~~We assess the impairment of goodwill and other identifiable intangibles whenever events or changes in circumstances~~are present which indicate that the carrying value may not be ~~recoverable. Some factors~~recoverable, we will recognize an impairment loss. Factors we consider important, which could trigger impairment include:

significant underperformance relative to expected historical or projected future operating results;

significant changes in the manner of our use of the acquired assets or the strategy for our overall business;

significant negative industry or economic trends;

significant decline in our stock price for a sustained period; and

significant decline in our market capitalization relative to net book value.

Such impairment loss is measured by comparing the recoverable amount of the asset with its carrying value. The determination of the value of such intangible assets requires management to make assumptions regarding estimated future cash flows and other factors to determine the fair value of the respective assets. If these estimates or the related assumptions change in the future, we could be required to record impairment charges. Any material change in our valuation of assets in the future and any consequent adjustment for impairment could have a material adverse impact on our future reported financial results.

Goodwill

Goodwill associated with the excess purchase price over the fair value of assets acquired is currently reviewed for impairment annually or sooner if events or changes in circumstances indicate the carrying amount of goodwill may not be recoverable.

Factors considered important, which could trigger an interim impairment review, include the following:

significant under performance relative to expected historical or projected future operating results;

significant changes in the manner or our use of the acquired assets or the strategy for our overall business;

•

~~Significant under-performance relative to expected historical or projected future operating results;~~

significant negative industry or economic trends; and

•

~~Significant changes in the manner of our use of the acquired assets or the strategy for our overall business; and~~

significant decline in our stock price for a sustained period; and our market capitalization relative to net book value.

•

~~Significant negative industry or economic trends.~~

~~In accordance~~

Such impairment loss is measured by comparing the recoverable amount of goodwill with ~~SFAS No. 142, “Goodwill~~its carrying value. The determination of the value of goodwill requires management to make assumptions regarding estimated future cash flows and ~~Other Intangible Assets,” on January 1, 2002~~other factors to determine its fair value. If these estimates or the related assumptions change in the future, we ~~ceased amortizing goodwill arising from acquisitions completed prior to July 1, 2001. In lieu of amortization, we are~~could be required to ~~perform an initial~~record impairment ~~review~~charges. Any material change in our valuation of ~~our~~ goodwill in ~~2002~~the future and ~~an annual~~any consequent adjustment for impairment ~~review thereafter. If we determine through the impairment review process that goodwill has been impaired, we would record the impairment charge in~~could have a material adverse impact on our ~~statement of operations.~~

~~Accounting for Stock Based Compensation~~

In accordance with the provisions of the Financial Accounting Standards Board’s (“FASB”) Statement of Accounting Standard No. 123, “Accounting for Stock-Based Compensation” (“SFAS No. 123”), we have elected to follow the Accounting Principles Board’s Opinion No. 25, “Accounting for Stock Issued to Employees and the related interpretations” (“APB No. 25”) in accounting for our employee stock-based compensation plans.

future reported financial results.

RECENT ACCOUNTING PRONOUNCEMENTS

In ~~August 2001,~~June 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets" ("SFAS 144"), which addresses financial accounting and reporting for the impairment or disposal of long-lived assets and superseded SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of". SFAS 144 applies to all long-lived assets (including discontinued operations) and consequently amended APB Opinion No. 30, "Reporting the Results of Operations for a Disposal of a Segment of a Business". SFAS 144 develops one accounting model for long-lived assets that are to be disposed of by a sale. SFAS 144 requires that long-lived assets that are to be disposed of by a sale be measured at the lower of book value or fair value less this cost of sale. SFAS 144 is effective for fiscal years beginning after December 15, 2001, with earlier application encouraged. We adopted SFAS 144 as of January 1, 2002, and the adoption did not have a material effect on our financial position and results of operations.

FASB ~~recently also~~ issued SFAS No. 146, ~~"Accounting~~“Accounting for Costs Associated with Exit or Disposal ~~Activities" ("SFAS 146"). SFAS 146~~Activities,” which addresses ~~financial accounting~~significant issues regarding the recognition, measurement, and reporting ~~for~~of costs associated with exit and disposal activities, including restructuring activities. SFAS No. 146 requires that costs associated with exit or disposal activities ~~and nullifies Emerging Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs~~be recognized when they are incurred rather than at the date of a commitment to ~~Exit an Activity (including Certain Costs Incurred in a Restructuring)". SFAS 146 requires that a liability for a cost associated with~~ an exit or disposal ~~activity be recognized and measured initially at fair value only when the liability~~plan. SFAS No. 146 is ~~incurred. The provisions of SFAS 146 are~~ effective for all exit or disposal activities ~~that are~~ initiated after December 31, 2002. ~~We do~~The company adopted SFAS No. 146 during the three months ended March 31, 2003.

In November 2002, the FASB issued FASB Interpretation No. 45 “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others,” (“FIN 45”). FIN 45 requires a guarantor to recognize, at the inception of a guarantee, a liability for the fair value of the obligation undertaken by it in issuing the guarantee. It also expands the disclosure requirements in the financial statements of the guarantor with respect to its obligations under certain guarantees that it has issued. The Company is required to adopt the initial recognition and initial measurement accounting provisions of this interpretation on a prospective basis to guarantees issued or modified after December 31, 2002.

The Company does not ~~expect~~anticipate that the adoption ~~of SFAS 146 to~~will have a material effect on ~~our~~the Company’s financial position, or results of ~~operation.~~

operations or cash flows The adoption of FIN 45 did not have any impact on the financial position, results of operations, cash flows of and disclosures by the Company.

In January 2003, the FASB issued FASB Interpretations No. 46, “Consolidation of Variable Interest Entities,” (“FIN 46”). This interpretation clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 is effective February 1, 2003 for variable interest entities created after January 31, 2003, and July 31, 2003 for variable interest entities created prior to February 1, 2003. The adoption of FIN 46 did not have a material impact on the financial position, results of operations or cash flows of the Company.

FACTORS ~~AFFECTING~~THAT COULD AFFECT OUR OPERATING RESULTS

We caution you that the following important factors, among others, could cause our actual future results to differ materially from those expressed in forward-looking statements made by or on behalf of ~~ParthusCeva~~us in filings with the Securities and Exchange Commission, press releases, communications with investors and oral statements. Any or all of our forward-looking statements in this ~~Quarterly Report on Form 10-Q~~quarterly report, and in any other public statements we make, may turn out to be wrong. They can be affected by inaccurate assumptions we might make or by known or unknown risks and uncertainties. Many factors mentioned in the discussion below will be important in determining future results. We undertake no obligation to publicly update any forward-looking statements, whether as a result of new information, future events or otherwise. You are advised, however, to consult any further disclosures we make in our reports filed with the Securities and Exchange Commission.

RISKS RELATING TO ~~THE SEPARATION OF~~OUR MARKETS AND OPERATIONS

The industries in which we license our technology are experiencing a challenging period of slow growth that has negatively impacted and could continue to negatively impact our business and operating results.

The primary customers for our products are semiconductor design and manufacturing companies, system OEMs and electronic equipment manufacturers, particularly in the telecommunications field. These industries are highly cyclical and have been subject to significant economic downturns at various times, particularly in recent periods. These downturns are characterized by production overcapacity and reduced revenues, which at times may encourage semiconductor companies or electronic product manufacturers to reduce their expenditure on our technology. During 2001, the semiconductor industry as a whole experienced the most severe contraction in its history, with total semiconductor sales worldwide declining by more than 30%, according to the Semiconductor Industry Association. The market for semiconductors used in mobile communications was particularly hard hit, with the overall decline in sales worldwide estimated by Gartner Dataquest to have been well above 30%. These

adverse conditions stabilized but did not improve during the course of 2002. If the market does not recover during 2003, our business could be further materially and adversely affected.

The markets in which we operate are highly competitive, and as a result we could experience a loss of sales, lower prices and lower revenue.

The markets for the products in which our technology is used are highly competitive. Aggressive competition could result in substantial declines in the prices that we are able to charge for our intellectual property. It could also cause our existing customers to move their orders to our competitors. Many of our competitors are large companies that have significantly greater financial and other resources than we have.

In addition, we may face increased competition from smaller, niche semiconductor design companies in the future. Some of our customers may also decide to satisfy their needs through in-house design and production. We compete on the basis of price, product quality, design cycle time, reliability, performance, customer support, name recognition and reputation and financial strength. Our inability to compete effectively on these bases could have a material adverse effect on our business, results of operations and financial condition.

We have undertaken an effort to strengthen our headquarters functions in the U.S. and intend to hire a new CEO and CFO; this process may not be completed successfully and could be disruptive to our operations.

In the first quarter of 2002 we incurred a reorganization and severance charge of $1.4 million as a result of the decision to strengthen the headquarters function in the US. Although we believe that our announced goal to establish a U.S.-based management team will strengthen our sales and investor presence in the U.S., where most of our customers and stockholders are located, and will further advance the integration process arising from our combination with Parthus, we can provide no assurance that the anticipated benefits of this move will arise. Moreover, the transition to new management, including a new CEO and CFO, as well as a new independent chairman of the board of directors, may create operational difficulties that could hinder our ability to exploit our market opportunities. To the extent that this transition takes longer than planned, it could also delay our ability to implement our overall business strategy on a timely basis.

Our operating results fluctuate from quarter to quarter due to a variety of factors, including our lengthy sales cycle, and are not a meaningful indicator of future performance.

