining earnings for
reinvestment in its business.

-72-

U.S. dollars in thousands, except share and per share data.

Share repurchase program:

In November 2013, the Company entered into a share repurchase plan, in accordance with Rule 10b5-1 of the
Securities Exchange Act of 1934, for the repurchase of up to 2,700,000 shares of its common stock. This
amount is in addition to the approximately 308,000 shares that were available for repurchase under the board’s
prior authorizations. Furthermore, in August 2015, the Company’s board of directors authorized an additional
$10 million dollar share repurchase plan, of which 0.5 million shares are available for repurchase under a Rule
10b5-1 plan. In 2015, 2014 and 2013, the Company repurchased approximately 1,295,000, 1,414,000 and
390,000 shares, respectively, of common stock at an average purchase price of $10.24, $8.83 and $8.95 per
share, respectively, for an aggregate purchase price of $13,267, $12,484 and $3,490, respectively. As of
December 31, 2015, 905,040 shares of the Company’s common stock remained authorized for repurchase
under the Company’s board-authorized share repurchase program.

In 2015, 2014 and 2013, the Company issued 1,024,000, 908,000 and 1,066,000 shares, respectively, of
common stock, out of treasury stock, to employees who exercised their equity awards under the Company’s
equity incentive plans or purchased shares from the Company’s 1993 Employee Stock Purchase Plan (“ESPP”).

Stock purchase plan and equity incentive plans:

The Company has various equity incentive plans under which employees, officers, non-employee directors of
the Company and its subsidiaries and others, including consultants, may be granted rights to purchase the
Company’s common stock. The plans authorize the administrator, except for the grant of RSUs, to grant equity
incentive awards at an exercise price of not less than 100% of the fair market value of the common stock on
the date the award is granted. It is the Company’s policy to grant stock options and SARs at an exercise price
that equals the fair market value

Equity awards granted under all stock incentive plans that are cancelled or forfeited before expiration become
available for future grant.

Until the end of 2012, the Company granted to employees and executive officers of the Company primarily
share appreciation rights (“SARs”), capped with a ceiling, under the various equity incentive plans. The SAR
unit confers the holder the right to stock appreciation over a preset price of the Company’s common stock
during a specified period of time. When the unit is exercised, the appreciation amount is paid through the
issuance of shares of the Company’s common stock. The ceiling limits the maximum income for each SAR
unit and the maximum number of shares to be issued. SARs are considered an equity instrument as it is a net
share settled 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 time the award is vested. RSUs granted to employees and executive officers
generally vest over a four year period from the grant date with 25% of the RSUs granted vesting on 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 (Directors Plan)

Upon the closing of the Company’s initial public offering, the Company adopted the Directors Plan. Under the
Directors Plan, which expired in January 2014, the Company was authorized to issue nonqualified stock options
to the Company’s outside non-employee directors to purchase up to 1,980,875 shares of common stock at an
exercise price equal to the fair market value of the common stock on the date of grant. The Directors Plan, as
amended, provided that each person who became an outside, non-employee director of the Board of Directors
was automatically granted an option to purchase 30,000 shares of common stock (the “First Option”).
Thereafter, each outside director was automatically granted an option to purchase 15,000 shares of common
stock (a “Subsequent Option”) on January 1 of each year if, on such date, he had served on the Board of
Directors for at least six months. In addition, an option to purchase an additional 15,000 shares of common
stock (a “Committee Option”) was granted on January 1 of each year to each outside director for each
committee of the Board on which had served as a chairperson for at least six months.

-73-

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 year and 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, 2015, 2,464,933 shares of common stock had been granted under the plan and stock options to
acquire 495,000 shares remained outstanding in the plan prior to its expiration.

1998 Non-Officer Employee Stock Option Plan (1998 Plan)

In 1998, the Company adopted 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 the purchase of up to
5,062,881 shares of common stock. As of December 31, 2015, 35,473 shares of common stock remained
available for 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 stock options, as determined by the Company’s Board of Directors or a committee appointed
by the Company’s Board of Directors.

Options under the 1998 Plan are generally exercisable over a 48-month period beginning 12 months after
issuance, or as determined by the Company’s Board of Directors or a committee appointed by the Company’s
Board of Directors. Options under the 1998 Plan expire up to seven years after the date of grant.

2001 Stock Incentive Plan (2001 Plan)

In 2001, the Company adopted the 2001 Plan. The 2001 Plan expired in 2011 and no further grants of awards
may be made thereunder. As of December 31, 2015, 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 fair market 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 as determined by the Company’s Board of Directors or a committee appointed by the
Company’s Board of Directors. Equity awards under the 2001 plan expired up to seven years after the date of
grant.

2003 Israeli Share Incentive Plan (2003 Plan)

In 2003, the Company adopted 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 of
December 31, 2015, 10,700,543 shares of common stock had been granted under the plan and stock option and
SARs to acquire 922,595 shares of common stock remained outstanding under the plan. As the 2003 Plan
expired in May 2012, no further awards may be granted thereunder.

Equity awards under the 2003 Plan were generally exercisable over a 48-month period beginning 12 months
after issuance, or as determined by the Company’s Board of Directors or a committee appointed by the
Company’s Board of Directors. Equity awards under the 2003 Plan expired up to seven years after the date of
grant.

2012 Equity Incentive Plan (2012 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. The exercise price of the equity awards under the 2012 Plan shall not
be less than the fair market value of common stock at the time of grant, unless otherwise determined by the
Company’s Board of Directors or a committee appointed by the Company’s Board of Directors. The 2012 Plan
currently provides for the purchase of up to 2,450,000 shares of common stock. As of December 31, 2015,
1,027,577 shares of common stock remained available for grant under the 2012 Plan.

-74-

U.S. dollars in thousands, except share and per share data.

Stock options, SARs and RSUs awarded under the 2012 Plan to employees and executive officers are generally
exercisable over a 48-month period beginning 12 months after issuance, or as determined by the Company’s
Board of Directors or a committee appointed 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-employee directors. The director subplan is designed to work automatically; however, to the
extent administration is necessary, it would be provided by the Company’s board of directors. Starting in 2014,
non-employee directors are granted automatically under the director subplan, 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 of one year from the
grant date. If a director is appointed for a term commencing during a calendar year, the director would be
granted stock options and restricted stock units on the date of appointment and the number of stock options
and restricted stock units granted would be based upon the number of days remaining in the in the calendar
year following the date such person was nominated as a director. Solely with respect to calendar year 2014, in
addition to the grants of 8,000 stock options and 4,000 restricted stock units on January 1, 2014 to all then
elected board members, each committee chair also received an automatic grant of stock 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 aggregate of 4,800,000 shares of common stock for issuance under the ESPP. The ESPP provides
that substantially all employees of the Company may purchase Company common stock at 85% of its fair
market value on specified dates via payroll deductions. There were approximately 233,000, 310,000 and
374,000 shares of common stock issued at a weighted average purchase price of $7.59, $5.55 and $4.44 per
share under the ESPP in 2015, 2014 and 2013, respectively. As of December 31, 2015, 1,170,000 shares of
common stock were reserved under the ESPP.

