DSP GROUP INC /DE/ - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
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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, 1997

COMMISSION FILE NUMBER 0-23006
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DSP GROUP, INC.

(Exact name of registrant as specified in its charter)

DELAWARE 94-2683643
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation and organization)

3120 SCOTT BOULEVARD, SANTA CLARA, CA 95054

(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 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 /X/ 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. [ ]

The aggregate market value of the voting stock held by non-affiliates of the
Registrant, based on the closing price of the Common Stock on March 2, 1998, as
reported on the Nasdaq National Market, was approximately $231,228,988. 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 2, 1998 the Registrant had outstanding 10,086,095 shares of
Common Stock.

DOCUMENTS INCORPORATED BY REFERENCE

1. Portions of the Registrant's Annual Report to Stockholders for the fiscal
year ended December 31, 1997 are incorporated by reference into Part II of
this Form 10-K Report. With the exception of those portions which are
incorporated by reference, the Registrant's 1997 Annual Report is not
deemed filed as part of this Report.

2. Portions of the Registrant's Proxy Statement for the Annual Meeting of
Stockholders to be held on May 19, 1998 are incorporated by reference into
Part III of this Form 10-K Report.

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INDEX
DSP GROUP, INC.

PAGE
----

PART I

Item 1. BUSINESS.................................................................. 3

Item 2. PROPERTIES................................................................ 19

Item 3. LEGAL PROCEEDINGS......................................................... 19

Item 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS....................... 19

PART II

Item 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS..... 20

Item 6. SELECTED FINANCIAL DATA................................................... 20

Item 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONAL AND RESULTS
OF OPERATIONS............................................................. 20

Item 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA............................... 20

Item 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURE................................................................ 20

PART III

Item 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT........................ 21

Item 11. EXECUTIVE COMPENSATION.................................................... 21

Item 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT............ 21

Item 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS............................ 21

PART IV

Item 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.......... 22

SIGNATURES................................................................ 27

PART I

ITEM 1. BUSINESS.

FOR A DISCUSSION OF VARIOUS RISKS AND UNCERTAINTIES AFFECTING THE COMPANY'S
FUTURE OPERATIONS SEE "FACTORS AFFECTING FUTURE OPERATING RESULTS" BEGINNING ON
PAGE 16 BELOW. THIS ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31,
1997 CONTAINS TRADEMARKS OF THE COMPANY.

DSP Group develops and markets digital signal processing integrated circuits
and software for use in digital speech products targeted at the consumer
telephone and computer telephony markets. Digital speech technology provides
several advantages over analog speech technology, including higher attainable
levels of compression, greater ability to process and manipulate data, and
faster development of products through use of a programmable digital signal
processor ("DSP") rather than dedicated analog hardware. As a result, digital
speech technology is incorporated today in the digital telephone answering
device ("TAD") market and enables the implementation of many new applications in
computer telephony such as voice mail messaging, digital simultaneous voice and
data ("DSVD") transmission and video conferencing.

The Company has developed digital signal processing and digital speech
technologies, including proprietary algorithms, software, system designs and
VLSI circuit designs that have enabled the introduction of three synergistic
product families: speech and telephony digital signal processing integrated
circuits, proprietary architectures for digital signal processors ("DSP core
designs") and proprietary TrueSpeech-Registered Trademark- digital speech
compression algorithms.

SPEECH AND TELEPHONY PROCESSORS

The Company has developed two series of speech and telephony processors for
use in the consumer telephone and computer telephony markets. Both series are
based on the Company's DSP core designs, incorporate several of its digital
telephony signal processing algorithms and provide TrueSpeech compression
capabilities. In 1989, the Company introduced the first cost effective speech
processor for use in digital TADs and today the Company is the leading
independent supplier of DSPs to digital TAD suppliers. The Company's TAD speech
processors are incorporated in the products of leading digital TAD suppliers
such as Alcatel, British Telecom, L.G. Electronics, Panasonic, Philips, Sagem,
Samsung, Sanyo, Siemens, Sony and Uniden.

DSP Group has also developed a series of speech co-processors for use in
conjunction with microprocessors in personal computers and in many standalone
applications to enhance the microprocessors' speech and telephony capabilities.
The Company's speech co-processors utilize many of the same technologies used in
its TAD speech processors. These speech co-processors provide a variety of
real-time speech applications for personal computers, standalone videophones,
portable dictation devices and Internet telephony applications, such as voice
mail messaging, DSVD transmission and video conferencing.

DSP CORE DESIGNS

DSP Group has also developed proprietary, low power DSP core designs--the
PineDSPCore-Registered Trademark- and OakDSPCore-Registered Trademark---which
represent low cost solutions for current and emerging digital signal processing
applications. The Company's DSP core designs are incorporated in its own family
of speech and telephony processors and are also licensed to more than
twenty-five entities, including Adaptec, Fujitsu, Kawaski, LSI Logic, NEC,
Samsung, Siemens, Temic and VLSI Technology. These licensees are able to use the
Company's DSP core designs to develop their own DSPs for various products,
including cellular telephones, modems, audio boards and cordless telephones. In
the fourth quarter of 1995, the first shipment of products utilizing the
Company's PineDSPCore-Registered Trademark- technology occurred. Royalties from
two DSP Core licensees have started to become meaningful in 1997.

3

DSP Group is in the process of developing a new generation of DSP core--the
TeakDSPCore-TM-. In order to enhance versatility, efficiency and ease of use,
the TeakDSPCore is offered in two complementary versions: the TeakLite-TM- and
the Teak-TM-. Each version is designed to provide effective solutions for
different segments of the DSP market. The Company's developers have designed the
TeakLite to improve the performance of the existing
OakDSPCore-Registered Trademark- in three areas: lower power consumption, higher
frequency and greater portability. The TeakLite is now available for licensing.

The Teak will possess the TeakLite features as well as improved DSP
architectural features such as dual arithmetic units, larger addressing space
and support for DSP algorithm. The Teak will be available in the second half of
1998.

TRUESPEECH

The Company has developed TrueSpeech, a family of proprietary speech
compression algorithms which it incorporates in its TAD speech processors and
personal computer speech co-processors and also licenses to various companies in
the computer telephony and personal computer industries. The Company believes
that TrueSpeech offers several advantages over other currently available speech
compression technologies, including a combination of high compression ratios,
high quality speech playback and cost effectiveness. The proliferation of speech
applications in the computer telephony, personal computer and consumer markets
requires standardized digital speech compression technologies. The Company seeks
to establish industry standards for its target markets based on TrueSpeech
algorithms. However, the establishment of industry standards depends upon the
acts of third parties, which are not within the control of the Company. The
development of industry standards utilizing TrueSpeech algorithms would create
an opportunity for the Company to develop and market speech co-processors that
provide complete TrueSpeech solutions and enhance the performance and
functionality of products incorporating these speech co-processors. For example,
in the personal computer market, Microsoft has incorporated a TrueSpeech
algorithm in Windows 95. In addition, in the video conferencing market, the
International Telecommunications Union ("ITU") in February 1995 established
G.723.1, which is predominantly composed of a TrueSpeech algorithm, as the
standard speech compression technology for use in video conferencing over public
telephone lines.

PRODUCT FAMILIES, TECHNOLOGY AND CUSTOMERS

The Company has incorporated its proprietary algorithms and technologies in
three product families--speech and telephony processors, DSP core designs and
TrueSpeech software--for use in the consumer telephone and computer telephony
markets.

SPEECH AND TELEPHONY PROCESSORS

The Company has developed and introduced two series of DSPs--speech
processors for digital TADs, telephony applications, modems, disk controllers
and other communication applications, which were first introduced in 1989 for
digital TADs, and personal computer speech co-processors, which were first
introduced in late 1994, to maximize the benefits of TrueSpeech compression in
personal computer applications. Both series are based upon the Company's cost
effective, low power DSP core designs and incorporate its TrueSpeech algorithms.

4

The following chart describes some of the Company's other speech and
telephony technologies that may be incorporated in various combinations in its
products.

TECHNOLOGY DESCRIPTION

Triple Rate Coder-TM- Instructs the system to decide automatically between
better voice quality and longer recording time.
G.723.1 Provides thespeech compression algorithm for video
conferencing over POTs lines (H.324 video
conferencing standard)
Caller ID and Call Waiting Caller Identifies the telephone number being used by the
ID calling party, when the line is not engaged and when
the receiving party is already engaged on another
call
Call Progress Tone Detection Detects standard telephony signals during the
progress of the telephone call
DTMF Signaling Detects and generates DTMF signals ("touch tones")
that comply with telephone requirements
Full Duplex Speakerphone Allows simultaneous two-way (full-duplex), hands-free
operation of the telephone and incorporates
acoustical echo cancellation for suppression of room
echoes and electrical echo cancellation for
elimination of electrical echoes
Speech Prompts Provides time-date stamp capabilities and allows the
user to access operating instructions
Variable Speed Playback Permits playback of distortion-free, natural sounding
(FlexiSpeech-Registered Trademark-) speech at variable speeds
Voice Operated Switch ("VOX") Detects human speech and stops recording during
(Smart-Vox-Registered Trademark-) periods of silence, thereby conserving available
memory
Alpha Least Cost Routing Executes telephone calls automatically via a
("LCR")/Super LCR telephone provider with the lowest available rates.
Voice Recognition Allows voice command operation of functions

These technologies enable the Company's speech and telephony processors to
provide a variety of speech capabilities for digital TAD, telephony and computer
telephony products.

