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DSP Group Inc. Reports Fourth Quarter 2002 Earnings

SANTA CLARA, Calif., Jan. 21 /PRNewswire/ -- DSP Group Inc. (Nasdaq: DSPG) today announced results for the fourth quarter and year ending December 31, 2002.

Fourth Quarter Results:

The company announced fourth quarter 2002 revenues of $28,128,000, an increase of 14% from revenues of $24,744,000 for the fourth quarter of 2001. Net income from continuing operations for the fourth quarter of 2002 was $3,626,000 an increase of 22% from $2,970,000 in the fourth quarter of 2001. However, net income for the fourth quarter of 2002 was $3,604,000 a decrease of 11% from net income of $4,043,000 for the fourth quarter of 2001. Diluted earnings per share (EPS) for the fourth quarter of 2002 decreased 13% to $0.13, compared with $0.15, for the fourth quarter of 2001. Net income and diluted EPS for the fourth quarter of 2001 and one month of the fourth quarter of 2002 included the spun off DSP Core licensing activity.

Year-end Results:

Revenues for the year ended December 31, 2002, were $125,158,000, an increase of 40% over 2001 revenues of $89,430,000. Net income from continuing operations for 2002 was $12,672,000 an increase of 10% compared to $11,561,000 for 2001. Net income for the year 2002 was $15,142,000 compared to $21,916,000 for the year 2001, a decrease of 31%. Diluted EPS for the year 2002 decreased by 32% to $0.54 from $0.79 for the year 2001. Net income and diluted EPS for 2001 and for the first ten months of 2002 included the spun off DSP Core licensing activity.

Proforma Results:

Results for the fourth quarter of 2002 and for the year ended December 31, 2002 include an unusual loss item for impairment of available for sale marketable securities of $414,000 and $10,229,000 respectively, mainly associated with the decline in value of our holdings in AudioCodes Ltd. shares (Nasdaq: AUDC) in the second quarter of 2002. In addition, we recorded in the first quarter of 2002, an amount of $865,000 as an unusual expense related to the abandoned IPO expenses of the "Ceva" DSP Core licensing business.

The results of operations of the company for the fourth quarter of 2002 and the year December 31, 2002 include a net loss from the discontinued operations of $22,000 and net income from the discontinued operations of $2,470,000 compared to a net income of $1,073,000 and $10,355,000 for the fourth quarter and year ended December 31, 2001.

Proforma net income and EPS for the company excluding the discontinued operations, and the unusual loss and expense items described above, for the fourth quarter of 2002 would have been $3,961,000 and $0.14, respectively. An increase of 33% and 27% of net income and EPS, respectively, compared to the fourth quarter 2001. Proforma net income and EPS for year ended December 31, 2002 would have been $19,930,000 and $0.71 respectively. An increase of 72% and 69% of net income and EPS, respectively compared to 2001.

Eli Ayalon, Chairman & CEO of DSP Group Inc. stated: "We are very proud of our achievements this year, our fourth quarter results conclude a year of success for DSP Group. Despite facing a challenging business environment and severe contraction in the semiconductor industry, we succeeded to significantly grow our revenues and proforma net income.

"A remarkable year over year growth of 40% in our product business and a three years CAGR of 29% (from 1999), are the result of paying close attention to the needs of our customers and our investment policy in R&D that gave birth to a series of new products, which aided our OEM customers to increase their market share and spearheaded our growth."

Mr. Ayalon added: "Despite, and in large part due to, a significant increase of our R&D from approximately $12,000,000 in 1999 to approximately $20,000,000 in 2002, our proforma net income for the semiconductor business also increased. Our management spirit of tight control on expenses, and high productivity of each individual employee allowed us to achieve these results. In 2002 we surpassed our own productivity records with an average revenue per employee of approximately $840,000 (among the highest in our industry), an increase of 41% over 2001.

"We reached a level of average proforma net income per employee (excluding the one time charges described above) of $134,000, an increase of 74% over 2001."

Mr. Ayalon went on saying: "In 2002, we completed the separation of the DSP Core Licensing business from the company.

"DSP Group has now a clear and focused fabless semiconductor model which we intend to develop and enhance through strong cooperation with our customers and suppliers and which will continue to be implemented and executed by the Company's dedicated employees and experienced management team."

Boaz Edan, COO of DSP Group said: "We continue to have a strong demand for our 2.4GHz line of Products. The company plans to launch new products in 2003 (including the DECT (1.9GHz), Bluetooth solutions and DVR's with MP3 applications). These new developments, among others are on schedule. We continue to invest efforts of our marketing and R&D teams to work closely with key customers to define the future generations of products and solutions to be launched in 2004 and 2005."