Stock Reserved for Future Issuance

The following table summarizes the number of shares available for future issuance at December 31, 2015 (after
giving effect to the above increases in the equity incentive plans):

ESPP ...................................................................................................................................
Equity awards ......................................................................................................................
Undesignated preferred stock ..............................................................................................

1,170,000
1,063,000
5,000,000

7,233,000

-75-

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’s various plans:

2015
Weighted
average
exercise
price

Amount of
options/

SARs/RSUs
in thousands

Year ended December 31,
2014
Weighted
average
exercise
price

Amount of
options/

Aggregate
intrinsic
value (4)

SARs/RSUs
in thousands

2013

Amount of
options/

SARs/RSUs
in thousands

Aggregate
intrinsic
value (4)

Weighted
average
exercise
price

Aggregate
intrinsic
value (4)

Options outstanding at

beginning of year .......

4,644 $

6.52 $

6,537 $

8.68 $

9,622 $

10.72 $

Changes during the

year:

Options granted ............
RSUs granted ................
Exercised (4) .................
Forfeited and cancelled

Options/SARs/RSUs

outstanding at end of
year (1,2,4).................

Options/SARs/RSUs

exercisable at end of
year (1,3,4).................

179 $
405 $
(1,403) $
(85) $

11.2 $
- $
5.68 $
12.21 $

-
-
7,302
-

232 $
337 $
(1,715) $
(747) $

9.15 $
- $
7.92 $
20.11 $

-
-
3,537
-

524 $
552 $
(2,105) $
(2,056) $

6.42 $
- $
6.49 $
17.56 $

-
-
3,795
-

3,740 $

6.22 $

13,364

4,644 $

6.52 $

21,409

6,537 $

8.68 $

16,673

2,552 $

7.47 $

6,031

3,106 $

7.73 $

10,941

4,623 $

10.30 $

7,230

(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 the SAR 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 of shares 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 are convertible 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 grants made
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 units subject to the grant.

(2) Due to the ceiling imposed on the SAR grants, the outstanding amount above can be exercised for a maximum of

3,154,626 shares of the Company’s common stock as of December 31, 2015.

(3) Due to the ceiling imposed on the SAR grants, the exercisable amount above can be exercised for a maximum of

1,992,668 shares of the Company’s common stock as of December 31, 2015.

(4) Calculation of aggregate intrinsic value for options, RSUs and SARs outstanding and exercisable is based on the share
price of the Company’s common stock as of December 31, 2015, 2014 and 2013 which was $9.44, $10.87 and $9.71
per share, respectively. The intrinsic value for options, RSUs and SARs exercised during those years represents the
difference between the fair market value of the Company’s common stock on the date of exercise and the exercise
price of each option, RSU or SAR, as applicable.

-76-

U.S. dollars in thousands, except share and per share data.

The stock options and SARs outstanding as of December 31, 2015, have been separated into ranges of
exercise price as follows:

Range of
exercise
price
$

Outstanding
thousands

Remaining
contractual
life (years)
(1)

Weighted
average
exercise
price
$

Remaining
contractual
life (years)

Weighted
average
exercise
price
$

Exercisable
thousands

0 (RSUs)
5.21 - 7.26
7.49 - 9.71
10.87 - 15.79
21.07 - 25.06

706
1,797
958
219
60

-
2.68
3.87
6.21
0.50

-
6.48
8.04
11.54
23.38

-
1,625
827
40
60

-
2.51
3.45
1.96
0.50

-
6.51
7.93
13.10
23.38

3,740

3.27

6.22

2,552

2.76

7.47

(1) Calculation of weighted average remaining contractual term does not include the RSUs that were

granted, which have an indefinite contractual term.

As of December 31, 2015, the outstanding number of SARs was 1,541,977 and based on the share price
of the Company’s common stock as of December 31, 2015 ($9.44 per share), 1,541,977 of those SARs
were in the money as of December 31, 2015.

The weighted average estimated fair value of employee RSUs granted during 2015, 2014 and 2013 was
$10.43, $7.94 and $6.17 per share, respectively, (using the weighted average pre vest cancellation rate
of 3.49%, 3.79% and 3.84% during 2015, 2014 and 2013, respectively, on an annual basis).

The weighted-average estimated fair value of employee stock options granted during the years ended
December 31, 2015, 2014 and 2013 was $3.80, $3.47 and $4.90 per stock option, respectively, using
the binomial model with the following weighted-average assumptions (annualized percentages):

Year ended December 31,
2014

2015

2013

Volatility ......................................................
Risk-free interest rate ...................................
Dividend yield .............................................
Pre-vest cancellation rate *) .........................
Post-vest cancellation rate **) .....................
Suboptimal exercise factor ***) ..................
Expected life (years) ....................................

49.04 %
1.96 %
0 %
3.95 %
3.86 %
1.46
4.43

43.14%
1.85%
0%
4.17%
4.09%
1.61
3.27

46.24%
1.39%
0%
3.48%
2.52%
1.81
4.66

*) The pre-vest cancellation rate was calculated on an annual basis and is presented here on an annual

basis.

**) The post-vest cancellation rate was calculated on a monthly basis and is presented here on an

annual basis.

***) The ratio of the stock price to strike price at the time of exercise of the option.

The computation of volatility uses a combination of historical volatility and implied volatility derived
from the Company’s exchange 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 employee equity-based awards.

-77-

U.S. dollars in thousands, except share and per share data.

The dividend yield assumption is based on the Company’s historical and expectation of future dividend
payouts and may be subject to substantial change in the future.

The expected term of employee equity-based awards represents the weighted-average period the awards
are expected to remain outstanding and is a derived output of the binomial model. The expected life of
employee equity-based awards is impacted by all of the underlying assumptions used in the Company’s
model. The binomial model assumes that employees’ exercise behavior is a function of the award’s
remaining contractual life and the extent to which the award is in-the-money (i.e., the average stock
price during the period is above the strike price of the award). The binomial model estimates the
probability of exercise as a function of these two variables based on the history of exercises and
cancellations on past award grants made by the Company.

As equity-based compensation expense recognized in the consolidated statement of operations is based
on awards ultimately expected to vest, it should be reduced for estimated forfeitures. The forfeitures are
estimated at the time of grant and revised, if necessary, 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 using the same assumptions set forth above for the years ended 2015, 2014 and
2013 except the expected life and the volatility. The expected life was assumed to be between six to 24
months based on the contractual life of the plan, and the expected volatility was assumed to be in a
range of 22.83%-34.53% in 2015, 29.06%-37.17% in 2014 and 36.37%-44.19% in 2013.

The Company’s aggregate equity compensation expenses for the years ended December 31, 2015, 2014
and 2013 totaled $5,092, $5,359 and $4,159, respectively. The Company recognized no tax benefit in
its consolidated statements of operations for the years ended December 31, 2015, 2014 and 2013 for the
Company’s equity-based compensation arrangements.

A summary of the status of the Company’s non-vested stock options, SARs and RSUs as of
December 31, 2015, and changes during the year ended December 31, 2015, is presented below:

Non-vested

Units
(In thousands)

Weighted
Average grant
date fair value

Non-vested at January 1, 2015 ...........................................

1,538

Granted ..............................................................................
Vested ................................................................................
Forfeited ............................................................................