TAD SPEECH PROCESSORS. DSP Group's TAD speech processors are currently
incorporated in over 90 models of digital TADs from more than 40 different
companies. These models include standalone digital TADs, integrated digital
TADs, facsimile machines with integrated digital TADs, standalone speaker phones
with integrated digital TADs, hand-held devices and digital cordless telephones
with integrated digital TADs. To date, the Company has shipped approximately 22
million speech processors to digital TAD suppliers, including approximately 9.0
million TAD speech processors in 1997. TAD speech processor product sales
accounted for 79% of the Company's total revenues in 1997.

The Company's TAD speech processors use TrueSpeech to provide high quality
speech recording and playback. All of the Company's TAD speech processors are
based on the Company's PineDSPCore-Registered Trademark- and incorporate certain
of the Company's technologies, including VOX, caller ID, call waiting, DTMF
signaling and call progress tone detection. Some of the Company's TAD speech
processors feature additional technologies, including speech prompt
capabilities, variable speed playback and full duplex speakerphone.

5

The following table sets forth certain characteristics of the primary TAD
speech processors currently offered by the Company:

DSP GROUP'S TAD SPEECH PROCESSORS

D6305 D6365 D6455 D6386 D6471 D6301
--------- --------- --------- --------- --------- ---------

Process Geometry (microns)........................... 0.5 0.6 0.8 0.8 0.5 0.5
Minutes Record, 4 Mbit Memory........................ 15-17 15-17 25-27 15-17 25-27 15
Memory Type.......................................... ARAM ARAM ARAM ARAM Flash Flash
Advanced Features:
Speech Prompts..................................... Yes Yes Yes Yes Yes Yes
Variable Speed Playback............................ -- Yes -- Yes Yes Yes
Full Duplex Speakerphone........................... -- Yes Yes Yes Yes --
Caller ID and Call Waiting Caller ID............... -- -- -- -- Yes Yes
Voice Recognition.................................. -- -- -- Yes -- --
Other Required Components:
Microcontroller.................................... Yes Yes Yes Yes Yes Yes
Codec.............................................. Yes Yes Yes Yes Yes Yes
EPROM.............................................. Yes Yes Yes Yes -- --
Battery............................................ Yes Yes Yes Yes -- --

DSP Group's D6301 and D6471 interface directly with a new flash memory chip
introduced by Samsung and facilitate lower overall system costs for digital
TADs. The new Samsung flash memory chip is designed for speech recording and is
less expensive than other currently available flash memories. The D6301 and
D6471 eliminate the need for audio-grade random access memories ("ARAMs"), which
from time to time have constrained the growth of the digital TAD market due to
supply shortages. By allowing substitution of a flash memory for an ARAM, the
D6301 and D6471 also eliminate the need for battery circuitry to maintain the
data in the ARAM during power failures and an EPROM to store pre-recorded voice
prompts and time-date stamps.

In 1997, the Company developed an advanced compression technology called
Triple Rate Coder-TM-. The new technology provides for tradeoffs between quality
and recording time. The Triple Rate Coder-TM- provides three compression rates
as follows:

- Long recording time--22 to 25 minutes recording time (on a four megabit
flash memory).

- Quality recording--the technology provides approximately 10 recording
minutes (on a four megabit flash memory). The speech quality equals that
of a line telephone conversation. This technology overcomes one of the
disadvantages of digital speech, i.e., the inferior clarity of digitized
speech.

- Tradeoff between long recording time and high quality recording is enabled
through another compression rate. The technology allows approximately 15
recording minutes with a quality that matches G.723.1 standard (Part of
H.324, video conferencing standard).

ADVANCED VOICE-ACTIVATED DIGITAL TAD. In 1997, the Company announced that
it had attained the capability of voice recognition, a technology that the
Company believes may become well sought after for speech and telephony
processors. The Company believes that this new voice recognition capability,
combined with the Company's TrueSpeech-Registered Trademark- low bit rate voice
compression and full duplex SpeakerPhone-Registered Trademark-, provides the
Company with an advantage over competitors in the field. Also contained in the
voice recognition processor are: caller ID, caller ID on call waiting, and other
key telephony algorithms. This voice recognition processor provides for hands
free operation of an answering machine either locally or from a remote location.

6

VOICE ACTIVATED CAR KIT. The Company has expanded its products line to
include a hands free digital speech processor, which the Company believes will
be highly in demand in the cellular telephone and automotive markets. The
product line provides a unique combination of functions such as voice
recognition, echo suppression, noise reduction, and True
Speech-Registered Trademark- voice compression. The combination of voice
recognition and full duplex speaker phone, enables free hand operation of a car
phone for example, thus contributing to the driver's safety. The voice
recognition processor with its unique integration of full duplex Speaker
Phone-Registered Trademark- makes it possible for the Company to enter the
market of car phones and hand held devices.

The following is a list of TAD manufacturers and resellers whose products
incorporate the Company's TAD speech processors:

TAD MANUFACTURERS AND RESELLERS

TAD MANUFACTURERS TAD RESELLERS
- -------------------------------------------- ---------------------

Alcatel Maxon Bell South
Ascom National Telecom Bosch Telecom
CCT Telecom Panasonic British Telecom
Daewoo Philips France Telecom
D&B Electronics Sagem GE
Giant Samsung German Telecom
Hagenuk Sanyo Loewe-Binatone
Hanchang Siemens Radio Shack
Hanwha Telecom Smoothline Southwestern Bell
HPF Ascom Sony Swiss Telecom
Hyundai Thomson
I.N.T. Corp. Tiptel
Kinpo Uniden
L.G. Electronics Yupiteru
Matra

PERSONAL COMPUTER SPEECH CO-PROCESSORS. The Company has developed its
personal computer speech co-processors as complementary application-specific
DSPs to enhance the performance and functionality of personal computer, computer
telephony and consumer products using TrueSpeech. While the current generation
of microprocessors contained in personal computers can compress and record
speech in real-time, the microprocessors are not specifically designed to run
digital speech processing algorithms and, therefore, require a substantial
amount of the personal computer's computing power to do so. As a result, the use
of speech co-processors that incorporate TrueSpeech in personal computers
provides a more efficient utilization of the personal computer's computing
power. The Company believes personal computer users will demand real-time speech
compression capability and manufacturers will begin to provide real-time speech
compression by including application-specific DSPs on personal computer products
such as modems, audio boards, PCMCIA cards and personal computer based
videophone and video conferencing products.

To date, the Company has announced and begun shipments of three speech
co-processors--the CT8005, CT8015 and CT8020--for use in personal computers,
voice-over-data modems, video telephones and video conferencing equipment.
These speech co-processors are based on the Company's DSP core designs,
incorporate TrueSpeech and many of its other proprietary algorithms and
technologies, and are fully controlled by the personal computer's host
processor. All of the Company's speech co-processors contain the TrueSpeech
algorithm incorporated in Windows 95. The CT8005 provides telephone and
speech recording and playback functions in personal computers and in digital
voice recorders, while the CT8015 is designed as a low-cost solution for use
in voice-over-data modems, in wireless voice and in Internet telephony
products. The CT8020 is designed for use in video telephones and video
conferencing equipment and also implements all the specifications of the
G.723.1 speech compression standard for video telephony. The CT8020 also is
being utilized in many Internet-based telephone applications.

7

The following table sets forth the features of the personal computer speech
co-processors currently offered by the Company:

DSP GROUP'S PERSONAL COMPUTER SPEECH CO-PROCESSORS

CT8005 CT8015 CT8020
--------------- --------------- ---------------

DSP Core Design............................... PineDSPCore PineDSPCore OakDSPCore
Process Geometry (microns).................... 0.8 0.8 0.6
TrueSpeech Algorithm Data Rate, Kilobits Per 8.5, 6.3, 5.3,
Second...................................... 8.5 8.5 4.8 & 4.1
Features:
Voice Mail Messaging........................ Yes -- Yes
Telephone Answering......................... Yes -- Yes
Full Duplex Speakerphone.................... Yes Yes Yes
Variable Speed Message Playback............. Yes -- --
Full Duplex DSVD............................ -- Yes Yes
Video Conferencing.......................... -- -- Yes
Internet Telephony.......................... Yes (HDX) Yes Yes

FUTURE SPEECH AND TELEPHONY PROCESSORS. The Company is developing its next
generation of TAD speech processors based on 0.35 micron technology to reduce
its manufacturing costs and increase its competitiveness in the price sensitive
TAD business. In addition, the Company intends to continue to enhance its
existing speech and telephony processors through the addition of advanced
capabilities and to develop new speech and telephony processors for emerging
applications. For example, the Company intends to enhance its TAD speech
processors through the addition of capabilities such as improved speech quality,
full duplex speakerphone, advanced voice recognition algorithm, integrated micro
processor, and integrated analog functions.

The Company believes that emerging applications for its personal computer
speech co-processors may include other personal computer products such as laptop
computers, personal digital assistants ("PDAs"), personal communications systems
and other mobile computing devices. In addition, DSP Group believes that its
digital signal processing and digital speech expertise will also be applicable
to emerging digital speech applications for consumer electronics. For example,
one manufacturer has introduced and is shipping a personal digital voice
recorder with one hour of recording time based on a DSP Group TAD speech
processor. This recorder utilizes the Company's variable speed playback
algorithm and provides the capability of editing a stored speech file. The
recorder also provides memory storage in a detachable module with a PCMCIA
connector, allowing transfer of the recorded speech file to a computer with a
PCMCIA interface for storage, playback or transmittal over a modem. The Company
intends to develop additional speech co-processors for the personal digital
voice recorder market, and intends to pursue the use of its technologies for
other speech applications in the computer telephony, personal consumer and
consumer electronics market.

