The discussions in this Quarterly Report on Form 10-Q should be read in conjunction with our accompanying financial statements and the related notes thereto. This Quarterly Report on Form 10-Q contains forward-looking statements within the "safe harbor" provisions of the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended, and
Section 21E of the Exchange Act of 1934, as amended. All statements included or incorporated by reference in this Quarterly Report, other than statements that are purely historical, are forward-looking statements. Words such as "anticipates," "expects," "intends," "plans," "believes," "seeks," "estimates" and similar expressions also identify forward looking statements. The forward looking statements in this Quarterly Report on Form 10-Q are not guarantees of future performance and include, without limitation, statements regarding:

• Our expectation that sales from Digital Enhanced Cordless Telephony ("DECT") and 2.4GHz products and, to a lesser extent, 5.8GHz products, will continue to represent a significant percentage of our revenue for the remainder of 2009;

• Our belief that international sales will continue to account for a significant portion of our net product sales for the foreseeable future;

• Our belief that sales to our Hong Kong-based customers will continue to increase in future periods in absolute dollars and as a percentage of total revenues as a result of the expansion of our new DECT product;.

• Our belief that our revenues and gross profit will decrease in 2009 as compared to 2008 mainly due to the severe global economic downturn generally and the significant declines in the semiconductor and consumer electronics industries specifically;

• Our belief that U.S. sales of our 2.4GHz and 5.8GHz products will continue to decrease for the remainder of 2009 with a sharper decrease in sales of our 5.8GHz products;

• Our belief that U.S. sales of our DECT 6.0 products will continue to increase on account of the decrease in sales of our 2.4GHz and 5.8GHz products as the shift to DECT 6.0 products in the U.S. market is occurring at a fast pace;

• Our belief that the rapid deployment of new communication access methods, as well as the projected lack of growth in fixed-line telephony, will reduce our total revenues derived from, and unit sales of, cordless telephony products, including our DECT, 2.4GHz and 5.8GHz product, for 2009 and the long term;

• Our belief that the market will remain price sensitive for the remainder of 2009 and that price erosion will continue;

• Our belief that research and development expenses in absolute dollars will decrease in 2009 as compared to 2008;

• Our belief that interest rate fluctuations will not have a material effect on our financial position on an annual or quarterly basis; and

• Our belief that our available cash, cash equivalents, cash deposits and marketable securities at March 31, 2009 should be sufficient to finance our operations for both the short and long term.

All forward-looking statements included in this Quarterly Report on Form 10-Q are made as of the date hereof, based on information available to us as of the date hereof, and we assume no obligation to update any forward-looking statement. Many factors may cause actual results to differ materially from those expressed or implied by the forward-looking statements contained in this report. These factors include, but are not limited to, our dependence on one primary distributor, our OEM relationships and competition, as well as those risks described in Part II - Item 1A - "Risk Factors" of this Form 10-Q.

Overview

The following discussion and analysis is intended to provide an investor with a narrative of our financial results and an evaluation of our financial condition and results of operations. The discussion should be read in conjunction with our consolidated financial statements and notes thereto.

Business Overview

DSP Group is a fabless semiconductor company that is a leader in providing chipsets to telephone equipment and design manufacturers (OEMs and ODMs) for incorporation into consumer products for the short-range residential wireless communications market.

In recent years, we have become a worldwide leader in developing and marketing Total Telephony Solutions™ for the wireless residential market by taking advantage of the market transformation from analog-based technologies to digital-based technologies for telephony products and the shift from 900MHz to 2.4GHz to 5.8GHz technologies. One additional primary factor that contributed to our success in recent years is our penetration of the DECT market in Europe and our current presence in the U.S. DECT market (known as DECT 6.0).

In September 2007, we acquired the cordless and VoIP terminals business (the "CIPT Business") of NXP B.V. ("NXP") (the "Acquisition"). In connection with the Acquisition, we paid NXP approximately $200 million in cash and issued 4,186,603 shares of our common stock to NXP. We also agreed to a contingent cash payment of up to $75 million payable based on future revenue performance of the products of the CIPT Business for the first four financial quarters following the closing of the Acquisition. Such revenue milestones were not achieved and no additional cash payments were made to NXP. On March 12, 2009, we repurchased the shares of common stock issued to NXP in connection with the Acquisition for an aggregate consideration of approximately $20,028,000.