584
(910)
(24)

Non-vested at December 31, 2015 .....................................

1,188

5.01

8.38
6.00
4.68

6.90

As of December 31, 2015, equity-based compensation arrangements to purchase a maximum of
approximately 2,902,000 shares of common stock were vested and expected to vest (the calculation
takes into consideration the average forfeiture rate).

As of December 31, 2015, there was a total unrecognized compensation expense of $3,061 related to
non-vested equity-based compensation arrangements granted under the Company’s various equity
incentive plans. That expense is expected to be recognized during the period from 2016 through 2019.

-78-

U.S. dollars in thousands, except share and per share data.

NOTE 14:- COMMITMENTS AND CONTINGENCIES

Commitments

The Company and its subsidiaries lease certain equipment and facilities under non-cancelable operating
leases. The Company has significant leased facilities in Herzliya Pituach, Israel. The lease agreement
for the Israeli facilities is effective until November 2018. The Company leases its facilities in the U.S.
under a contract which terminates in 2018. The Company’s subsidiaries in Scotland, Japan, Germany,
China and Hong-Kong have lease agreements for their facilities that terminate in 2019, 2016, 2016, 2016
and 2016, respectively. The Company’s subsidiary in India has a lease agreement which terminates in
2020. The Company has operating lease agreements for its motor vehicles which terminate in 2016
through 2018.

At December 31, 2015, the Company is required to make the following minimum lease payments under non-
cancelable operating leases for motor vehicles and facilities:

Year ended December 31,

2,684
1,835
1,614
145

6,278

Facilities rental expenses amounted to $2,252, $2,298 and $2,389 for the years ended December 31, 2015, 2014
and 2013, respectively.

The Company participated in programs (most of which are royalty bearing grants) sponsored by the
Israeli government for the support of research and development activities. Through December 31, 2015,
the Company had obtained grants from the Israeli Office of the Chief Scientist (the “OCS”) for certain
of the Company’s research and development projects. The Company is obligated to pay royalties to the
OCS, amounting to 5% of the sales of the products and other related revenues (based on the dollar)
generated from such projects, up to 100% of the grants received. The royalty payment obligations also
bear interest at the LIBOR rate. The obligation to pay these royalties is contingent on actual sales of the
applicable products and in the absence of such sales, no payment is required.

As of December 31, 2015, the aggregate contingent liability to the OCS amounted to $7,880. The Israeli
Research and Development Law provides that know-how developed under an approved research and
development program may not be transferred to third parties without the approval of the OCS. Such
approval is not required for the sale or export of any products resulting 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 for such OCS-funded know-how or in consideration for the sale of the grant
recipient itself, as the case may be, which portion will not exceed six times the amount of the grants
received plus interest (or three times the amount of the grant received plus interest, in the event 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 such transfer of know-how arises in
connection with a liquidation by reason of insolvency or receivership of the grant recipient.

Litigation

The Company is involved in certain claims arising in the normal course of business. However, the
Company believes that the ultimate resolution of these matters will not have a material adverse effect on
its financial position, results of operations, or cash flows.

-79-

U.S. dollars in thousands, except share and per share data.

From time to time, the Company may become involved in litigation relating to claims arising in the
ordinary course of business activities. Also, as is typical in the semiconductor industry, the Company
has been and, from time to time may be, notified of claims that it may be infringing on patents or
intellectual property rights owned by third parties.

NOTE 15:- TAXES ON INCOME

The provision for income taxes is as follows:

Domestic taxes

Federal taxes:
Current ................................................................... $

State taxes:
Current ...................................................................

Year ended December 31,
2014

2013

2015

- $

(271)

(9)

Foreign taxes:
Current (1) ..............................................................
Deferred (2) ............................................................

1,081
(756)

(1,672)
(1,170)

Domestic taxes ......................................................

325

(2,842)

Tax expenses (income) tax benefit ......................... $

327 $

(2,840) $

507
(377)

130

(150)

(1) Includes for 2014 (i) income in the amount of $858 due to reversal of income tax contingency reserves that
were determined to be no longer 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 for 2014 income tax benefit in the amount of $827 due to elimination of valuation allowance of

deferred tax assets.

There were no tax benefits associated with the exercise of non-qualified stock options in 2015, 2014 and 2013.

Income (loss) before taxes is comprised as follows:

Year ended December 31,
2014

2015

2013

Domestic ................................................................ $
Foreign ...................................................................

(909) $
2,798

(3,497) $
4,258

(3,525)
6,051

1,889 $

761 $

2,526

A reconciliation between the Company’s effective tax rate assuming all income is taxed at statutory tax
rate applicable to the income of the Company and the U.S. statutory rate is as follows:

-80-

U.S. dollars in thousands, except share and per share data.

Year ended December 31,
2014

2013

2015

Income (loss) before taxes on income ....................... $

1,889 $

761 $

266 $
2

2,526

884
2

661 $
2

Theoretical tax at U.S. statutory tax rate (35%) ......... $
State taxes, net of federal benefit ...............................
Foreign income taxed at rates other than the U.S. rate
(including deferred taxes that were not provided,
valuation allowance and current adjustment and
interest on uncertain tax position liability) .............
Nondeductible equity-based compensation expenses
Current adjustment and interest on uncertain tax

position liability in U.S. .........................................
Valuation allowance in U.S. .......................................
Other .........................................................................

(2,209)
1,782

(5,974)
1,876

(3,015)
1,456

-
91
-

-
989
1

327 $

(2,840) $

(283)
804
2

(150)

Deferred income taxes reflect the net tax effects of temporary differences between the carrying amounts
of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes.

December 31,

2015

2014

Deferred tax assets (short-term):

Reserves and accruals ........................................................................... $
Carryforward tax losses ......................................................................... $

Total deferred tax assets (short-term) .....................................................
Valuation allowance ...............................................................................

Total .......................................................................................................

- $
- $

-
-

149
626

775
-

775

Deferred tax assets (long-term):

Reserves and accruals ............................................................................
Equity-based compensation ....................................................................
Intangible assets ....................................................................................
Carryforward tax losses .........................................................................
Other ......................................................................................................

1,823
462
805
(1) 5,798
-

1,669
2,761
1,198
27,621
15

Total deferred tax assets (long-term) ......................................................
Valuation allowance ...............................................................................

8,888
(7,577)

33,264
(33,115)

Total .......................................................................................................

1,311

Total deferred tax assets ........................................................................ $

1,311 $

149

924

Deferred tax liabilities, net (Long term):
Acquired intangible assets .....................................................................
Acquired carryforward tax losses ..........................................................

963
(487)

1,360
(515)

Total deferred tax liabilities, net ............................................................ $

476 $

845

-81-

U.S. dollars in thousands, except share and per share data.

(1) The amount in 2015 is after a deduction of $207,405 carryforward tax losses of a foreign subsidiary that
expired by December 31, 2015.

Management believes that part of the deferred tax assets will not be realized based on current levels of future
taxable income and potentially refundable taxes. Accordingly, a valuation allowance in the amount of $7,577
and $33,115 was recognized as of December 31, 2015 and 2014, respectively.