DSP CORE DESIGNS

The Company's DSP core designs--PineDSPCore-Registered Trademark- and
OakDSPCore-Registered Trademark---are low power, low voltage and low cost
digital signal processing integrated circuit architectures with associated
advanced software development tools. The Company's DSP cores and associated
instruction sets are designed for general purpose applications including
speech processing, speakerphone, telephony algorithms and cellular, which
enables efficient processing for digital speech applications. The DSP core
designs operate at both 3 volts and 5 volts and incorporate power management
features for low power consumption. As digital signal processing and software
migrate into high volume communication and computing products, the Company
believes there will be a significant demand for low cost, low power DSP
platforms. The efficient processing, flexible design and scaleable memories
of the Company's DSP core designs allow the development of smaller and lower
cost DSP solutions and shorten time to market for new products and product
enhancements.

8

The Company's DSP core designs are small, highly efficient, 16-bit, general
purpose DSPs with adjacent modular RAM and ROM and general I/O blocks for
flexible layout and design. Universal design rules are used in the DSP core
designs to allow easy implementation across multiple semiconductor process
technologies. The DSP cores, initially implemented in 1.0 micron CMOS
technology, were converted into 0.8 micron CMOS technology and then were further
redesigned for 0.6 micron CMOS technology to reduce cost and increase
performance. The Company is currently in the process of converting the DSP cores
into 0.35 micron CMOS technology. These successive cost reductions in
manufacturing are aimed at reducing the product cost and increasing product
performance.

The PineDSPCore-Registered Trademark-, first introduced in 1992, was
developed by the Company's VLSI designers and its software developers to
efficiently process speech and telephony algorithms. During 1994, the Company
announced its OakDSPCore-Registered Trademark-, an enhanced version of the
PineDSPCore-Registered Trademark- that achieves a higher processing speed
through improved architecture and is specifically suited for use in personal
communication products and higher level processing applications, such as digital
cellular telephones, high bit rate modems, DSVD modems and video telephone
conferencing applications. The OakDSPCore-Registered Trademark- offers
significantly improved processing features compared to the
PineDSPCore-Registered Trademark-, including a higher processing speed of 80
MIPS and an advanced, more efficient instruction set. Algorithms implemented on
the PineDSPCore-Registered Trademark- instruction set may also be run on the
OakDSPCore-Registered Trademark-. The Company recently has started developing
the next generation DSP core--the TeakDSPCore-TM-. This core will contain two
arithmetic units, which will both function in parallel. This will improve the
performance of a notable portion of the application. The Company is targeting
this DSP core to the new cellular application standards (e.g., half rate GSM and
wide band CDMA) and for advanced wire line modems (e.g., 56kbit/ second) as well
as for multimedia applications (e.g., AC3, MPEG2).

The following table shows a comparison of the Company's DSP core designs:

DSP GROUP'S DSP CORE DESIGNS

PINEDSPCORE OAKDSPCORE
------------ ------------

Word Length...................................................... 16 bit 16 bit
Process Geometry (microns)....................................... 0.5 0.35
Performance...................................................... 40 MIPS 65 MIPS
Voltage.......................................................... 5.0 V 3.3V
Advanced Instruction Set......................................... -- Yes

The Company incorporates its DSP core designs in its speech and telephony
processors and also licenses them to original equipment manufacturers ("OEMs").
The Company's licensing program, introduced in 1992, enables OEMs to incorporate
the Company's DSP core designs in the OEMs' products. Licensing revenues are
generally recognized on shipment by the Company provided that no significant
vendor or post contract support obligations remain outstanding and that
collection of the resulting receivable is deemed probable. In addition, most
licenses require the licensee to pay the Company ongoing per-unit royalties
based on the unit shipments of the licensee's products and a monthly support
fee. The timing and amount of royalties from licensing of the DSP core designs
will depend on the timing of each licensee's product development and the degree
of market acceptance of such licensee's product, both of which are not within
the Company's control. Royalties from two DSP Core licensees have started to
become meaningful in 1997.

9

The following is a partial list of companies who have licensed the Company's
DSP core designs and representative applications for which they are able to use
the DSP core designs:

DSP CORE DESIGN LICENSES

LICENSEES REPRESENTATIVE APPLICATIONS
- ------------------------------------------ --------------------------------------------------

Adaptec................................... Disk Drives
Asahi Kasei Microsystems.................. Cordless Telephones
Atmel..................................... ASIC, Communications
DSP Communications, Inc................... Digital Cellular Telephones
Fujitsu................................... ADSL, Communications
GEC Plessey............................... Communications
Harris Semiconductor...................... Video Conferencing
Hyundai................................... Communications
Integrated Circuit Systems................ Multimedia Boards
Kawasaki.................................. ASIC, Communications
Kenwood................................... Audio Products
LSI Logic................................. ASIC, Communications, DBA
NEC....................................... Communications and Consumer Products
ROHM...................................... ASIC, Communications
Samsung................................... ASIC, Communications and Multimedia
Siemens................................... Digital Cellular Telephones, Communications
TDK Semiconductor......................... Modems
TEMIC (Daimler-Benz)...................... DBA, Communications
TSMC...................................... ASIC Library
VLSI Technology........................... ASIC, Communications
Xicor..................................... Programmable DSP

The Alta Group of Cadence, Mentor Graphics and Synopsys have announced the
development of electronic design automation ("EDA") tools, system level design
kits and software co-design and co-simulation products for systems designers
that use the PineDSPCore-Registered Trademark- and
OakDSPCore-Registered Trademark-. In addition, a number of independent software
vendors, including VoCal Technologies and Ensigma, have announced the
development of digital signal processing algorithms that operate on the
PineDSPCore-Registered Trademark- and OakDSPCore-Registered Trademark- for a
variety of communications and multimedia applications. The Company believes that
these developments make its DSP core designs more attractive to potential OEM
licensees. In addition, the Company believes that these software tools assist in
the creation of the PineDSPCore-Registered Trademark- and the
OakDSPCore-Registered Trademark- as industry standards, much as most ASIC
vendors worldwide are in fact DSP Group licensees.

RISC CORE

The Company has entered into an agreement with National Semiconductors
Corporation ("NSC") to become the worldwide exclusive distributor for general
licensing and support of the CompactRISC core technology. The Company decided to
enter the RISC market because it believes that customers use RISC cores along
with DSP cores in their applications to implement control functions efficiently.
The Company established this relationship with NSC to shorten the time to market
for the Company's products and to make use of already proven and established
technology.

Currently, Advanced RISC Machines ("ARM") controls the RISC market. The
Company estimates that the CompactRISC technology is better suited for the
embedded market than ARM's products because CompactRISC is a true 16-bit
machine, whereas the ARM core is a 32-bit machine with a wrapper. As such, the
CompactRISC consumes less power and is less expensive in die size and memory
consumption. However, ARM's brand name is prevailing and there is no assurance
that the CompactRISC technology will be able to compete effectively in the
market.

10

The following table sets forth the key features of the CompactRISC core
design:

CR16B
-------------

Word Length.......................................................... 16 bit
Process Geometry (microns)........................................... 0.35
Performance.......................................................... 50 MIPS
Voltage.............................................................. 3.0 to 5.0 V

TRUESPEECH PRODUCTS

TrueSpeech is a high-quality, cost effective speech compression technology
based on complex mathematical algorithms that are derived from the way airflow
from the lungs is shaped by the throat, mouth and tongue during speech. This
shaping of bursts of air is what the ear interprets as speech. TrueSpeech
converts this speech into digital data and then selectively eliminates and
enhances certain sound data to replicate human speech. Originally developed for
consumer telephone applications, such as the Company's TAD speech processors,
the Company has since enhanced TrueSpeech for use in the computer telephony and
personal computer markets.

The Company seeks to establish industry standards for digital speech
compression technology based on its TrueSpeech algorithms for emerging speech
applications in the consumer telephone and computer telephony markets. However,
the establishment of industry standards depends upon the acts of third parties,
which are not within the control of the Company. The development of industry
standards utilizing TrueSpeech algorithms would create an opportunity for the
Company to develop and market speech co-processors that would serve as
complementary application-specific DSPs to enhance the performance and
functionality of personal computers using TrueSpeech. In the personal computer
market, Microsoft has incorporated a TrueSpeech algorithm in Windows 95. In the
video telephone market, the ITU in February 1995 established G.723.1, which is
predominantly composed of a TrueSpeech algorithm, as the standard speech
compression technology for video conferencing over public telephone lines. In
addition to the Company's TrueSpeech algorithm, G.723.1 incorporates elements of
algorithms developed by France Telecom and the University of Sherbrooke. In
addition, although the ITU committee has approved the G.723.1 standard for
analog telephone line, there is no assurance that the video conference market in
analog line will be widely accepted, mainly due to quality of the current
implementations and price issues. Furthermore, in March 1997, the International
Multimedia Teleconferencing Consortium ("IMTC"), a nonprofit industry group,
recommended the use of G.723.1 as the default audio coder for all voice
transmissions over the Internet or for Internet Protocol ("IP") applications for
H.323 conferencing products. The IMTC membership approved this recommendation in
1997.