In some quarters our operating results could be below the expectations of securities analysts and investors, which could cause our stock price to fall. Factors that may affect our quarterly results of operations in the future include, among other things:

the timely introduction of, demand for and market acceptance of new or enhanced technologies;

new product announcements and introductions by competitors;

timing and volume of orders and production;

gain or loss of significant customers, licensees, distributors and suppliers; and

changes in our pricing policies and those of our competitors and suppliers.

Our corporate restructuring following the consummation of the combination resulted in a restructuring charge during the fourth quarter of 2002 of approximately $6.4 million. We expect that this restructuring will result in a short-term reduction in revenues. Our operating results will also be affected by general economic and other conditions affecting the timing of customer orders and capital spending. Unfavorable general economic conditions have harmed our business and the business of Parthus in the past and may harm our combined business in the future.

Our lengthy sales cycle may also cause our revenue and operating results to vary unpredictably from period to period. The period of time between our initial contact with a potential customer and the receipt of a request for a quote on an intellectual property license is generally at least 12 months, and the time from such a request to a binding contract is generally at least another four to six months. Due to the complexity of our technology and of the legal framework in which our industry operates, we must devote a substantial amount of time to negotiating the terms of our licensing arrangements with our customers. In addition, customers perform, and require us to perform, extensive process and product evaluation and testing before entering into purchase or licensing arrangements. Even after we enter into an agreement and provide a final product to a customer in the form of silicon or intellectual property, we expect that it will be at least six months more before the customer begins to sell its products incorporating our technology, and therefore even longer before we begin to receive royalty income. Many of the milestones along our sales cycle are beyond our control and difficult to predict. This fact makes it more difficult to forecast our quarterly results and can cause substantial variations in operating results from quarter to quarter that are unrelated to the long-term trends in our business. This lack of predictability and variability in our results could harm our stock price and could significantly affect it in particular periods.

We rely significantly on revenue derived from a limited number of licensees.

We expect that a limited number of licensees will account for a substantial portion of our revenues in any period. Moreover, license agreements for our DSP cores have not historically provided for substantial ongoing license payments, although they may provide for royalties based on product shipments. Significant portions of our anticipated future revenue, therefore, will likely depend upon our success in attracting new customers or expanding our relationships with existing customers. Our ability to attract new customers and expand our relationships with existing customers will depend on a variety of factors, including the performance, quality, breadth and depth of our current and future products. Our failure to obtain agreements with these customers will impede our future revenue growth.

We depend on market acceptance of third-party semiconductor intellectual property (SIP).

Our future growth will depend on the level of acceptance by the market of our third-party, licensable intellectual property model and the variety of intellectual property offerings available on the market, which to a large extent are not in our control. If the market shifts and third-party SIP is no longer desired by our customers, our business, results of operations and financial condition could be materially harmed.

We depend on the success of our licensees to promote our solutions in the marketplace.

We do not sell our technology directly to end-users; we license our technology primarily to semiconductor companies and to electronic equipment manufacturers, who then incorporate our technology into the products they sell. Because we do not control the business practices of our licensees, we do not influence the degree to which they promote our technology or set the prices at which they sell products incorporating our technology. We cannot assure you that our licensees will devote satisfactory efforts to promote our solutions. In addition, our unit royalties from licenses are totally dependent upon the success of our licensees in introducing products incorporating our technology and the success of those products in the marketplace. If we do not retain our current licensees and continue to attract new licensees, our business may be harmed.

We depend on a limited number of key personnel who would be difficult to replace.

Our success depends to a significant extent upon our key employees and senior management; the loss of the service of these employees could materially harm us. Competition for skilled employees in our field is intense. We cannot assure you that we will be successful in attracting and retaining the required personnel.

RISKS RELATING TO

POLITICAL AND ECONOMIC DEVELOPMENTS

Terrorist attacks and threats, and war or the threat of war, could adversely affect our operating results and the price of our common stock.

Recent terrorist attacks, the response to those attacks, the war in Iraq, and the related decline in consumer confidence and continued economic weakness have had an adverse impact on our operations. Recent consumer reports indicate that consumer confidence has reached its lowest level in nearly a decade. If consumer confidence continues to decline or does not recover, our revenues and results of operations may continue to be adversely impacted in 2003 and beyond. Any escalation in these events, or similar future events, may disrupt our operations or those of our licensees. Any of these events could also increase volatility in the U.S. and worldwide financial markets and economy, which could harm our stock price and may limit the capital resources available to us and our licensees. This could have a significant impact on our operating results, revenues and costs and may result in increased volatility in the market price of our common stock and on the future price of our common stock.

Potential political, economic and military instability in Israel may adversely affect our results of operations.

Some of our principal research and development facilities are located in, and some of our directors and executive officers are residents of, Israel. Although substantially all of our sales currently are being made to customers outside Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting Israel. Any major hostilities involving Israel, or the interruption or curtailment of trade between Israel and its current trading partners, could significantly harm our business, operating results and financial condition.

In addition, certain of our officers and employees are currently obligated to perform annual reserve duty in the Israel Defense Forces and are subject to being called for active military duty at any time. Although we have operated effectively under these requirements since our inception, we cannot predict the effect of these obligations on the company in the future. Our operations could be disrupted by the absence, for a significant period, of one or more of our officers or key employees due to military service.

RISKS RELATING TO OUR

~~DSP CORES LICENSING BUSINESS~~SEPARATION FROM DSP GROUP

We may have conflicts of interest with DSP Group with respect to our past and ongoing relationships and we may not be able to resolve these conflicts on terms that are most favorable to us.

The separation of our DSP cores licensing business from DSP Group ~~including the transfer of related assets, liabilities and intellectual property rights to us,~~ was completed in November 2002. Immediately thereafter, we combined with Parthus Technologies plc. Prior to that time, we were a wholly owned subsidiary of DSP Group. Conflicts of interest may arise between DSP Group and us in a number of areas relating to our past and ongoing relationships, ~~including:~~

•

~~labor, tax, employee benefit, indemnification and other matters arising from our separation from DSP Group;~~

•

~~intellectual property matters;~~

•

~~employee retention and recruiting;~~

•

~~the nature, quality and pricing of transitional services DSP Group has agreed to provide us; and~~

•

~~business opportunities that may be attractive to both DSP Group and us.~~

including labor, tax, employee benefit, indemnification, intellectual property, employee retention and recruiting, transitional services provided by DSP Group, and business opportunities that may be attractive to both DSP Group and us. We may not be able to resolve any of the potential conflicts of interest discussed above on favorable terms or at all.

We currently use some of DSP Group’s operational, administrative and technical ~~infrastructure and if these services are not sufficient to meet our needs or if we are not able to replace these services, we may be unable to manage critical operational functions of our business.~~infrastructure.

Pursuant to our transition services agreement, DSP Group, Ltd. has agreed to provide our subsidiary, ParthusCeva Ltd. (formerly called Corage, Ltd.), with certain general and administrative services, including management and information services and network, hardware and software maintenance and support.

Although DSP Group ~~Ltd.~~ is contractually obligated to provide us with ~~these~~operational, administrative and technical services pursuant to a transition services agreement, these services may not continue to be provided at the same level or quality as when we were part of DSP Group. ~~In addition, we cannot assure you that the quality of services and level of responsiveness will meet our needs.~~ If we are unable to obtain services of sufficient quality or replace any services that are not effectively provided, our business and results of operations could be harmed.

~~After the initial term of the transition services agreement, we will need to either extend the term of this agreement, engage others to perform these services or perform these services internally.~~ We cannot assure you that DSP Group ~~Ltd.~~ will continue to provide us with these services after the initial term of the transition services agreement, that the quality of services and level of responsiveness will meet our needs or that the cost of these services will not be significantly higher if we purchase them from other providers or employ staff to handle them internally. If we fail to find replacements for these services in a timely fashion, or if we are not able to replace them on favorable terms, our business, results of operations and financial condition could be harmed.

Restrictions on our ability to issue stock and take certain other actions could inhibit our growth.

The agreement governing our separation from DSP Group contains restrictions on issuances of our capital stock and other specified actions by us during the one-year period following our spin-off from DSP Group, and on the liquidation, disposition or discontinuation of our DSP cores licensing business during the two-year period following our spin-off. These restrictions, as well as our agreement to indemnify DSP Group if we do not comply with these restrictions, could limit our ability to grow our business and compete effectively during the period following the distribution. In addition, these restrictions and indemnification obligations could make us a less attractive acquisition or merger candidate during this period.

We could be subject to joint and several liability for taxes of DSP Group.

As a former member of a group filing consolidated income tax returns with DSP Group, we could be liable for federal income taxes of DSP Group and other members of the consolidated group, including taxes, if any, incurred by DSP Group on the distribution of our stock to the stockholders of DSP Group. DSP Group has agreed to indemnify us against these taxes, other than taxes for which we have agreed to indemnify DSP Group pursuant to the terms of the tax indemnification and allocation agreement and separation agreement we entered into with DSP Group.

Our historical financial information may not be representative of our results as a separate company.

~~The~~

Our historical consolidated financial statements ~~of our DSP cores licensing business~~ have been carved out from the consolidated financial statements of DSP Group using the historical results of operations and historical bases of the assets and liabilities of ~~this~~our business. Accordingly, this information does not necessarily reflect what our financial position, results of operations and cash flows would have been had ~~this~~our business operated as a separate, stand-alone entity during the periods presented. DSP Group did not account for us, and we did not operate, as a separate, stand-alone entity for the periods presented. The costs and expenses of this business include allocations from DSP Group for centralized corporate services and infrastructure costs, including accounting and legal, research and development, sales and marketing, and general administration costs. These allocations have been determined on bases that we and DSP Group consider to reasonably reflect the utilization of services provided to us or the benefit we received.