As of December 31, 2015, the Company had cash and cash equivalents, marketable securities and time deposits
of approximately $121.7 million. Out of total cash, cash equivalents and marketable securities of $121.7 million,
$107.8 million was held by foreign subsidiaries of the Company. The Company intends to permanently reinvest
earnings of its foreign 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 as well as taxes
in other countries to repatriate these funds. The determination of the amount of additional taxes related to the
repatriation of these earnings is 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 from which the cash would be repatriated.

Uncertain tax positions:

A reconciliation of the beginning and ending balances of the total amounts of gross unrecognized tax
benefits is as follows:

2015

2014

Gross unrecognized tax benefits at January 1 ............................... $
Increases in tax positions for previous years ................................
Increases in tax positions for current year ....................................
Change in interest and linkage related to tax positions .................
Lapse in statute of limitations or finalization of tax assessment ..

1,031 $
177
533
(30)
-

1,892
115
71
(85)
(858)

Gross unrecognized tax benefits at December 31 ......................... $

1,711 $

1,031

The total amount of net unrecognized tax benefits that, if recognized, would affect the effective tax rate
was $1,711 and $1,031 at December 31, 2015 and 2014, respectively. The Company accrues interest
and penalties relating to unrecognized tax benefits in its provision for income taxes. At December 31,
2015 and 2014, the Company had accrued interest and penalties related to unrecognized tax benefits of
$180 and $135, respectively.

The Company reversed income tax contingency reserves that were determined to be no longer required
due to the expiration of applicable statute of limitations. Pursuant to this reversal, the Company recorded
a tax benefit of $284 during 2013. During 2014, the Company recorded a tax benefit of $858 due to the
finalization of a tax assessment.

The Company and certain of its subsidiaries file income tax returns in the U.S. federal jurisdiction and
various state and foreign jurisdictions. The last examination conducted by U.S. tax authorities was with
respect to the Company’s U.S. federal income tax returns for 2004. The statute of limitations relating to
the Company’s consolidated Federal income tax return is closed for all tax years up to and including
2011.

The last examination conducted by the Israeli tax authorities was with respect to the Company’s Israeli
income tax returns for the years 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 to the expiration of the statute of limitations.

-82-

U.S. dollars in thousands, except share and per share data.

With respect to the Company’s Swiss subsidiary, the statute of limitations related to its tax returns is
opened for all tax years since its incorporation.

A change in the amount of unrecognized tax benefit is reasonably possible in the next 12 months due to
the examination by the German tax authorities of the Company’s German tax returns for 2007 – 2009.
The Company currently cannot provide an estimate of the range of change in the amount of the
unrecognized tax benefits due to the ongoing status of the examination.

Tax benefits under the Law for the Encouragement of Capital Investments, 1959 (“Investment Law”).

The Investment Law provides certain 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 the provisions of the Investment Law. Generally, DSP Israel’s investment
programs that obtained approval for Approved Enterprise status prior 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 that companies are no longer required to get the Investment Center’s prior approval
to qualify for tax benefits. An enterprise that receives tax benefits without the initial approval from the
Investment Center is called a “Beneficiary Enterprise,” rather than the previous terminology of
“Approved Enterprise” used under the Investment Law. The period of tax benefits for a new Beneficiary
Enterprise commences in the “Year of Commencement,” which is the later of: (1) the year in which
taxable income was first generated by the company, or (2) the year of election.

In addition, under the Amendment, tax benefits are available for production facilities, which generally
are required to derive more than 25% of their business income from export. Furthermore, in order to
receive the tax benefits under the Amendment, a company is required to make an investment in the
Benefited Enterprise exceeding a certain percentage or a minimum amount specified in the Investment
Law.

DSP Israel chose 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 reduced corporate tax rate of 10%-25% (based on the percentage
of foreign ownership) for an additional period of six or eight years.

DSP Israel’s first, second, third, fourth, fifth and sixth investment programs, which were completed and
commenced operations in 1994, 1996, 1998, 1999, 2002 and 2004, respectively, were tax exempt for a
period of between two and four years, from the first year they had taxable income and were entitled to
a reduced corporate tax rate of 10%-25% (based on the percentage of foreign ownership) for an
additional period of between six to eight years. As of 2015, all those investment programs were no
longer entitled to a reduced corporate tax rate.

DSP Israel’s seventh and eighth investment programs have been in operation since 2006 and 2009,
respectively, and entitles DSP Israel to a corporate tax exemption for a period of two years and a reduced
corporate tax rate of 10%-25% (based on the percentage of foreign ownership) for an additional period
of eight years from the first year it had taxable income. Beginning in 2016, the seventh investment
program was no longer entitled to a reduced corporate tax rate.

Since DSP Israel is operating under more than one approval, its effective tax rate is the result of a
weighted combination of the various applicable tax rates and tax exemptions and the computation is
made for income derived from each investment program on the basis and formulas specified in the
Investment Law and the approvals.

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U.S. dollars in thousands, except share and per share data.

During 2006, DSP Israel received an approval for the erosion of tax basis in respect to its fifth and sixth
investment programs. During 2008, DSP Israel received an approval for the erosion of tax basis with
respect to its second, third and fourth investment programs. Those approvals resulted in increasing the
taxable income attributable to the later investment programs, which are currently in operation and will
be taxed at a lower tax rate than the previous investment programs, which in turn will decrease the
overall effective tax rate.

The Company’s investment programs that generate taxable income are currently subject to an average
tax rate of up to approximately 10% based on a variety of factors, including percentage of foreign
ownership and approvals for the erosion of the tax basis of our investment programs. The Company’s
average tax rate for its investment programs may change in the future due to circumstances outside of
its control and therefore, the Company cannot provide any assurances that its average tax rate for its
investment programs will continue at an approximate rate of 10% in the future.

Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 68):

In December 2010, the Israeli Parliament passed the Law for Economic Policy for 2011 and 2012
(Amended Legislation), 2011 (the “2011 Amendment”). The 2011 Amendment, which prescribes,
among other things, amendments in the Law for the Encouragement of Capital Investments, 1959 (the
“Law”). The 2011 Amendment became effective as of January 1, 2011. According to the 2011
Amendment, the benefit tracks in the Law were modified and a flat tax rate applies to the Company's
entire preferred income under its status as a preferred company with a Preferred Enterprise (rather than
the previous terminology of “Beneficiary Enterprise” under the Amendment). Commencing in 2011, the
Company could elect (without possibility of reversal) to apply the 2011 Amendment in a certain tax
year and from that year and thereafter, it would be subject to the amended tax rates. The tax rates under
the 2011 Amendment were: 2011 and 2012 - 15% and in 2013 - 12.5%. As discussed in greater detail
below, the Company evaluated the effect of the adoption of the 2011 Amendment and determined not
to apply such amendment.

Amendment to the Law for the Encouragement of Capital Investments, 1959 (Amendment 71):

On August 5, 2013, the Israeli Parliament issued the Law for Changing National Priorities (Legislative
Amendments for Achieving Budget Targets for 2013 and 2014), 2013 which consists of Amendment 71
to the Law for the Encouragement of Capital Investments (the “2013 Amendment”). According to the
2013 Amendment, the tax rate on preferred income from a Preferred Enterprise in 2014 and thereafter
would be 16%.