The Company believes that the principal advantages of TrueSpeech compared
with other currently available digital speech compression technologies are as
follows:

HIGH COMPRESSION RATIO. The three versions of TrueSpeech currently
offered for license by DSP Group compress digital speech at ratios ranging
from 15:1 to 26:1. These compression ratios are between seven and twelve
times greater than the compression provided by Pulse Code Modulation ("PCM")
used in current generation telephone speech transmissions and four to six
times greater than compression using Adaptive Differential PCM ("ADPCM")
currently used in personal computer audio cards. As a result, a standard 1.4
megabyte floppy diskette can hold approximately 37 minutes of speech using
the most advanced version of TrueSpeech commercially available, compared to
approximately three minutes using PCM and six minutes using ADPCM.
Competitors have introduced other advanced speech compression algorithms
that offer compression ratios comparable to the most advanced TrueSpeech
algorithms, including competing algorithms that were submitted by several
companies to the ITU standards committee evaluating speech compression
algorithms for video telephones. The ITU testing showed that TrueSpeech
provides superior quality playback and requires lower computational
complexity than these competing algorithms.

11

HIGH QUALITY SPEECH. Another advantage of TrueSpeech is that it
reproduces high quality speech playback with minimum distortion by
selectively eliminating nonessential and background sound data without
significant loss of speech quality. TrueSpeech has received high scores for
speech quality from a number of independent evaluators. For example,
TrueSpeech scored the highest on the ITU's intricately structured test used
to numerically rate the quality of the five competing speech compression
algorithms submitted for adoption as the G.723.1 standard for video
telephones.

COST EFFECTIVENESS. TrueSpeech's ability to achieve high speech
compression with lower computational complexity provides it with a
competitive cost advantage. As an example, competing speech compression
algorithms evaluated by the ITU use 20% to 50% more computing power for the
same compression and transmission rates, and more RAM and ROM for storage
and operation. Consequently, competing speech compression algorithms require
larger, more expensive DSPs and result in higher cost solutions.

The Company incorporates its TrueSpeech technology in its speech and
telephony processors and also licenses TrueSpeech to computer telephony and
personal computer companies for inclusion in their products. The Company's
TrueSpeech licensees include Analog Devices, Cirrus Logic, Creative Labs,
Dialogic, IBM, Integrated Circuit Systems, Intel, LSI Logic, Lucent, Microsoft,
Netspeak, Philips, Phylon, Prodigy, Siemens, Sierra Semiconductor, Silicon
Systems, Smith Micro, Texas Instruments ("TI"), Unisys, US Robotics, VDOnet and
VLSI Technology. In addition, the Company has ported its TrueSpeech algorithms
to certain DSP platforms offered by Analog Devices, Lucent, Motorola and TI,
four leading merchant vendors of programmable DSPs. To date, the Company's
royalties from TrueSpeech licenses have not been significant.

SALES, MARKETING AND DISTRIBUTION

The Company markets and distributes its products through a direct sales and
marketing organization, consisting of 22 employees, as well as through a network
of distributors and independent manufacturers' representatives. A marketing and
sales team located in the Company's headquarters in Santa Clara, California and
in Israel pursues business with the Company's customers in North America,
closely monitor new markets, trends and customer needs to shape the Company's
strategic decisions. In Japan, the Company operates from a marketing and support
office in Tokyo and through Tomen Electronics, a local distributor. In the rest
of Asia, the Company operates through DSP Solutions Ltd., a distributor and
sales representative in Hong Kong, and through manufacturers' representatives in
Singapore, South Korea and Taiwan. To handle sales and distribution in Europe,
the Company operates a marketing and support office located in France and has
manufacturers' representatives in Denmark, Germany, Spain and Sweden. The
Company's distributors are not subject to minimum purchase requirements and can
cease marketing the Company's products at any time. The loss of one or more
representatives or the failure of such parties to renew agreements with the
Company upon expiration could have an adverse effect on the Company's business,
financial condition and results of operations.

In 1997, 1996 and 1995 sales to Tomen Electronics comprised 33%, 17% and 25%
of total revenues respectively. In 1996, sales to Samsung comprised 11% of total
revenues.

Export sales accounted for 92%, 91% and 81% of total revenue in 1997, 1996
and 1995, respectively. Due to its export sales, the Company is subject to the
risks of conducting business internationally, including unexpected changes in
regulatory requirements, fluctuations in exchange rates that could increase the
price of the Company's products in foreign markets, delays resulting from
difficulty in obtaining export licenses for certain technology, tariffs, other
barriers and restrictions, and the burden of complying with a variety of foreign
laws. All of the Company's export sales are denominated in United States
dollars. See Note 3 of the Notes to Consolidated Financial Statements of the
Company's Annual Report to Stockholders for the year ended December 31, 1997,
for a summary of the Company's operations within various geographic areas.

12

MANUFACTURING AND DESIGN METHODOLOGY

Since the Company's products are based on its proprietary DSP core designs,
which are not dependent upon a particular foundry's library cells, these
products can be manufactured at a number of independent foundries. Accordingly
all of the Company's manufacturing occurs at independent foundries. The Company
contracts fabrication services for speech and telephony processors from Taiwan
Semiconductor Manufacturing Company ("TSMC"), Tower Semiconductor ("Tower") and
Samsung Semiconductor, Inc. ("Samsung"). Under non-exclusive agreements, these
independent foundries normally provide the Company with finished, packaged and
tested speech processors at variable prices depending on the volume of units
purchased. The Company customarily pays for fully-tested products meeting
predetermined specifications. To ensure the integrity of quality assurance
procedures, the Company develops detailed test procedures and specifications for
each product and requires each foundry to use such procedures and specifications
before shipping finished products.

The Company plans to continue to use independent foundries to manufacture
digital speech processors and other products for the consumer telephone and
computer telephony markets. To obtain an adequate supply of wafers, the Company
is considering various alternative production sites. The Company's reliance on
independent foundries involves a number of risks such as the foundries'
achievement of acceptable manufacturing yields and allocation of capacity to the
Company.

In addition to the Company's speech processors, digital TADs include various
other components such as ARAMs, codecs and flash memories that are supplied by
third party manufacturers. Temporary fluctuations in the pricing and
availability of these components could have a material adverse effect on sales
of the Company's speech processors for digital TADs and other computer telephony
products, which could in turn have a material adverse effect on the Company's
business, financial condition and results of operations.

COMPETITION

The markets in which the Company operates are extremely competitive and the
Company expects that competition will increase. In each of the Company's
business activities it faces current and potential competition from competitors
that have significantly greater financial, technical, manufacturing, marketing,
sales and distribution resources and management expertise than the Company. The
Company's future prospects will be highly dependent upon the successful
development and introduction of new products that are responsive to market
needs. There can be no assurance that the Company will be able to successfully
develop or market any such products.

The principal competitive factors in the digital TAD speech processor market
include price, speech quality, compression ratio, value-added features such as
variable speed message playback and speakerphone, customer support and the
timing of product introductions by the Company and its competitors. The Company
believes that it is competitive with respect to each of these factors.
Currently, the key competitive challenge for digital TADs is the relative lower
cost of analog tape-based machines. The Company believes that the continuing
decline in prices of digital speech processors and silicon memory devices will
close the cost gap between the analog and digital solution. The Company's
principal competitors in the TAD speech processor market include ISD, Lucent
Microelectronics, Macronix, TI, Toshiba, Siemens and Zilog.

The principal competitive factors in the DSP core designs market for high
volume, low cost applications include such features as small size, low power,
flexible I/O blocks and associated development tools. The Company's DSP core
designs compete with companies such as Analog Devices, Atmel, Clarkspur Designs,
SGS Thompson and Tensleep, which license DSP platforms, and Analog Devices,
Lucent Microelectronics, Motorola, and TI, which sell their own complete DSP
solutions (general purpose DSPs).

Several digital speech compression technologies exist and are currently
being developed that may be promoted by competitors as industry standards for
the computer telephony and personal computer markets. The Company's TrueSpeech
algorithms compete with ADPCM, and the speech compression technologies used in
GSM and VSELP, each of which is available in the public domain. There are many
versions of these algorithms that have been developed by different parties,
including AT&T (which has been actively involved in the development of GSM) and
Motorola (which developed the original VSELP). Although TrueSpeech has achieved
a degree of acceptance in the computer telephony and personal computer markets,
ADPCM and the speech compression technologies for GSM and VSELP are widely used
in the

13

development and implementation of new products in the telephony industry. In
addition, other advanced speech compression algorithms have been introduced
by competitors which offer compression ratios comparable to the TrueSpeech
algorithms, including a competing algorithm sponsored by the University of
Sherbrooke that the ITU standards committee has adopted as the speech
compression standard for DSVD modems. Large companies, such as AT&T, Creative
Labs, Motorola and Rockwell, have speech processing technologies that can be
applied to speech compression for use in the markets for which the Company's
products are targeted.

Price competition in the markets in which the Company currently competes and
proposes to compete is intense and may increase, which could have a material
adverse effect on the Company's business, financial condition and results of
operations. The Company has experienced and expects to continue to experience
increased competitive pricing pressures for its TAD speech processors. During
1997, the Company was able to completely offset this decrease on an annual basis
through manufacturing cost reductions. There can be no assurance that the
Company will be able to further reduce product costs or be able to compete
successfully as to price or any other of the key competitive factors.

RESEARCH AND DEVELOPMENT

The Company believes that continued timely development and introduction of
new products are essential to maintaining its competitive position. The Company
currently conducts most of its product development effort in-house and at
December 31, 1997 had a staff of 56 research and development personnel located
in Israel. The Company also employs independent contractors to assist with
certain product development and testing activities. During the years 1997, 1996
and 1995, the Company spent approximately $8.4 million, $8.5 million and $8.4
million, respectively, on research and development activities.