Our current primary focus is digital cordless telephony with sales of our in-house developed Communications over Internet Protocol (CoIP), 1.9GHz (Digital Enhanced Cordless Telephony (DECT)), 2.4GHz and 5.8GHz chipsets representing approximately 91% of our total revenues for the first quarter of 2009. Our revenues were $39.9 million for the first quarter of 2009, a decrease of 45% in comparison to the same period of 2008. This decline resulted from decreased sales of all of our product lines. We believe that U.S. sales of our 2.4GHz and 5.8GHz products will continue to decrease for the remainder of 2009 with a sharper decrease in sales of our 5.8GHz products. On the other hand, we believe sales of our DECT 6.0 products in the U.S. market will continue to increase on account of the decrease in sales of our 2.4GHz and 5.8GHz products as the shift to DECT 6.0 products in the U.S. market is occurring at a fast pace.

Our business operates in a highly competitive environment. Competition has historically increased pricing pressures for our products and decreased our average selling prices. Our gross margin decreased to a level of 33.6% of total revenues for the first quarter of 2009 from 37% for the first quarter of 2008, primarily due to the decline in overall revenues, the continued decline in average selling prices of our products, and the increased sales of DECT products with lower gross margin on account of 5.8GHz and 2.4GHz products with higher gross margin. The cordless telephony market is additionally undergoing a challenging period of transition characterized by stagnation due to the lack of new model launches and market anticipation of next generation products. As a result, we expect the market to remain price sensitive for the remainder of 2009 and expect price erosion to continue. Moreover, various other factors, including increases in raw materials and commodity costs and our suppliers passing such increases onto us, increases in silicon wafer costs and increases in production, assembly and testing costs, all may decrease our gross profit in future periods. Furthermore, the current worldwide economic downturn has resulted in a decrease in product demand, excess customer inventories, accelerated erosion of prices, longer product cycles and decision-making processes at our customers' organizations, reduced corporate profits and capital, liquidity concerns and general adverse business conditions. The downturn also has resulted in a significant downturn of the semiconductor industry, the industry in which we operate. Moreover, our semiconductor OEM customers incorporate our chipsets into consumer electronics products, the demand for which has significantly slowed due to the economic downturn and more specifically decreased consumer confidence. We currently anticipate that our revenues and gross profit will decrease in 2009 as compared to 2008 mainly due to the severe global economic downturn generally and the significant declines in the semiconductor and consumer electronics industries specifically.

Our operating expenses decreased by 30% for the first quarter of 2009 compared to the same period for 2008, reaching a level of $25.1 million. The decrease in operating expenses for the first quarter of 2009 as compared to the same period of 2008 was primarily attributable to (i) a decrease in the amortization cost for intangibles assets related to the Acquisition in the amount of $2.7 million, resulting from the recordation of impairment costs related to such intangible assets in 2008 which decreased the original cost of such intangible assets for future amortization measurement, (ii) a decrease in payroll and facilities expenses related to research and development, resulting from our restructuring plans, which included a reduction in the numbers of employees and the shut down of some of our sites, (iii) a decrease in IP and tapeout expenses related to research and development, (iv) a decrease in commission expenses due to decreased sales for the first quarter of 2009, and (v) a decrease in equity-based compensation expenses. Our operating loss was $11.7 million for the first quarter of 2009, approximately 29% of revenues, compared to $9.1 million of operating loss for the same period of 2008, representing 13% of revenues. The increase in operating loss was mainly due to the decrease in overall revenues and gross margins, offset to some extent by the decrease in operating expenses as noted above.

We believe there are also several emerging market trends that challenge our continued business growth potential. For example, the rapid deployment of new communication access methods, including mobile, wireless broadband, cable and other connectivity, as well as the projected lack of growth in products using fixed-line telephony, may reduce our revenues derived from, and unit sales of, cordless telephony products, which are currently our primary focus. Our business also may be affected by the outcome of the current competition between cellular phone operators and fixed-line operators for the provision of residential communication. Our revenues are currently generated from sales of chipsets used in cordless phones that are based on fixed-line telephony. Another market trend that could affect the results of our operations is the shift in the U.S. digital telephony market, our primary market, from sales of 2.4GHz and 5.8GHz products towards DECT products, a trend that is occurring faster than anticipated. The shift resulted in an overall decrease in our revenues and gross margin as our DECT 6.0 products are sold at lower average selling prices and gross margin than our 2.4GHz and 5.8GHz products. We also are witnessing a move of manufacturing activities from large systems suppliers in the U.S., Japan and Europe to Southeast Asia, a trend that also could adversely affect our business.