The 2013 Amendment also prescribes that any dividends distributed to individuals or foreign residents
from the preferred enterprise's earnings would be subject to a tax rate of 20%.

The Company evaluated the effect of the adoption of the 2011 Amendment and the 2013 Amendment
on its financial statements, and determined to not apply for either amendment. Rather the Company has
continued to comply with the Investment Law as it was in effect prior to enactment of the amendments
until the earlier of such time that compliance with the Investment Law prior to enactment of the
amendments is no longer in the Company’s best interests or until the expiration of its current investment
programs. The Company may change its position in the future.

The Company is required to comply with the 2011 Amendment and the 2013 Amendment subsequent
to the expiration of the Company’s current investment programs and for any new qualified investment
program after a transitional period. Once the Company is required to comply with the amendments, its
average tax rate may increase.

As of December 31, 2015, DSP Israel believed that it met all the conditions required under the plans,
which include, among other things, an obligation to invest certain amounts in property and equipment
and an obligation to finance a percentage of investments by share capital.

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U.S. dollars in thousands, except share and per share data.

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 (26.5% for 2015) plus a consumer price index linkage adjustment and interest
and could be required to refund tax benefits already received.

As of December 31, 2015, approximately $33,293 was derived from tax exempt profits earned by DSP
Israel’s “Approved Enterprises” and “Beneficiary Enterprises.” The Company has determined that such
tax-exempt income will not be distributed as dividends and intends to reinvest the amount of its tax
exempt income earned by DSP Israel. Accordingly, no provision for deferred income taxes has been
provided on income attributable to DSP Israel’s “Approved Enterprises” and “Beneficiary Enterprises”
as such income is essentially permanently reinvested.

If DSP Israel’s retained tax-exempt income is distributed, the income would be taxed at the applicable
corporate tax rate (currently 10%) as if 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,
2015.

DSP Israel’s income from sources other than the “Approved Enterprises” and “Beneficiary Enterprises”
during the benefit period will be subject to tax at the effective standard corporate tax rate in Israel (26.5%
for 2015).

The Law for Encouragement of Industry (Taxation), 1969:

DSP Israel has the status of an “industrial company”, as defined by this law. According to this status
and by virtue of regulations published thereunder, DSP Israel is entitled to claim a deduction of
accelerated depreciation on equipment used in industrial activities, as determined in the regulations
issued under the Inflationary Law. The Company is also entitled to amortize a patent or rights to use a
patent or intellectual property that are used in the enterprise's development or advancement to deduct
issuance expenses for shares listed for trading, and to file consolidated financial statements under certain
conditions.

Israeli tax rates:

The rate of the Israeli corporate tax is as follows: 2013 – 25%, and 2014 and 2015 – 26.5%. Tax rate of
25% applies to capital gains arising after January 1, 2003.

On January 4, 2016, the Israeli Parliament's Plenum approved by a second and third reading, the Bill for
Amending the Income Tax Ordinance (No. 217) (Reduction of Corporate Tax Rate), 2015, which
includes a reduction of the corporate tax rate from 26.5% to 25% for 2016.

The Company has accumulated losses for federal and state tax purposes as of December 31, 2015 of
approximately $12,110 and $2,432, respectively, which may be carried forward and offset against future
taxable income for a period of fifteen to twenty years from its creation. DSP Israel has accumulated
losses for tax purposes as of December 31, 2015, of approximately $18,837 (including research and
development expense carry forwards), which may be carried forward and offset against future taxable
income for an indefinite period. The Swiss subsidiary has accumulated losses for tax purposes as of
December 31, 2015, of approximately $4,279, which may be carried forward and offset against future
taxable income for a period of seven years from its creation. As of December 31, 2015, $207,405 of
accumulated losses for tax purposes, which related to the Swiss subsidiary, expired.

-85-

U.S. dollars in thousands, except share and per share data.

NOTE 16:- BASIC AND DILUTED LOSS PER SHARE

The following table sets forth the computation of basic and diluted net loss per share:

Numerator:

Net income .................................................................................... $

1,562 $

3,602 $

2,676

Year ended December 31,
2014

2015

2013

Denominator:

Weighted average number of shares of common stock

outstanding during the year used to compute basic net earnings
per share (in thousands) ..............................................................

Incremental shares attributable to exercise of outstanding

options, SARs and RSUs (assuming proceeds would be used to
purchase treasury stock) (in thousands) ......................................

21,924

21,968

22,249

1,416

986

657

Weighted average number of shares of common stock used to

compute diluted net earnings per share (in thousands) ...............

23,340

22,954

22,906

Basic net earnings per share .......................................................... $

Diluted net earnings per share ....................................................... $

0.07 $

0.16 $

0.12

NOTE 17:- SEGMENT INFORMATION

Description of segments:

The Company operates under three reportable segments.

The Company’s segment information has been prepared in accordance with ASC 280, “Segment Reporting.”
Operating segments are defined as components of an enterprise engaging in business activities about which separate financial
information is available that is evaluated regularly by the Company’s chief operating decision-maker (“CODM”) in deciding
how to allocate resources and assess performance. The Company’s CODM is its Chief Executive Officer, who evaluates the
Company’s performance and allocates resources based on segment revenues and operating income.

The Company’s operating segments are as follows: Home, Office and Mobile. The classification of the Company’s
business segments is based on a number of factors that its management uses to evaluate, view and run its business operations,
which include, but are not limited to, customer base, homogeneity of products and technology.

A description of the types of products provided by each business segment is as follows:

Home - Wireless chipset solutions for converged communication at home. Such solutions include integrated circuits
targeted for cordless phones sold in retail or supplied by telecommunication service providers, home gateway devices
supplied by telecommunication service providers which integrate the DECT/CAT-iq functionality, integrated circuits
addressing home automation applications, as well as fixed-mobile convergence solutions. In this segment, (i) revenues from
cordless telephony products exceeded 10% of the Company’s total consolidated revenues and amounted to 72%, 79% and
85% of the Company’s total revenues for 2015, 2014 and 2013, respectively, and (ii) revenues from home gateway products
exceeded 10% of the Company’s total consolidated revenues and amounted to 10%, 8% and 6% of the Company’s total
revenues for 2015, 2014 and 2013, respectively.

-86-

U.S. dollars in thousands, except share and per share data.

Office - Comprehensive solution for Voice-over-IP (VoIP) office products, including office solutions that offer
businesses of all sizes low-cost VoIP terminals with converged voice and data applications. Revenues from the Company’s
VoIP products represented 15%, 10% and 6% of its total revenues for 2015, 2014 and 2013, respectively. No revenues derived
from other products in the office segment exceeded 10% of the Company’s total consolidated revenues for the years 2015,
2014 and 2013.

Mobile - Products for the mobile market that provides voice enhancement, always-on and far-end noise elimination
targeted for mobile phone and mobile headsets and wearable devices that incorporate the Company’s noise suppression and
voice quality enhancement HDClear technology. No revenues were derived from products in the mobile segment exceeded
10% of the Company’s total consolidated revenues for the years 2015, 2014 and 2013.