RELATIONSHIPS WITH AFFILIATED COMPANIES

The Company has a $1.7 million equity investment in, and has entered into
technology arrangements with, AudioCodes Ltd. ("AudioCodes"), an Israeli
corporation primarily engaged in DSP-related contract engineering in connection
with speech and speech algorithm technologies. The Company currently owns 29% of
the capital stock of AudioCodes, a company formed in April 1993 by two former
employees of DSP Group. Pursuant to an agreement between the Company and
AudioCodes, the Company and AudioCodes have joint ownership of any speech
compression technology developed by AudioCodes. The Company has established this
relationship to complement its in-house product development efforts.

In July 1996, the Company invested $2.0 million of cash for approximately
40% of the equity interests in Aptel Ltd. ("Aptel"), an emerging company in
its product development stage located in Israel. Aptel has expertise in
spread spectrum direct sequence modulation technology, which is applicable to
the development of products for two-way paging systems and telemetry
applications. In 1996, the Company incurred a one-time write-off of acquired
in-process technology of $1.5 million. In October 1997, the Company invested
approximately $176,000 in convertible debentures issued by Aptel. In December
1997, the Company converted its debentures and Aptel's shareholders
(including the Company) exchanged their shares in Aptel for shares in Nexus
Telecommunications Systems Ltd. ("Nexus"), an Israeli company registered and
traded on the Nasdaq SmallCap Market. The Nexus shares received in the
transaction are restricted from being traded until December 1998 and are
presented in the Company's balance sheet at $1,226,000, which is the market
value of such shares on December 31, 1997.

LICENSES, PATENTS AND TRADEMARKS

The Company has been granted seven United States patents and has one
patent pending in the United States. The Company actively pursues foreign
patent protection in other countries of interest to the Company. The policy
of the Company is to apply for patents or for other appropriate statutory
protection when it develops valuable new or improved technology. The status
of patents involves complex legal and factual questions and the breadth of
claims allowed is

14

uncertain. Accordingly, there can be no assurance that any patent application
filed by the Company will result in patents being issued, or that its
patents, and any patents that may be issued in the future, will afford
protection against competitors with similar technology; nor can there be any
assurance that patents issued to the Company will not be infringed or
designed around by others. In addition, the laws of certain countries in
which the Company's products are or may be developed, manufactured or sold,
including Hong Kong, Japan and Taiwan, may not protect the Company's products
and intellectual property rights to the same extent as the laws of the United
States.

The Company attempts to protect its trade secrets and other proprietary
information through agreements with its customers, suppliers, employees and
consultants, and through other security measures. Although the Company
intends to protect its rights vigorously, there can be no assurance that
these measures will be successful.

The semiconductor and software industries are subject to frequent litigation
regarding patent and other intellectual property rights. While the Company has
not been involved in any material patent or other intellectual property rights
litigation to date, there can be no assurance that third parties will not assert
claims against the Company with respect to existing or future products or that
the Company will not need to assert claims against third parties to protect its
proprietary technology. For example, AT&T has asserted that G.723.1, which is
primarily composed of a TrueSpeech algorithm, includes certain elements covered
by patents held by AT&T and has requested that video conferencing equipment
manufacturers license this technology from AT&T. In the event of litigation to
determine the validity of any third party claims or to protect its proprietary
technology, such litigation could result in significant expense to the Company
and could divert the efforts of the Company's technical and management
personnel, whether or not such litigation is determined in favor of the Company.
In the event of an adverse result in any such litigation, the Company 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.
There can be no assurance that the Company would be successful in such
development or that any such licenses would be available on commercially
reasonable terms.

The Company has been issued registered trademarks for the use of the
PineDSPCore-Registered Trademark-, OakDSPCore-Registered Trademark- and
TrueSpeech trademarks. In addition the Company applied for trademarks for
TeakDSPCore and PalmDSPCore.

While the Company's ability to compete may be affected by its ability to
protect its intellectual property, the Company believes that, because of the
rapid pace of technological change in the industry, its technical expertise and
ability to innovate on a timely basis will be more important in maintaining its
competitive position than protection of its intellectual property. The Company
believes that, because of the rapid pace of technological change in the consumer
telephone, computer telephony and personal computer industries, patents and
trade secret protection are important but must be supported by other factors
such as the expanding knowledge, ability and experience of the Company's
personnel, new product introductions and frequent product enhancements. Although
the Company continues to implement protective measures and intends to defend its
intellectual property rights, there can be no assurance that these measures will
be successful.

BACKLOG

At December 31, 1997, the Company's backlog was approximately $16.8 million
compared with approximately $15.1 million at December 31, 1996. The Company
includes in its backlog all accepted product purchase orders with respect to
which a delivery schedule has been specified for product shipment within one
year and fees specified in executed licensing contracts. The Company's business
in TAD speech processors is characterized by short-term order and shipment
schedules. Product orders in the Company's current backlog are subject to
changes in delivery schedules or to cancellation at the option of the purchaser
without significant penalty. Accordingly, although useful for scheduling
production, backlog as of any particular date may not be a reliable measure of
sales for any future period.

15

EMPLOYEES

As of December 31, 1997, the Company had 105 employees, including 56 in
research and development, 22 in marketing and sales, and 27 in corporate and
administration and manufacturing coordination. Competition for personnel in the
semiconductor, software and personal computer industries in general is intense.
The Company believes that its future prospects will depend, in part, on its
ability to continue to attract and retain highly skilled technical, marketing
and management personnel, who are in great demand. In particular, there is a
limited supply of highly qualified engineers with digital signal processing
experience. None of the Company's employees is represented by a collective
bargaining agreement, nor has the Company ever experienced any work stoppage.
The Company believes that its employee relations are good.

FACTORS AFFECTING FUTURE OPERATING RESULTS

THIS FORM 10-K CONTAINS FORWARD LOOKING STATEMENTS CONCERNING THE COMPANY'S
FUTURE PRODUCTS, EXPENSES, REVENUE, LIQUIDITY AND CASH NEEDS AS WELL AS THE
COMPANY'S PLANS AND STRATEGIES. THESE FORWARD-LOOKING STATEMENTS ARE BASED ON
CURRENT EXPECTATIONS AND THE COMPANY ASSUMES NO OBLIGATION TO UPDATE THIS
INFORMATION. NUMEROUS FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER SIGNIFICANTLY
FROM THE RESULTS DESCRIBED IN THESE FORWARD-LOOKING STATEMENTS, INCLUDING THE
FOLLOWING RISK FACTORS.

POTENTIAL FLUCTUATIONS IN QUARTERLY OPERATING RESULTS. The Company's
revenues are derived predominately from product sales and accordingly vary
significantly depending on the volume and timing of product orders. The
Company's quarterly operating results also depend on the timing of recognition
of license fees and the level of per unit royalties. Through 1998, the Company
expects that revenues from its DSP core designs and TrueSpeech will be derived
primarily from license fees rather than per unit royalties. The uncertain timing
of these license fees has caused, and may continue to cause, quarterly
fluctuations in the Company's operating results. The Company's per unit
royalties from licenses are totally dependent upon the success of its OEM
licensees in introducing products utilizing the Company's technology and the
success of those OEM products in the marketplace. Per unit royalties from
TrueSpeech licensees have not been significant to date. Royalties from two DSP
Core licensees have started to become meaningful in 1997.

The Company's quarterly operating results may also fluctuate significantly
as demand for TADs varies during the year due to seasonal customer buying
patterns, and as a result of other factors such as the timing of new product
introductions by the Company or its customers, licensees or competitors; market
acceptance of new products and technologies; the mix of products sold;
fluctuations in the level of sales by OEMs and other vendors of products
incorporating the Company's products; and changes in general economic
conditions.

DECLINING AVERAGE SELLING PRICES AND GROSS MARGINS; DEPENDENCE ON DIGITAL
TAD MARKET. The Company has experienced a decrease in the average selling
prices of its TAD speech processors, but has to date been able to offset this
decrease on an annual basis through manufacturing cost reductions and the
introduction of new products with higher performance. The Company experienced a
significant decline in the gross margin on TADs in the second and third quarters
of 1996 due to competitive market pricing pressures and delays in ongoing cost
reduction efforts. Although significant cost reductions were achieved in the
fourth quarter of 1996 and throughout 1997, there is no guarantee that such
on-going efforts will be successful or that they will keep pace with the
anticipated, continuing decline in average selling prices. The markets for the
Company's products are extremely competitive, and the Company expects that
competition will increase. The Company's existing and potential competitors in
each of its markets include large and emerging domestic and foreign companies,
many of which have significantly greater financial, technical, manufacturing,
marketing, sale and distribution resources and management expertise than the
Company. Any inability of the Company to respond to increased price competition
for its TAD speech processors or its other products through the continuing and
frequent introduction of new products or reductions of manufacturing costs, or
any significant delays by the Company in developing, manufacturing or shipping
new or enhanced products would have a material adverse effect on the Company's
business, financial condition and results of operations. Sales of TAD products
comprise a substantial portion of the Company's product sales. Any adverse
change in the digital TAD market or the Company's ability to compete and
maintain its position in that market would have a material adverse effect on the
Company's business, financial condition and results of operations.