We recognize the competitive landscape and are actively engaged in addressing these market challenges and trends. We continue to expand our presence in the U.S. and European DECT markets to maintain our business. Revenues derived from the sale of DECT products represented 72% of our total revenues for the first quarter of 2009. In addition to DECT technologies, we are investing in developing CoIP technologies in-house. Our strategic focus is to launch next generation products to capitalize on the transition underway in the residential communications market with the move from wireless voice communication to voice communication over IP networks and ultimately the convergence of voice, video and data communication. As an initial step, we introduced products to facilitate the deployment of residential broadband services. Our long term goal is to leverage the Wi-Fi technology acquired in 2004 from Bermai Inc. to develop and offer products for home communication that integrate voice, data and video with broadband offerings. To that end, we recently introduced to the market the XpandR platform that integrates DECT and Wi-Fi capabilities to enable multimedia and web-related applications in our future products. However, our success in introducing new products and penetrating new markets may not occur and may require us to substantially increase our operating expenses. As a result, our past operating results should not be relied upon as an indication of future performance.

As of March 31, 2009, our principal source of liquidity consisted of cash and cash equivalents of approximately $45.3 million and marketable securities of approximately $58.7 million, totaling $104.0 million. Our cash, investments and securities were materially decreased during the first quarter of 2009, mainly due to the repurchase of 4,186,603 shares of our common stock from NXP for approximately $20,028,000.

RESULTS OF OPERATIONS

Total Revenues. Our total revenues were $39.9 million for the first quarter of 2009, as compared to $72.7 million for the same period in 2008. This decrease was primarily as a result of decreased sales of all of our lines of products, especially our DECT products. Sales of DECT products were $28.9 million and $45.9 million for the first quarter of 2009 and 2008, respectively, representing approximately 72% and 63% of our total revenues for the first quarter of 2009 and 2008, respectively, a decrease of 37% in absolute dollars. Sales of 5.8GHz products were $0.7 million and $5.2 million for the first quarter of 2009 and 2008, respectively, representing approximately 2% and 7% of our total revenues for the first quarter of 2009 and 2008, respectively, representing a decrease of 86% in absolute dollars. Sales of 2.4GHz products were $6.8 million and $8.9 million for the first quarter of 2009 and 2008, respectively, represented 17% and 12% of our total revenues for the first quarter of 2009 and 2008, respectively, representing a decrease of 24% in absolute dollars. The decrease in revenues on a percentage basis and in absolute dollars generated by our 5.8 GHz and 2.4 GHz products for the comparable periods was mainly attributable to increased sales of our DECT 6.0 products in the U.S. market on account of sales of those products.

The following table shows the breakdown of revenues for the periods indicated by geographic location (in thousands):

                                        Period ended March 31,
                                         2009            2008
                    United States    $        388    $      6,732
                    Japan            $     15,896    $     26,308
                    Europe           $      3,413    $     10,398
                    Hong Kong        $     17,218    $     24,637
                    Other            $      2,999    $      4,654

                    Total revenues   $     39,914    $     72,729

Sales to our customers in Hong Kong decreased for the first quarter of 2009 as compared to the same period of 2008, representing a 30% decrease in absolute dollars. The decrease in our sales to Hong Kong for the comparable periods resulted from (i) a decrease in sales to Vetch, representing a 12% decrease in absolute dollars, and (ii) a decrease in sales to CCT, representing a 66% decrease in absolute dollars. The decrease in our sales to Japan for the comparable periods resulted from (i) a decrease in sales to Panasonic, representing a 48% decrease in absolute dollars, and (ii) a decrease in sales to the Japanese domestic market and to Uniden, both a 32% decline in absolute dollars. We anticipate that sales to our Hong Kong-based customers will continue to increase in future periods in absolute dollars and as a percentage of total revenues as a result of the expansion of our new DECT products.