Segment data:

The Company derives the results of its business segments directly from its internal management reporting system
and by using certain allocation methods. The accounting policies the Company uses to derive business segment
results are substantially the same as those the Company uses for consolidation of its financial statements. The
CODM measures the performance of each business segment based on several metrics, including earnings from
operations. CODM uses these results, in part, to evaluate the performance of, and to assign resources to, each of
the business segments. The Company does not allocate to its business segments certain operating expenses, which
it manages separately at the corporate level. These unallocated costs include primarily amortization of purchased
intangible assets, equity-based compensation 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 the financial information for segments. Selected operating results information for
each business segment was as follows for the year ended December 31, 2015, 2014 and 2013:

Year ended December 31

Home ................. $
Office ................. $
Mobile ............... $
Total .................. $

2015
121,714 $
22,216 $
341 $
144,271 $

Revenues
2014
128,690 $
14,276 $
70 $
143,036 $

2013

142,144 $
8,849 $
70 $
151,063 $

Income (loss) from operations
2014

2015

2013

24,815 $
(4,861) $
(10,308) $
9,646 $

23,438 $
(2,805 ) $
(11,983 ) $
8,650 $

25,367
(4,656 )
(11,040 )
9,671

The reconciliation of segment operating results information to the Company’s consolidated financial information
was as follows:

Income from operations ...................................... $
Unallocated corporate, general and

administrative expenses * ...............................
Proxy contest related expenses ...........................
Equity-based compensation expenses .................
Intangible assets amortization expenses .............
Write–off of expired option related to

investment in other company .........................
Financial income, net ..........................................
Total consolidated income before taxes .............. $

Year ended December 31,

2015

2014

2013

9,646 $

8,650 $

(2,156)
-
(5,092)
(1,284)

(400)
1,175
1,889 $

(2,161)
-
(5,359)
(1,573)

-
1,204
761 $

9,671

(2,368)
(1,403)
(4,159)
(1,672)

-
2,457
2,526

*Includes mainly legal, accounting, board of directors and investors relation expenses.

-87-

U.S. dollars in thousands, except share and per share data.

Major customers and geographic information The following is a summary of operations within geographic areas
based on customer locations:

Revenue distribution

2015

Year ended December 31,
2014

2013

Hong-Kong ................................................... $
Japan .............................................................
Europe ...........................................................
United States .................................................
China .............................................................
Taiwan ..........................................................
Other .............................................................

72,608 $
26,114
8,464
3,944
10,359
16,902
5,880

79,622 $
31,261
6,787
4,702
6,568
9,077
5,019

86,090
34,377
7,370
4,342
6,999
7,093
4,792

144,271 $

143,036 $

151,063

For a summary of revenues from major customers, please see Note 1. Sales to these customers were primarily
related to the Company’s Home reportable segment.

The following is a summary of long-lived assets within geographic areas based on the assets’ locations:

December 31,

2015

2014

Long-lived assets

Europe ................................................................................................ $
Israel ..................................................................................................
Other ..................................................................................................

259 $
2,989
516

3,764 $

188
2,264
391

2,843

-88-

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 Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of
our disclosure controls and procedures. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer
concluded that our disclosure controls and procedures were effective as of December 31, 2015.

There has been no change in our internal control over financial reporting that occurred during our most recent fiscal

quarter that has materially affected 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 in Rule 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 a process designed to provide reasonable assurance regarding the
reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that
controls may become inadequate 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, we conducted 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 management concluded that our internal control
over financial reporting was effective as of December 31, 2015.

The effectiveness of our internal control over financial reporting as of December 31, 2015 has been audited by Kost,
Forer, Gabbay & Kasierer, a member of Ernst & Young Global, an independent registered public accounting firm, who
audited and reported on the consolidated financial statements of the company for the year ended December 31, 2015, as stated
in their report which is presented in this Annual Report on Form 10-K under Item 8.

Item 9B.

OTHER INFORMATION.

None.

-89-

PART III

Certain information required by Part III of this Annual Report is omitted and will be incorporated by reference
herein from our definitive proxy statement pursuant to Regulation 14A in connection with the 2016 Annual Meeting of
Stockholders to be held on June 6, 2016.

Item 10.

DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE.

Information relating to our directors and executive officers will be presented under the captions “Proposal No. 1 –
Election of Directors” and “Executive Officers and Directors” in our definitive proxy statement. Such information is
incorporated herein by reference.

Item 11.

EXECUTIVE COMPENSATION.

Information relating to executive compensation will be presented under the caption “Executive Compensation” in

our definitive proxy statement. Such information is incorporated herein by reference.

Item 12.

SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS.

Information relating to the security ownership of our common stock by our management and other beneficial owners
will be presented under the caption “Security Ownership of Certain Beneficial Owners and Management” in our definitive
proxy statement. Such information is incorporated herein by reference.

Information relating to our equity compensation plans will be presented under the caption “Equity Compensation

Plan Information” in our definitive 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 independence information, will be presented under the caption “Certain Relationships and Related Transactions”
in our definitive proxy statement. Such information is incorporated herein by reference.

Item 14.

PRINCIPAL ACCOUNTANT FEES AND SERVICES.

Information relating to principal accountant fees and services will be presented under the caption “Principal

Accountant Fees and Services” in our definitive proxy statement. Such information is incorporated herein by reference.

-90-

Item 15.

EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.

PART IV

(a)

The following documents have been filed as a part of this Annual Report on Form 10-K.

Index to Financial Statements.

Description:

Report of Kost, Forer, Gabbay & Kasierer, a member of Ernst & Young Global

Consolidated Balance Sheets as of December 31, 2015 and 2014

Consolidated Statements of Operations for the years ended December 31, 2015, 2014 and 2013

Consolidated Statements of Changes in Stockholders’ Equity for the years ended December 31, 2015, 2014 and
2013

Consolidated Statements of Cash Flows for the years ended December 31, 2015, 2014 and 2013

Notes to Consolidated Financial Statements

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 Accounts

Schedule II

All other schedules are omitted because they are not applicable or the required information is included in the
attached consolidated financial statements or the related notes for the year ended December 31, 2015.

-91-

List of Exhibits:

Exhibit
Number
3.1

Description
Second Restated Certificate of Incorporation (filed as Exhibit 3.1 to the Registrant’s Current Report on Form
8-K filed on June 12, 2015, and incorporated herein by reference).

3.2

Amended and Restated Bylaws, effective as of June 22, 2015 (filed as Exhibit 3.1 to the Registrant’s Current
Report on Form 8-K filed on June 26, 2015, and incorporated herein by reference).

10.1

10.2

10.3

10.4

10.5

10.6

10.7

10.8

10.9

10.10

10.11

10.12

Amended and Restated 1991 Employee and Consultant Stock Plan (filed as Exhibit 10.1 to the Registrant’s
Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by reference).
††

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 year ended December 31, 2011, and incorporated herein by reference). ††

Form of Option Agreement for Israeli Directors under the Amended and Restated 1993 Director Stock Option
Plan (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004, and incorporated herein by reference). ††

Form of Option Agreement for Non-Israeli Directors under the Amended and Restated 1993 Director Stock
Option Plan (filed as Exhibit 10.4 to the Registrant’s Quarterly Report on Form 10-Q for the quarter ended
September 30, 2004, and incorporated herein by reference). ††

Amended and Restated 1993 Employee Stock Purchase Plan and form of subscription agreement thereunder
(filed as Exhibit 10.2 to the Registrant’s Quarterly Report on Form 10-Q filed on August 10, 2015 and
incorporated herein by reference). ††

Form of Indemnification Agreement for directors and executive officers (filed as Exhibit 10.1 to the
Registrant’s Registration Statement on Form S-1, file no. 33-73482, as declared effective on February 11,
1994, and incorporated herein by reference).