16

REVENUES FROM ASIA. In 1997, the Company generated approximately $19.9
million, or 39% of its total product sales, from sales to customers located in
South Korea, Taiwan, Singapore and Hong Kong. While economic activity in some of
these countries, most notably Korea, has been adversely affected by recent
developments in local currency and banking markets, the Company believes that
the effect of these developments on the Company's business is somewhat mitigated
by the financial condition of many of the Company's customers in these markets,
such as Daewoo, L.G. Electronics and Maxon. Many of these customers are leaders
in their respective industries and conduct their business on a multinational
basis. In addition, management estimates that approximately 70% of the Company's
product sales generated from the Asian region in 1997 were used in end-products
subsequently exported to non-Asian markets such as the United States and Europe,
which represent an important source of foreign currency for these customers. The
Company does not believe that economic conditions in Asia had a material effect
on its 1997 revenue. The Company continues to believe that the geographic
diversity of its customers and the diverse end-markets for its customers'
products will continue to benefit the Company. However, in the first quarter of
1998, the Company has been experiencing a decline in the flows of orders from
Southeast Asia, specifically South Korea mainly due to the general economic
atmosphere in that region. If this trend continues, it may result in a decrease
of the Company's backlog at the end of the first quarter of 1998. There can be
no assurance that continued negative developments in the Asian region will not
have an adverse effect on the Company's future operating performance.

RELIANCE ON INDEPENDENT FOUNDRIES. All of the Company's integrated circuit
products are manufactured by independent foundries. While these foundries have
been able to adequately meet the demands of the Company's increasing business,
the Company is and will continue to be dependent upon these foundries to achieve
acceptable manufacturing yields and quality levels, and to allocate to the
Company a sufficient portion of foundry capacity to meet the Company's needs in
a timely manner. To meet its increased wafer requirements, the Company has added
additional independent foundries to manufacture its TAD speech processors.
Revenues could be materially and adversely affected should any of these
foundries fail to meet the Company's request for products due to a shortage of
production capacity, process difficulties or low yield rates.

RELIANCE ON INTERNATIONAL OPERATIONS; RISK OF OPERATIONS IN ISRAEL. The
Company is subject to the risks of doing business internationally, including
unexpected changes in regulatory requirements; fluctuations in the exchange
rate for the United States dollar; imposition of tariffs and other barriers
and restrictions; and the burdens of complying with a variety of foreign
laws. The Company is also subject to general geopolitical risks, such as
political and economic instability and changes in diplomatic and trade
relationships, in connection with its international operations. In
particular, the Company's principal research and development facilities are
located in the State of Israel and, as a result, at December 31, 1997, 76 of
the Company's 105 employees were located in Israel, including all 56 research
and development personnel. In addition, although the Company is incorporated
in Delaware, the majority of the Company's directors and executive officers
are non-residents of the United States. Therefore, the Company is directly
affected by the political, economic and military conditions to which that
country is subject. In addition, many of the Company's expenses in Israel are
paid in Israeli currency, thereby also subjecting the Company to foreign
currency fluctuations and to economic pressures resulting from Israel's
generally high rate of inflation. The rate of inflation in Israel for 1996
and 1997 was 10.6% and 7.0%, respectively. While substantially all of the
Company's sales and expenses are denominated in United States dollars, a
portion of the Company's expenses are denominated in Israeli shekels. The
Company's primary expenses paid in Israeli currency are employee salaries and
lease payments on the Israeli facility. As a result, an increase in the value
of Israeli currency in comparison to the United States dollar could increase
the cost of technology development, research and development expenses and
general and administrative expenses. There can be no assurance that currency
fluctuations, changes in the rate of inflation in Israel or any of the other
aforementioned factors will not have a material adverse effect on the
Company's business, financial condition and results of operations.

RELIANCE ON OEMS TO OBTAIN REQUIRED COMPLEMENTARY COMPONENTS. Certain of
the raw materials, components and subassemblies included in the products
manufactured by the Company's OEM customers, which also 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.
Supply disruptions, shortages or termination could have an adverse effect on the
Company's business and results of operations due to its customers delay or
discontinuance of orders for the Company's products until such components are
available.

DEPENDENCE UPON ADOPTION OF INDUSTRY STANDARDS BASED ON TRUESPEECH. The
Company's prospects are partially dependent upon the establishment of industry
standards for digital speech compression based on TrueSpeech algorithms in

17

the computer telephony and personal computer markets. The development of
industry standards utilizing TrueSpeech algorithms would create an
opportunity for the Company to develop and market speech co-processors that
provide TrueSpeech solutions and enhance the performance and functionality of
products incorporating these co-processors. In February 1995, the ITU
established G.723.1, which is predominately composed of a TrueSpeech
algorithm, as the standard speech compression technology for use in video
conferencing over public telephone lines.

INTELLECTUAL PROPERTY. As is typical in the semiconductor and software
industries, the Company has been and may from time to time be notified of claims
that it may be infringing patents or intellectual property rights owned by third
parties. For example, AT&T, Lucent Microelectronics, NTT and VoiceCraft have
recently asserted that G.723.1, which is primarily composed of a TrueSpeech
algorithm, includes certain elements covered by patents held by these entities
and have requested that video conferencing equipment manufacturers license such
technology from them. If it appears necessary or desirable, the Company may seek
licenses under such patents or intellectual property rights that it is allegedly
infringing. Although holders of such intellectual property rights commonly offer
such licenses, no assurances can be given that licenses will be offered or that
the terms of any offered licenses will be acceptable to the Company. The failure
to obtain a license for key intellectual property rights from a third party for
technology used by the Company could cause the Company to incur substantial
liabilities and to suspend the manufacture of products utilizing the technology.
The Company believes that the ultimate resolution of these matters will not have
a material adverse effect on the Company's business, financial position or
results of operations.

YEAR 2000 COMPLIANCE. The Company is aware of the issues associated with
the programming code in existing computer systems as the year 2000 approaches.
The "Year 2000" problem is concerned whether computer systems will properly
recognize date sensitive information when the year changes to 2000. Systems that
do not properly recognize such information could generate erroneous data or
cause a system to fail. The year 2000 problem is pervasive and complex as
virtually every company's computer operation will be affected in some way. The
Company is utilizing both internal and external resources to identify, correct
or reprogram, and test the systems for Year 2000 compliance. It is anticipated
that all reprogramming efforts will be completed by December 31, 1998, allowing
adequate time for testing. To date, confirmations have been received from the
Company's primary processing vendors that plans are being developed to address
processing of transactions in the year 2000. Management believes that Year 2000
compliance expenses will not have an adverse effect on the Company's earnings.
However, there can be no assurance that Year 2000 problems will not occur with
respect to the Company's computer systems. The Year 2000 problem may impact
other entities with which the Company transacts business, and the Company cannot
predict the effect of the Year 2000 problem on such entities.

ONGOING LITIGATION. In November 1995, after the Company's stock price
declined, several lawsuits were filed in the United States District Court for
the Northern District of California accusing the Company, its former Chief
Executive Officer, and its former Chief Financial Officer of issuing materially
false and misleading statements in violation of the federal securities laws.
These lawsuits were consolidated into a single amended complaint in February
1996. In the amended complaint, plaintiffs sought unspecified damages on behalf
of all persons who purchased shares of the Company's Common Stock during the
period June 6, 1995 through November 10, 1995. On June 11, 1996, the Court
granted the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997, the
Court issued an order dismissing with prejudice all claims based on statements
issued by the Company. The Court allowed plaintiffs to proceed with their claims
regarding statements the Company allegedly made to securities analysts, and also
permitted plaintiffs to amend their complaint as to their claim that the Company
is responsible for the statements contained in analysts' reports. Plaintiffs
chose not to amend their complaint after the March 7, 1997 order. On November 5,
1997, the parties reached an agreement in principle to settle this litigation.
The proposed settlement requires that the Company fund approximately $50,000 of
the settlement amount to fulfill the retention amounts under the Company's
insurance policy. The proposed settlement is subject to the execution of a
stipulation of settlement and court approval.

POSSIBLE VOLATILITY OF STOCK PRICE. The variety and uncertainty of the
factors affecting the Company's operating results, and the fact that the Company
participates in a highly dynamic industry, may result in significant volatility
in the Company's Common Stock price.

18

ITEM 2. PROPERTIES.

The Company's operations in the United States are located in an
approximately 15,700 square foot leased facility in Santa Clara, California.
This facility houses the Company's marketing and support, North American sales,
operations, manufacturing coordination and administrative personnel. This
facility is leased through December 1999. In August 1997, the Company's
subsidiary, DSP Semiconductors (Israel), Ltd. moved to a facility in Herzlia
Pituach, Israel with approximately 27,000 square feet pursuant to a lease ending
in May 2002. In August 1997, DSP Semiconductors (Israel), Ltd. signed an
additional lease agreement for office space in Omer (located in the south of
Israel), for 840 square feet through September 1999.

ITEM 3. LEGAL PROCEEDINGS.

In November 1995, after the Company's stock price declined, several
lawsuits were filed in the United States District Court for the Northern
District of California accusing the Company, its former Chief Executive
Officer, and its former Chief Financial Officer of issuing materially false
and misleading statements in violation of the federal securities laws. These
lawsuits were consolidated into a single amended complaint in February 1996.
In the amended complaint, plaintiffs sought unspecified damages on behalf of
all persons who purchased shares of the Company's Common Stock during the
period June 6, 1995 through November 10, 1995. On June 11, 1996, the Court
granted the Company's motion to dismiss the lawsuit, with leave to amend. The
plaintiffs filed an amended complaint on July 11, 1996. On March 7, 1997, the
Court issued an order dismissing with prejudice all claims based on
statements issued by the Company. The Court permitted plaintiffs to proceed
with their claims regarding statements the Company allegedly made to
securities analysts, and also permitted plaintiffs to amend their complaint
as to their claim that the Company was responsible for the statements
contained in analysts' reports. Plaintiffs chose not amend their complaint
after the March 7, 1997 order. On November 5, 1997, the parties reached an
agreement in principle to settle this litigation. The proposed settlement
requires that the Company fund approximately $50,000 of the settlement amount
to fulfill the retention amounts under the Company's insurance policy. The
proposed settlement is subject to the execution of a stipulation of
settlement and court approval.