We have not made adjustments to the historical financial information ~~contained herein~~for periods prior to November 1, 2002 to reflect the significant changes in the cost structure, funding and operations which resulted from the separation of the DSP cores licensing business from DSP Group and the combination with Parthus.

Some of our directors and executive officers may have conflicts of interest because of their ownership of DSP Group’s common ~~stock.~~stock or position with DSP Group.

Some of our directors and executive officers, including Eliyahu Ayalon, who serves as the Chairman of our board of directors and ~~Chairman~~ of the board of directors of DSP Group; Gideon Wertheizer, our Executive Vice President—Business Development and Chief Technology Officer; Issachar Ohana, our Vice ~~President—Sales;~~President Sales and General Manager of the DSP Intellectual Property Licensing Division; and Bat-Sheva Ovadia, our Chief Scientist—DSP Technologies, hold a significant number of shares of DSP Group’s common stock and options to purchase shares of DSP Group’s common stock. Ownership of DSP Group’s common stock by certain of our directors and executive officers could create, or appear to create, conflicts of interest when they are faced with decisions that could have different implications for DSP Group and us.

RISKS RELATING TO ~~THE~~OUR

COMBINATION WITH PARTHUS

A number of factors could impair our ability to successfully ~~integrate~~complete the long-term integration of the combined businesses, and thereby harm our business, financial condition and operating results.

In November 2002, we combined our business with that of Parthus ~~Technologies plc. As part of the combination,~~Technologies. Although we ~~changed~~have made substantial progress in integrating our name from Ceva, Inc. to ParthusCeva, Inc. and Parthus became our wholly owned subsidiary. We must integrate the operations these business, each of which previously operated independently of the other. Webusinesses, we cannot assure you that wesuch integration will be ~~able to successfully integrate these businesses~~completed in athe most efficient, effective and timely ~~and efficient~~ manner ~~if at all.~~or ultimately be successful over the long-term. We may ~~face~~encounter future difficulties in ~~effecting~~connection with the ~~successful~~ integration of these businesses, including:

the impairment and/or loss of relationships with employees, customers, suppliers, distributors, licensees, vendors and others;

adverse financial results associated with integration of the two businesses, including unanticipated expenses related to the ~~following:~~

•

~~impairment and/or loss of relationships with employees, customers, suppliers, distributors, licensees, vendors~~integration and deployment of acquired technologies and personnel; and ~~others;~~

the disruption of our business and distraction of our management.

•

~~adverse financial results associated with integration of the two businesses, including unanticipated expenses related to the integration and deployment of acquired technologies; and~~

•

~~disruption of our business and distraction of our management.~~

In addition, the anticipated benefits of the combination may not be realized ~~because, among other reasons:~~

•

~~our technology may not be as robust as expected or may not achieve the expected performance, features or product yield;~~

•

~~our intellectual property, including~~and its ~~patent portfolio, may not be as valuable as expected; and~~

•

~~the~~ value ~~of the combination may not be accretive.~~

We may not ~~succeed in addressing these risks.~~prove to be accretive because our combined technology may not be as strong as anticipated, our business model may not be successful, or other unanticipated difficulties may be encountered. Further, we cannot assure you that our growth rate will equal the historical growth rates experienced by the two businesses separately.

~~In connection with the combination, we expect to write off substantial acquired in-process research and development, which may adversely affect our stock price.~~

The amount of excess cost attributable to in-process research and development of Parthus is estimated to be approximately $14.1 million. This in-process research and development was not considered to have reached technological feasibility and had no alternative or future use and, in accordance with generally accepted accounting principles, we will expense the value of such in-process research and development. This amount will be recorded as part of our research and development expense in the fiscal quarter ended December 31, 2002. This write-off, which is a non-cash charge, will reduce our net income, negatively impact our results of operations and reduce our earnings per share for that fiscal quarter. As a result, our stock price could be significantly and adversely affected.

ADDITIONAL RISKS RELATING TO OUR BUSINESS

~~The industries in which we license our technologies are experiencing a challenging period of slow growth and have experienced and~~Our success will ~~continue to experience other cyclical effects which may negatively impact our operating results and business.~~

The primary customers for our products are semiconductor design and manufacturing companies, system OEMs and electronic equipment manufacturers, particularly in the telecommunications field. These industries are highly cyclical and have been subject to significant economic downturns at various times. These downturns are characterized by production overcapacity and reduced revenues, which at times may, if the downturn is sufficiently prolonged or severe, encourage semiconductor companies or electronic product manufacturers to reduce their expendituredepend on our ~~technology. During 2001, the semiconductor industry as a whole experienced the~~ability to manage our geographically dispersed operations successfully.

Although we are headquartered in San Jose, California, most severe contraction in its history, with total semiconductor sales worldwide declining by more than 30%, according to the Semiconductor Industry Association. The market for semiconductors used in mobile communications was particularly hard hit, with the overall decline in sales worldwide estimated by Gartner Dataquest

to have been well above 30%. These adverse conditions have stabilized but have not improved during the course of 2002. If the market does not recover during the first half of 2003, our business could be materially and adversely affected.

The difficulties of the telecommunication and semiconductor industries has resulted and may continue to result in the reduction of capital and research and development budgets or the delay of product introduction, both of which have resulted and may continue to result in a reduction in demand for our products. Our success depends on increasing demand for products that use our technology. In particular, in 2001, more than 56% of our ~~licenses~~executives and employees are located in Dublin, Ireland and Herzeliya, Israel. Accordingly, our ability to compete successfully will depend in part on the ability of ~~DSP cores were~~a limited number of key executives located in geographically dispersed offices to ~~chip manufacturers whose products are incorporated in or are being developed for use in digital cellular telephones. Recently there has been a downturn in~~integrate management, address the ~~cellular handset industry. As a result, the growth rate~~needs of ~~sales by~~ our customers and ~~potential customers has slowed significantly. Demand for other products that incorporate~~respond to changes in our ~~technology, such as MP3 devices, hard disk drives and voice over packet network services, has also weakened. Continued weakening demand for such products will adversely affect~~markets. If we are unable to effectively manage our ~~ability to maintain~~remote operations, our ~~current margins, and could harm our financial results.~~

business may be harmed.

We may not be successful in licensing integrated, system-level solutions.

We ~~intend to~~ offer our application-level IP platforms built around our DSP cores, ~~as well as to~~and continue to offer our DSP cores and IP platforms on a stand-alone basis. We have ~~limted~~limited experience in offering DSP cores and IP platforms as an integrated solution. ~~Any~~Future licenses for these integrated solutions may be on terms less favorable than we currently anticipate.

We rely significantly on revenue derived from a limited number of licensees and customers and the success of the products they introduce, and our business and results of operations may be materially harmed if we do not continue to obtain agreements with new customers or expand our relationships with existing and former customers.

We expect that a limited number of licensees and customers will account for a substantial portion of our revenues in any period. For example, two DSP core licensees generated 67% of the revenues of our DSP cores licensing business in the third quarter of 2002 with revenues from one licensee accounting for more than 35%. Similarly, 31% of Parthus’ annual revenues in 2001 were derived from a single customer, STMicroelectronics. We expect to continue to derive a significant portion of our revenue from a small number of licensees and customers in the future.

Moreover, we anticipate that we will depend upon new license agreements and purchase orders to generate revenues for future quarters because, historically, license agreements for our DSP cores licensing business have not generally provided for substantial ongoing license payments, although they may provide for royalties based on product shipments. Therefore, significant portions of our anticipated future revenue will likely depend upon our success in attracting new customers or expanding our relationships with existing and former customers. Our ability to attract new customers and expand our relationships with existing and former customers will depend on a variety of factors, including the performance, quality, breadth and depth of our current and future products. Our failure to obtain agreements with these customers will impede our future revenue growth.

In addition, our unit royalties from licenses are totally dependent upon the success of our licensees in introducing products incorporating our technology and the success of those products in the marketplace. If we do not retain our current licensees and customers and continue to attract new licensees and customers, our business may be harmed.

~~Our quarterly operating results will fluctuate due to a variety of factors and are not a meaningful indicator of future quarterly performance.~~

The operating results of each of our businesses have fluctuated from quarter to quarter in the past, and our operating results as a combined company may continue to do so in the future. As a result, it is possible that in some quarters, our operating results could be below the expectations of securities analysts and investors, which could cause our stock price to fall. Factors that may affect our results of operations in the future include, among other things:

•

~~timely introduction, demand and market acceptance of new or enhanced products;~~

•

~~new product announcements and introductions by competitors;~~

•

~~supply constraints for and changes in the cost of components incorporated in our products;~~

•

~~timing and volume of orders and production;~~

•

~~gain or loss of significant customers, licensees, distributors and suppliers; and~~

•

~~changes in our pricing policies and those of our competitors and suppliers.~~

Parthus implemented a reduction in workforce in connection with the streamlining of two product lines in the second half of fiscal 2002. The reduction in workforce and realignment of resources resulted in the incurrence of a one time restructuring charge during Parthus’ third quarter of fiscal 2002 of approximately $3.8 million. Due in part to this restructuring charge and the continuing sustained downturn in the semiconductor industry, Parthus’ revenues for the third quarter of fiscal 2002 decreased by 9% from the same time period in 2001. We expect that further restructuring following the consummation of the combination will result in a one time restructuring charge during the fourth quarter of fiscal 2002 of between $5 million and $7 million. We expect that these charges will result in a further short-term reduction in revenues. Our operating results will also be affected by general economic and other conditions affecting the timing of customer orders and capital spending. Unfavorable general economic conditions have harmed our businesses in the past and may harm our combined business in the future.