Lease, dated November 28, 1996, by and between DSP Semiconductors Ltd. and Gav-Yam Lands Company
Ltd., relating to the property located on Shenkar Street, Herzliya Pituach, Israel (filed as Exhibit 10.1 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended September 30, 1997, and incorporated
herein by reference).

Lease, dated September 13, 1998, between DSP Group, Ltd. and Bayside Land Corporation Ltd., relating to
the property located on Shenkar Street, Herzliya 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).

Amended and Restated 1998 Non-Officer Employee Stock Option Plan (filed as Exhibit 10.19 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, and incorporated herein by
reference). ††

Appendix Agreement, dated May 5, 1999, by and between DSP Group, Ltd. and Bayside Land Corporation
Ltd., relating to the property located on Shenkar Street, Herzliya Pituach, Israel (filed as Exhibit 10.25 to the
Registrant’s Annual Report on Form 10-K for the year ended December 31, 1999, and incorporated herein by
reference).

Non-Exclusive Distribution Agreement between the Registrant and Tomen Electronics Corporation as
amended on October 12, 2000 (filed as Exhibit 10.28 to the Registrant’s Annual Report on Form 10-K for the
year ended December 31, 2000, and incorporated herein by reference).

Amended and Restated 2001 Stock Incentive Plan and form of option agreement thereunder (filed as
Exhibit 10.31 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, and
incorporated herein by reference). ††

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Exhibit
Number
10.13

10.14

10.15

10.16

10.17

10.18

10.19

10.20

10.21

10.22

10.23

10.24

10.25

Description
Amended and Restated 2003 Israeli Share Incentive Plan (filed as Exhibit 10.1 to the Registrant’s Current
Report on Form 8-K filed on May 4, 2011, and incorporated herein by reference) and form of option agreement
thereunder (filed as Exhibit 10.32 to the Registrant’s Annual Report on Form 10-K for the year ended
December 31, 2003, and incorporated herein by reference). ††

Agreement, dated March 5, 2003, between DSP Group, Ltd. and The Gav-Yam Real Estate Company Ltd.,
relating to the property located on Shenkar Street, Herzliya Pituach, Israel (filed as Exhibit 10.33 to the
Registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2003, and incorporated herein
by reference).

Form of Option Agreement under DSP Group, Inc.’s 2001 Stock Incentive Plan for Eliyahu Ayalon (filed as
Exhibit 10.41 to Registrant’s Annual Report on Form 10-K for the year ended December 31, 2003, and
incorporated herein by reference). ††

Manufacturing Capacity Agreement, effective as of July 1, 2004, by and among DSP Group, Inc., DSP Group,
Ltd, and Taiwan Semiconductor Manufacturing Company Ltd (filed as Exhibit 10.4 to the Registrant’s
Quarterly Report on Form 10-Q for the quarter ended September 30, 2004, and incorporated herein by
reference) (confidential treatment has been granted for portions of this exhibit).

Form of Non-Qualified Stock Option Agreement Providing for the Grant of Options as a Material Inducement
of Employment (filed as Exhibit 4.1 to Registrant’s Registration Statement on Form S-8 filed on July 21, 2005,
and incorporated herein by reference). ††

Form of Stock Appreciation Right Agreement for Executive Officers pursuant to the Amended and Restated
2003 Israeli Share Incentive Plan (filed as Exhibit 99.2 to Registrant’s Current Report on 8-K filed on April 11,
2006, and incorporated herein by reference). ††

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 by reference) (confidential treatment has been
granted for portions of this exhibit).

Intellectual Property Library Services and R&D Agreement, dated September 4, 2007, by and among DSP
Group, Inc., DSP Group Ltd. and NXP, B.V. (filed as Exhibit 10.41 to Registrant’s Quarterly Report on 10-Q
for the quarter ended September 30, 2007, and incorporated herein by reference) (confidential treatment has
been granted for portions of this exhibit).

Employment Agreement by and between DSP Group, Ltd. and Ofer Elyakim, effective June 25, 2009 (filed
as Exhibit 10.32 to Registrant’s Annual Report on 10-K for the year ended December 31, 2010, and
incorporated herein by reference). ††

Amendment to Employment Agreement by and between DSP Group, Ltd. and Ofer Elyakim, effective
January 31, 2011 (filed as Exhibit 10.33 to Registrant’s Annual Report on 10-K for the year ended
December 31, 2010, and incorporated herein by reference). ††

Amendment to Employment Agreement by and between DSP Group, Ltd. and Ofer Elyakim, as amended,
effective as of May 16, 2011(filed as Exhibit 10.2 to Registrant’s Current Report on 8-K filed on May 20,
2011, and incorporated herein by reference). ††

Employment Agreement by and between DSP Group, Ltd. and Dror Levy, effective June 9, 2002 (filed as
Exhibit 10.34 to Registrant’s Annual Report on 10-K for the year ended December 31, 2010, and incorporated
herein by reference). ††

Amendment to Employment Agreement by and between DSP Group, Ltd. and Dror Levy, effective January 31,
2011 (filed as Exhibit 10.35
the year ended
December 31, 2010, and incorporated herein by reference). ††

to Registrant’s Annual Report on 10-K for

-93-

Exhibit
Number
10.26

10.27

10.28

10.29

Description
Amendment to Employment Agreement by and between DSP Group, Ltd. and Dror Levy, as amended,
effective as of May 16, 2011 (filed as Exhibit 10.3 to Registrant’s Current Report on 8-K filed on May 20,
2011, and incorporated herein by reference). ††

Employment Agreement by and between DSP Group, Ltd. and David Dahan, effective February 1, 2012 (filed
as Exhibit 10.41 to the Registrant’s Annual Report on Form 10-K for the year ended December 31, 2011, and
incorporated herein by reference). ††

Amendment to Employment Agreement by and among DSP Group, Inc., DSP Group, Ltd. and Ofer Elyakim,
as amended, effective as of November 5, 2012(filed as Exhibit 10.1 to Registrant’s Current Report on 8-K
filed on November 9, 2012, and incorporated herein by reference). ††

Amendment to Employment Agreement by and among DSP Group, Inc., DSP Group, Ltd. and Dror Levy, as
amended, effective as of November 5, 2012 (filed as Exhibit 10.2 to Registrant’s Current Report on 8-K filed
on November 9, 2012, and incorporated herein by reference). ††

10.30

DSP Group, Inc. Amended and Restated 2012 Stock Incentive Plan. (Filed as Exhibit 10.1 to Registrant's
Current Report on Form 8-K filed on May 26, 2015, and incorporated herein by reference) ††

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-K filed 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 to Registrant’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 on 8-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

10.38

10.39

10.40

Form of Restricted Stock Unit Agreement for Members of the Board of Directors under the 2012 Stock
Incentive Plan. (filed as Exhibit 10.41 to Registrant's Annual Report on Form 10-K filed on March 18, 2014
and incorporated herein by reference). ††

Form of Restricted Stock Unit Agreement for Members of the Board of Directors Who Are Israeli Residents
under the 2012 Stock Incentive Plan. (filed as Exhibit 10.42 to Registrant's Annual Report on Form 10-K filed
on March 18, 2014 and incorporated herein by reference). ††

Amended and Restated Director Equity Sub-Plan under the 2012 Equity Incentive Plan. (filed as Exhibit 10.43
to Registrant's Annual Report on Form 10-K filed on March 18, 2014 and incorporated herein by reference).
††

2014 Performance-Based Bonus Plan applicable for the Chief Executive Officer, Chief Financial Officer and
Chief Operating Officer of DSP Group, Inc. the Company (terms set forth in the Registrant’s Current Report
on Form 8-K filed on April 4, 2014, and incorporated herein by reference).