About DSP Group

DSP Group, Inc. is a semiconductor fabless company that is a leader in the short-range wireless market. By combining its DSP cores technology with advanced RF, communication technology and speech-processing algorithms, DSP Group is a worldwide leader in developing and providing Total Telephony Solutions(TM). These applications include digital 900MHz, 2.4GHz, DECT (1.9GHz), 5.8GHz and Bluetooth for voice and data communication in residential, SOHO, SME, enterprise and automotive applications. DSP Group's advanced RF CMOS and communications technology provides the company with a clear path to a Phone-on-a-Chip(TM) solution. DSP Group also develops and markets embedded, integrated silicon/software solution for Voice-over-Digital- Subscriber Line (VoDSL), Voice-over-Internet-Protocol (VoIP) applications, and other Voice over Packet applications for Integrated Access Device (IAD) and IP Phone. More information about DSP Group is available at www.dspg.com.

NOTE: Total Telephony Solutions and Phone-on-a-Chip are trademarks of DSP
Group, Inc.

This press release may contains statements that qualify as "forward- looking statements" under the Private Securities Litigation Reform Act of 1995, including statements made by Mr. Edan concerning continued demand for our 2.4GHz line of products and our corporate plans to develop and launch new products. These forward-looking statements are based on current expectations and DSP Group assumes no obligation to update this information. In addition, the events described in these forward-looking statements may not actually arise. DSP Group's actual results could differ materially from those described in this press release as a result of various factors, including, the acceptance by customers in the digital voice recorder market of DSP Group's products, DSP Group's ability to differentiate its products from those of its competitors in the same market and the general market demand for products that incorporate DSP Group's technology in the market. These factors and other factors which may effect future operating results or DSP Group's stock price are discussed under "RISK FACTORS" in the Form 10-K for the year ended December 31, 2001 as well as other report, including Form 10-Qs, DSP Group has filed with the Securities and Exchange Commission and which are available on DSP Group's Web site (www.dspg.com) under Investor Relations.

Earnings conference call

DSP Group has scheduled a conference call for 8:00 a.m. EST today to discuss fourth quarter results and invites you to listen to a live broadcast over the Internet. The broadcast can be accessed by all interested parties through the Investor Relations section (investor message board) of DSP Group's website at www.dspg.com or link to: http://www.dspg.com/website/ir/investor_messageb.html .

For more information, please contact Yaniv Arieli, President of US Operations, Investor Relations, DSP Group at (408) 986-4423.

                               DSP GROUP, INC.
                 CONSOLIDATED STATEMENTS OF INCOME - US GAAP
                   (In thousands, except per share amounts)

                              Three Months Ended            Year Ended
                                 December 31,              December 31,
                             2002          2001          2002         2001

    Product revenues
     and other            $ 28,128      $ 24,744    $ 125,158      $ 89,430
    Cost of product
     revenues and other     16,213        14,665       74,412        53,122

    Gross profit            11,915        10,079       50,746        36,308
    Operating expenses:
     Research and
      development            4,621         5,807       19,745        21,066
     Sales and marketing     2,767         2,325       10,745         9,168
     General and
      administrative         1,523         1,280        5,048         4,907
     Aborted spin off
      expenses and other        --            --          865            --

     Total operating
      expenses               8,911         9,412       36,403        35,141

    Operating income         3,004           667       14,343         1,167
    Other income :
     Interest and other
      income, net            1,886         2,885        9,452        12,522
     Equity in earnings
      of affiliates             --            --           --           105
     Minority interest
      in loss of
      subsidiary                --            --           --           173

    Income after financial
     and other income        4,890         3,552       23,795        13,967
    Impairment of
     available-for-sale
     marketable securities   (414)            --  (*)(10,229)            --

    Income before
     provision for income
     taxes                   4,476         3,552       13,566        13,967
    Provision for
     income taxes              850           582      (**)894         2,406

    Net income from
     continuing
     operations              3,626         2,970       12,672        11,561
    Net income (loss)
     from discontinued
     operations(***)          (22)         1,073        2,470        10,335
                            $3,604        $4,043      $15,142      $ 21,916
    Net income
    Net earnings per
     share for continuing
     operations:
     Basic                   $0.13         $0.11        $0.47         $0.43
     Diluted                 $0.13         $0.11        $0.45         $0.42
    Net earnings (loss)
     per share for
     discontinued
     operations:
     Basic                 $(0.00)         $0.04        $0.09         $0.39
     Diluted               $(0.00)         $0.04        $0.09         $0.37
    Net earnings per
     share (combined):
     Basic                   $0.13         $0.15        $0.56         $0.82
     Diluted                 $0.13         $0.15        $0.54         $0.79
    Weighted average
     number of shares of
     Common Stock used
     in computing of:
     Basic                  27,188        26,834       27,070        26,641
     Diluted                28,028        27,818       28,041        27,606