~~We depend on market acceptance of third-party semiconductor intellectual property.~~

~~Since we do not sell our products directly to end users, we depend on the success of our licensees to promote our solutions in the marketplace.~~

We license our technology primarily to semiconductor companies, such as STMicroelectronics, Texas Instruments and National Semiconductor, who then incorporate our technology into the products they sell. We believe that our licensee network is essential to improving our brand name recognition, bringing more rapid acceptance of our architectures and platforms and ensuring that there are multiple, reliable sources of products incorporating our technologies available at competitive prices. We cannot assure you that we will be able to maintain our current relationships or establish new relationships with additional licensees, and any failure by us to do so could have a material adverse effect on our business. Existing and potential licensees are not contractually obligated to use our architecture and some of them design and develop processors based on competing architectures, including their own, and others may do so in the future. None of our current semiconductor manufacturer customers is obligated to license new or future generations of our technology designs. In addition, because we do not control the business practices of our customers, we do not influence the degree to which they promote our technology or set the prices at which they sell products incorporating our technology to consumer product manufacturers. We cannot assure you that our licensees will devote satisfactory efforts to promote our solutions.

~~We also depend significantly on system OEMs to adopt our solutions and on their success in selling products containing our technology.~~

Although we have licensed directly to system OEMs in the past, these companies typically purchase chips or components containing our technology from our semiconductor manufacturing licensees. As system OEMs are the creators of many of the final products containing our technology, our success is substantially dependent upon the adoption and continued use of chips containing our technology by system OEMs. We face numerous risks because of this fact, including the potential difficulties in persuading large system OEMs to rely on our technology for their critical components, rather than developing the technology themselves or relying on competing products of more established companies with greater resources and name recognition than we have. In addition, we might face difficulties in persuading users of our technologies to bear certain development costs associated with adopting our technologies and to make other necessary investments to produce embedded processors using our technologies, and of electronic product manufacturers to incorporate our technologies into their products. We depend on electronic product manufacturers to incorporate our technology in their products, and any failure by them to do so or to successfully sell their products to end users could substantially limit our revenue growth.

We also face substantial risks which are beyond our control that influence the success or failure of our existing or potential system OEM customers, including the competition they face and the market acceptance of their products; their engineering, marketing and management capabilities and the technical challenges unrelated to our technology that they face in developing their products; and their financial and other resources. The failure of one or more of the system OEMs using our technology may have a material adverse effect on our business, results of operations and financial condition.

If we are unable to meet the changing needs of our end-users or to address evolving market demands, our business may be harmed.

The markets for programmable DSP cores and IP platforms are characterized by rapidly changing technology, emerging markets and new and developing end-user needs, requiring significant expenditure for research and development. We cannot assure you that we will be able to introduce systems and solutions that reflect prevailing industry standards on a timely basis, to meet the specific technical requirements of our end-users or to avoid significant losses due to rapid decreases in market prices of our products, and our failure to do so may seriously harm our business. In addition, the reduction in the number of our employees in connection with our recent restructuring efforts could adversely affect our ability to attract or retain customers who require certain R&D capabilities from their IP providers.

~~To remain competitive, we must be able to meet our needs for substantial capital, and financing may not be available on favorable terms, if at all.~~

We believe that success in our markets requires substantial capital in order to maintain the flexibility to take advantage of opportunities as they arise and to fund our anticipated combined research and development needs. Our capital requirements may vary greatly from quarter to quarter, depending on, among other things, capital expenditures, fluctuations in our operating results, financing activities, acquisitions and investments and receipt of receivables. We believe that our existing resources, including existing cash and cash equivalents, and anticipated cash flows from operations, will be adequate to meet our projected working capital, capital expenditure and research and development requirements for at least the next 12 months. However, we may need to raise funds sooner if, among other things, we acquire additional businesses, products or technologies. We cannot assure you that additional financing will be available on commercially reasonable terms, if at all. To the extent that existing resources and anticipated cash flows are not adequate for our operational and other cash needs, our operating results and financial position could be harmed.

We depend on a limited number of key personnel who would be difficult to replace. If we lose the services of these individuals or cannot hire additional qualified personnel, our business will be harmed.

Our success will depend to a significant extent upon our key employees and senior management. The loss of the service of these employees could materially harm us. We believe that our future success will depend in large part upon our ability to attract and retain highly skilled technical, managerial and marketing personnel. Competition for skilled employees in these fields is intense. We cannot assure you that we will be successful in attracting and retaining the required personnel. In addition, we cannot assure you that our newly combined management team will successfully work together to build our business. If any of the members of our senior management team, including Kevin Fielding and Gideon Wertheizer, are unable or unwilling to continue in ParthusCeva’s employ, our results of operations could be materially harmed.

~~Our success will depend on our ability to manage our geographically dispersed operations successfully.~~

Although we are headquartered in San Jose, California, most of our executives are in Dublin, Ireland and Herzeliya, Israel and most of our employees are based in Dublin. Accordingly, our ability to compete successfully will depend in part on the ability of a limited

number of key executives located in geographically dispersed offices to integrate management, address the needs of our customers and respond to changes in our markets. If we are unable to effectively manage our remote operations, our business may be harmed.

We may seek to expand our business through acquisitions that could result in diversion of resources and extra ~~expenses, which could disrupt our business and harm our financial condition.~~expenses.

We may pursue acquisitions of businesses, products and technologies, or establish joint venture arrangements in the future that could expand our business. The negotiation of potential acquisitions or joint ventures, as well as the integration of acquired or jointly developed businesses, technologies or products could cause diversion of management’s time and our resources. ~~Future acquisitions could result in:~~

•

~~difficulties integrating acquired operations, personnel, technologies or products;~~

•

~~diversion of management’s focus from our core business concerns;~~

•

~~the incurrence of debt and contingent liabilities;~~

•

~~amortization of intangibles and impairment of goodwill;~~

•

~~research and development write-offs; and~~

•

~~other acquisition-related expenses.~~

We may not be able to successfully integrate acquired businesses or joint ventures with our operations. If we were to make any acquisition or enter into a joint venture, we may not receive the intended benefits of the acquisition or joint venture. If future acquisitions or joint ventures disrupt our operations, or if we have difficulty integrating the businesses or technologies we acquire, our business, financial condition and results of operations could suffer.

We may not be able to adequately protect our intellectual property.

Our success and ability to compete ~~will~~ depend in large part upon the protection of our proprietary technologies. We rely on a combination of patent, copyright, trademark, trade secret, mask work and other intellectual property rights, confidentiality procedures and licensing arrangements to establish and protect our proprietary rights. These agreements and measures may not be sufficient to protect our technology from third-party infringement, or to protect us from the claims of others. As a result, we face risks associated with our patent position, including the potential need to engage in significant legal proceedings to enforce our patents, the possibility that the validity or enforceability of our patents may be denied, the possibility that third parties will be able to compete against us without infringing our patents and the possibility that our products may infringe patent rights of third parties.

We generally enter into non-disclosure agreements with our employees, consultants and corporate partners and attempt to control access to and distribution of their technologies, documentation and other proprietary information. Despite these efforts, however, third parties could copy or otherwise obtain and make unauthorized use of our technologies or independently

develop similar technologies. These steps may not prevent misappropriation of our solutions or technologies, particularly in foreign countries where laws or law enforcement practices may not protect our proprietary rights as fully as in the United States. In addition, we cannot assure you that our pending patents will issue or that the issued patents will be valid or enforceable.

Our tradenames or trademarks may be registered or utilized by third parties in countries other than those in which we have registered them, impairing our ability to enter and compete in these markets. In the United States, the trademark SmartCore has been registered by an unrelated company. ~~While~~Although we have successfully co-existed with this other trademark holder,we cannot assure you that this state of affairs will continue. If we were forced to change any of our brand names, we could lose a significant amount of our brand equity.

If we fail to protect our intellectual property rights and proprietary technologies adequately, if there are changes in applicable laws that are adverse to our interests, or if we become involved in litigation relating to our intellectual property rights and proprietary technologies or relating to the intellectual property rights of others, our business, results of operations and financial condition could be harmed.

Our business will suffer if we are sued for infringement of the intellectual property rights of third parties or if we cannot obtain licenses to these rights on commercially acceptable terms.

Although we are not currently involved in any material litigation, we are subject to the risk of adverse claims and litigation alleging infringement of the intellectual property rights of others. ~~Our products rely on technology that could be the subject of existing patents or patent applications of third parties.~~ There are a large number of patents held by others, including our competitors, pertaining to the broad areas in which we are active. We have not, and cannot reasonably, investigate all such patents. From time to time, we have become aware of patents in our technology areas and have sought legal counsel regarding the validity of such patents and their impact on how we operate our business, and we will continue to seek such counsel when appropriate in the future. ~~Third parties may assert infringement claims in the future with respect to our current or future products. These claims~~Claims against us may require us to enter into license arrangements or result in protracted and costly litigation, regardless of the merits of these claims. Any necessary licenses may not be available or, if available, may not be obtainable on commercially reasonable terms. If we cannot obtain necessary licenses on commercially reasonable terms, we may be forced to stop licensing our technology, and our business would be seriously harmed.