21.1

Subsidiaries of DSP Group, Inc.*

-94-

Exhibit
Number
23.1

Description
Consent of Kost Forer Gabbay & Kasierer, a member of Ernst & Young Global, Independent Registered Public
Accounting Firm.*

24.1

Power of Attorney (See signature page of this Annual Report on Form 10-K).*

31.1

Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer.*

31.2

Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer.*

32.1

Section 1350 Certification of Chief Executive Officer.*

32.2

Section 1350 Certification of Chief Financial Officer.*

XBRL Instance Document

101.INS
101.SCH XBRL Taxonomy Extension Schema Document
101.CAL XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF XBRL Taxonomy Extension Definition Linkbase Document
101.LAB XBRL Taxonomy Extension Labels Linkbase Document
101.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.

-95-

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 be signed on its behalf by the undersigned, thereunto duly authorized.

SIGNATURES

DSP GROUP, INC.

By: /s/ Ofer Elyakim

Ofer Elyakim
Chief Executive Officer
(Principal Executive Officer)

Power of Attorney

KNOW ALL MEN BY THESE PRESENTS, that each person whose signature appears below constitutes and
appoints Ofer Elyakim and Dror Levy 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, place and 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 and other documents in
connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them, 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 all intents 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, or their 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 the Registrant and in the capacities and on the dates indicated.

Signature
/s/ Patrick Tanguy
Patrick Tanguy

Chairman of the Board

Title

Date

March 15, 2016

/s/ Ofer Elyakim
Ofer Elyakim

Chief Executive Officer (Principal Executive Officer)
and Director

March 15, 2016

/s/ Dror Levy
Dror Levy

Chief Financial Officer and Secretary
(Principal Financial Officer and Principal Accounting Officer)

March 15, 2016

/s/ Thomas A. Lacey
Thomas A. Lacey

/s/ Reuven Regev
Reuven Regev

/s/ Norman J. Rice III
Norman J. Rice III

/s/ Gabi Seligsohn
Gabi Seligsohn

/s/ Yair Seroussi
Yair Seroussi

/s/ Norman Taffe
Norman Taffe

/s/ Kenneth H. Traub
Kenneth H. Traub

Director

-96-

March 15, 2016

Schedule II

DSP GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(in thousands)

Description

Year ended December 31, 2013:
Allowance for doubtful accounts
Sales returns reserve .......................................................................
Year ended December 31, 2014:
Allowance for doubtful accounts
Sales returns reserve .......................................................................
Year ended December 31, 2015:
Allowance for doubtful accounts
Sales returns reserve .......................................................................

Balance at
Beginning of
Period

Charged to
(deducted
from) Costs
and Expenses

Balance at
End
of Period

-97-

Corporate Directory

Management

Ofer Elyakim
Chief Executive Officer

Dror Levy
Corporate Vice President of Finance and Chief Financial Officer

Lior Blanka
Corporate Vice President and Chief Technology Officer

Alex Sin
Corporate Vice President of Sales

Ran Klier
Corporate Vice President of Sales, Marketing and BizDev Europe and Americas

Tali Chen
Corporate Vice President, Corporate Development

Doron Koren
Corporate Vice President and Platform Division Manager

Dima Friedman
Corporate Vice President of Operations

Dotan Sokolov
Corporate Vice President and IC Division Manager

Jan Abelev
Corporate Vice President of Product Marketing

Avi Keren
Corporate Vice President and HDMobile Division Manager

Yosi Brosh
Corporate Vice President of Sales & Marketing Korea, Taiwan

Directors

Patrick Tanguy
Chairman of the Board
Managing Director, Head of Operational Support, Wendel

Ofer Elyakim
Chief Executive Officer

Tom Lacey
Chief Executive Officer and Board Member, Tessera

Dr. Reuven Regev
Chairman & Chief Executive Officer, Topscan Ltd.

Norman J. Rice III
Executive Vice President of Global Marketing,
Corporate Development, and the Stadium & Venue Business Unit,
Extreme Networks

Gabi Seligsohn
CEO, Kornit Digital Ltd.

Yair Seroussi
Chairman of the Board of Directors, Bank Hapoalim B.M

Norm P. Taffe
VP, GM Power Plant Products and Solutions, SunPower Corporation

Kenneth H. Traub
Managing Partner, Raging Capital Management

Independent Auditors
Kost, Forer Gabbay & Kassierer
A member of Ernst & Young Global, Tel Aviv, Israel

General Legal Counsel
Morrison & Foerster LLP, San-Francisco, California

Registrar and Transfer Agent
American Stock Transfer and Trust Company
New York, NY

Annual Meeting
The annual meeting of stockholders will be held on
June 6, 2016 at 8:30am local time
New York Marriott East Side
525 Lexington Avenue
New York, NY 10017 |
Tel: +1 212.715 4000
Fax: +1 212.980 6175
www.nymarriotteastside.com

About DSP Group
DSP Group®, Inc. (NASDAQ: DSPG) is a leading global provider of wireless chipset solutions
for converged communications. Delivering semiconductor system solutions with software and
hardware reference designs, DSP Group enables OEMs/ODMs, consumer electronics (CE)
manufacturers and service providers to cost-effectively develop new revenue-generating products
with fast time to market.At the forefront of semiconductor innovation and operational excellence
for over two decades, DSP Group provides a broad portfolio of wireless chipsets integrating
DECT/CAT-iq, ULE, Wi-Fi, PSTN, HDClear™, video and VoIP technologies.DSP Group
enables converged voice, audio, video and data connectivity across diverse mobile, consumer and
enterprise products – from mobile devices, connected multimedia screens, and home automation
& security to 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 converged communications at home, office and on the go.

For more information, visit www.dspg.com.

DSP Group, Inc.
161 S San Antonio Rd, Suite 10, Los Altos, CA 94022, USA
Tel: +1(408) 986-4300
Fax: +1(408) 986-4323
www.dspg.com

Copyright © 2016, DSP Group, Inc. All rights reserved. DSP Group, Inc. and DSP Group Logo
are trademarks of DSP Group, Inc. Other third party trademarks are property of their respective
owners. All product information, dates and figures are not warranted as accurate or complete, and
may be revised based on further information without notice.

For more information on our products and services, visit our website at: www.dspg.com or
contact us at: ir@dspg.com