On February 12, 1997, BEKA Electronic GmbH ("BEKA") commenced an action in
the United States District Court for the Northern District of California against
the Company. The action alleges breach of contract, breach of implied covenant
of good faith and fair dealing and requests an accounting by the Company in
connection with the Company's termination of the Sales Representative Agreement
between BEKA and the Company. The complaint seeks an unspecified amount of
damages. The Company filed an answer to the complaint on April 14, 1997, denying
all causes of action. The Company believes the lawsuit to be without merit and
intends to defend itself vigorously.

In February 1997, a lawsuit between the Company and Elk Industries, Inc.
("Elk") was settled. The litigation had been pending since April 1996 in the
United States District Court for the Southern District of Florida. Elk had
alleged patent infringement by the Company in connection with the Company's
making, selling and using an audio storage and distribution system allegedly
covered under a patent held by Elk.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

19

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS.

The section labeled "Price Range of Common Stock" appearing on page 18 of
the Registrant's Annual Report to Stockholders for the year ended December 31,
1997 is incorporated herein by reference.

ITEM 6. SELECTED FINANCIAL DATA.

The section labeled "Selected Consolidated Financial Data" appearing on page
17 of the Registrant's Annual Report to Stockholders for the year ended December
31, 1997 is incorporated herein by reference.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS.

The section labeled "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing on pages 19 through 24 of the
Registrant's Annual Report to Stockholders for the year ended December 31, 1997
is incorporated herein by reference.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

The consolidated financial statements and related notes and independent
auditors report appearing on pages 25 through 46 of the Registrant's Annual
Report to Stockholders for the year ended December 31, 1997 are incorporated
herein by reference.

The section labeled "Quarterly Data" appearing on page 17 of the
Registrant's Annual Report to Stockholders for the years ended December 31, 1996
and 1997 is incorporated herein by reference.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE.

None.
20

PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT.

The section labeled "Directors, Executive Officers and Key Personnel" of the
Registrant's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 19, 1998 is incorporated herein
by reference.

ITEM 11. EXECUTIVE COMPENSATION.

The section labeled "Executive Compensation and Other Information" of the
Registrant's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 19, 1998 is incorporated herein
by reference.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT.

The section labeled "Security Ownership of Certain Beneficial Owners and
Management" of the Registrant's definitive Proxy Statement to be filed shortly
hereafter for the annual meeting of stockholders to be held on May 19, 1998 is
incorporated herein by reference.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.

The section labeled "Certain Relationships and Related Transactions" of the
Registrant's definitive Proxy Statement to be filed shortly hereafter for the
annual meeting of stockholders to be held on May 19, 1998 is incorporated herein
by reference.

21

PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K.

(a) The following documents have been filed as a part of this Annual Report on
Form 10-K.

1. INDEX TO FINANCIAL STATEMENTS.

The following financial statements and related notes and auditor's report
are included in the Registrant's Annual Report to Stockholders for the year
ended December 31, 1997 and are incorporated herein by reference pursuant to
Item 8.

PAGE IN 1997
ANNUAL REPORT
DESCRIPTION TO STOCKHOLDERS
- -------------------------------------------------------------------------------------------------- ---------------

Consolidated Balance Sheets as of December 31, 1997 and 1996...................................... 26-27

Consolidated Statements of Income for the years ended December 31, 1997, 1996 and 1995............ 25

Consolidated Statements of Stockholders' Equity for the years ended December 31, 1997, 1996 and
1995............................................................................................. 28-29

Consolidated Statements of Cash Flows for the years ended December 31, 1997, 1996 and 1995........ 30-31

Notes to Consolidated Financial Statements........................................................ 32-46

Report of Ernst & Young LLP, Independent Auditors................................................. 47

2. INDEX TO FINANCIAL STATEMENT SCHEDULES.

The following financial statement schedules and related auditor(1)s report
are filed as part of this Annual Report on Form 10-K:

PAGE IN THIS
ANNUAL REPORT
DESCRIPTION ON FORM 10-K
- --------------------------------------------------------------------------------------- -------------------------

Schedule II: Valuation and Qualifying Accounts......................................... (included at page 32)

Consent of Ernst & Young LLP, Independent Auditors..................................... Exhibit 23.1
(included at page 30)

Consent of Almagor & Co., Independent Auditors......................................... Exhibit 23.2
(included at page 31)

All other schedules are omitted because they are not applicable or not
required or because the required information is included in the Consolidated
Financial Statements or the Notes thereto.

22

3. LIST OF EXHIBITS:

EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------

3.1 Amended and Restated Certificate of Incorporation (filed as Exhibit 3.1B
to the Registrant's Registration Statement on Form S-1, file no.
33-73482, as declared effective on February 11, 1994 and incorporated
herein by reference).

3.2 Bylaws (filed as Exhibit 3.2B to the Registrant's Registration Statement
on Form S-1, file no. 33-73482, as declared effective on February 11,
1994 and incorporated herein by reference).

3.3 Amendment to Registrant's Bylaws, dated March 30, 1995 (filed as Exhibit
3.2.c to the Registrant's Quarterly Report on Form 10-Q for the quarter
ended March 31, 1995, and incorporated herein by reference).

3.4 Certificate of Determination of Preference of Series A Preferred Stock of
the Registrant, filed with the Secretary of State of the State of
Delaware on June 6, 1997 (filed as Exhibit 3.1 to the Registrant's
Current Report on Form 8-K filed on June 6, 1997).

3.5 Rights Agreement, dated as of June 5, 1997, between the Registrant and
Norwest Bank Minnesota, N.A., as Rights Agent (filed as Exhibit 2.1 to
the Registrant's Current Report on Form 8-K filed on June 6, 1997).

3.6 Specimen Rights Certificate (filed as Exhibit 1.1 to the Registrant's
Current Report on Form 8-K filed on June 6, 1997).

3.7 Amendment to Registrant's Bylaws, dated November 3, 1997.

10.1 1991 Employee and Consultant Stock Plan and forms of option agreements
thereunder (filed as Exhibit 10.2 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).

10.2 Israeli Stock Option Plan and form of option agreement thereunder (filed
as Exhibit 10.3 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).

10.3 1993 Directors Stock Option Plan (filed as Exhibit 10.4 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).

10.4 1993 Employee Stock Purchase Plan and form of subscription agreement
thereunder (filed as Exhibit 10.5 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).

10.5 Registration Rights Agreement, dated August 30, 1993, by and among the
Registrant and certain shareholders of the Registrant (filed as Exhibit
10.9 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).

23

EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------

10.6 Technology Assignment and License Agreement, dated January 7, 1994, by and
between the Registrant and DSP Telecommunications, Ltd. (filed as
Exhibit 10.24 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).

10.7 ACL Technology License Agreement, dated June 24, 1994, by and between the
Registrant and AudioCodes, Ltd. (filed as Exhibit 10.12 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended June
30, 1994, and incorporated herein by reference).

10.8 Investment Agreement, dated June 16, 1994, by and between the Registrant
and AudioCodes Ltd. (see Exhibit 10.30 for Appendix B to Investment
Agreement) (filed as Exhibit 10.39 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1994, and incorporated herein
by reference).

10.9 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).

10.10 Severance and Consulting Agreement, dated as of May 6, 1996, by and
between the Registrant and Eli Porat (filed as Exhibit 10.36 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended March
31, 1996, and incorporated herein by reference).

10.11 Severance Agreement, dated June 8, 1996, by and between the Registrant and
Karin Pitcock (filed as Exhibit 10.1 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, and
incorporated herein by reference).

10.12 Share Purchase and Shareholders Agreement, dated July 4, 1996, by and
among Aptel Ltd., the shareholders named therein, and DSP Semiconductors
Ltd. (filed as Exhibit 10.2 to the Registrant's Quarterly Report on Form
10-Q for the quarter ended June 30, 1996, and incorporated herein by
reference).

10.13 Employment Agreement, dated April 22, 1996, by and between the Registrant
and Eli Ayalon (filed as Exhibit 10.3 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended June 30, 1996, and
incorporated herein by reference).

10.14 Severance and Consulting Agreement, dated as of October 25, 1996, by and
between the Registrant and John Goldsberry (filed as Exhibit 10.1 to the
Registrant's Quarterly Report on Form 10-Q for the quarter ended
September 30, 1996, and incorporated herein by reference).

10.15 Employment Severance and Consulting Agreement, dated as of December 2,
1996, by and between the Registrant and Mike Hoberg (filed as Exhibit
10.23 to the Registrant's Annual Report on Form 10-K for the year ended
December 31, 1996, and incorporated herein by reference).

10.16 Assignment and Assumption Agreement, dated October 9, 1996, by and between
the Registrant and Dialogic Corporation, relating to the Registrant's
facility located at 3120 Scott Boulevard in Santa Clara, California
(filed as Exhibit 10.24 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, and incorporated herein by
reference).