~~We have a very lengthy sales cycle, which increases the likelihood that our quarterly revenue will fluctuate and which may, in turn, adversely affect the market price of our common stock.~~

Our lengthy sales cycle may cause our revenue and operating results to vary unpredictably from period to period. The period of time between our initial contact with a potential customer and the receipt of a request for a quote on an intellectual property license is generally at least six months, and the time from such a request to a binding contract is generally at least another four to six months. Due to the complexity of our technology and of the legal framework in which our industry operates, we must devote a substantial amount of time to negotiating the terms of our licensing arrangements with our customers. In addition, customers

perform, and require us to perform, extensive process and product evaluation and testing before entering into purchase or licensing arrangements. Even after we enter into an agreement and provide a final product to a customer in the form of silicon or intellectual property, we expect that it will be at least six months more before the customer begins to sell its products incorporating our technology, and therefore even longer before we begin to receive royalty income.

Many of the milestones along our sales cycle are beyond our control and difficult to predict. This fact makes it more difficult to forecast our quarterly results and can cause substantial variations in operating results from quarter to quarter that are unrelated to the long-term trends in our business. This lack of predictability and variability in our results could harm our stock price and could significantly affect it in particular periods.

~~The markets in which we operate are highly competitive, and as a result we could experience a loss of sales, lower prices and lower revenue.~~

Our ~~DSP cores licensing~~ business depends on OEMs and their suppliers ~~to obtain~~obtaining required complementary components.

Some of the raw materials, components and subassemblies included in the products manufactured by our OEM customers are obtained from a limited group of suppliers. Supply disruptions, shortages or termination of any of these sources could have an adverse effect on ~~the~~our business and results of operations ~~of our DSP cores licensing business~~ due to the delay or discontinuance of orders for products containing our IP, ~~or for~~especially our ~~products~~DSP cores, until those necessary components are available.

The future growth of our ~~DSP cores licensing~~ business depends in part on our ability to license to system OEMs and small-to-medium-sized semiconductor companies directly.

Historically ~~our DSP cores licensing business has derived~~ a substantial portion of ~~its revenue~~the revenues from the licensing of our DSP cores has been derived in any period ~~from license fees~~ from a relatively small number of ~~licenses.~~licensees. Because of the high license fees we currently charge, only large semiconductor companies or vertically integrated system OEMs typically license our DSP core technologies. Part of our current growth strategy ~~for our DSP cores licensing business~~ is to broaden ~~its~~our client base by offering tailored packages to small- and medium-sized semiconductor companies and other system OEMs to

enable them to license our DSP core technologies. If we are unable to effectively develop and market our intellectual property through this model, our ~~DSP cores licensing business~~ revenues will continue to be largely dependent on a smaller number of licensees and the failure to secure these types of relationships could harm our business and results of operations.

~~We may need to increase our research and development efforts to remain competitive.~~

Some of our competitors are attempting to use new technologies to manipulate their chip designs to increase the parallel processing of the chips and/or designs they offer. For example, one such technology used is Very Long Instruction Word (VLIW), of which some of our competitors possess elements, but which we do not possess at the present time. If such technology continues to improve the programming processing of these chips, or if other new technologies are demanded by our customers, we may need to change the focus of our research and development to obtain such technologies. Failure to do so could hurt our ability to remain competitive and could have an adverse effect on our results of operations. Our DSP cores licensing business spent $1.4 million, or 29% of its total revenues, on research and development in the third quarter of 2002 and $5.1 million, or 20% of its total revenues, in 2001, on research and development and we expect to continue to invest heavily in this area. However, we cannot assure you that these past or future expenditures will result in new and enhanced products or such products will be accepted in the market.

We utilize third-party foundries to produce the chips we sell, and any failure by them to deliver the chips we require on time could limit our ability to satisfy our customers’ demands.

~~Our business strategy calls for revenue~~

Part of our revenues is generated from the sale of silicon chips embodying our intellectual property, which we refer to ~~comprise an increasing percentage of the total revenue of our IP platforms licensing business over the next two years. We currently utilize third party foundries to produce chips using our designs.~~as Hard IP. Any interruption in our relationship with ~~these~~the third party foundries that produce these chips could harm our ability to develop this part of our business

profitably. We do not have the ability to produce chips independently and thus depend on these foundries to:

allocate a portion of their manufacturing capacity to our needs;

produce acceptable quality silicon wafers and chips with acceptable manufacturing yields; and

•

~~allocate a portion of their manufacturing capacity to our needs;~~

deliver chips on a timely basis at a competitive price.

•

~~produce acceptable quality silicon wafers and chips with acceptable manufacturing yields; and~~

•

~~deliver chips on a timely basis at a competitive price.~~

ADDITIONAL RISKS RELATING TO OUR

INTERNATIONAL OPERATIONS

~~Potential political, economic and military instability in Israel may adversely affect our results of operations.~~

Some of our principal research and development facilities are located in the State of Israel. In addition, some of our directors and executive officers are residents of Israel. Although substantially all of our sales currently are being made to customers outside Israel, we are nonetheless directly influenced by the political, economic and military conditions affecting

Israel. Any major hostilities involving Israel, or the interruption or curtailment of trade between Israel and its present trading partners, could significantly harm our business, operating results and financial condition.

The Israeli tax benefits ~~and government program~~ that we currently receive orand the government programs in which we participate in require us to meet ~~several~~certain conditions and may be terminated or reduced in the future, which could increase our costs.

We were assigned certain tax benefits in Israel from DSP Group, and have received others for our Israeli facilities, particularly as a result of the “Approved Enterprise” status of our facilities and programs. To maintain our eligibility for these tax benefits, we must continue to meet certain conditions, relating principally to adherence to the investment program filed with the Investment Center of the Israeli Ministry of Industry and Trade and to periodic reporting obligations. We believe that we will be able to continue to meet such conditions. Should we fail to meet such conditions in the future, however, these benefits would be cancelled and we would be subject to corporate tax in Israel at the standard rate of 36% and could be required to refund tax benefits already received. In addition, we cannot assure you that these grants and tax benefits will be continued in the future at their current levels or otherwise. The termination or reduction of certain programs and tax benefits (particularly benefits available to us as a result of the Approved Enterprise status of our facilities and programs) or a requirement to refund tax benefits already received may seriously harm our business, operating results and financial condition.

~~The~~Our corporate tax rate ~~applicable to our IP platforms licensing business~~ may increase, which could adversely impact our cash flow, financial condition and results of operations.

We have significant operations in the Republic of Ireland and a substantial portion of ~~the~~our taxable income ~~on our IP platforms licensing business~~historically has ~~historically~~ been generated there. Currently, some of our Irish subsidiaries are taxed at rates substantially lower than U.S. tax rates. Although there is no expectation of any changes to Irish tax law, if our Irish subsidiaries were no longer to qualify for these lower tax rates or if the applicable tax laws were rescinded or changed, our operating results could be materially adversely affected. In addition, because ~~the IP platforms licensing business is~~our Irish and Israeli operations are owned by subsidiaries of a U.S. corporation, distributions to the U.S. corporation, and in certain circumstances undistributed income of the subsidiaries, may be subject to U.S. tax. Moreover, if U.S. or other foreign tax authorities were to change applicable foreign tax laws or successfully challenge the manner in which our subsidiaries’ profits are currently recognized, our overall taxes could increase, and our business, cash flow, financial condition and results of operations could be materially adversely affected.

~~Our results of operations may be affected by currency fluctuations.~~

Due to our multinational operations, our business is subject to fluctuations based upon changes in the exchange rates between the U.S. dollar, British pound, the euro and the New Israeli Shekel, the currencies in which we collect revenues or pay expenses. Part of our expenses in Israel are paid in Israeli currency, which subjects us to the risks of foreign currency fluctuations and to economic pressures resulting from Israel’s general rate of inflation. Additionally, some of our revenues and part of our expenses in Dublin, Ireland are paid in euro, which subjects us to similar risks with respect to the European economies. While a significant part of our sales and expenses are denominated in United States dollars, a portion of our expenses are denominated in New Israeli Shekels and euro. As a result, an increase in the value of the Israeli shekel and/or the euro in comparison to the United States dollar could increase the cost of our technology development, research and development expenses and general and administrative expenses. We cannot assure you that currency fluctuations, changes in the rate of inflation between these regions and the U.S. or any of the other factors mentioned above will not have a material adverse effect on our business, financial condition and results of operations.

Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

~~As a significant part~~

A majority of ~~both the~~our revenues and ~~expenses~~a portion of our ~~DSP cores licensing business~~expenses are transacted in U.S. dollars and our assets and liabilities together with our cash holdings are predominately denominated in U.S. dollars. However, a portion of our expenses are denominated in currencies other than the U.S. ~~dollars, we have experienced only insignificant foreign exchange gains~~dollar, principally the euro, the Israeli NIS and ~~losses to date. However, although we have not done so to date as part of~~ the ~~DSP cores licensing business, because recent increases~~British pound. Increases in the volatility of the exchange ~~rate~~rates of the ~~New Israeli Shekel (NIS)~~euro, NIS and pound versus the U.S. dollar could have an adverse effect on the expenses and liabilities that we incur when translated into U.S. dollars. We incurred foreign exchange losses of approximately $199,000 for the three-month period ended March 31, 2003 arising principally on euro liabilities as a result of the appreciation of the euro against the U.S. dollar. As a result of such currency fluctuations and the conversion to U.S. dollars for financial reporting purposes, we may experience fluctuations in our operating results on an annual and a quarterly basis going forward. We have not in the ~~State of Israel, we~~past, but may ~~hedge part of the risk of a devaluation of the NIS~~ in the ~~future.~~future, hedge against fluctuations in exchange rates. Future hedging transactions may not successfully mitigate losses caused by currency fluctuations. We ~~will ensure that options~~expect to continue to experience the effect of exchange rate fluctuations on an annual and ~~forward contracts meet~~quarterly basis, and currency fluctuations could have a material adverse impact on our results of operations.