As our products are generally incorporated into consumer products sold by our OEM customers, our revenues are affected by seasonal buying patterns of consumer products sold by our OEM customers that incorporate our products. The fourth quarter in any given year is usually the strongest quarter of sales for our OEM customers and, as a result, the third quarter in any given year is usually the strongest quarter for our revenues as our OEM customers request increased shipments of our products in anticipation of the fourth quarter holiday season. This trend can be generally observed from reviewing our quarterly information and results of operations. However, the magnitude of this trend varies annually.

Significant Customers. The Japanese market and the OEMs that operate in that market are among the largest suppliers of residential wireless products with significant market share in the U.S. market. Revenues derived from sales through our largest distributor, Tomen Electronics Corporation ("Tomen Electronics"), accounted for 29% of our total revenues for the first quarter of 2009 as compared to 26% for the same period of 2008. The increase was primarily due to the decrease in overall revenues for the first quarter of 2009, which increased the percentage of revenues attributable to Tomen out of our total revenues.

Tomen Electronics sells our products to a limited number of customers. One customer, Panasonic Communications Co., Ltd., ("Panasonic"), has continually accounted for a majority of the sales through Tomen Electronics. Sales to Panasonic through Tomen Electronics generated approximately 15% and 16% of our revenues for the three months ended March 31, 2009 and 2008, respectively. Sales through Tomen Electronics or directly to Uniden represented 13% and 11% of our revenues for the three months ended March 31, 2009 and 2008, respectively. The loss of

Tomen Electronics as a distributor and our inability to obtain a satisfactory replacement in a timely manner would harm our sales and results of operations. Additionally, the loss of Panasonic and Tomen Electronics' inability to thereafter effectively market our products would also harm our sales and results of operations.

Other significant customers of the company include various Hong Kong-based OEMs. Sales to VTech represented 28% and 18% of the total revenues for the three months ended March 31, 2009 and 2008, respectively. Sales to CCT Telecom represented 6% and 10% of our total revenues for the three months ended March 31, 2009 and 2008, respectively.

Significant Products. Revenues from our DECT products represented 72% of our total revenues for the first quarter of 2009. Revenues from our 5.8GHz and 2.4GHz digital products represented 2% and 17%, respectively, of our total revenues for the first quarter of 2009. We believe that sales of DECT and 2.4GHz digital products and, to a lesser extent, 5.8GHz digital products will continue to represent a substantial percentage of our revenues for the remainder of 2009. However, we believe that U.S. sales of our 2.4GHz and 5.8GHz products will decrease for the remainder of 2009 with a sharper decrease in sales of our 5.8GHz products. We believe that the rapid deployment of new communication access methods, as well as the projected lack of growth in fixed-line telephony, will reduce our total revenues derived from, and unit sales of, cordless telephony products, including future sales of our DECT, 2.4GHz and 5.8GHz products for the remainder of 2009 and the long term.

Gross Profit.Gross profit as a percentage of revenues was 33.6% for the first quarter of 2009 and 37% for the first quarter of 2008. The decrease in our gross profit was primarily due to the continuing decline in the average selling prices of our products and the increased sales of DECT products with lower average gross margin on account of 5.8GHz and 2.4GHz products with higher average gross margin. As gross profit reflects the sale of chips and chipsets that have different margins, changes in the mix of products sold have impacted and will continue to impact our gross profit in future periods. Our gross profit may decrease in the future due to a variety of factors, including the continued decline in the average selling prices of our products, changes in the mix of products sold, our failure to achieve the corresponding cost reductions, roll-out of new products in any given period and our failure to introduce new engineering processes, increases in raw materials such as gold and oil and silicon wafer costs and increases in production, assembly and testing costs. Moreover, our suppliers may pass the increase in raw materials and commodity costs onto us which would further reduce the gross margin of our products. We cannot guarantee that our ongoing efforts in cost reduction and yield improvements will be successful or that they will keep pace with the anticipated continuing decline in average selling prices of our products. One approach we are using to offset the expected decrease in gross profit is offering our customers "bare-die" chips that eliminate assembly and testing services in return for lower selling prices to our customers. Other steps we are taking include the implementation of cost improvement plans to reduce testing costs and offer our customers more cost effective products. However, we can provide no assurance that any alternative solutions we provide to our customers will be acceptable to them or that these steps will help us offset the continued decrease in gross margins of our products.