(*) Related to impairment of marketable securities

(**) Including tax credit related to impairment of marketable securities

(***) Related to the DSP Licensing business (Ceva) which was discontinued

          following the merger with Parthus


                               DSP GROUP, INC.
                 CONSOLIDATED PRO FORMA STATEMENTS OF INCOME
                   (In thousands, except per share amounts)

                              Three Months Ended            Year Ended
                                 December 31,              December 31,
                             2002          2001         2002          2001

    Product revenues
     and other             $28,128       $24,744     $125,158       $89,430
    Cost of product
     revenues and other     16,213        14,665       74,412        53,122

    Gross profit            11,915        10,079       50,746        36,308
    Operating expenses:
     Research and
      development            4,621         5,807       19,745        21,066
     Sales and marketing     2,767         2,325       10,745         9,168
     General and
      administrative         1,523         1,280        5,048         4,907

     Total operating
      expenses               8,911         9,412       35,538        35,141

    Operating income         3,004           667       15,208         1,167
    Other income:
     Interest and other
      income, net            1,886         2,885        9,452        12,522
     Equity in earnings
      of affiliates             --            --           --           105
     Minority interest
      in loss of
      subsidiary                --            --           --           173

    Income after financial
     and other income        4,890         3,552       24,660        13,967

    Provision for
     income taxes              929           582        4,730         2,406

    Net income from
     continuing
     operations              3,961         2,970       19,930        11,561
    Net income (loss)
     from discontinued
     operations(***)          (22)         1,073        2,470        10,355
                            $3,939        $4,043      $22,400       $21,916
    Net income
    Net earnings per
     share for continuing
     operations:
     Basic                   $0.15         $0.11        $0.74         $0.43
     Diluted                 $0.14         $0.11        $0.71         $0.42
    Net earnings (loss)
     per share for
     discontinued
     operations:
     Basic                 $(0.00)         $0.04        $0.09         $0.39
     Diluted               $(0.00)         $0.04        $0.09         $0.37
    Net earnings per
     share (combined):
     Basic                   $0.15         $0.15        $0.83         $0.82
     Diluted                 $0.14         $0.15        $0.80         $0.79
    Weighted average
     number of shares of
     Common Stock used
     in computing of:
     Basic                  27,188        26,834       27,070        26,641
     Diluted                28,028        27,818       28,041        27,606

    The above pro forma
     consolidated statements
     of income have been
     adjusted to exclude
     the following items
     to US GAAP reported
     net income:

    Reported net income
     per US GAAP            $3,604        $4,043      $15,142       $21,916
    Adjustments:
     Aborted spin off
     expenses and other         --            --          865            --
     Impairment of
      available-for-sale
      marketable securities    414            --       10,229            --
     Tax benefit              (79)            --      (3,836)            --

    Pro forma net income    $3,939        $4,043      $22,400       $21,916


                               DSP GROUP, INC.
                         CONSOLIDATED BALANCE SHEETS
                                (In thousands)

                                                  December 31,   December 31,
    Assets                                            2002           2001
    Current Assets:
     Cash and cash equivalents                       $39,919        $39,146
     Marketable securities and short term
      bank deposits                                   45,371         70,893
     Trade receivable, net                             4,873          6,315
     Inventories                                       6,916          2,048
     Other accounts receivable                         1,352          1,547
     Deferred income taxes                             1,685          2,098
    Assets of discontinued operation, net              4,737         12,197
    Total current assets                             104,853        134,244

    Property and equipment, net                        4,690          5,390
    Long term marketable securities                  150,692        139,752
    Other investments                                 12,031         25,536
    Other assets, net                                  6,190          6,229
    Severance pay fund                                 1,616          1,228

    Total Assets                                    $280,072       $312,379

    Liabilities and Stockholders' Equity
    Current liabilities:
     Trade payable                                    $6,745         $5,123
     Other current liabilities                        21,552         11,592
     Liabilities of discontinued operation                --          7,852
    Total current liabilities                         28,297         24,567
    Long term liabilities:
    Accrued severance pay                              1,686          1,294
    Deferred income taxes                              2,371          7,541
    Total long term liabilities                        4,057          8,835

    Stockholders' equity:
     Common stock                                         27             27
     Additional paid-in capital                      156,443        155,969
     Less cost of treasury stock                          --        (8,623)
     Accumulated other comprehensive income              476          2,652
     Retained earnings                                90,772        128,952
    Total stockholders' equity                       247,718        278,977

    Total liabilities and stockholders' equity      $280,072       $312,379

SOURCE DSP Group Inc.

-0- 01/21/2003

CONTACT: Yaniv Arieli, President of US Operations, Investor Relations of DSP Group, +1-408-986-4423/

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