We are exposed to financial market risks, including changes in interest rates. We typically do not attempt to reduce or eliminate our market exposures on our investment securities because the ~~requirements~~majority of ~~cash flow hedges,~~our investments are short-term. We do not have any derivative instruments.

The fair value of our investment portfolio or related income would not be significantly impacted by either a 100 basis point increase or decrease in interest rates due mainly to the short-term nature of our investment portfolio.

All the potential changes noted above are based on sensitivity analysis performed on our balances as ~~defined by SFAS No. 133 and are all effective as hedges~~ of ~~these expenses. Such amounts will be recorded in earnings in the period in which they occur.~~

March 31, 2003.

Item 4. CONTROLS AND PROCEDURES

(a)Evaluation of disclosure controls and ~~procedures.~~procedures. Based on the evaluation of our disclosure controls and procedures (as defined in Rules 13a-14(c) and 15d-14(c) under the Exchange Act) as of a date within 90 days of the filing date of this quarterly report on Form 10-Q, our chief executive officer and chief financial officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and are operating in an effective manner.

(b)Changes in internal ~~controls.~~controls. There were no significant changes in our internal controls or in other factors that could significantly affect these controls subsequent to the date of the most recent evaluation.

PART II. OTHER INFORMATION

~~Item 2. CHANGES IN SECURITIES AND USE OF PROCEEDS~~

~~(a) Not applicable.~~

~~(b) Not applicable.~~

(c) From July 1, 2002 through September 30, 2002, we granted options to purchase an aggregate of 51,836 shares of our common stock, at a per-share weighted average exercise price of $10.03. No underwriters were involved in any of the foregoing sales of securities. The sales were made in reliance upon an exemption from the registration provisions of the Securities Act set forth in Rule 701 of the Securities Act. All of the foregoing securities are deemed to be restricted securities for the purposes of the Securities Act.

~~(d) Not applicable.~~

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

On July 24, 2002, our sole stockholder, acting by written consent, approved the following matters: (1) an amendment and restatement of our 2000 Stock Incentive Plan, increasing the number of shares available thereunder, (2) our 2002 employee stock purchase plan and (3) our 2002 stock incentive plan.

Item 6. EXHIBITS AND REPORTS ON FORM 8-K

(a) Exhibits

Exhibit No.		Description

99.1		Certification of Brian Long pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2		Certification of Elaine Coughlan pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

~~(b) Reports on Form 8-K~~

On November 14, 2002, ParthusCeva filed a Report on Form 8-K dated November 1, 2002 announcing the closing of the combination of ParthusCeva (formerly known as Ceva, Inc.) with Parthus Technologies plc. ParthusCeva is filing an amendment to that Form 8-K on the date hereof containing the required financial statements of the acquired business and the related pro forma combined financial statements of the combined entity for the third quarter of 2002.

(b)

Reports on Form 8-K

None.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Dated: ~~December 16, 2002~~ May 13, 2003	~~PARTHUSCEVA, INC.~~ PARTHUSCEVA, INC.

	~~By:~~
	By:	/s/ ~~Elaine Coughlan~~ ELAINE COUGHLAN
		Elaine Coughlan
		Chief Financial Officer
		(principal financial officer)

~~CERTIFICATION~~CERTIFICATIONS

I, ~~Kevin Fielding,~~Brian Long, certify that:

I have reviewed this quarterly report on Form 10-Q of ParthusCeva, Inc.;

Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

Based on my knowledge, the financial statements, and other financial information included in this quarterly report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

44.

The registrant’s other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and we have:

~~designed~~Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

~~evaluated~~Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

~~presented~~Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

The registrant’s other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant’s auditors and the audit committee of registrant’s board of directors (or persons performing the equivalent function):

~~all~~All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

~~any~~Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

6. The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


~~Dated:~~	~~December 16, 2002~~	~~/s/ Kevin Fielding~~
		~~Kevin Fielding~~ ~~President and Chief Executive Officer~~ ~~(principal executive officer)~~

~~CERTIFICATION~~

~~I, Elaine Coughlan, certify that:~~

~~I have reviewed this quarterly report on Form 10-Q of ParthusCeva, Inc.;~~

designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

~~evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and~~

~~presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;~~

all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

~~any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and~~

The registrant’s other certifying officers and I have indicated in this quarterly report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses.


Dated: May 13, 2003	~~December 16, 2002~~	/s/ ~~Elaine Coughlan~~ BRIAN LONG
			Brian Long
			Chief Executive Officer
			(principal executive officer)

CERTIFICATIONS

I, Elaine Coughlan, certify that:

I have reviewed this quarterly report on Form 10-Q of ParthusCeva, Inc.;

Designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

Evaluated the effectiveness of the registrant’s disclosure controls and procedures as of a date within 90 days prior to the filing date of this quarterly report (the “Evaluation Date”); and

Presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date;

All significant deficiencies in the design or operation of internal controls which could adversely affect the registrant’s ability to record, process, summarize and report financial data and have identified for the registrant’s auditors any material weaknesses in internal controls; and

Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal controls; and

Dated: May 13, 2003						/s/ ELAINE COUGHLAN
						Elaine Coughlan
						Chief Financial Officer
						(principal financial officer)

INDEX TO EXHIBITS

Exhibit No.		Description

99.1		Certification of Brian Long pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

99.2		Certification of Elaine Coughlan pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.

Delaware		~~77-0556376~~
(State or Other Jurisdiction of Incorporation or Organization)		77-0556376 (I.R.S. Employer Identification No.)

~~2033 Gateway Place, Suite 150, San Jose, California~~		~~95110-1002~~
~~(Address of Principal Executive Offices)~~		~~(Zip Code)~~

		Page

PART I.	FINANCIAL INFORMATION	4

Item 1.	Financial Statements	4

	~~Item 1.~~ Interim Condensed Consolidated Balance Sheets at March 31, 2003 and December 31, 2002	~~FINANCIAL STATEMENTS~~ 4

	Interim Condensed Consolidated Statements of Operations for the three months ended March 31, 2003 and 2002	~~Interim Consolidated Balance Sheets at September 30, 2002 (unaudited) and December 31, 2001 (audited)~~ 5

		~~Unaudited Interim Consolidated Statements of Income for the nine months and three months ended September 30, 2002 and 2001~~

		~~Unaudited~~ Interim Statements of Changes in Stockholders’ Equity and Parent Company Investment for the ~~nine~~three months ended ~~September 30,~~March 31, 2003 and 2002	6

		~~Unaudited~~ Interim Condensed Consolidated Statements of Cash Flows for the ~~nine~~three months ended ~~September 30,~~March 31, 2003 and 2002 ~~and 2001~~	7

		Notes to the ~~Unaudited~~ Interim Condensed Consolidated Financial Statements	8

Item 2.	~~Item 2.~~ Management’s Discussion and Analysis Of Financial Condition and Results of Operations	~~MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS~~ 15

Item 3.	~~Item 3.~~ Quantitative and Qualitative Disclosures About Market Risk	~~QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK~~ 33

Item 4.	~~Item 4.~~ Controls and Procedures	~~CONTROLS AND PROCEDURES~~ 33

PART II.	OTHER INFORMATION	34

Item 6.	~~Item 6.~~ Exhibits and Reports on Form 8-K	~~EXHIBITS AND REPORTS ON FORM 8-K~~ 34

SIGNATURES		35

CERTIFICATIONS		36

	December 31, 2001		September 30, 2002
	Note 1c		(unaudited)
ASSETS
CURRENT ASSETS:
Trade receivables	$	8,115	$	8,181
Other accounts receivable and prepaid expenses		319		3,104
Deferred income taxes		240		240
Inventories		50		60

Total current assets		8,724		11,585

LONG-TERM INVESTMENT:
Severance pay fund		1,084		1,234
Long-term lease deposits		190		167

		1,274		1,401

PROPERTY AND EQUIPMENT, NET		2,199		2,336

Total assets	$	12,197	$	15,322

LIABILITIES, STOCKHOLDERS’ EQUITY AND PARENT COMPANY INVESTMENT
CURRENT LIABILITIES:
Trade payables	$	707	$	935
Employees and payroll accruals		2,006		1,274
Income tax payable		3,496		1,201
Accrued expenses		519		543
Deferred revenues		—		245

Total current liabilities		6,728		4,198

ACCRUED SEVERANCE PAY		1,124		1,256


COMMITMENTS AND CONTINGENCIES

STOCKHOLDERS’ EQUITY AND PARENT COMPANY INVESTMENT:
Common Stock:
$ 0.001 par value: 100,000,000 shares authorized at December 31, 2001, and September 30, 2002; 20,000,000 shares issued and outstanding at December 31, 2001 and September 30, 2002		20		20
Parent Company’s investment		4,325		9,848
Retained earnings		—		—