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

Research and Development Expenses. Our research and development expenses decreased to $13.7 million for the first quarter of 2009 from $20.0 million for the first quarter of 2008. The decrease in research and development expenses in 2009 as compared to the same period of 2008 was mainly attributed to (i) savings of $1.3 million as a result of the shut down of, or reduction in capacity at, some of our sites as part of our restructuring plans, (ii) savings of $1.4 million in IP and tapeouts expenses, (iii) savings of $1.8 million in payroll expenses, resulting mainly from the reduction in the number of employees at sites that remain operation after implementation of our restructuring plans in 2008, (iv) a devaluation of the NIS against the U.S. dollar with respect to our Israeli facilities and employees which reduced the research and development expenses attributable to such facilities and employees, and (v) a decrease in equity-based compensation expenses of $0.5 million.

Our research and development expenses as a percentage of total revenues were 34% for the three months ended March 31, 2009 and 28% for the three months ended March 31, 2008. This increase in research and development expenses as a percentage of total revenues was due to the decrease in absolute dollars of our total revenues.

As we implemented two restructuring plans following the Acquisition to improve operational efficiency at our various sites and to reduce our operating expenses for 2009, our research and development expenses in absolute dollars are expected to decrease in 2009 in comparison to 2008.

Research and development expenses consist mainly of payroll expenses to employees involved in research and development activities, expenses related to tapeout and mask work, subcontracting, labor contractors and engineering expenses, depreciation and maintenance fees related to equipment and software tools used in research and development, and facilities expenses associated with and allocated to research and development activities.

Sales and Marketing Expenses. Our sales and marketing expenses decreased to $4.5 million for the first quarter of 2009 from $6.0 million for the first quarter of 2008. The decrease in sales and marketing expenses was mainly attributed to (i) a decrease in sales commissions paid due to a lower level of revenues subject to sales commissions for the first quarter of 2009, as compared to the same period of 2008, and (ii) a decrease in payroll expenses due to lower number of sales and marketing employees and contractors, partially as a result of our restructuring plans.

Our sales and marketing expenses as a percentage of total revenues were 11% and 8% for the three months ended March 31, 2009 and 2008, respectively. This increase in sales and marketing expenses as a percentage of total revenues was due to the decrease in our total revenues.

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

General and Administrative Expenses. Our general and administrative expenses were $3.8 million for the three months ended March 31, 2009, as compared to $4.3 million for the three months ended March 31, 2008. The decrease in general and administrative expenses for the first quarter of 2009 was mainly due to the decrease in equity-based compensation expenses. Equity-based compensation expenses amounted to $0.8 million for the first quarter of 2009 as compared to $1.1 million for the first quarter of 2008. General and administrative expenses as a percentage of total revenues were 10% and 6% for the first quarters of 2009 and 2008, respectively. This increase in general and administrative expenses as a percentage of total revenues was due to the decrease in our total revenues.

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

Amortization of Intangible Assets. During the first quarter of 2009, we recorded an expense of approximately $3.0 million, as compared to $5.8 million for the three month ended March 31, 2008, relating to the amortization of intangible assets associated with the Acquisition. The decrease was due to the recordation of impairment costs of such intangible assets in 2008, which reduced the basic cost of such intangible assets and therefore the future amortization cost of such intangible assets.

Interest and Other Income, net. Interest and other income, net, for the three months ended March 31, 2009 decreased to $0.6 million from $1.2 million for the three months ended March 31, 2008. The decrease was due to (i) a decrease in our level of cash, cash equivalents and marketable securities attributable to our various share repurchases since the first quarter of 2008, (ii) lower interest rates, and (iii) the devaluation of the Euro against the U.S. dollar, which resulted in expenses associated with the exchange rate differences.

Our total cash, cash equivalents and marketable securities were $104.0 million as of March 31, 2008, compared to $135.5 million as of March 31, 2008.

Provision for Income Taxes. Our income tax benefit was $0.4 million for the . . .