24

EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------

10.17 Sublease, dated October 18, 1996, as amended on December 4, 1996, by and
between Dialogic Corporation and the Registrant, relating to the
Registrant's facility located at 3120 Scott Boulevard in Santa Clara,
California (filed as Exhibit 10.25 to the Registrant's Annual Report on
Form 10-K for the year ended December 31, 1996, and incorporated herein
by reference).

10.18 Employment Agreement, dated February 24, 1997, by and between the
Registrant and Avi Basher (filed as Exhibit 10.26 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference).

10.19 Employment Agreement, dated June 1, 1996, by and between the Registrant
and Moshe Shahaf (filed as Exhibit 10.27 to the Registrant's Annual
Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference).

10.20 Rescission Agreement, dated as of August 15, 1996, by and between the
Registrant and Igal Kohavi (filed as Exhibit 10.28 to the Registrant's
Annual Report on Form 10-K for the year ended December 31, 1996, and
incorporated herein by reference).

10.21 Service Agreement, dated as of August 15, 1996, by and between DSP
Semiconductors, Ltd. and Niko Consulting and Management (1995) Ltd.
(filed as Exhibit 10.29 to the Registrant's Annual Report on Form 10-K
for the year ended December 31, 1996, and incorporated herein by
reference).

10.22 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, Herzlia 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).

10.23 Agreement, dated August 18, 1997, by and between DSP Semiconductors Ltd.
and Aptel Ltd (filed as Exhibit 10.2 to the Registrant's Quarterly
Report on Form 10-Q for the quarter ended September 30, 1997, and
incorporated herein by reference).

10.24 Employment Agreement with Igal Kohavi, dated as of June 1, 1997.

10.25 CompactRISC Technology License Agreement, dated as of September 29, 1997,
by and between DSP Semiconductors Ltd. and National Semiconductor
Corporation.

10.26 Amendment to Employment Agreement with Eliyahu Ayalon,
dated as of November 3, 1997.

10.27 Amendment to Employment Agreement with Igal Kohavi, dated
as of November 3, 1997.

10.28 Amendment to 1993 Directors Stock Option Plan, as adopted November 3,
1997.

11 Statements regarding computation of per share earnings (included at page
28).

13 Portions of the Annual Report to Stockholders for the year ended December
31, 1997.

21 Subsidiaries of the Registrant (included at page 29).

23.1 Consent of Ernst & Young LLP, Independent Auditors (included at page 30).

25

EXHIBIT
NUMBER DESCRIPTION
- ------ --------------------------------------------------------------------------

23.2 Consent of Almagor & Co., Independent Auditors (included at page 31).

27.1 Financial Data Schedule for the fiscal year ended December 31, 1997.

27.2 Restated Financial Data Schedule for the quarter ended September 30, 1997.

27.3 Restated Financial Data Schedule for the quarter ended June 30, 1997.

27.4 Restated Financial Data Schedule for the quarter ended March 31, 1997.

27.5 Restated Financial Data Schedule for the fiscal year ended December 31, 1996.

27.6 Restated Financial Data Schedule for the quarter ended September 30, 1996.

27.7 Restated Financial Data Schedule for the quarter ended June 30, 1996.

27.8 Restated Financial Data Schedule for the quarter ended March 31, 1996.

27.9 Restated Financial Data Schedule for the fiscal year ended December 31, 1995.

99.1 Auditor's Report of Almagor & Co., Certified Public Accountants (Israel)

(b) Reports on Form 8-K

The Company filed a Current Report on Form 8-K dated June 5, 1997, relating
to the adoption of the Stockholder's Rights Agreement, pursuant to which one
preferred share purchase right was distributed for each outstanding share of
Common Stock of the Company.

26

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

DSP GROUP, INC.

By: /s/ ELIYAHU AYALON
---------------------------------------
Eliyahu Ayalon
PRESIDENT AND CHIEF EXECUTIVE OFFICER
(PRINCIPAL EXECUTIVE OFFICER)

Date: March 31, 1998

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 TITLE DATE
- ------------------------------ -------------------------- -------------------

/s/ IGAL KOHAVI
- ------------------------------ Chairman of the Board March 31, 1998
Igal Kohavi

President, Chief Executive
/s/ ELIYAHU AYALON Officer and Director
- ------------------------------ (Principal Executive March 31, 1998
Eliyahu Ayalon Officer)

Vice President of Finance,
Chief Financial Officer
/s/ AVI BASHER and Secretary (Principal
- ------------------------------ Financial Officer and March 31, 1998
Avi Basher Principal Accounting
Officer)

/s/ SAMUEL L. KAPLAN
- ------------------------------ Director March 31, 1998
Samuel L. Kaplan

/s/ MILLARD PHELPS
- ------------------------------ Director March 31, 1998
Millard Phelps

/s/ YAIR SHAMIR
- ------------------------------ Director March 31, 1998
Yair Shamir

27

EXHIBIT 11

DSP GROUP, INC.
STATEMENTS RE COMPUTATION OF PER SHARE EARNINGS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

YEAR ENDED DECEMBER 31,
-------------------------------
1997 1996 1995
-------- -------- --------

Numerator:

Net income . . . . . . . . . . . . . $11,034 $5,979 $7,211
-------- ------- -------
-------- ------- -------
Denominator:

Weighted average number of common
shares outstanding during the
period used to compute basic
earnings per share . . . . . . 9,736 9,510 9,352

Incremental shares attributable to
exercise of outstanding options
(assuming proceeds would be used
to purchase treasury stock) . . 467 71 306
-------- ------- -------

Weighted average number of shares of
common stock used to compute
diluted earnings per share . . . . 10,203 9,581 9,658
-------- ------- -------
-------- ------- -------

Net income per share -- basic . . . . . . $1.13 $0.63 $0.77
-------- ------- -------
-------- ------- -------

Net income per share -- diluted . . . . . $1.08 $0.62 $0.75
-------- ------- -------
-------- ------- -------

28

EXHIBIT 21

LIST OF SUBSIDIARIES

NAME OF SUBSIDIARY JURISDICTION OF INCORPORATION
--------------------------- -----------------------------

1. Nihon DSP K.K. Japan

2. DSP Semiconductors Ltd. Israel

3. DSP Group Europe SARL France

29

EXHIBIT 23.1

CONSENT OF ERNST & YOUNG LLP, INDEPENDENT AUDITORS

We consent to the incorporation by reference in this Annual Report (Form
10-K) of DSP Group, Inc. of our report dated January 23, 1998 (except for Note
9, as to which the date is January 27, 1998), included in the 1997 Annual Report
to Stockholders of DSP Group, Inc.

Our audits also included the consolidated financial statement schedule of
DSP Group, Inc. listed in Item 14(a). This schedule is the responsibility of the
Company's management. Our responsibility is to express an opinion based on our
audits. In our opinion, the consolidated financial statement schedule referred
to above, when considered in relation to the basic consolidated financial
statements taken as a whole, presents fairly in all material respects the
information set forth therein.

We also consent to the incorporation by reference in the Registration
Statements (Form S-8 Nos. 33-83456 and 33-87390) pertaining to the 1991 Employee
and Consultant Stock Plan, the 1991 DSP Group, Inc. Israeli Stock Option Plan,
the 1993 Director Stock Option Plan, and the 1993 Employee Stock Purchase Plan
of our report dated January 23, 1998 (except for Note 9, as to which the date is
January 27, 1998), with respect to the consolidated financial statements and
schedules incorporated herein by reference or included in this Annual Report
(Form 10-K) for the year ended December 31, 1997.

/s/ ERNST & YOUNG LLP

San Jose, California
March 27, 1998

30

EXHIBIT 23.2

CONSENT OF ALMAGOR & CO. CPA (ISR), INDEPENDENT AUDITORS

We consent to the incorporation by reference in this Annual Report (Form
10-K) of DSP Group, Inc., of our report dated January 22, 1998 on the financial
statements of DSP Semiconductors, Ltd. as of December 31, 1997 and for the year
then ended, not included in the 1997 Annual Report to Stockholders of DSP Group,
Inc.

We also consent to the incorporation by reference in the Registration
Statements (Form S-8 33-83456 and 33-87390) pertaining to the 1991 Employee and
Consultant Stock Plan, the 1991 DSP Group, Inc. and Israeli Stock Option Plan,
the 1993 Directors Stock Option Plan, and the 1993 Employee Stock Purchase Plan
of our report dated January 22, 1998 on the financial statements of DSP
Semiconductors Ltd. as of December 31, 1997 and for the year ended, not included
in the 1997m Annual Report and Stockholders of DSP Group, Inc.

/s/ ALMAGOR & CO.
Certified Public Accountants (Israel)

Tel Aviv, Israel
March 27, 1998

31

SCHEDULE II

DSP GROUP, INC.
VALUATION AND QUALIFYING ACCOUNTS
(IN THOUSANDS)

CHARGED TO
BALANCE AT (DEDUCTED FROM)
BEGINNING OF COSTS BALANCE AT
DESCRIPTION PERIOD AND EXPENSES DEDUCTION END OF PERIOD
- ---------------------------------------------------------- --------------- --------------- ----------- ---------------

Year ended December 31, 1995:
Allowance for doubtful accounts......................... $ 150 $ 15 $ 3 $ 162
Sales returns reserve................................... 254 296 269 281

Year ended December 31, 1996:
Allowance for doubtful accounts......................... 162 60 151 71
Sales returns reserve................................... 281 245 149 377

Year ended December 31, 1997:
Allowance for doubtful accounts......................... 71 60 61 70
Sales returns reserve................................... 377 345 600 122

32