Total stockholders’ equity and parent Company investment		4,345		9,868

Total liabilities, stockholders’ equity and parent company investment	$	12,197	$	15,322

	March 31, 2003			December 31, 2002¹
ASSETS
Current assets:
Cash and cash equivalents	$	68,519		$	73,810
Trade receivables, net		9,281			6,471
Other accounts receivable and prepaid expenses		1,513			1,748
Inventories, net		296			168

Total current assets		79,609			82,197

Long-term investments:
Severance pay fund		1,311			1,152
Investment in other company		1,350			1,350

		2,661			2,502

Property and equipment, net		8,264			6,593
Goodwill		38,398			38,398
Other intangible assets, net		5,208			5,492

Total assets	$	134,140		$	135,182

LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Trade payables	$	5,334		$	2,491
Accrued expenses and other payables		16,309			18,982
Taxes payable		1,233			1,291
Deferred revenues		1,108			1,115

Total current liabilities		23,984			23,879

Accrued severance pay		1,321			1,231

Stockholders’ equity:
Common Stock:
$ 0.001 par value: 100,000,000 shares authorized at December 31, 2002, and March 31, 2003; 18,053,507 and 18,079,119 shares issued and outstanding at December 31, 2002 and March 31, 2003		18			18
Additional paid in capital		134,132			134,051
Accumulated deficit		(25,315	)		(23,997	)

Total stockholders’ equity		108,835			110,072

Total liabilities and stockholders’ equity	$	134,140		$	135,182

	Nine months ended September 30,				Three months ended September 30,
	2001		2002		2001		2002
	(unaudited)
Revenues:
License and royalties	$	17,583	$	10,915	$	6,917	$	3,921
Technical support, maintenance and other		3,217		2,619		895		931

Total revenues		20,800		13,534		7,812		4,852

Cost of revenues		951		938		344		322

Gross profit		19,849		12,596		7,468		4,530

Operating expenses:
Research and development, net		3,979		4,624		1,291		1,408
Sales and marketing		1,984		2,227		654		734
General and administrative		2,163		2,367		809		1,013

Total operating expenses		8,126		9,218		2,754		3,155

Operating income		11,723		3,378		4,714		1,375
Financial income, net		346		75		125		25

Income before taxes on income		12,069		3,453		4,839		1,400
Taxes on income		2,802		961		1,679		419

Net income	$	9,267	$	2,492	$	3,160	$	981

	Three months ended March 31,
	2003			2002
Revenues:
Licensing and royalties	$	6,981		$	3,213
Other revenue		1,862			883

Total revenues		8,843			4,096

Cost of revenues		1,638			311

Gross profit		7,205			3,785

Operating expenses:
Research and development, net		4,049			1,650
Sales and marketing		1,373			703
General and administrative		1,478			693
Amortization of intangible assets		284			—
Reorganization and severance charge		1,380			—

Total operating expenses		8,564			3,046

Operating income (loss)		(1,359	)		739
Financial income, net		240			18
Currency translation differences		(199	)		—

Income (loss) before taxes on income		(1,318	)		757
Taxes on income		—			242

Net income (loss)		(1,318	)		515

Basic and diluted net earnings (loss) per share	$	(0.073	)	$	0.057
Weighted average number of Common Stock used in computation of basic and diluted net earnings (loss) per share		18,070			9,041

	Common stock			Parent company investment		Retained earnings			Total stockholders’ equity and parent company investment
	Shares	Amount		Parent company investment		Retained earnings			Total stockholders’ equity and parent company investment
Balance as of January 1, 2001 (Note 1c)	20,000,000	$	20	$	2,000	$	—		$	2,020
Net income (unaudited)	—		—		—		9,267			9,267
Capital return to Parent Company (unaudited)	—		—		—		(9,267	)		(9,267	)
Contribution from Parent Company (unaudited)	—		—		3,506		—			3,506

Balance as of September 30, 2001 (unaudited)	20,000,000	$	20	$	5,506	$	—		$	5,526

	Common stock				Additional paid-in capital		Accumulated deficit			Total stockholders’ equity
	Shares	Amount			Additional paid-in capital		Accumulated deficit			Total stockholders’ equity
Balance as of January 1, 2003 (Note 1c)	18,053,507	$	18		$	134,051	$	(23,997	)	$	110,072
Net loss	—		—			—		(1,318	)		(1,318	)
Issuance of Common Stock upon exercise of stock options	7,388		—	(*)		16		—			16
Issuance of Common Stock upon purchase of ESPP shares	18,224		—	(*)		65		—			65

Balance as of March 31, 2003	18,079,119	$	18		$	134,132	$	(25,315	)	$	108,835

	Common stock			Related Company investment		Retained earnings			Total stockholders’ equity and Related Company investment
	Shares	Amount		Related Company investment		Retained earnings			Total stockholders’ equity and Related Company investment
Balance as of January 1, 2002 (Note 1c)	20,000,000	$	20	$	4,325	$	—		$	4,345
Net income	—		—		—		515			515
Capital return to Related Company	—		—		—		(515	)		(515	)
Contribution from Related Company	—		—		3,508		—			3,508

Balance as of March 31, 2002	20,000,000	$	20	$	7,833	$	—		$	7,853

	Nine months ended September 30,
	2001			2002
	(unaudited)
Cash flows from operating activities:
Net income		9,267			2,492
Adjustments required to reconcile net income to net cash provided by (used in) operating activities:
Depreciation		477			697
Increase in trade receivables		(2,468	)		(66	)
Increase in other accounts receivable and prepaid expenses		(68	)		(2,785	)
Increase in inventories		(9	)		—
Increase in deferred income taxes		(69	)		(10	)
Increase in trade payables		194			228
Increase in deferred revenues		56			245
Increase (decrease) in employees and payroll accruals		120			(732	)
Increase (decrease) in accrued expenses		(56	)		24
Decrease in income tax payable		(636	)		(2,295	)
Increase (decrease) in accrued severance pay, net		39			(18	)

Net cash provided by (used in) operating activities		6,847			(2,220	)

Cash flows from investing activities:
Purchase of property and equipment		(986	)		(834	)
Investment in long term lease deposits, net		(100	)		23

Net cash used in investing activities		(1,086	)		(811	)

Cash flows from financing activities:
Capital return to Parent Company		(9,267	)		(2,492	)
Contribution from Parent Company		3,506			5,523

Net cash provided by (used in) financing activities		(5,761	)		3,031

Changes in cash and cash equivalents		—			—
Cash and cash equivalents at the beginning of the year		—			—

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

	Three months ended
	March 31,
	2003			2002
Cash flows from operating activities:
Net income (loss)		(1,318	)		515
Adjustments required to reconcile net income (loss) to net cash provided by (used in) operating activities:
Depreciation		896			189
Amortization of intangible assets		284			—
Loss on disposal of property and equipment		4			—
Currency translation differences		100			—
Decrease (increase) in trade receivables		(2,795	)		36
Decrease (increase) in other accounts receivable and prepaid expenses		253			(91	)
Increase in inventories		(128	)		(59	)
Increase in trade payables		219			434
Increase (decrease) in deferred revenues		(7	)		93
Increase (decrease) in accrued expenses and other payables		(2,741	)		69
Decrease in taxes payable		(60	)		(3,254	)
Decrease in accrued severance pay, net		(69	)		(869	)

Net cash (used in) operating activities		(5,362	)		(2,937	)

Cash flows from investing activities:
Purchase of property and equipment		(86	)		(56	)
Proceeds from sale of property and equipment		38			—

Net cash used in investing activities		(48	)		(56	)

Cash flows from financing activities:
Proceeds from issuance of Common Stock upon exercise of stock options		16
Proceeds from issuance of Common Stock upon purchase of ESPP shares		65
Contribution from Related Company		—			2,993

Net cash provided by financing activities		81			2,993
Effect of exchange rate movements on cash		38			—

Changes in cash and cash equivalents		(5,291	)		—
Cash and cash equivalents at the beginning of the period		73,810			—

Cash and cash equivalents at the end of the year period	$	68,519		$	—

~~NOTE 1: -~~	~~General~~

	a.	~~Background:~~

		~~ParthusCeva, Inc. (formerly known as Ceva, Inc.) (the “Company”) is engaged in the development and license of designs for programmable Digital Signal Processor cores (“DSP Cores”~~ (U.S. dollars in thousands) NOTE 1:- GENERAL Background: ParthusCeva, Inc. (formerly Ceva, Inc) (the “Company”) was a wholly-owned subsidiary of DSPG, Inc. (“DSPG”) until November 1, 2002. On November 1, 2002, DSPG, the Company and Parthus Technologies plc (“Parthus”) finalized the terms of the combination agreement dated April 4, 2002 (the “Combination Agreement”) pursuant to which the Company and Parthus agreed to effect a combination of their businesses. DSPG contributed the DSP cores licensing business and operations and the related assets and liabilities of such business and operations to the Company (the “Separation”); DSPG then spun-off the Company by distributing 9,040,851 shares of Common Stock of the Company to the existing stockholders of DSPG on a one-for-three basis (one share of the Company Common Stock for every three shares of DSPG Common Stock held); Parthus was acquired by the Company from the existing shareholders of Parthus in exchange for the issuance of 8,998,887 new shares of Common Stock of the Company (the “Combination”). The combined company was renamed ParthusCeva, Inc. (“ParthusCeva”). The Company was incorporated in Delaware on November 22, 1999. The Company had no business or operations prior to the transfer of the DSP cores licensing business and operations from DSPG. These financial statements give effect to the transfer by DSPG of the DSP cores licensing business and operations and the related assets and liabilities of such businesses to the Company for all periods presented and include the results of Parthus subsequent to the Combination on November 1, 2002. ParthusCeva licenses to semiconductor companies and electronic equipment manufacturers (also known as original equipment manufacturers, or OEMs) complete, integrated intellectual property (IP) solutions that enable a wide variety of electronic devices. The Company’s programmable digital signal processing (DSP) cores and application-level IP platforms power handheld wireless devices, global positioning system (GPS) devices, consumer audio products, automotive applications and a range of other consumer products. NOTE 2:- BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of presentation: The accompanying unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles for interim financial ~~statements do not give effect to the combination of the Company with Parthus Technologies plc (“Parthus”) on November 1, 2002, as described below.~~

		A programmable DSP Core is a special purpose, software-controlled processor that, through complex mathematical calculations, analyzes, manipulates and enhances voice, audio and video signals. The programmable DSP Cores that the Company designs are used as the central processor in semiconductor chips made for specific applications. These chips are used in a wide variety of electronic devices, including digital cellular telephones, modems, hard disk drives, MP3 players and digital cameras, and are critical to the performance of the electronic products in which they are used.

		The Company licenses its software to semiconductor companies throughout the world. These semiconductor companies then manufacture, market and sell custom-designed chips to system original equipment manufacturers (OEMs) of a variety of electronic products. The Company also licenses its software directly to system OEMs.

		The Company was incorporated in Delaware in November 1999 and, until November 1, 2002, was a wholly owned subsidiary of DSP Group Inc. (the “Parent”). The Company was incorporated under the name DSP Cores, Inc. and changed its name to Corage, Inc. in 2001 and changed its name again to Ceva, Inc. in April 2002. The Company had no business or operations prior to the transfer of the DSP Core licensing business and operations from the Parent.

		On November 1, 2002, the Parent completed the spin-off (the “Spin-off”) of its DSP Cores licensing division to the Company, and immediately thereafter the Company combined with (the “Combination”) Parthus.

		The Spin-off and the Combination were governed by a Combination Agreement, dated as April 4, 2002, and amended as of August 29, 2002, by and among the Parent, Parthus and the Company (the “Combination Agreement”). The Spin-off was completed by means of a Separation Agreement by and among the Parent, the Company, and certain of their respective subsidiaries; a Technology Transfer Agreement between DSP Group, Ltd. (a wholly-owned subsidiary of the Parent) and Corage Ltd. (a wholly-owned subsidiary of the Company); a Tax Indemnification and Allocation Agreement between the Parent and the Company; and a Transition Services Agreement between DSP Group, Ltd. and Corage, Ltd.; each dated as of November 1, 2002.

(1)		Under the terms of the Spin-off, the Parent contributed its DSP Cores licensing division to the Company in exchange for common stock of the Company and distributed all of the common stock of the Company it held to the Parent’s stockholders of record as of October 31, 2002. The Company then immediately acquired Parthus and issued common stock to the former Parthus shareholders and the Company changed its name to ParthusCeva, Inc. Pursuant to the terms agreed to by the parties, as part of the assets contributed to the Company, DSP Group also contributed a sum of $40 million plus cash equal to the amount by which the transaction costs of the Spin-off and Combination exceeded $2 million, and Parthus made a $60 million capital repayment to its shareholders immediately prior to the Combination. The Parent received private letter rulings from the IRS to the effect that, among other things, the Spin-off was tax-free under Section 355 of the Internal Revenue Code of 1986 for federal income tax purposes, except with respect to cash received in lieu of fractional shares.

		At the effective time of the Spin-off, stockholders of record of the Parent on October 31, 2002, received one share of common stock of the Company for every three shares of the Parent’s common stock held by them on that date. Fractional shares were not issued. Instead, fractional interests were aggregated and sold on the market on the first day after the closing of the transactions, and cash in lieu of fractional shares was distributed ratably to the Parent’s stockholders who would otherwise have received a fraction of a share of the Company’s common stock. The distribution was made to the Parent’s stockholders without payment of any consideration or the exchange of any shares by the Parent’s or the Company’s stockholders. At the effective time of the Combination, each shareholder of Parthus received 0.015141 shares of the Company’s common stock for each ordinary share of Parthus held by them (0.15141 shares per Parthus ADS) on October 31, 2002, the record date for the Combination.

	b.	~~Basis of presentation:~~

		These financial statements reflect the transfer by the Parent of the DSP Cores licensing business and operations and the related assets and liabilities of such business and operations to the Company immediately prior to the spin-off of the Company to the shareholders of the Parent (the “Separation”).

		The Company’s financial statements include the licensing business and operations of the Parent which have been carved out from the financial statements of the Parent using the historical results of operations and historical bases of the assets and liabilities of the DSP Group business that it comprises. The consolidated financial statements reflect the assets, liabilities, results of operations, financial positions, changes in stockholders’ equity, Parent company investment, and cashflows (the “Company’s Business”) as if the Company and its subsidiaries were separate entities for all periods presented. The balances of the assets and liabilities presented in the accompanying financial statements are not necessarily indicative of the balances of the assets and liabilities to be transferred upon the Separation.

~~NOTE 1:–~~	~~General (CONT.)~~

		Changes in Parent investment represent the Parent’s contribution of its net investment after giving effect to the net income of the Company plus net cash transfers to or from the Parent. Based on the Separation Agreement and related documents between the Company, the Parent and certain of the Parent subsidiaries, upon the Separation, Parent and the Company shall jointly calculate the net investment account and the Company shall pay to Parent, or Parent shall pay to the Company, as the case may be, the net amount thereof.

		~~The Company will begin accumulating its retained earnings on the date on which the Parent transfers to the Company all of the assets and liabilities relating to the Company’s Business.~~

		The transfer of assets, liabilities and operations of the Company’s Business from the Parent is a reorganization of entities under common control and has been accounted for in a manner similar to a pooling of interests. Accordingly, the financial statements of the Company have been restated to include the Company Business as if it had always been operated as a separate entity.

		~~Additionally, the consolidated financial statements include allocations~~Allocations of certain ~~DSP Group, Inc.~~DSPG corporate ~~headquarters’~~headquarters assets, liabilities and expenses relating to the Company’s Business. ~~Management believes these allocations are reasonable. All material intercompany transactions and balances between the Company’s subsidiaries have been eliminated.~~

	(2)			~~The Company utilized services~~Services from certain employees of ~~DSP Group~~DSPG in Japan and France who performed marketing and technical support activities and whose costs were allocated to the Company.

	(3)			~~The statements of income include the costs~~Costs directly attributable to the Company’s Business including charges for shared facilities, functions and services used by the Company’s Business. Certain costs and expenses have been allocated based on management’s estimates of the ~~costs~~cost of services provided to the Company’s Business. Such costs include research and development costs, sales and marketing and general and administrative expenses. ~~These~~Such allocations and charges are based on either a direct cost pass-through or a percentage of total costs for the services provided based on factors such as headcount or the specific level of activity directly related to such costs.

	September 30,
	2001		2002
	(Unaudited)
Long-lived assets by geographical region
United States	$	45	$	33
Israel		2,110		2,363
Other		63		107
	$	2,218	$	2,503

	Three months ended March 31,
	2003		2002
Revenues based on customer location:
United States	$	5,574	$	1,312
Europe, Middle east and Africa		2,072		2,170
Asia		1,197		614

	$	8,843	$	4,096

	~~Nine~~Three months ended ~~September 30,~~March 31,
	~~2001~~2003		2002
Customer A	22.6	%	—
Customer B	10.4	%	—
Customer C	—		29.3	%
Customer D	—		14.4	%
Customer E	—		12.7	%
Customer F	—		10.4	%
Customer G	—		10.0	%

	Three Months ended March 31,
	~~(Unaudited)~~2003
~~Customer A~~	*) —		13	% 2002
~~Customer B~~ Dividend yield	*) — 0	%		13	% —
~~Customer C~~ Expected volatility	*) — 80	%		11	% —
~~Customer E~~ Risk-free interest	29 2	%	*) —
~~Customer F~~ Expected life	15 4 Years	%	*) —
~~Customer G~~	15	%	*) —

		Weighted average fair value of options grants at an exercise price
	~~In April~~	2003	2002 ~~the Company’s Board~~
Equal to fair value at date of Directors approved an amendment to its Certificate of Incorporation which became effective in connection with the Combination providing for, among other things, (i) the authorization of one hundred five million (105,000,000) shares of the Company’s Common Stock, and (ii) the authorization of five million (5,000,000) shares of preferred stock with rights, preferences and privileges to be designated and established by the Board of Directors.grants		$ —	$ —

	Balance at December 31, 2002		Charge		Cash		Balance at March 31, 2003
Reorganization payments	$	125	$	1,230	$	116	$	1,239
Onerous leases		2,898		—		732		2,166
Professional fees		231		150		6		375

	$	3,254	$	1,380	$	854	$	3,780

	Payments Due by Period ($ in thousands)
Contractual Obligations	Total	Less than 1 year	1-3 Years	3-5 Years	More than 5 years
Capital Lease Obligations	29,130	2,042	3,015	2,820	21,253
Operating Lease Obligations	2,576	2,350	226	—	—
Purchase Obligations	3,298	2,648	650	—	—

Total	35,004	7,040	3,891	2,820	21,253